FidelityConnects: Five questions into 2026: Insights from the GAA team
In their first white paper of 2026, the GAA team tackles five critical questions shaping global markets. Join David Wolf as he shares the team’s perspective on what these questions mean for investors and how they could influence asset allocation strategies in the months ahead.
Transcript
00:01.001 --> 00:06.573
<b>Subtitles are AI Generated</b>
00:07.240 --> 00:08.942
Hello, and welcome to Fidelity Connects.
00:08.942 --> 00:12.912
I'm Pamela Ritchie. Fidelity's Global Asset Allocation team has released
00:12.912 --> 00:15.148
their first white paper of 2026.
00:15.148 --> 00:19.185
It's titled Five Questions Into 2026, and it captures the
00:19.185 --> 00:23.323
most common and most pressing questions that they're hearing from investors.
00:23.323 --> 00:27.594
From renewed optimism around this country, Canada, to how AI
00:27.594 --> 00:31.798
is creating opportunity, to whether the 60/40 portfolio still holds up,
00:31.798 --> 00:36.069
this paper connects today's big themes to what they mean for markets and
00:36.069 --> 00:39.839
for portfolios. Joining us here today to discuss these questions and how
00:39.839 --> 00:43.910
they're translating them into portfolio strategy is portfolio manager,
00:43.910 --> 00:46.046
David Wolf. Welcome, great to see you this year.
00:46.046 --> 00:47.247
Great to see you as well.
00:47.247 --> 00:50.316
Happy 2026. It's been a long time since that started.
00:50.316 --> 00:52.218
Can you say that six weeks into the year?
00:52.218 --> 00:54.654
Only because I haven't seen you for some time.
00:54.654 --> 00:57.057
We'll go with that, best wishes and all.
00:57.057 --> 01:01.861
Inviting everyone to send questions in for David for the next half hour or so.
01:01.861 --> 01:05.999
A year ago you had already seen the beginning of
01:05.999 --> 01:10.804
the international trade turn. It was an extraordinary year, actually.
01:10.804 --> 01:13.907
I think a lot of people wondering, first, how did you see that and second of
01:13.907 --> 01:18.011
all, is it too late? Let's start with what you saw at the beginning of last
01:18.011 --> 01:19.879
... was it last year or even earlier?
01:19.879 --> 01:24.317
Yeah, it was right around this time, should we say.
01:24.317 --> 01:28.388
It's obviously been a fascinating, fascinating is one way to put it, 12
01:28.388 --> 01:31.825
months. If you go back, and I remember you and I sitting here and talking about
01:31.825 --> 01:35.929
this right around this time a year ago, and what we
01:35.929 --> 01:40.767
talked about was the ascendant kind of US exceptionalism.
01:40.767 --> 01:45.038
The US market's been outperforming everybody for years and years.
01:45.038 --> 01:49.242
They had reached a record high concentration in
01:49.242 --> 01:53.513
global indexes, 73% of the global market cap, companies
01:53.513 --> 01:56.683
were making a lot more money than anywhere else in the world, and then you had
01:56.683 --> 02:00.753
the new administration coming in that, at least ostensibly, was gonna
02:00.753 --> 02:05.859
bring even more good stuff like tax cuts, deregulation,
02:05.859 --> 02:07.927
reinvigoration of animal spirits.
02:07.927 --> 02:11.598
We had to be involved in the US and we subscribed to that view, and I think
02:11.598 --> 02:13.299
just about everybody did.
02:13.299 --> 02:17.237
It pretty quickly became clear to us that that was
02:17.237 --> 02:20.740
completely wrong.
02:20.740 --> 02:22.842
Completely wrong? That's a statement.
02:22.842 --> 02:26.779
Yeah, at least directionally wrong, shall
02:26.779 --> 02:31.017
we say, in terms of, as I mentioned,
02:31.017 --> 02:35.021
ascendant US exceptionalism. It turned out, and
02:35.021 --> 02:39.259
this became clear to us relatively quickly, that it was actually
02:39.259 --> 02:40.927
peak US exceptionalism.
02:40.927 --> 02:44.430
The reason for that was ...
02:44.430 --> 02:48.501
it doesn't have to do with tariffs or payrolls or whatever, it had
02:48.501 --> 02:52.472
to do with the administration, obviously, working
02:52.472 --> 02:56.609
towards effectively eroding all of the really deep fundamentals
02:56.609 --> 02:59.579
in the US that allowed it to be exceptional.
02:59.579 --> 03:03.950
That's things like the rule of law, property rights, stable institutions,
03:03.950 --> 03:05.351
predictable governance, et cetera.
03:05.351 --> 03:08.988
A lot of people don't say this. This is somewhat...
03:08.988 --> 03:11.357
I hope it doesn't get broadcast to the world.
03:11.357 --> 03:11.424
That's what you saw.
03:11.424 --> 03:16.029
I don't mind saying it to our friends on the line.
03:16.029 --> 03:21.834
This became clear, obviously, not all at once but I think it's been proven out.
03:21.834 --> 03:26.673
Last February we took action and actually moved quite quickly to
03:26.673 --> 03:30.710
say if the US is, shall we say, richly
03:30.710 --> 03:34.948
valued whether it be the equity market, bond market, currency, et cetera,
03:34.948 --> 03:39.352
and it's going down and not up in terms of this
03:39.352 --> 03:43.656
US exceptionalism dynamic, we want to be moving money out of the United States.
03:43.656 --> 03:47.760
In the space of, I want to say a couple of months, we sold
03:47.760 --> 03:51.764
probably on the order of $15 billion in
03:51.764 --> 03:56.703
US securities. That's equity, fixed income and, obviously, the
03:56.703 --> 04:00.473
US dollar, and we put it in a lot of other places.
