FidelityNow: How is inflation shaping portfolio construction?

00:06.639 --> 00:10.677

So there are two main macro themes that are shaping both our outlook

00:10.677 --> 00:13.913

and market dynamics at this point.

00:13.913 --> 00:18.118

One is AI and two is the war in Iran and everything associated

00:18.118 --> 00:22.922

with that. From an equity market perspective and the sort of riskier

00:22.922 --> 00:25.859

elements of our portfolios, AI is the most important.

00:25.859 --> 00:29.896

And there's a lot of speculation out there long term about the implications of

00:29.896 --> 00:33.967

AI. Everything from it's going to usher in a golden age of productivity

00:34.000 --> 00:37.971

and efficiency and growth to it's gonna replace everybody's

00:37.971 --> 00:40.473

job and the economy is gonna collapse.

00:40.473 --> 00:43.209

We don't know, nobody else does either.

00:43.209 --> 00:46.846

And so rather than trying to make a bet on that, what we've been doing, the

00:46.846 --> 00:51.051

stance we've taking is looking to our underlying fixed

00:51.051 --> 00:55.188

income and equity managers and analysts who know these companies best.

00:55.188 --> 00:58.558

And what they've been saying consistently for years is...

00:58.558 --> 01:02.662

The market is underestimating the earnings power of these companies

01:02.662 --> 01:04.898

associated with AI.

01:04.898 --> 01:08.535

So long as they believe that and they've been right about that, we're going to

01:08.535 --> 01:12.238

continue to make sure that we're fully invested in those areas.

01:12.238 --> 01:16.476

And frankly, given how important AI, hyperscalers, et cetera, are to

01:16.509 --> 01:20.747

the overall equity market, if those companies keep beating and raising

01:20.747 --> 01:24.150

on earnings, the equity market in general is going to be fine.

01:24.150 --> 01:26.719

So that's how we're thinking about that particular theme.

01:28.822 --> 01:32.992

Yes, so with respect to portfolio construction and the FMPs and the other funds

01:32.992 --> 01:37.130

that I'm responsible for, that has more to do with the second theme

01:37.130 --> 01:41.234

that I discussed earlier, which is the Iran War and everything associated with

01:41.234 --> 01:45.538

that. So we would put the Iran war in context, which is

01:45.538 --> 01:49.609

this broader evolution of a world that's more subject to

01:49.609 --> 01:52.178

inflation and inflationary shocks.

01:52.178 --> 01:53.980

And that's been true for some time.

01:53.980 --> 01:56.349

It goes back even before COVID.

01:56.349 --> 02:00.520

With a sort of de-globalisation and higher government debt.

02:00.520 --> 02:04.657

Through COVID, it intensified, and then with

02:04.657 --> 02:08.728

the sort of withdrawal of the U.S., and as one

02:08.728 --> 02:12.198

way of putting it, it's intensified once again.

02:12.198 --> 02:16.269

And so in an inflationary world, we need to be a lot more careful

02:16.269 --> 02:19.506

with how we get protection and diversification.

02:19.506 --> 02:22.442

Inflation obviously is no good for bonds, so the usual...

02:22.442 --> 02:26.379

60-40 setup where bonds hedge stock drawdowns is not going

02:26.379 --> 02:29.949

to work as well. So we've been diversifying more creatively.

02:29.949 --> 02:33.853

We've been buying bonds outside of the United States, which you think we're

02:33.853 --> 02:37.457

going to be more resilient. And in particular, we've being allocating to

02:37.457 --> 02:40.827

commodities more as a protective element.

02:40.827 --> 02:45.298

And that's gold, that's commodity producers, but we've also created a new

02:45.298 --> 02:49.402

building block for use in my funds that invests in a wide range of commodity

02:49.402 --> 02:51.671

futures to be able the harness.

02:51.671 --> 02:55.608

That capability, not really so much for the return, although returns

02:55.608 --> 02:59.579

have been good, but very much for their protection, because if you're

02:59.579 --> 03:03.583

in an inflationary world and bonds aren't gonna protect you, it's useful to

03:03.583 --> 03:07.120

own the thing that's part of the inflation, which is commodities.

03:07.120 --> 03:08.121

So we're doing that.