The Upside: CIO insights: Mid-year market review with Andrew Marchese
Join us for a mid-year market update with Andrew Marchese, Chief Investment Officer. Andrew shares his latest perspective on the forces shaping markets, how portfolios are positioned and what investors should be watching in the months ahead.
Transcript
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Subtitles are AI-Generated.
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Hello, and welcome to The Upside.
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I'm your host, Emily Anonuevo.
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Well, we've reached the halfway point of the year and perhaps there's no better
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time as investors to pause, reflect and look out to the rest of the year
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ahead. Canadians are surely concerned about inflation, housing,
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unemployment, and ongoing geopolitical tensions.
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At this point in time the markets have absorbed a lot, economic slowdown,
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shifting global dynamics but also strong corporate performance as well.
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What should investors be focused on at this point of the year and what major
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factors will shape the markets going forward?
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Here to share his CIO insights and perspectives is portfolio manager, Andrew
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Marchese. Welcome, Andrew.
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Pleasure to be here.
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Nice to have you in the studio today.
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Thank you.
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Okay, let's just dive right in. I wanted to get your overall thoughts on this
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technical recession that we're in.
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Should investors be worried? For the investors watching online right now,
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a technical recession is when we experience two consecutive quarters
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of negative GDP decline.
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A true recession is when we see a more severe decline.
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Is that about right?
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Yeah, that's about right. I think should we be concerned?
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No. The first thing you have to remember about the stock market and
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investing in general, the stock market's are forward looking discounting
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mechanism so any bad news is usually anticipated
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ahead of time and it's priced in ahead of the time.
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Now, that can be anywhere from 3 months to 18 months in some cases
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depending on what the news actually is, whether it's macroeconomic related or
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related to specific companies or securities.
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In this case, if you look at it consensus estimates on Bay Street are
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for about 1.1% GDP growth in Canada this year,
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for the calendar year, and then next year I think estimates are closer to about
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1.7%, 1.6% and then 1.8%.
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A slow, gradual kind of increase.
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What to be noteworthy about that I think is some
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of the initiatives that we're seeing more in the industrial context,
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the commercial context kind of going forward, fixed
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asset investment in Canada has been trending a little bit below
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normal over the last two to three years.
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If we were to resume a pace that we saw a
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few years back, call it five years back, six years back, that would be a more
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normalized pace, you could easily add about a half a percentage point
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to those GDP numbers.
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Typically, when economies get better through fixed asset investment
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and whatnot by the private sector that has a way of trickling down to the
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consumer. In theory, the number could be greater than a
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half a percentage point if consumers feel confident, they spend,
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interest rates are manageable, so on and so forth.
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People feel good about their investments, people feel good about their real
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estate, people feel about their job. If all that comes to fruition then
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you potentially have upside to those numbers.
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Right, correct. I mean, consumers have felt a lot and
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experienced a lot in the first six months of 2026.
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We're seeing higher gas prices at the pumps.
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Now they're a bit lower, give or take which week you're in.
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Maybe a bit of their discretionary
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income has gone down.
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Let's take a step back and look at the first six months of this
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year and then maybe look ahead to the next six months.
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What, in your perspective, are the main factors and forces
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shaping and influencing the market today?
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If we look back six months, we came into the year, I think, noticing a
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few positives. One was, generally speaking, in both Canada and
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the United States we saw a lot of improving
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economic metrics, in both manufacturing and
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service. That was good so the market got off to a good start this year.
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As we got into late February, obviously, we had to deal with
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the Iran conflict, the conflicts in the Middle East.
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We saw a spike up in oil prices as a result of that.
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A lot of people were consternating exactly about what you said, higher prices
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at the pump, what would that do for consumers' wallets,
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discretionary spending, what would mean for industry that
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manufactures things because the price of raw materials
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would go up in nature and therefore that would potentially hurt profit margins.
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We thought generally these things are kind of fleeting, and indeed it's proven
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to be fleeting. The oil is now back in the 70s, it
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didn't take that long to get there in the grand scheme of things.
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As we look forward into the next six months of the year, the theme that
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tends to be dominating the stock market is all things related to artificial
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intelligence, whether you're talking about semiconductors,
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whether you're talking about data centers, power generation and supply, all
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of this is in some way, shape or form related.
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It has been the most newsworthy and probably frothiest
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place in the market on a day in and day out basis.