04:00.473 --> 04:04.711
We moved into emerging market and EAFE
04:04.711 --> 04:08.715
equity. Did the same on the debt side, selling off our US Treasuries all the
04:08.715 --> 04:13.119
way to zero, actually, eventually last year,
04:13.119 --> 04:17.290
and put that, you know, there's better yields on offer in places like
04:17.290 --> 04:21.294
Germany and the UK, even Japanese government bonds
04:21.294 --> 04:25.298
are not insultingly low in yield the way they used to be, some
04:25.298 --> 04:27.967
emerging market debt, et cetera.
04:27.967 --> 04:29.936
What about Canada?
04:29.936 --> 04:34.040
Canada also is an area that was not of interest to you
04:34.040 --> 04:38.411
for, I mean, years and years at this point.
04:38.411 --> 04:41.848
It also had a fantastic year last year but not everyone saw that right at the
04:41.848 --> 04:42.815
beginning of the year either.
04:42.815 --> 04:45.718
Yeah, so there are a couple of things going on there.
04:45.718 --> 04:48.988
First, Pamela, as you know maybe better than anyone, we had been underweight
04:48.988 --> 04:49.822
Canada for...
04:49.822 --> 04:51.391
As long as I've known you, however long that is.
04:51.391 --> 04:54.694
Twelve years I've been doing this and we've had an underweight and it's varied
04:54.694 --> 04:57.563
in size depending on the outlook, et cetera.
04:57.563 --> 05:00.133
But we said a couple of things.
05:00.133 --> 05:04.070
Number one, that the US was
05:04.070 --> 05:08.107
less attractive so we wanted to be more not in
05:08.107 --> 05:09.809
the US, of which Canada is, obviously, part.
05:09.809 --> 05:14.447
Number two, we have had a
05:14.447 --> 05:18.518
pretty large position in gold for a number of years, mostly as a
05:18.518 --> 05:22.955
diversifier, but in this environment where people would be more concerned
05:22.955 --> 05:26.926
about dollar debasement, we can talk about that a little bit further today,
05:26.926 --> 05:31.564
we knew that not only holding physical
05:31.564 --> 05:35.735
gold, which we do, but also buying back into Canada had leverage
05:35.735 --> 05:39.706
to the gold price more broadly since Canada is a lot more concentrated
05:39.706 --> 05:43.476
in gold stocks than elsewhere, and that was a big story behind the TSX
05:43.476 --> 05:47.880
outperformance. The third was the Canada story
05:47.880 --> 05:49.749
itself which is to say ...
05:49.749 --> 05:53.319
you and I have talked over the years about we were kind of on a road to nowhere
05:53.319 --> 05:57.323
in terms of the economy, that housing was overdone, household debt was
05:57.323 --> 06:01.494
too high, productivity was stagnant, per capita GDP was coming
06:01.494 --> 06:05.498
down, it was always going to end up kind of where we are now which is
06:05.498 --> 06:08.668
the economy stagnant, housing market going down, et cetera.
06:08.668 --> 06:12.805
What we said several months ago was at least there's
06:12.839 --> 06:15.508
starting to be a path to better.
06:15.508 --> 06:19.545
It had to do with policy reorienting towards the
06:19.545 --> 06:23.516
kind of thing that Canada's long needed to do, which is invest
06:23.516 --> 06:28.454
more infrastructure, break down interprovincial trade barriers, pipelines,
06:28.454 --> 06:33.292
seek out trade opportunities with countries other than the US, et cetera.
06:33.292 --> 06:37.430
We'll see how much that manifests itself going forward but at least there's
06:37.430 --> 06:41.434
a path to better. Given all those things we said, we've
06:41.434 --> 06:44.303
been underweight for 12 years, we no longer want to be underweight, so we
06:44.303 --> 06:45.371
closed it.
06:45.371 --> 06:49.308
It's incredible and, actually, over those, did you say 12 years, that's how
06:49.308 --> 06:52.311
long you've been underweight? And I think that's roughly the period of time
06:52.311 --> 06:56.616
that you've been in the position that you're in right now.
06:56.616 --> 07:00.353
Just tell us what the funds, there's so many funds that you manage, but
07:00.353 --> 07:02.922
ultimately what it's worth. I think you started, you mentioned to me just
07:02.922 --> 07:07.193
before, in 2023 it was worth $25 billion.
07:07.193 --> 07:08.294
What is it worth now?
07:08.294 --> 07:10.296
It's about $115 billion.
07:10.296 --> 07:14.233
$115 billion over a 10, 11
07:14.233 --> 07:17.570
year period. That's pretty good.
07:17.570 --> 07:19.705
Congrats, that's very good. Holy smokes.
07:19.705 --> 07:21.607
It's not bad at all.
07:21.607 --> 07:23.109
I should point out--
07:23.109 --> 07:25.144
You have a team around you, I get it, but still.
07:25.144 --> 07:29.148
--we have a big team and I'm just kind of like the tip of the iceberg, so to
07:29.148 --> 07:33.186
speak. It's also worth pointing out that we
07:33.219 --> 07:37.256
appreciate the flows and the expansion of the AUM and
07:37.256 --> 07:41.327
we as portfolio managers see that gratefully as
07:41.327 --> 07:45.531
sort of a vote of confidence in what we're doing and a response to the
07:45.531 --> 07:49.035
returns we've generated and the risk management, what have you.
07:49.035 --> 07:52.939
I'm not sure if everybody is aware but we actually don't
07:52.939 --> 07:57.710
get paid on AUM as portfolio managers.
07:57.710 --> 08:00.079
Oh, actually, I don't know how you get paid. How do you get paid?
