FidelityConnects: Capital markets playbook

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Hello, and welcome to Fidelity Connects. I'm Pamela Ritchie.

 

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With markets settling into the realities of the end of year trade

 

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will next year's theme include watching pretty closely the other so-called

 

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943 stocks in the S&P 500, essentially the

 

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broadening trade. This as AI swirls its way through the back

 

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offices of corporate North America and, indeed, through corporations across the

 

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globe. Our next guest is perfectly positioned to shine his lens on

 

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the markets and the state of play with some of Fidelity's most successful

 

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products on the market.

 

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He and his team actually designed them.

 

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Please welcome Fidelity Director of ETFs, Andrei Bruno, for his end of

 

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year take. Great to see you again. How are you?

 

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Always great to see you. I'm doing fantastic going into the year end here.

 

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It's been an exciting and busy year for all of us, I'm sure.

 

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Kind of an extraordinary year that we're sitting at the end of here after an

 

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extraordinary year just before it as well.

 

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We'll invite everyone to send their questions in for Andrei over the next half

 

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hour or so. Let's begin a little bit with what has

 

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led this market. We are gonna talk about leadership change and the other 493

 

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but let's first start with are the Mag 7, you

 

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can argue about the number there a little bit, whether it's a 9 or whatever,

 

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are they too expensive?

 

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That's a big question that everyone's asking, are they too expensive?

 

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If we rewind back to the start of the year, start of year was basically a

 

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continuation of the prior year. The Mag 7 was still working, the growth trade,

 

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the momentum trade was still working. Then we got the tariff tantrum,

 

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everything reversed.

 

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What wasn't working was now working and the growth names were no longer

 

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working. Then we got to pause and we've kind of continued this momentum

 

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growth trade for the remainder of yeah, the summer on.

 

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If we think about the Mag 7, a couple things we think about is

 

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does this rhyme with the tech wreck?

 

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Are there any similarities, are there dissimilarities?

 

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If we look at purely valuations we're not at kind of

 

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the tech bubble levels of valuation.

 

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We're in the 30s times things and that's okay.

 

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That's okay.

 

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Relative to historical averages in the S&P, yes, we are

 

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elevated. The other thing we also need to appreciate, if we think back to the

 

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tech wreck there is a lot of companies that were commanding these large

 

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valuations that had very poor cash flows, very poor

 

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profitability. That is not the case [indecipherable].

 

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This is not to say we can't get some level of pullback, some level

 

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of price-to-earnings earnings contractions in

 

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terms of the valuations metrics but we do have some confidence

 

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in thinking that we're not going to repeat that tech wreck as it stands right

 

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now. Obviously, things can change for sure.

 

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That's one thing we look at.

 

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The next question is, well, how much longer can we continue this?

 

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That seems to be the big one, doesn't it?

 

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As you mentioned, this year was a continuation of last year so we've been

 

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coasting along here with this story.

 

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Right now the way I like to look at it, we've got kind of three

 

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buckets to think about AI. You've got your hardware side, you've got your

 

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software side and then you've got your kind of bricks and mortar side.

 

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Those first two buckets is kind of what we're looking at now.

 

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Think of your Nvidias of the world, your OpenAI's of the world, the types of

 

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companies that are creating the software and hardware to support, that's what

 

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the trade's been on right now.

 

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The longer term trend, which I find very exciting, is kind the bricks and

 

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mortar AI. How does it affect that other 493 names within the

 

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S&P 500? The question is, though, when is that gonna happen?

 

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A lot of people are waiting for it, is it gonna happen now?

 

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That's the million dollar question, I don't know.

 

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Maybe we're gonna start to see it next year.

 

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Anecdotally, I'm sure folks on the line, internally, a lot of people have been

 

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talking about AI, how can we implement AI to increase efficiencies.

 

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I think that's what the broader economy is trying to do right now, how can you

 

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utilize this new infrastructure?

 

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But they've been doing that for, arguably, a couple of years now.

 

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They've been training it, trying to figure it out, how it's going to work

 

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internally. The question is, I guess, that old accretive question,

 

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when does it actually kick in as it's helpful for margins, ultimately,

 

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to every other company out there.

 

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Again, that's the big question.

 

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The question is too, at what pace are we going to see it?

 

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Are we expecting this big jump in productivity?

 

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Is it going to be more of a steady as it goes over time?

 

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These are the questions that I'm sure many people on the street, many portfolio

 

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managers, many CEOs are trying to figure out right now as we speak.

 

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Does it feel like, though, leadership has an opportunity to change?

 

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Or to what extent does it feel like leadership could change?

 

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I think over the long term it certainly can.

 

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You think about where the valuations are on some

 

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of those hardware and software names and where the valuation ...

 

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if you compare the price-to-earnings on the S&P 500 cap-weighted

 

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we're above historical averages.

 

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If you compared it to the equal-weighted S&Ps 500, the equal-weighted S&P

 

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500 is actually close to historical averages.