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Those themes are gonna dominate continue going
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forward. I think to a somewhat lesser degree there could
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be continued talk about central bank interest rate policy
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kind of going forward. You may have seen more recently
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that some inflation metrics have ticked up.
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We attribute that largely to oil and some other input costs that have
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temporarily risen. It would not surprise me if those numbers
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came off in the back half of the year and we wouldn't have
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to worry about, necessarily, central bank tightening to curb
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inflation.
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That will be an ongoing watch to see how those numbers progress and, by
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definition then, how central banks will react.
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Typically, when central banks have to tighten, and they have to tighten
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multiple times, that has a knock-on effect of
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slowing the economy, not immediately but usually about 12 months out.
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The market kinda sees through that and that results
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in a higher discount rate which means lower valuations and also, potentially,
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some negative earnings revisions.
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But we're not there yet so this is just something to keep on our radar screen.
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Absolutely. Now, if we step back and focus on
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home soil, interested to get your thoughts on the health of
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Canada's economy right now. You've spoken about this on our previous
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webcasts. How would you describe it?
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I mean, I know you've used cautiously optimistic as a term,
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how would you diagnose the health our economy right now?
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Well, as I stated previously from the GDP's numbers, it's not great.
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What you have to ask yourself is where could it possibly improve?
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The one area I think it could improve, and our Prime Minister has talked about
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that, is bringing more focus in on industry here in
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Canada and forming new trade alliances around the world.
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Now, that's not a quick fix. That's a multi-year, multi-decade
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potentially, strategy that the country has to
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undertake, be committed to.
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How they execute that and the success of those
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measures will dictate how our future GDP looks.
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In the short term we have kind of mediocre growth.
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Those things that the Prime Minister is talking about tend to be longer term
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in nature.
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The other thing in the short term that we have to be wary of is just for
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years many Canadians have been in the black
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on their housing. That's been a huge source of wealth
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for Canadians. We tend to have a levered consumer
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but it's disproportionately exposed to mortgages.
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Now, more recently we've seen 20%,
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some 20+% corrections in real estate in the GTA, other
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parts around the country as well, so some people are underwater in
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their house right now from an equity value perspective.
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To the extent that that bottoms out and starts to come back I think consumers
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will feel better about their real estate situation, their home situation, and
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that could be a good thing going forward.
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That could, to the extent that those prices start to rise again that could
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potentially, you know, again, trickle down into the economy and
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spur a little bit of short term growth.
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Those are the things I'm probably most focused on
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with respect to the Canadian economy.
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We're kind of meandering but the longer term looks very
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good because I think there is a very disconcerted
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effort on behalf of our leadership federally to
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try to grow this economy for a sustained period of
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time by forging new trade alliances, changing policy,
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potentially changing taxation. Those are all good things.
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Again, they're not quick fixes. You won't see it in next quarter's numbers
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but I'm optimistic because it's talk and
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action that we haven't seen in decades.
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Interesting. In the longer term what I'm hearing is to
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be optimistic in the longer term but there are some pain points Canadians are
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failing in the short term, like you said, with debt on their mortgages
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and whatnot.
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If you turn back to last year, sort of the tariff
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turning point for our country, in the last year we've shown a lot of
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resilience and that has sort of shifted Canada
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to think about different ways to invest and maybe different trading
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partners, like you just alluded to.
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How's that shaping the economy?
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What is deglobalization affecting our economy?
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I know we talked about that in previous webcasts.
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How's that affecting how we invest here in Canada?
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I think what deglobalization does is it puts a
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magnifying glass or a microscope under the fact that as a
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nation we're very rich in natural resources.
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If you look historically, if you look back over centuries and centuries,
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where you have had periods where there has been unrest
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in trade and the formation and forging
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of new trade alliances because countries tend to break away from them,
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you have a major country that tends to break away, what
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you — and that's what the United States is really
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adopting, more of an isolationist kind of policy.
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We'll see if it endures beyond the current administration but
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generally when these things gain momentum they keep the inertia.
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I think it's very important to note that as your major trading
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partner kind of moves in a slightly different direction it's
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incumbent upon you as a nation to forge new alliances to diversify your
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trade base. It would be no different than if a
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business had 75% of
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its revenue tied to one customer, you'd want to diversify.
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No matter how good the customer is you want to diversify that customer base.
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I think that's what Canada has to do.