08:00.079 --> 08:04.016
If the asset base is larger versus smaller, actually doesn't have any
08:04.016 --> 08:08.354
direct influence. I mean, we obviously tend to prefer larger than smaller
08:08.354 --> 08:14.026
but what we get paid on as portfolio managers is exclusively performance.
08:14.026 --> 08:18.097
How the fund is doing versus the benchmark is what matters to me in
08:18.097 --> 08:20.566
terms of a PM.
08:20.566 --> 08:24.670
I think folks should want it that way because you don't want a manager that's
08:24.670 --> 08:28.574
spending more time going out and soliciting business and growing the asset base
08:28.574 --> 08:31.177
instead of focusing on the funds.
08:31.177 --> 08:35.114
We just focus on the funds and I think the results show that
08:35.114 --> 08:36.549
that can be fruitful.
08:36.549 --> 08:38.684
Fruitful, absolutely, the results certainly show that.
08:38.684 --> 08:42.622
And to think that what you're pivoting is such a much larger
08:42.622 --> 08:46.626
base into what is now a more positive view of
08:46.626 --> 08:50.596
Canada. Let's talk a little bit, I remember in the pandemic
08:50.596 --> 08:54.734
you were talking a lot about, you know, there's a huge upheaval of the supply
08:54.734 --> 08:57.904
and demand, we were talking about models not being adequate to measure what was
08:57.904 --> 09:01.874
going on, there was a repatriation of kind of everything, or at least
09:01.874 --> 09:05.811
you saw it coming. I don't know if it was happening at that time.
09:05.811 --> 09:09.482
How would you compare some of those, you can call them de-globalized, you can
09:09.482 --> 09:11.851
call them more localized, I don't know what you wanna call it, but those
09:11.851 --> 09:16.355
trends, they're what we're talking about all the time now.
09:16.355 --> 09:20.426
Are they investible? How are you looking at that as an investment trend,
09:20.426 --> 09:21.627
if it is one?
09:21.627 --> 09:25.731
There are so many things caught up in that and we can kind of unpack them
09:25.731 --> 09:30.503
a little bit. One of the things to mention, just writ large,
09:30.503 --> 09:34.607
geopolitics look really different today than they did during the pandemic.
09:34.607 --> 09:37.209
That's going back, I guess, five years or so.
09:37.209 --> 09:41.581
You had, again, the
09:41.581 --> 09:45.318
US ascendant, so to speak, and, yes, China and then a couple years later you
09:45.318 --> 09:50.756
had Russia invading Ukraine. That
09:50.756 --> 09:53.759
has sort of realigned the chessboard, so to speak. Now it very much feels, and
09:53.759 --> 09:57.897
we have a political research service out of Boston
09:57.897 --> 10:01.767
that is a good source of intelligence for us, and what they've been talking
10:01.767 --> 10:06.105
about is the return to this kind of multipolar world
10:06.105 --> 10:10.376
where you have the US and then maybe a block in the Americas, you have Europe
10:10.376 --> 10:15.147
that seems to have been kind of
10:15.147 --> 10:19.619
... I'm looking for a diplomatic term but
10:19.619 --> 10:23.990
the US doesn't seem to be as interested in supporting Europe as it was before,
10:23.990 --> 10:24.690
shall we say, so they kind of...
10:24.690 --> 10:29.562
Canada does but the US doesn't so the allies are changing a little bit.
10:29.562 --> 10:32.498
All of the pieces are shifting around.
10:32.498 --> 10:36.535
That makes it more challenging for us because we love
10:36.535 --> 10:40.906
it when markets are predictable, when we can just focus on economic growth
10:40.906 --> 10:45.277
and company earnings and inflation and policy
10:45.277 --> 10:49.215
and map that into expected returns in
10:49.215 --> 10:51.951
the various building blocks and then move money that way.
10:51.951 --> 10:56.022
When you have different, and in many cases unpredictable,
10:56.022 --> 11:00.026
policy from the political side that
11:00.026 --> 11:04.797
makes things more challenging. Again, one of the decisions
11:04.797 --> 11:09.068
we took almost a year ago was to say, we don't know how this is gonna work
11:09.068 --> 11:13.039
out but it's probably not good for US markets relative to the rest
11:13.039 --> 11:17.043
of the world so let's be less in US markets relative to the rest
11:17.043 --> 11:17.476
of world.
11:17.476 --> 11:19.912
When you look at it, I mean, the US markets actually have done very well and
11:19.912 --> 11:23.149
they're at all-time ties right now, equity markets.
11:23.149 --> 11:27.620
Just discuss that a little bit. It may be a different longer term trend but
11:27.620 --> 11:31.691
it has actually bounced back from, basically, the
11:31.691 --> 11:32.692
tariff tantrum.
11:32.692 --> 11:36.762
Yeah, and if you've been invested in the US, whether as an American
11:36.762 --> 11:40.533
or Canadian, what have you, you've been great for a long time.
11:40.533 --> 11:44.770
Even the past year you've been fine. We're up, you know, whatever, over
11:44.770 --> 11:47.406
the past year 20%.
11:47.406 --> 11:51.977
On a common currency basis, if you're a Canadian investor
11:51.977 --> 11:56.449
you earned not that much in the US market, you earned 30%
11:56.449 --> 12:00.686
last year in the TSX. We're interested in
12:00.686 --> 12:04.724
driving return and managing risk so if
12:04.724 --> 12:08.928
we think we're going to get 10% out of the US but 20% out of Japan
12:08.928 --> 12:12.898
and 25% out in Mexico and 30% out Canada, obviously,
12:12.898 --> 12:16.402
what we want to be doing is moving money out of US, moving it into those other
12:16.402 --> 12:19.805
places. We've done that, and we're still there, I should mention, in terms of
12:19.805 --> 12:21.707
our current positioning.