 

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If you think about that discrepancy from a stock market return perspective over

 

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the long run, if we have that switch in regime change or switch

 

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in leaders I think there's a lot of opportunity in the other 493

 

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names.

 

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It's really, really interesting to see how some of that will begin to play out.

 

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Let's also talk just a little bit about the risks that are out

 

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there. It's an interesting moment.

 

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You're ultimately a bond desk guy but you do a lot of other things at this

 

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point. We'll talk about what you're doing now.

 

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When you take a look at credit markets, take a look at sort of the fixed income

 

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story right now credit spreads are very, very tight.

 

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Some have said when they're this tight there's only one direction and that's

 

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wider. I don't know. Where do you fall in sort of the discussion of how

 

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healthy the market is right now and where it goes.

 

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If you think about corporate credit, think about

 

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credit spreads, your credit risky bonds, as you mentioned, credit spreads are

 

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kind of almost at historical tightness right now.

 

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Said in another way, if you're buying credit right now you're kind of buying

 

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closer to the all-time highs.

 

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When we take a under the hood, defaults, distressed debts, there's nothing

 

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that's screaming we've got a credit scenario right now, a credit

 

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crisis right now. It also makes you think about

 

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do I want to buy at the all-time high. If I am buying at the all-time high

 

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how diversified do I want it to be? I think the answer is you do want to be

 

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very diversified across credit right now.

 

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Ts that a duration story or that's...

 

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Duration's a whole other story here.

 

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If you take a look at the short end of the curve, obviously, central banks have

 

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been cutting rates. We've been seeing rates come lower.

 

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But the long end of curve has been kind of ...

 

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the long end is typically dictated by growth and inflation so you've actually

 

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seen the long and kind of push a little bit higher.

 

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If we take a look at GDP forecasts, they're edging a little bit higher whether

 

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you're looking at the United States or even Canada.

 

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Even Europe, even Europe.

 

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You've got this scenario where you're seeing the low end kind of drift lower

 

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and the high end drift a little bit higher. Also overlay inflation as well,

 

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which indicates the long end of the curve as well, we're still pushing a little

 

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hot. In the U.S.

 

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we're sitting somewhere around 2.8, 2.7. We got a print I think later this week

 

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as well. Canada, similar around there.

 

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Canada, unless something changes, appears to be at the end

 

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of its cycle here.

 

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It could be a hike. I mean, no one's predicting there's gonna be a hike soon

 

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but it appears like this is the end of the cycle, is it not?

 

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What do you say to that?

 

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If you look at the market probabilities for next year

 

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they're pricing in hikes for next year.

 

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It's not baked in. I think you have to go pretty far out before you even get

 

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close to one hike being priced in.

 

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I think it's about 75% probability of a hike sometime in Q2,

 

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Q3 of next year.

 

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But it's the other direction.

 

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It's the hike. In the U.S. they're still pricing in a couple more cuts but

 

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they're a little bit higher.

 

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When we think about interest rate differentials across the globe U.S.

 

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rates are still quite high relative to the rest of the globe.

 

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Whereas Canada, obviously, we're much lower than them which has implications

 

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for currencies as well, which will be another interesting story for next year.

 

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Let's go there. We can go briefly into sort of the positioning

 

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story but one of the big question marks for any investor, really, across the

 

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globe is the U.S. dollar and the discussion of moving away from

 

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the so-called U. S. exceptionalism to diversify, essentially.

 

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Maybe just talk about that as it relates to currency, the U.S.

 

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dollar.

 

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Obviously, all the tariff implications are, broadly speaking, negative

 

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for U.S. dollar considerations.

 

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What's kind of partly offsetting that is how high their rates are relative to

 

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the rest of the world. Obviously, equity markets are doing quite well as well

 

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so financial capital is still funnelling into the United States.

 

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I think when we think about the U.S. next year ...

 

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and just take a step back too, we think broadly about currency cycles

 

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as well. Historically speaking, the U.S.

 

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dollar cycle has been around 15 to 17 years where you see

 

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kind of this big trend and down and then back and up.

 

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We're kind of on the leg of ... if we're thinking purely technical, looking at

 

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charts and history, we're on that downward slope of

 

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kind of U.S. dollar weakness there.

 

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Again, I think for next year we saw quite a bit of depreciation on the U.S.

 

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dollar versus kind of the remaining G10 currencies.

 

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I think on a balance for next year I think we could see kind of a continuation

 

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of that but maybe not to the degree that we saw it this year.

 

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Again, those interest rate differentials are obviously going to play.

 

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The carry trade comes up quite a bit as well.

 

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Right now if you think about the carry trade, ultimately the carry-trade

 

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101 is you borrow in low interest rate currencies

 

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and you invest in higher rate. Right now the U.S.

 

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is relatively higher ... from an interest rate is relatively higher

 

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whereas you have a lot of funding currencies that are relatively lower.

 

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What will be interesting is Japan as well which has historically

 

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been a big carry trade currency with the possibility of the

 

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Bank of Japan potentially raising interest rates.

 

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It's generational, literally.

 

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Very generational.