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What you have seen with the United States and the
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movement into Venezuela, the chatter about Greenland, you
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don't have to look that far back. You could go back into the late 1800s when
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the United States adopted a similar type of policy
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that trading lanes, shipping lanes and natural resources
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were front and centre as a means of commandeering power.
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Canada's sitting in a very good position because we're rich in natural
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resources. Those assets have become scarcer and, by
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definition, have become more valuable.
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The assets in the ground are more valuable.
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That's how we deal with globalization.
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Do we decide as a nation to build out pipelines from coast to coast?
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Do we change the laws in the ports in British Columbia
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to allow tankers to come in so that we can provide liquefied
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natural gas or other products to Asia?
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These are all things that we're going to have to deal with.
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The political endeavors that the United States is
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taking on has forced our hand to think about
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trade differently, to exploit industries or grow industries we haven't
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really thought about in a holistic way.
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Therefore, we have
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a great and rich natural resource base by which to take
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advantage of all that and exploit that.
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It'll be very interesting to see the inertia and the momentum that
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this whole idea of deglobalization kind of takes
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on over the next 5 to 10 years, but I have
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to believe that Canada, just given the words of our Prime Minister, is going to
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continue to forge forward and foster new relationships
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that we haven't had or had in a very small way previously.
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That's great, that's great. Now, you've been in this industry for quite some
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time, Andrew, over 28 years, been a fund manager for several years, interested
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to know what opportunities, what sectors are piquing your interest
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at the moment here in Canada or beyond?
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I think we're not really sector-specific.
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There isn't one area. I mean, thematically everybody is talking about
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artificial intelligence. Certainly, in many areas
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those sub-industries related to artificial intelligence have
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demonstrated the most profit growth in the market.
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If you look at all sectors you see
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a bias in stock performance towards
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earnings growth, more so than you've seen in recent memory.
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In other words, irrespective of industry or sector,
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consumer discretionary, industrials, financials,
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the stocks that are growing profits the fastest are getting the greatest lifts
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in terms of stock price.
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That is generally a true statement over long stretches of
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time in the market but it is particularly true over the last
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12 to 24 months. We call them factors.
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Profit growth as a factor, a term to look at,
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is really leading the charge and leadership in stock returns.
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We're just being mindful of businesses that are growing faster
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than their peers and competitors in the same industry and making sure that
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... ask ourselves the question, is that profit growth durable
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and is the stock still relatively inexpensive based on our outlook for growth
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in that specific security?
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It's really sector agnostic.
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Curious to know, we've mentioned AI a couple of times in
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the program, you've been in this business for a long time, has this
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AI bubble, is this the biggest you've seen it
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in your time, in your experience?
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Do you see a lot of growth in the short term, in the two
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to four years?
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If you look at some metrics you would still say that
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the technology bubble, Nasdaq bubble of '99
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and peaking in February of 2000, would be the biggest.
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In other ways some people would say this is
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as big as that. It depends on what data you want to use
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to make that conclusion.
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What we really need to figure out — there are some similarities to'
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99, there are also some differences.
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What everybody is really trying to figure out is the durability
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of the CapEx spend associated with this topic by
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a number of people involved in it.
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The numbers are enormous, they're absolutely astronomical, so
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it begs the question, can these astronomical numbers continue
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for multiple years?
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They're going to need to because some of the valuations associated with the
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securities are implying that.
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To the extent that does not come to fruition those stocks are gonna meet
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with some pretty significant headwind.
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To the extent that there's still a
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big, long runway ahead of us in terms of CapEx spending
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then one would think that the securities have more room to run.
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That's what we're all trying to figure out.
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There is some healthier aspects to this CapEx cycle that
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were not apparent in 1999.
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I lived through '99.
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There was companies who were consuming
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optical switches and equipment and telecom equipment, were
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spending 3 and 4X their cashflow, which is not sustainable.
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Today, the biggest spenders are pretty much spending their cash flow
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so they're not getting in trouble with debt and whatnot.
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Now, there's some similarities, like vendor financing and whatnot, we gotta be
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mindful of that. I guess the short answer is there's a lot of
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crosscurrents. There are some similarities to '99 but there's also some
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healthy differences.
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Interesting. Super interesting.
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Now, a lot to digest here, to sort of sum it up for our investors watching,
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Andrew, as we approach the mid-point of the year what should investors
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be focused on at this point in time?
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I think it's really about building a diversified portfolio.
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There's been a lot of chatter about artificial intelligence
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is the only game in town and if you miss out on that
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you're missing out on potentially the trade of a lifetime and that hurts
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your long term returns. I think that's pretty myopic thinking.