12:21.707 --> 12:25.644
We're underweight the US market.
12:25.644 --> 12:27.646
We're basically neutral Canada.
12:27.646 --> 12:32.251
We're overweight EAFE, so Europe and Japan, primarily overweight
12:32.251 --> 12:36.188
emerging markets, we're overweight commodities as
12:36.188 --> 12:36.922
well.
12:36.922 --> 12:40.826
Have you done that via Canada or all over the world?
12:40.826 --> 12:43.963
Both. We own gold and we have, as I mentioned, for some time.
12:43.963 --> 12:48.367
we have other commodity holdings and then we have
12:48.367 --> 12:51.570
enough Canada that we know we're getting some commodity push.
12:51.570 --> 12:55.975
Let's go laser focus in there on the question of inflation.
12:55.975 --> 12:59.879
We see central banks around the world bringing down rates.
12:59.879 --> 13:04.583
The US has taken longer to get at that but the rest of the world has
13:04.583 --> 13:08.254
been doing that for a couple of years at this stage.
13:08.254 --> 13:10.022
Where is inflation?
13:10.022 --> 13:13.359
It looks like commodities are going to do well, which may cause some inflation
13:13.359 --> 13:17.163
in sort of a new realm, and then there's also circling other reasons for
13:17.163 --> 13:20.699
inflation, be it attached to tariffs or not, people have different opinions on
13:20.699 --> 13:23.469
that. What's your call on inflation?
13:23.469 --> 13:27.606
How are you maneuvering through this right now in the rates/inflation
13:27.606 --> 13:29.241
story?
13:29.241 --> 13:32.244
There are a few things to talk about that way.
13:32.244 --> 13:36.348
The first, just with respect to our conversation earlier about the
13:36.348 --> 13:40.619
world kind of splitting into a different configuration,
13:40.619 --> 13:43.823
should we say, and this is a bit of an extension of what we talked about five
13:43.823 --> 13:47.760
years ago during COVID of the kind of reshoring and the breaking
13:47.760 --> 13:51.931
up of supply chains. All of that makes the world less efficient--
13:51.931 --> 13:52.898
And more expensive.
13:52.898 --> 13:57.069
--and more expensive. That's basically a direct drive into
13:57.069 --> 14:01.140
inflation. The swell in commodity prices, I mean, one way of looking
14:01.140 --> 14:05.644
at what's happening in the world is you're getting this geopolitical friction
14:05.644 --> 14:09.615
which kind of is creating a scramble for resources, so to speak, and you see
14:09.615 --> 14:13.919
that in oil, you see that in rare earths,
14:13.919 --> 14:16.989
that kind of thing. That's pushing commodity prices up.
14:16.989 --> 14:21.260
In that vein, by the way, much like five years ago
14:21.260 --> 14:24.997
said this is going to be more inflationary than people think and we launched,
14:24.997 --> 14:28.901
you'll remember, the Inflation Focused Fund.
14:28.901 --> 14:32.905
That was in April of' 21, well before inflation actually took off, to
14:32.905 --> 14:37.176
provide folks with a vehicle to protect against
14:37.176 --> 14:37.943
inflation.
14:37.943 --> 14:41.146
Hello, investors. We'll be back to the show in just a moment.
14:41.146 --> 14:44.483
I wanted to share that here at Fidelity, we value your opinion.
14:44.483 --> 14:47.519
Please take a few minutes to help us shape the future of Fidelity Connects
14:47.519 --> 14:51.991
podcasts. Complete our listener survey by visiting fidelity.ca/survey,
14:51.991 --> 14:54.360
and you could win one of our branded tumblers.
14:54.360 --> 14:57.663
Periodic draws ending by March 30th, 2026.
14:57.663 --> 15:01.267
And don't forget to listen to Fidelity Connects, the Upside, and French
15:01.267 --> 15:05.304
DialoguesFidelity podcasts available on Apple, Spotify, YouTube, or wherever
15:05.304 --> 15:08.507
else you get your podcasts. Now back to today's show.
15:08.507 --> 15:12.945
The third element, and this is worth a half an hour in and of itself,
15:12.945 --> 15:16.949
is what's happening with the US and Fed policy and the
15:16.949 --> 15:20.886
incoming, potentially incoming, Fed chair, how
15:20.886 --> 15:24.990
pressure from the administration fits into
15:24.990 --> 15:28.093
the rate path and what that means for inflation.
15:28.093 --> 15:30.930
I mean, he probably will wear a heavy crown, it sounds like.
15:30.930 --> 15:35.134
In some ways he'll have some very
15:35.134 --> 15:39.171
difficult voices to listen to on either side of his shoulder on
15:39.171 --> 15:42.808
that one. Let's get your thoughts on that.
15:42.808 --> 15:44.710
First of all, what do you know about him?
15:44.710 --> 15:47.780
He's up to the job? You were a central banker at one stage, this is a world
15:47.780 --> 15:50.115
that you know well. Do you know Kevin Warsh?
15:50.115 --> 15:52.017
I know him a little bit.
15:52.017 --> 15:55.554
I met him a few times while he was at the Fed and I was at the bank.
15:55.554 --> 16:01.427
This is going back 16, 17 years.
16:01.427 --> 16:05.531
Very, very smart guy, sort of a young, urbane banker
16:05.531 --> 16:08.534
type, not unlike my boss at the time, Mark Carney.
16:08.534 --> 16:12.538
There's a lot of folks in that central bank orbit that are not like that
16:12.538 --> 16:17.676
so they actually got to know one another reasonably well.