 

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Along with sort of the currency implications in that story what

 

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do you see ... April happened and we saw a changeover

 

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of, perhaps, international investors coming out of the U.S.

 

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dollar, then lots of flows right back in and caught this amazing rest

 

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of the year trade.

 

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Just sort of speak to how it works with funds who rebalance

 

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around at year end. I don't know when that all happens.

 

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If there are those international investors, even U.S.

 

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investors, Canadian investors, who might just hold out until year end before

 

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they make decisions what will a depreciating U.

 

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S. dollar, if you believe that's what it is, mean for sort of this

 

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moment, literally year end, as things turn over for a lot of funds?

 

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One other quick thing. I want to take a quick sidebar.

 

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The other thing as well is you're seeing a lot of central banks

 

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diversify away from the U.S.

 

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dollar which is placing some pressure on the U.S.

 

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dollar. That ties into the gold trade as well.

 

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You're seeing lot of central banks and the way they're diversifying away from

 

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the U.S. dollar is buying gold. Gold has had a generational run this

 

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year as well so that's a longer term trend that we're seeing with

 

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central banks. If you rewind back to the early aughts it was the opposite.

 

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Central banks were selling gold. I can't remember the exact year but I think

 

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Canada sold off all its gold reserves sometime in the aughts.

 

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You're seeing a bit of a reversal of that trend.

 

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That's obviously weighing on the U.S. dollar and also helping to support the

 

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gold trade.

 

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In terms of year end, in term of hedging under

 

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the hood there's usually  ...

 

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if you have hedged products, just a little bit of mechanics here, typically

 

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at year end you will see a lot of hedging and usually how that happens, if U.S.

 

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equity markets go up you need to hedge more because

 

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now the value of your U.S. dollars in your portfolio have gone up.

 

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Generally, thinking back to my FX days, whenever you saw a really strong run

 

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in U.S. equity markets, you typically saw U.S.

 

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selling at the back because now the volume of your hedge is here

 

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but the value equity has gone up, you have to overlay some more hedges.

 

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Could that happen over the course of a year end?

 

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There are lots of decisions that tend ... they're not always made now but some

 

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of them are.

 

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Yeah, and then there's also the active side of it, people thinking about

 

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should I be hedging, should I go more into currency neutral?

 

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We hear that a lot, the currency neutral discussion now.

 

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Well, we didn't have that discussion for five, six years and it

 

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certainly has cropped up more this year with people looking to take some U.S.

 

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dollar exposure off the table. I think you'll continue to see that trend as we

 

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go into 2026.

 

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Do you think it will be somewhat slow and steady or, gosh, it's

 

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year-end, there's some real rotation. What's your general sense?

 

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I doubt you'll see ...

 

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typically people don't want to make too big of moves, especially this late

 

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in the year now. The last two weeks of the year people

 

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don't wanna do anything too drastic, don't want to move too much around.

 

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Liquidity is a little bit thin.

 

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Let's talk a bit about that. This is that moment, isn't it, when...

 

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As we get in the back half of the year, regardless if you're looking at fixed

 

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income markets or equity markets you see liquidity get a little bit dry.

 

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People don't want to hold as much risk going into year end.

 

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There's always a word of caution.

 

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Next week we're going into the holidays there, you

 

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typically don't wanna move too much around that week.

 

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Liquidity can be low, prices can be a little worse than you'd otherwise expect

 

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so there's always a word of caution.

 

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FX markets are a little bit different. They're super, I think, I don't know

 

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what the number is now but 4, $5 trillion dollars are traded daily in FX

 

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markets so it's an insanely deep and liquid market, particularly around the

 

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U.S. dollar, of course, as well.

 

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Hello, investors. We'll be back to the show in just a moment.

 

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else you get your podcasts. Now back to today's show.

 

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Okay, that's fascinating to go into that.

 

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I wonder, some of the discussion of how people can diversify

 

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and change a bit how they're allocated comes

 

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a bit from different products and different products that are available.

 

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Your team, let's go into what your team does exactly.

 

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As I sort of mentioned you come from the bond desk, from FX,

 

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but at Fidelity you create some of products that go out there and then you make

 

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sure you're a huge liaison. What is your job exactly So we can talk

 

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about how clients can diversify.

 

15:05.571 --> 15:09.575

My job on my desk, what we essentially do is we deal with product

 

15:09.575 --> 15:11.577

development, particularly around our ETFs.

 

15:11.577 --> 15:15.614

We keep our finger on the pulse on what's happening in the ETF market,

 

15:15.614 --> 15:18.817

what kind of products are we seeing coming out, where are there gaps in the

 

15:18.817 --> 15:22.855

overall market, where are the gaps in our own lineup, and how can

 

15:22.855 --> 15:26.325

we bring the best-in-class solutions to market to meet those needs, whether

 

15:26.325 --> 15:30.162

it's our investors, whether it is rounding out our particular lineup.

 

15:30.162 --> 15:34.099

There's a lot of research and analysis that goes into our day-in-day.