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I think you always want to have a balanced portfolio and not get yourself
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extended too far in any one direction.
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The question is what should they think about at this point in time, which I
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would answer like at every point in time you think about the same thing, which
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is are you well diversified, is the risk in your portfolio appropriate for
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you personally and the lifestyle you have, the financial goals
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that you have and the targets you aspire to achieve?
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That's first and foremost.
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The one aspect I would say about all this is traditionally we've
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looked at equity and fixed income splits.
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If you're younger it tends to be more 80/20, equity, fixed
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income, or even higher all equity.
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As you get older, maybe have children,
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you're planning for retirement, that ratio of equity comes down and it changes.
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The one aspect I would encourage people to look at is maybe
18:57.503 --> 19:00.372
— and it would be taken from the fixed income portion of their portfolio — is
19:00.372 --> 19:04.443
your exposure to hard assets and real assets, whether that
19:04.443 --> 19:08.947
means land, for some people that means gold,
19:08.947 --> 19:11.583
it can mean a whole lot of things in terms of hard assets.
19:11.583 --> 19:15.754
The reason I feel that way is because the money supply, M2 money
19:15.754 --> 19:19.725
supply has been growing uncontrollably for a long period of
19:19.725 --> 19:24.029
time so there is always that tail risk of
19:24.029 --> 19:27.432
inflation just grinding higher over time.
19:27.432 --> 19:30.936
We talked about a little bit earlier that it should abate a little bit as oil
19:30.936 --> 19:35.073
comes down but what I'm referring to is more of a multi-year
19:35.073 --> 19:38.043
type of tick-up in inflation.
19:38.043 --> 19:42.481
That's not to say it will happen but I think because of the underlying
19:42.481 --> 19:46.685
ingredients, so to speak, in the financial world it would
19:46.685 --> 19:50.956
be best to kind of devote some percentage of one's portfolio
19:50.956 --> 19:54.326
to hedge against that potential outcome.
19:54.326 --> 19:56.495
That outcome is not zero.
19:56.495 --> 19:59.565
There's a non-zero risk that actually comes to fruition.
19:59.565 --> 20:03.602
It's hard to gauge what the probability is but I think because it's a
20:03.635 --> 20:08.073
non-zero risk and we have a lot of things
20:08.073 --> 20:12.444
that have transpired over the course of the last, pretty much two decades,
20:12.444 --> 20:16.448
that could potentially lead to a secular tick-up in
20:16.448 --> 20:21.420
inflation. One's portfolio should be adequately hedged
20:21.420 --> 20:22.688
against that.
20:22.688 --> 20:26.758
Very good, very good. Andrew, always a pleasure to have you in studio to get
20:26.758 --> 20:29.061
your insights and perspectives. Really appreciate your time.
20:29.061 --> 20:29.561
Thank you so much.
20:29.561 --> 20:30.862
Thank you, Emily.
20:30.862 --> 20:32.564
And thank you for tuning into The Upside.
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53:34.211 --> 53:37.914
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53:37.914 --> 53:41.184
Fidelity mutual funds and ETFs are available by working with a financial
53:41.184 --> 53:44.087
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53:44.087 --> 53:47.691
Visit fidelity.ca/howtobuy for more information.
53:47.691 --> 53:51.127
While on fidelity.ca you can also find more information on future live
53:51.127 --> 53:55.065
webcasts. Don't forget to follow Fidelity Canada on LinkedIn, YouTube,
53:55.065 --> 53:59.302
Instagram, or X. We'll wrap things up today with a quick disclaimer.
53:59.302 --> 54:02.606
The views and opinions expressed on this podcast are those of the participants
54:02.606 --> 54:06.943
and do not necessarily reflect those of Fidelity Investments Canada ULC or
54:06.943 --> 54:10.981
its affiliates. This podcast is for informational purposes only and should
54:10.981 --> 54:14.084
not be construed as investment, tax or legal advice.
54:14.084 --> 54:17.520
It is not an offer to sell or buy or an endorsement, recommendation or
54:17.520 --> 54:20.523
sponsorship of any entity or security cited.
54:20.523 --> 54:22.225
Read a fund's prospectus before investing.
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Funds are not guaranteed.
54:24.094 --> 54:27.664
Their values change frequently and past performance may not be repeated.
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Fees, expenses and commissions are all associated with fund investments.
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