16:17.676 --> 16:21.880
Warsh, a couple of things I know about him
16:21.880 --> 16:25.584
are number one, he is a long time Republican.
16:25.584 --> 16:29.822
Number two, I think he's always aspired to this
16:29.822 --> 16:30.823
role.
16:30.823 --> 16:33.258
He has, okay, that's interesting.
16:33.258 --> 16:35.894
Kind of neither of those is really relevant for the outlook.
16:35.894 --> 16:39.932
The more relevant stuff is he is on record for many, many
16:39.932 --> 16:43.902
years as being a sort of hawk, an inflation hawk,
16:43.902 --> 16:47.172
interest rate hawk, fiscal hawk et cetera.
16:47.172 --> 16:51.143
The big question in front of markets is how much of that is
16:51.143 --> 16:55.147
going to be reflected in his actual policy because being a hawk
16:55.147 --> 16:58.183
is not what the administration wants.
16:58.183 --> 17:00.786
Trump wants lower rates, being a hawk would mean higher rates.
17:00.786 --> 17:01.920
How is that--
17:01.920 --> 17:04.923
Because you're concerned about inflation.
17:04.923 --> 17:07.026
--friction going to play out?
17:07.026 --> 17:11.030
You saw, was it a week and a half ago when Warsh was named, that was
17:11.030 --> 17:15.367
that huge washout in gold in particular because people thought,
17:15.367 --> 17:19.638
well, he's not going to be as pliant as maybe
17:19.638 --> 17:23.842
some other potential Fed chairs so the debasement trade doesn't
17:23.842 --> 17:25.611
look as attractive.
17:25.611 --> 17:30.049
My personal view on this is I have a hard time thinking
17:30.049 --> 17:33.986
that the administration would put someone in that position that
17:33.986 --> 17:38.490
wasn't at least open to a more dovish
17:38.490 --> 17:41.727
approach, so to speak.
17:41.727 --> 17:45.798
If you look into Warsh's comments in recent months there is kind
17:45.798 --> 17:49.101
of a glimmer of that.
17:49.101 --> 17:52.838
I think when we step back and say, okay, what does the United States have to
17:52.838 --> 17:57.876
do, kind of putting aside what Trump thinks it has to do, US has
17:57.876 --> 18:00.112
gobs and gobs of government debt.
18:00.112 --> 18:04.083
There needs to be, needs to be,
18:04.083 --> 18:08.387
it is pressing
18:08.387 --> 18:12.424
over time for that debt not to become more and more
18:12.424 --> 18:16.395
of a burden on the economy and on the federal budget in particular.
18:16.395 --> 18:20.499
What do you do about that? Well, you put pressure on the central bank,
18:20.499 --> 18:24.470
or the central banks volunteers to do it, to lower rates,
18:24.470 --> 18:28.540
potentially more so than the economic outlook
18:28.540 --> 18:31.043
would warrant. That does a couple of things.
18:31.043 --> 18:35.013
Number one, it directly lowers financing costs for the government, at least
18:35.013 --> 18:36.815
in the shorter end of the curve.
18:36.815 --> 18:41.253
Number two, it sort of allows for, even fosters,
18:41.253 --> 18:45.257
inflation because if you think about where rates should be
18:45.257 --> 18:49.461
to keep inflation stable, if you have rates lower than that that's courting
18:49.461 --> 18:53.732
higher inflation. That actually, as much as people won't like it,
18:53.732 --> 18:57.269
and particularly if you're a creditor you don't like, but if you're a debtor
18:57.269 --> 19:01.173
like the United States you say, well, that's great, because it means I can pay
19:01.173 --> 19:01.540
back...
19:01.540 --> 19:02.574
Payments are less.
19:02.574 --> 19:06.678
Well, I can pay back US dollars to my creditors that are worth
19:06.678 --> 19:10.182
a whole lot less than the ones they lent me in the first place, including all
19:10.182 --> 19:13.719
these foreign creditors because the US dollar goes down.
19:13.719 --> 19:17.789
It actually kind of helps a lot of
19:17.823 --> 19:22.361
the US economic challenges to effectively devalue
19:22.361 --> 19:27.099
the US dollar. I think the new Fed Chairman
19:27.099 --> 19:31.069
probably realizes that. Exactly how it goes, I don't know.
19:31.069 --> 19:35.274
Maybe all to say we've been in that trade, as we talked about, for basically
19:35.274 --> 19:39.311
a year and I don't think it goes away just because you have a
19:39.311 --> 19:43.715
new Fed chairman that isn't obviously inclined that way.
19:43.715 --> 19:47.686
When you take a look at this discussion, you're the perfect person to ask
19:47.686 --> 19:51.623
this about, where we hear versions of the balance sheet of
19:51.623 --> 19:55.694
the Fed and the Treasury might sort of swap to an extent,
19:55.694 --> 19:59.731
or there's a version of whatever is held on the Fed's balance sheet in
19:59.731 --> 20:03.835
terms of mortgage-backed securities and so on maybe needs to not
20:03.835 --> 20:06.772
be held there and maybe is held at the Treasury.
20:06.772 --> 20:08.874
I'm just kind of curious about that discussion generally.
20:08.874 --> 20:13.579
It sounds very philosophical and it sounds
20:13.579 --> 20:16.615
like changing power as well.
20:16.615 --> 20:19.418
I'm just kind of curious what you think about that discussion and if it's
20:19.418 --> 20:21.687
something we should pay attention to.
20:21.687 --> 20:23.388
It's definitely something you should pay attention to.
20:23.388 --> 20:27.726
It is complicated and somewhat obscure.
20:27.726 --> 20:30.629
Warsh is on record saying the balance sheet of the Fed is too big.