 

15:34.099 --> 15:37.503

That's kind of one silo of the world that I operate in.

 

15:37.503 --> 15:40.906

The other silo is kind of on the ETF capital markets side as well.

 

15:40.906 --> 15:45.244

There we're dealing with any of the idiosyncrasies around how ETFs

 

15:45.244 --> 15:48.280

trade, you know, relative. Obviously, mutual funds, you put in your order, it

 

15:48.280 --> 15:50.115

gets filled at 4 p.m.

 

15:50.115 --> 15:52.785

NAV.  ETFs trade like stocks intraday.

 

15:52.785 --> 15:57.089

We work very closely with the market makers on Bay Street.

 

15:57.089 --> 16:00.225

These are the folks who are making markets in our ETF daily, making sure

 

16:00.225 --> 16:03.796

they're getting all the necessary information on a daily basis so that they can

 

16:03.796 --> 16:07.833

accurately price our ETFs on a database so investors can come to

 

16:07.833 --> 16:11.270

market and know that they're get execution prices that are close to what we

 

16:11.270 --> 16:14.840

call the intraday NAV of our ETF.

 

16:14.840 --> 16:18.177

Another part of our job is to try to keep them honest as well, making sure that

 

16:18.177 --> 16:22.247

they are appropriately pricing, providing liquidity to our end clients so

 

16:22.247 --> 16:26.051

that they can have a smooth experience when they're trading our ETFs in the

 

16:26.051 --> 16:26.785

secondary market.

 

16:26.785 --> 16:30.589

That's fascinating. Are you actually picking up the phone and checking in with

 

16:30.589 --> 16:34.760

people across the market maker universe but also other parts

 

16:34.760 --> 16:37.329

as well? You're a connector there in the markets?

 

16:37.329 --> 16:41.300

We can see on our screens where our ETFs are trading.

 

16:41.300 --> 16:45.504

We do have some kind of internal models where we try to

 

16:45.504 --> 16:49.675

estimate where our ETFs should trade so we kind of use that as a bellwether to

 

16:49.675 --> 16:52.277

keep kind of the market makers on us.

 

16:52.277 --> 16:56.682

For the most part they do a fantastic job.

 

16:56.682 --> 17:00.819

We do analysis, making sure we take a look at big block trades, was

 

17:00.819 --> 17:04.757

that priced reasonably because ultimately, again, our end

 

17:04.757 --> 17:08.694

clients are investors or financial advisors who work closely with us and have

 

17:08.694 --> 17:11.296

given us trust and we want to make sure that they're having a good experience

 

17:11.296 --> 17:15.300

in the market and paying as little as possible in terms of a bid offer

 

17:15.300 --> 17:15.901

spread.

 

17:15.901 --> 17:20.105

And just sort of make sure that everything's filled appropriately and so on.

 

17:20.105 --> 17:24.076

I'm sure lots of good companies do this but it's a little bit of

 

17:24.076 --> 17:28.047

a why Fidelity to make sure you have such a strong team doing that around

 

17:28.047 --> 17:29.515

the clock, pretty much.

 

17:29.515 --> 17:33.519

Exactly. When markets are open, there's a team, myself and there's two

 

17:33.519 --> 17:37.089

on the ETF capital market side so we're pretty dialled into what's happening

 

17:37.089 --> 17:40.259

all day. We're consistently watching. We have a number of alerts set up.

 

17:40.259 --> 17:44.263

If we see wild moves in our ETFs we investigate, make sure the market's

 

17:44.263 --> 17:48.133

operating appropriately, there's nothing wonky going on.

 

17:48.133 --> 17:50.169

We see if there's large blocks printed.

 

17:50.169 --> 17:54.373

We take a review of that and making sure that everything was

 

17:54.373 --> 17:59.745

priced at least reasonably for current market conditions.

 

17:59.745 --> 18:03.082

We take it very seriously and we do stay on top of it.

 

18:03.082 --> 18:07.186

We do retroactive quarterly reviews as well as our volumes of large

 

18:07.186 --> 18:10.556

blocks that were printed to make sure that everything's operating as it should

 

18:10.556 --> 18:11.690

in the secondary market.

 

18:11.690 --> 18:15.027

It's totally fascinating how that all connects in together.

 

18:15.027 --> 18:19.331

Some of the products that we've spoken to you and your colleagues about help

 

18:19.331 --> 18:23.602

everyone take a look at diversifying across regions, across various

 

18:23.602 --> 18:25.637

different asset classes.

 

18:25.637 --> 18:28.874

Let's talk a little bit about the regional story from this year.

 

18:28.874 --> 18:32.878

One of the other huge stories which does not connect to 2024

 

18:32.878 --> 18:36.949

in the way that perhaps the Mag 7 did is

 

18:36.949 --> 18:40.919

the international trade and how that has taken off this year for kind of a

 

18:40.919 --> 18:45.524

variety of different reasons but it's certainly, I think,

 

18:45.524 --> 18:47.626

surprised a number of people about how well that's done.

 

18:47.626 --> 18:50.762

The question is really does it have legs to go further?