20:30.629 --> 20:35.033
If you reduce the size of the balance sheet what are you doing?
20:35.033 --> 20:39.104
You're selling bonds that the Fed holds back into the
20:39.104 --> 20:41.940
market. That's a tightening of financial conditions.
20:41.940 --> 20:46.111
One way that it could be done to satisfy everyone, and it's probably
20:46.111 --> 20:50.282
what's going to happen, you sell the bonds
20:50.282 --> 20:54.586
but you also lower short term rates so you try to offset
20:54.586 --> 20:58.590
the tightening of financial conditions with more stimulative monetary
20:58.590 --> 20:59.891
policy from an interest rate point of view.
20:59.891 --> 21:01.126
And selling them on the market.
21:01.126 --> 21:05.264
And selling them on the market because the Treasury can't really buy its
21:05.264 --> 21:09.468
own debt that way, it doesn't make any sense.
21:09.468 --> 21:13.572
What all of this gives you is a steeper curve because shorter rates come
21:13.572 --> 21:16.141
down and longer rates go up.
21:16.141 --> 21:29.421
Now, that may or may not be palatable
21:29.421 --> 21:31.690
[audio cuts out] own more short and own less long.
21:31.690 --> 21:35.894
As I mentioned earlier, one of the things that we did, we did this
21:35.894 --> 21:40.065
early last year, we got rid of all of our US long
21:40.065 --> 21:44.069
Treasury bonds. That had a number of factors but
21:44.069 --> 21:48.240
one is the way that this was always going to go was going to be higher
21:48.240 --> 21:52.377
real interest rates, higher inflation, and long bonds really
21:52.377 --> 21:55.681
don't like that so we want to not own those.
21:55.681 --> 21:59.451
That's really, really interesting, first of all, that you did that and that the
21:59.451 --> 22:01.787
markets are as such.
22:01.787 --> 22:05.991
Can we just take this moment to go into the fixed income markets more
22:05.991 --> 22:10.062
broadly here for a second because it just sounds like the amount of issuance
22:10.062 --> 22:13.565
that is being discussed and what needs to be issued over the course of three to
22:13.565 --> 22:18.203
five years, this is for the AI trade, it's well telegraphed, what
22:18.203 --> 22:21.840
is going to sop that up? There's a question mark for demand but at the same
22:21.840 --> 22:25.811
time it seems to need to be spent somehow and the debt market seemed to be the
22:25.811 --> 22:27.779
place to go for that.
22:27.779 --> 22:31.049
Can you just comment a bit, one, is it interesting to you as an investor or is
22:31.049 --> 22:33.919
it just interesting to stay away from?
22:33.919 --> 22:36.822
Both, in a sense.
22:36.822 --> 22:38.523
Again, a few things on that.
22:38.523 --> 22:42.060
Number one, yes, there's a lot of issuance to come, including government
22:42.060 --> 22:44.596
issuance but not only government issuance.
22:44.596 --> 22:48.633
A lot of these hyperscalers have started to issue debt to
22:48.633 --> 22:53.004
support AI build-out, data centres, et cetera, which is its own thing.
22:53.004 --> 22:56.475
Your comment is quite right that there's gonna be a lot of debt issue.
22:56.475 --> 23:02.013
It will get bought, the question is at what price it gets bought.
23:02.013 --> 23:06.651
It may be that the capacity of the global economy to take on all this debt
23:06.651 --> 23:10.956
only happens with interest rates 100, 200, 300 hundred basis points higher
23:10.956 --> 23:15.093
than at present. That fits in a little bit to what
23:15.093 --> 23:17.996
we've been talking about from a portfolio construction point of view.
23:17.996 --> 23:20.532
We talked about this in the paper as well.
23:20.532 --> 23:25.070
The whole 60/40 construct, a couple of things have happened.
23:25.070 --> 23:28.840
Number one, bonds have become more correlated to stocks, and we've talked about
23:28.840 --> 23:31.109
that before, so it's less of a hedge.
23:31.109 --> 23:34.546
If it's less of a hedge it's not as valuable.
23:34.546 --> 23:38.550
If it's not as valuable you should be compensated more for holding
23:38.550 --> 23:41.953
it, which means the rates need to be going up.
23:41.953 --> 23:45.590
But there's also a structural factor, do you really want to hold that much of
23:45.590 --> 23:49.861
this at all if they need to be yielding more to be
23:49.861 --> 23:51.596
useful to you?
23:51.596 --> 23:55.767
It's one of the motivations we've had with diversifying that
23:55.767 --> 23:59.805
part of our portfolio, the sort of 40 more defensive part, into a
23:59.805 --> 24:01.740
number of other areas. We've bought...
24:01.773 --> 24:02.307
Alts is one.
24:02.307 --> 24:07.479
Yeah, alts is one and alts can be almost anything.
24:07.479 --> 24:10.582
A couple things we've done is we've diversified just our core fixed income
24:10.582 --> 24:14.553
holdings. I mentioned Treasuries but even away from things like
24:14.553 --> 24:17.155
Government of Canada bonds and into places ...
24:17.155 --> 24:21.059
we have a pretty good sized position in emerging market local currency debt.
24:21.059 --> 24:24.162
Which have been fabulous over the course of the last year.
24:24.162 --> 24:28.099
Which has been fabulous. Actually, I noticed that Goldman Sachs put out
24:28.099 --> 24:32.037
a piece, I think it was last week, saying, oh, it's great if you're
24:32.037 --> 24:36.174
a Canadian investor to buy emerging market local currency debt because yields
24:36.174 --> 24:40.111
are really high and the currency volatility is not that bad on the crosses.
24:40.111 --> 24:43.615
We've been there for several years.
24:43.615 --> 24:47.385
They put the note out just now but you've been doing this for many years.
24:47.385 --> 24:51.423
Yeah, and if others wanna do it too, that's great, because it makes our
24:51.423 --> 24:53.291
holdings even more valuable.
24:53.291 --> 24:57.262
Tell us a little about that. The Canadian dollar to an emerging market, you
24:57.262 --> 25:01.666
can choose which country it is, and the debt issued there in terms of
25:01.666 --> 25:06.071
a carry trade of sorts, or just the differential, is less than obviously
25:06.071 --> 25:09.207
a US dollar going to an emerging market.
25:09.207 --> 25:12.911
There's more similarity between Canada and emerging market debt, basically.
25:12.911 --> 25:14.846
I think I've said this a number ...
25:14.846 --> 25:18.450
a couple of different things because this is all a little bit complicated.
25:18.483 --> 25:20.552
Yeah, it's fascinating. This is what you do.
25:20.552 --> 25:24.656
First of all, emerging market low currency debt, we're buying Brazilian
25:24.656 --> 25:28.627
real bonds in real, buying Mexican
25:28.627 --> 25:31.263
peso bonds in pesos.
25:31.263 --> 25:35.433
The yield on those is very high, and traditionally has been very high.
25:35.433 --> 25:39.905
Why is it high? Because it's risky. One of the risks involved
25:39.905 --> 25:44.009
if you're a US investor is the Mexican peso could go way
25:44.009 --> 25:48.046
up or way down and that volatility is not something you like, particularly as a
25:48.046 --> 25:52.150
bond investor. In Canada, though, the Canadian dollar will tend to
25:52.150 --> 25:56.154
move with, for example, the Mexican peso when the
25:56.154 --> 26:00.191
US dollar is generally going up or generally going down so it means that
26:00.191 --> 26:04.262
the volatility of a local currency EM
26:04.262 --> 26:08.233
bond is lower if you're a Canadian investor than it
26:08.233 --> 26:10.302
is if you are a US investor.
26:10.302 --> 26:14.472
The yield pickup, because Canadian yields are so low, is actually higher if
26:14.472 --> 26:18.276
you're Canadian than if you're U.S.
26:18.276 --> 26:19.911
Is that material to your funds?
26:19.911 --> 26:21.780
It's material. We established...
26:21.780 --> 26:22.781
The performance?
26:22.781 --> 26:27.052
Yeah, I mean, EM local currency debt in Canadian dollar terms was up 20%
26:27.052 --> 26:30.655
last year. There wasn't anywhere else in the fixed income market that you could
26:30.655 --> 26:34.659
have gotten 20%. Our position is not that high in most of
26:34.659 --> 26:38.830
our funds just because it is volatile and we don't wanna put
26:38.830 --> 26:40.565
all of our chips there.
26:40.565 --> 26:43.501
It's made a material difference in terms of performance in the funds.
26:43.501 --> 26:47.472
In the kind of balanced, multi-asset strategies
26:47.472 --> 26:51.443
that I manage, if you can get out of a small
26:51.443 --> 26:55.580
sliver, particularly on the 40 defensive side, an extra 10, 20,
26:55.580 --> 26:59.618
30 basis points of performance, and you can do that a few different
26:59.618 --> 27:03.822
times in a few different ways, that aggregates up to some pretty
27:03.822 --> 27:04.856
meaningful numbers.
27:04.856 --> 27:08.026
There's a few minutes left and I just want to get to a couple of questions that
27:08.026 --> 27:11.730
people have been ... it's just fascinating to think how you've been pivoting
27:11.730 --> 27:15.767
and allocating assets, which is exactly what you do, in different ways.
27:15.767 --> 27:18.670
Some of the questions are on trade, a little bit of comment on the Canadian
27:18.670 --> 27:24.542
debt outlook, the Canadian economy. You kind of covered that, and also
27:24.542 --> 27:27.145
also inflation in the US which you've also covered.
27:27.145 --> 27:30.181
What I will ask you is just this one trade story.
27:30.181 --> 27:33.151
I know that you're not interested in tons about trade but I wonder if you can
27:33.151 --> 27:37.188
just sort of sketch out how Canada looks in the midst of the whole world
27:37.188 --> 27:40.225
renegotiating trade, trying to figure things out.
27:40.225 --> 27:44.262
What would you say high level is something that Canadians need to
27:44.262 --> 27:47.032
be aware of in terms of their investments?
27:47.032 --> 27:48.900
It's not great.
27:48.900 --> 27:52.971
Obviously, we, for many, many years, have been reliant on the US as by far
27:52.971 --> 27:56.941
our biggest international customer and now that's in question, that's tariffs
27:56.941 --> 28:00.879
and that's volatility and that's CUSMA and what have you.
28:00.879 --> 28:04.883
You see the effects on the manufacturing sector in Canada
28:04.883 --> 28:08.119
and what's happened in terms of production, what's happened in terms of
28:08.119 --> 28:12.257
employment and the uncertainty that gets generated which means
28:12.257 --> 28:15.326
you're not going to expand your plant if you don't know if you have anybody to
28:15.326 --> 28:17.629
sell it to. That's all not good.
28:17.629 --> 28:21.633
There's clearly a pivot at the federal level to saying,
28:21.633 --> 28:25.704
we want to negotiate free trade agreements with
28:25.704 --> 28:29.307
Europe, with China, with everybody.
28:29.307 --> 28:33.378
The problem is the US still takes 65%, 70% of
28:33.378 --> 28:35.213
Canadian exports.
28:35.213 --> 28:39.217
That's never going to shrink and then be compensated for by
28:39.217 --> 28:42.454
more trade with the UK or with Japan.