 

18:50.762 --> 18:54.933

It's the first year we've seen this trend in quite some time.

 

18:54.933 --> 18:58.370

If we go back to the last three, four, five years U.S.

 

18:58.370 --> 19:00.639

equities is where we've seen ...

 

19:00.639 --> 19:03.609

particularly around using the ETF market as a proxy I know those numbers quite

 

19:03.609 --> 19:07.546

intimately. On the equity side of the ledger it's been international equities

 

19:07.546 --> 19:10.949

have garnered more flows than U.S. equites and Canadian equites.

 

19:10.949 --> 19:15.120

That started probably somewhere around the tariff tantrum

 

19:15.120 --> 19:19.057

time when we saw that shift.

 

19:19.057 --> 19:22.728

Once we got that pause we said maybe this trend will reverse, we haven't seen

 

19:22.728 --> 19:26.865

it reverse. International equities have continued to garner more flows than

 

19:26.865 --> 19:30.269

U.S. equities. I think there's a couple factors at play there.

 

19:30.269 --> 19:33.105

Number one, a diversification play.

 

19:33.105 --> 19:36.942

People have been overweight U.S., the growth names for quite some time.

 

19:36.942 --> 19:40.112

It's a way to diversify geographically kind of away from the U.S.

 

19:40.112 --> 19:44.416

a little bit to some degree. Take some risk off with regards to those

 

19:44.416 --> 19:48.120

Mag 7 names. Number two, there's a valuation play as well.

 

19:48.120 --> 19:51.990

Obviously, European equities or even international equities, broadly speaking,

 

19:51.990 --> 19:56.061

are trading a lot closer to their historic averages

 

19:56.061 --> 19:58.564

relative to, say, the S&P 500.

 

19:58.564 --> 20:00.966

I think those two factors are at play.

 

20:00.966 --> 20:04.269

A third factor as well is kind of where ...

 

20:04.269 --> 20:08.440

think about Europe and international, where they are kind of the economic cycle

 

20:08.440 --> 20:09.875

as well.

 

20:09.875 --> 20:13.111

They're more like Canada in the sense that their interest rates were cut

 

20:13.111 --> 20:15.013

earlier and harder and faster.

 

20:15.013 --> 20:18.984

Exactly. The thought is they're kind of a little bit further along

 

20:18.984 --> 20:23.188

and maybe seeing glimpses of light at the end of the tunnel so potential some

 

20:23.188 --> 20:27.426

opportunities there from an international perspective.

 

20:27.426 --> 20:31.430

Because that's happened, for instance, interest rates being cut does take some

 

20:31.430 --> 20:35.634

time to filter through. You expect that to carry on?

 

20:35.634 --> 20:39.838

I mean, you would assume it would be stimulative, but to your point, it takes

 

20:39.838 --> 20:43.775

anywhere between 6 and 18 months for monetary policy to kind of

 

20:43.775 --> 20:46.411

find its way into the broader economy.

 

20:46.411 --> 20:50.682

From a monetary policy perspective they're certainly decently positioned,

 

20:50.682 --> 20:54.620

think it would be stimulative. There's obviously some structural factors,

 

20:54.620 --> 20:57.022

thinking about Europe, that are still at play there.

 

20:57.022 --> 20:59.958

If we think about China there's still some bumps there.

 

20:59.958 --> 21:04.263

China is one of their main clients and the consumer

 

21:04.263 --> 21:06.031

story out of China is not as good as it was.

 

21:06.031 --> 21:10.135

No, I mean, the recent consumer numbers, I think consumer demand has taken a

 

21:10.135 --> 21:14.439

dip most recently.

 

21:14.439 --> 21:18.744

I think they're projected to grow at 4 1/2% which I think historically,

 

21:18.744 --> 21:23.548

if we think back to the 2000s, even the teens, we had to

 

21:23.548 --> 21:27.419

hit greater than that 6% number so we are trending a little bit lower.

 

21:27.419 --> 21:31.290

It's also somewhat expected as the Chinese economy fundamentally changes as

 

21:31.290 --> 21:35.360

well. If you think back to the early 2000s there

 

21:35.360 --> 21:37.229

was no middle class, really.

 

21:37.229 --> 21:39.464

The middle class is certainly starting to grow.

 

21:39.464 --> 21:44.970

You are seeing kind of a real time shift from that manufacturing

 

21:44.970 --> 21:47.773

economy to more of a consumption economy.

 

21:47.773 --> 21:51.109

That's really interesting. What about sort of the EM story?

 

21:51.109 --> 21:55.847

It's also had a pretty fantastic year, in terms of diversification again.

 

21:55.847 --> 21:59.785

Certainly, EM is also another area where we haven't been looking too closely

 

21:59.785 --> 22:04.056

in the last few years. I think we think back to, I believe it was 2021,

 

22:04.056 --> 22:08.060

there was that whole real estate issue in China

 

22:08.060 --> 22:12.464

which affects broad market EM indices because I think it's like 40 to 50%

 

22:12.464 --> 22:16.501

of the EM indices. We can have a philosophical debate about whether

 

22:16.501 --> 22:18.203

China is an emerging market or not.

 

22:18.203 --> 22:20.972

It still is classified technically as one.

 

22:20.972 --> 22:24.009

But EM certainly is starting to get a little bit more interesting.

 

22:24.009 --> 22:25.877

Obviously, the weakening U.S.

 

22:25.877 --> 22:29.681

dollar helps funding situations for EMs.

 

22:29.681 --> 22:31.483

There was a few years back where U.S.

 

22:31.483 --> 22:34.686

dollar was really kind of strengthening up relative to EM.

 

22:34.686 --> 22:39.391

That's generally not positive for emerging markets.

 

22:39.391 --> 22:43.595

Certainly, there is somewhat of a tailwind there from

 

22:43.595 --> 22:45.764

a currency perspective alone.

 

22:45.764 --> 22:48.567

It is certainly an area that's going to be more interesting moving forward.

 

22:48.567 --> 22:53.305

It's been somewhat ignored for the last several years

 

22:53.305 --> 22:57.242

but it'll be more of an interesting story, I'd say, for 2026.

 

22:57.242 --> 23:01.313

You mentioned off the top that AI, its effect on large

 

23:01.313 --> 23:04.349

companies in the U.S., some of the story we're talking about in terms of

 

23:04.349 --> 23:08.720

leadership change, if it can filter through 493

 

23:08.720 --> 23:12.891

other companies and be kind of accretive and useful to margins and so on, can

 

23:12.891 --> 23:16.128

that same situation not take place in Europe?

 

23:16.128 --> 23:20.499

Is it built into the base case for why equities

 

23:20.499 --> 23:23.101

actually all over the world, like even EM.

 

23:23.101 --> 23:26.805

To what extent is that one of the next questions?

 

23:26.805 --> 23:29.941

It's certainly more obvious to me for developed markets that are more

 

23:29.941 --> 23:32.110

knowledge-based economies.

 

23:32.110 --> 23:36.648

The EM is an interesting one.

 

23:36.648 --> 23:38.617

I've tried to think about it.

 

23:38.617 --> 23:42.988

If they can leapfrog, right?

 

23:42.988 --> 23:48.126

That's the question. If you think from a manufacturing perspective long term

 

23:48.126 --> 23:52.230

the question is does AI create a lot of that manufacturing,

 

23:52.230 --> 23:56.268

do we bring some of that manufacturing back home because now it's AI,

 

23:56.268 --> 23:59.638

there's machines, there are robots, and this is a longer term, I don't think

 

23:59.638 --> 24:01.640

this is happening tomorrow.

 

24:01.640 --> 24:06.211

The question is does EM lose from that perspective,

 

24:06.211 --> 24:10.182

or even textiles manufacturing, for example, some of those

 

24:10.182 --> 24:14.019

industries that we've offshored over the last 20, 30 years in seek of cheaper

 

24:14.019 --> 24:15.720

labour markets.

 

24:15.720 --> 24:19.724

Does that hurt EM and does that come back to North America, does it

 

24:19.724 --> 24:21.660

come back to Europe? I don't know.

 

24:21.660 --> 24:26.898

The other question, your point, educational

 

24:26.898 --> 24:30.302

systems and having the right people in order to run certain companies is

 

24:30.302 --> 24:34.272

obviously very important, can they leapfrog that now with AI and

 

24:34.272 --> 24:38.577

saying we don't necessarily need all these people who have all these specialty

 

24:38.577 --> 24:41.546

expertise. We have AI who can do that.

 

24:41.546 --> 24:45.650

Can it advance an economy and companies within

 

24:45.650 --> 24:48.253

just maybe without a degree in whatever.

 

24:48.253 --> 24:52.557

I guess the real question is relative to some of these developing markets

 

24:52.557 --> 24:56.628

are they going to do better, are they going to do the same, are they gonna do

 

24:56.628 --> 24:59.364

worse? I don't have an answer to that question just yet but it is certainly one

 

24:59.364 --> 25:01.800

that I think will be answered over the next 10, 15 years.

 

25:01.800 --> 25:04.135

We've done a lot on regional which I think is really interesting because it's

 

25:04.135 --> 25:07.472

one of the fascinating sort of changes this year.

 

25:07.472 --> 25:10.475

What about in styles? You go from sort of the U.S.

 

25:10.475 --> 25:13.078

growth discussion which ties in U.S.

 

25:13.078 --> 25:16.615

exceptionalism to other types of styles, even taking a look at different

 

25:16.615 --> 25:18.817

factors as well.

 

25:18.817 --> 25:22.721

These tie again into the ETFs and many of which are offered here.

 

25:22.721 --> 25:26.191

What about style diversification?

 

25:26.191 --> 25:29.794

The first place I like to start in terms of styles is where are we in the

 

25:29.794 --> 25:32.297

economic cycle?

 

25:32.297 --> 25:35.433

Yes, where are we, Andrei? Honestly.