28:42.454 --> 28:43.088
The numbers don't add up.
28:43.088 --> 28:44.723
You can diversify but only so much.
28:44.723 --> 28:48.293
The one comment I would make, and it actually relates to the Canadian debt
28:48.293 --> 28:52.464
question as well, you think about all the headwinds that the Canadian economy
28:52.464 --> 28:54.566
has had over the past year or so.
28:54.566 --> 28:58.536
This is the trade stuff and that started with the tariffs almost exactly a
28:58.536 --> 29:01.740
year ago and you get that pressure that way.
29:01.740 --> 29:03.475
You've had all of the mortgage resets.
29:03.475 --> 29:07.445
It's you know commonly known that if you're resetting a five-year
29:07.445 --> 29:11.683
mortgage and you bought your place in 2020, 2021
29:11.683 --> 29:15.787
at the height of the kind of COVID boom you're now resetting from,
29:15.787 --> 29:19.924
call it, 1 1/2, 2% to 4 1/2, 5%, that's a material
29:19.924 --> 29:22.660
impact. That's the biggest delta that you're going to have.
29:22.660 --> 29:26.831
We've had a reversal in immigration so population growth
29:26.831 --> 29:29.567
as of a year or two ago was 3%, now it's negative.
29:29.567 --> 29:33.738
These are all hits at a fundamental level to
29:33.738 --> 29:37.842
Canadian growth. Not making a comment as to the desirability
29:37.842 --> 29:42.013
of higher or lower immigration, just if you have fewer people working that's
29:42.013 --> 29:46.417
probably not great for the aggregate
29:46.417 --> 29:50.955
amount of ... even with all that the Canadian economy is pretty flat.
29:50.955 --> 29:54.759
It's not actually obviously in recession.
29:54.759 --> 29:58.863
The housing story which is related to rates, housing in much of the country
29:58.863 --> 30:02.333
is going down and it may be going down at an accelerating rate.
30:02.333 --> 30:05.737
The fact that Canadian economy isn't in a severe recession, given all those
30:05.737 --> 30:09.941
headwinds, is actually pretty impressive to me.
30:09.941 --> 30:12.477
That's absolutely fascinating on all of these different things.
30:12.477 --> 30:16.481
What would be sort of your final comment for investors taking a look at
30:16.481 --> 30:19.350
the extraordinary success you've had in a lot of the funds right now.
30:19.350 --> 30:22.487
What would you sort of wrap up with, David, today?
30:22.487 --> 30:26.958
I would say, I mean, maybe I'll tell a little story, a little
30:26.958 --> 30:28.760
story from a couple of years ago.
30:28.760 --> 30:32.764
We were down at one of our Fidelity Canada events down
30:32.764 --> 30:37.168
south and we had advisors around and a number of them would say to me,
30:37.168 --> 30:39.237
why do you own anything outside of the US?
30:39.237 --> 30:43.374
The US has the best companies, they have the best earnings, the US dollar
30:43.374 --> 30:48.213
is strong, do we need to bother with international diversification?
30:48.213 --> 30:52.317
I think the last year has been a case study in why you have that
30:52.317 --> 30:57.422
international diversification. That story isn't done yet.
30:57.422 --> 31:00.959
We're always gonna have US holdings and it's always gonna be a cornerstone of
31:00.959 --> 31:05.096
the portfolio, just given its size and the nature of its companies, but I
31:05.096 --> 31:09.467
think what we're seeing is really the argument for not being only in the
31:09.467 --> 31:11.269
US and having that diversification.
31:11.269 --> 31:13.805
It's a fascinating moment and we're glad you're at the helm.
31:13.805 --> 31:15.940
David Wolf, thank you very much for joining us here today.
31:15.940 --> 31:16.908
Thanks, Pamela.
31:16.908 --> 31:19.544
Thanks for watching or listening to the Fidelity Connects
31:19.544 --> 31:23.848
podcast. Now if you haven't done so already, please subscribe to Fidelity
31:23.848 --> 31:27.218
Connects on your podcast platform of choice.
31:27.218 --> 31:30.054
And if you like what you're hearing, please leave a review or a five-star
31:30.054 --> 31:34.025
rating. Fidelity Mutual Funds and ETFs are available by working with
31:34.025 --> 31:37.395
a financial advisor or through an online brokerage account.
31:37.395 --> 31:41.099
Visit fidelity.ca/howtobuy for more information.
31:41.099 --> 31:44.936
While on Fidelity.ca, you can also find more information on future live
31:44.936 --> 31:49.073
webcasts. And don't forget to follow Fidelity Canada on YouTube, LinkedIn,
31:49.073 --> 31:50.375
and Instagram.
31:50.375 --> 31:53.244
We'll end today's show with a short disclaimer.
31:53.244 --> 31:57.081
The views and opinions expressed on this podcast are those of the participants,
31:57.081 --> 32:01.019
and do not necessarily reflect those of Fidelity Investments Canada ULC or
32:01.019 --> 32:05.023
its affiliates. This podcast is for informational purposes only, and should not
32:05.023 --> 32:07.558
be construed as investment, tax, or legal advice.
32:07.558 --> 32:09.861
It is not an offer to sell or buy.
32:09.861 --> 32:14.198
Or an endorsement, recommendation, or sponsorship of any entity or securities
32:14.198 --> 32:19.003
cited. Read a fund's prospectus before investing, funds are not guaranteed.
32:19.003 --> 32:22.573
Their values change frequently, and past performance may not be repeated.
32:22.573 --> 32:24.909
Fees, expenses, and commissions are all associated
32:24.909 --> 32:26.711
with fund investments.
32:26.711 --> 32:29.314
Thanks again. We'll see you next time.