 

25:35.433 --> 25:39.471

We think we're in late stage but then we, you know, increase growth

 

25:39.471 --> 25:43.542

forecasts so then maybe you say, for example, last time,

 

25:43.542 --> 25:46.645

a few years back we were like, we're in late and then we're like, oh, I think

 

25:46.645 --> 25:50.248

we've kicked back into mid-stage again.

 

25:50.248 --> 25:52.150

Right now we're in late.

 

25:52.150 --> 25:53.385

I'll say that with our best guess.

 

25:53.385 --> 25:57.756

There's some who say out of April we're in early but

 

25:57.756 --> 25:59.157

it's just another voice.

 

25:59.157 --> 26:03.528

Exactly. Historically, and certainly when you look at factor returns

 

26:03.528 --> 26:05.697

it's not obvious either.

 

26:05.697 --> 26:10.035

Historically in late you've wanted to look at momentum as

 

26:10.035 --> 26:13.305

well as quality. Those have been kind of what has outperformed historically in

 

26:13.305 --> 26:15.473

late stage. What we've seen this year, we've certainly seen momentum

 

26:15.473 --> 26:18.310

outperform. We haven't seen quality.

 

26:18.310 --> 26:22.447

It's been value has actually done better than quality which

 

26:22.447 --> 26:25.016

is interesting because you wouldn't expect those two to be working at the same

 

26:25.016 --> 26:27.652

time. I also think that's more of a diversification play.

 

26:27.652 --> 26:30.755

Money is flowing ... try to think how can I, you know, we talked about

 

26:30.755 --> 26:34.759

geographically diversifying, there's also factor diversification and one

 

26:34.759 --> 26:38.196

of the lower correlated with growth is obviously value.

 

26:38.196 --> 26:43.735

I think you've seen some investors take some chips off the growth story

 

26:43.735 --> 26:47.639

table and put it into value just as a means of diversification.

 

26:47.639 --> 26:49.374

That's really interesting.

 

26:49.374 --> 26:52.077

That may be a bit of a trend going forward.

 

26:52.077 --> 26:54.879

I mean, do you see that sort of going into 2026?

 

26:54.879 --> 26:58.984

I think as long as people remain to be

 

26:58.984 --> 27:03.588

... I shouldn't say uneasy with regards to the growth story but thinking maybe

 

27:03.588 --> 27:07.626

I need to diversify a little bit, maybe there's a possibility that we

 

27:07.626 --> 27:11.696

do see a bit of a pullback on some of these names, I think you'll continue to

 

27:11.696 --> 27:15.533

see folks potentially look at kind of value as a diversifier against their

 

27:15.533 --> 27:16.968

growth names and their portfolio.

 

27:16.968 --> 27:19.204

Let's do a quick round-up. We just have a couple of minutes left.

 

27:19.204 --> 27:22.240

There's a couple different questions here but one has to do with U.S.

 

27:22.240 --> 27:24.275

GDP earnings versus Canada.

 

27:24.275 --> 27:26.778

I wonder if just broadly we can ask you about ...

 

27:26.778 --> 27:30.015

there's going to be a bit of a data dump this week, a deluge.

 

27:30.015 --> 27:34.219

We've got jobs in the U.S. coming out, lots of it related to the shutdown and

 

27:34.219 --> 27:36.888

weird times for things to be released.

 

27:36.888 --> 27:40.258

Ultimately they tie into, you know, central bank policy.

 

27:40.258 --> 27:43.962

Just give us a little bit of an outline of what you think data coming out over

 

27:43.962 --> 27:48.066

the next little while might mean

 

27:48.066 --> 27:50.769

[indecipherable]. What might we see in terms of expectations?

 

27:50.769 --> 27:52.737

I think in the U.S., just a reminder, the U.S.

 

27:52.737 --> 27:55.473

has a dual mandate in terms of their Fed.

 

27:55.473 --> 27:58.910

They've got an employment mandate, maximize employment, as well as a 2%

 

27:58.910 --> 28:01.780

inflation target.

 

28:01.780 --> 28:05.850

Those are the two big numbers you want to look at with regards to Fed

 

28:05.850 --> 28:10.021

policy. Now, inflation is running above their target, whether you're

 

28:10.021 --> 28:14.259

looking at CPI, core CPI, PCE, whatever metric you're looking at,

 

28:14.259 --> 28:17.629

it's running in the high 2s.

 

28:17.629 --> 28:21.399

The other side of the coin is the employment story.

 

28:21.399 --> 28:25.036

Employment has deteriorated a little bit this year.

 

28:25.036 --> 28:28.139

We were talking about this before, we were talking about this back in the

 

28:28.139 --> 28:30.575

summer and we thought maybe they were seeing some data we weren't and that

 

28:30.575 --> 28:33.445

there was gonna be a big deterioration in the labour market.

 

28:33.445 --> 28:37.315

We haven't seen a massive deterioration in the labour market.

 

28:37.315 --> 28:37.749

There were some big revisions.

 

28:37.749 --> 28:42.053

There were big revisions but the headline number, if you look at unemployment

 

28:42.053 --> 28:44.022

it's still reasonable.

 

28:44.022 --> 28:46.791

They have ticked higher throughout the year.

 

28:46.791 --> 28:50.829

The question is can they hang their hat on the employment side

 

28:50.829 --> 28:54.999

and say we need to continue to cut, or do they start placing more focus

 

28:54.999 --> 28:59.137

on kind of the inflation side. If we take a look at the last meeting

 

28:59.137 --> 29:02.307

there were three dissenters, although one of the dissenters said we should

 

29:02.307 --> 29:04.843

actually cut more, so we're going to focus on the other two dissenters that

 

29:04.843 --> 29:06.644

said we should stand pat.

 

29:06.644 --> 29:10.281

If we also take a look at some of the other Fed members, non-voting members,

 

29:10.281 --> 29:12.751

there were a few of them who were also in the similar camp of maybe we need to

 

29:12.751 --> 29:13.752

put things on hold.

 

29:13.752 --> 29:16.654

Because there could be inflation that still needs to be worried about.

 

29:16.654 --> 29:19.190

That's just that. For Canada, we've cut a lot.

 

29:19.190 --> 29:23.294

We're hanging at the higher 2s as well here in Canada but we've got

 

29:23.294 --> 29:25.163

a 1 to 3% band.

 

29:25.163 --> 29:26.030

And we're in it.

 

29:26.030 --> 29:28.533

We're still in it right now.

 

29:28.533 --> 29:32.470

That being said, markets in Canada are pricing potential for hikes next

 

29:32.470 --> 29:36.474

year which could put us in a bad spot, to be

 

29:36.474 --> 29:40.612

perfectly honest. GDP's getting revised a little bit higher.

 

29:40.612 --> 29:44.883

The question is is it still gonna be strong enough to support

 

29:44.883 --> 29:48.853

... theoretically we could support a little higher interest rates but I

 

29:48.853 --> 29:52.190

think the Bank of Canada probably wants to stand pat where they are right now.

 

29:52.190 --> 29:54.826

So diversification seems to be the message.

 

29:54.826 --> 29:57.729

What's the most interesting sort of piece of the economy, the capital market

 

29:57.729 --> 30:01.766

story, that you might just point us in the direction of just keeping an eye

 

30:01.766 --> 30:04.002

on next year. There's lots of them.

 

30:04.002 --> 30:07.939

For me personally,

 

30:07.939 --> 30:12.076

and this is kind of headline stuff, but I'm

 

30:12.076 --> 30:16.681

very interested with the AI story still.

 

30:16.681 --> 30:20.919

From a short term and a long term perspective, me personally,

 

30:20.919 --> 30:24.689

I think long term it will be kind of another industrial revolution for the

 

30:24.689 --> 30:27.926

overall economy. That's something I'm looking at, and everyone and their mother

 

30:27.926 --> 30:30.495

is obviously looking at as well.

 

30:30.495 --> 30:34.098

That's what continues to interest me because I'm thinking more longer term and

 

30:34.098 --> 30:36.367

the implications it will have on the broader economy.

 

30:36.367 --> 30:40.471

I think it's a tremendous area for growth and productivity gains for

 

30:40.471 --> 30:43.174

the global economy over the next 10, 15, 20 years.

 

30:43.174 --> 30:45.176

It's really exciting for me.

 

30:45.176 --> 30:48.246

So exciting to get your views, the year-end views.

 

30:48.246 --> 30:50.415

Andrei Bruno, thank you for joining us. Have a great holiday when you get

 

30:50.415 --> 30:50.915

there.

 

30:50.915 --> 30:51.883

Thank you, same to you.

 

30:51.883 --> 30:55.820

Thanks for watching or listening to the Fidelity Connects

 

30:55.820 --> 30:59.958

podcast. Now if you haven't done so already, please subscribe to Fidelity

 

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And if you like what you're hearing, please leave a review or a five-star

 

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a financial advisor or through an online brokerage account.

 

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Visit fidelity.ca/howtobuy for more information.

 

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31:26.618 --> 31:29.487

We'll end today's show with a short disclaimer.

 

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The views and opinions expressed on this podcast are those of the participants,

 

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and do not necessarily reflect those of Fidelity Investments Canada ULC or

 

31:37.262 --> 31:41.266

its affiliates. This podcast is for informational purposes only, and should not

 

31:41.266 --> 31:43.801

be construed as investment, tax, or legal advice.

 

31:43.801 --> 31:46.104

It is not an offer to sell or buy.

 

31:46.104 --> 31:50.441

Or an endorsement, recommendation, or sponsorship of any entity or securities

 

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cited. Read a fund's prospectus before investing, funds are not guaranteed.

 

31:55.246 --> 31:58.816

Their values change frequently, and past performance may not be repeated.

 

31:58.816 --> 32:02.654

Fees, expenses, and commissions are all associated with fund investments.

 

32:02.654 --> 32:04.956

Thanks again. We'll see you next time.