FOCUS 2026: Quality without borders: Global equities in action

Agnes Doherty: Good morning, Patrice.

Patrice Quirion: Good morning, pleasure to be here.

Agnes Doherty: Good morning to our audience here in the room and to everybody watching online as well. It was about a year ago that you and I were sitting on stage at our event in Toronto. I remember you were pounding the table and you were saying that you're just finding so many incredible opportunities to invest in across the globe, specifically more in international markets. A lot has happened since then.

Patrice Quirion: Keeps happening.

Agnes Doherty: Yeah. Just tell us how you're feeling about the markets today [inaudible] perspective.

Patrice Quirion: In a way I think we're in a similar position to, call it, a year ago. We are back at a point with immense dispersion within the market. As active managers, especially as a contrarian active manager, we like that dispersion. We don't like when everything trades together. It's harder to take capital from one place to move it to another. Where the dispersion is taking place has changed relative to my view of the past couple years, as we've talked about at length over time. I think we came from, in the aftermath of Trump's second election win, US exceptionalism, rest of the world being like ... I'm exaggerating here but rest of world being uninvestable, or at least China, Europe having all the issues with the war in Ukraine, led to immense positive sentiment on the US and a complete opposite picture on most of international markets. My view is that had gone too far. That's what we had been talking about at the time. To some extent that did reverse through the course of last year.

International markets, including Canada, I think Ilan just mentioned Canada was the best performing market last year. China did actually really, really well too. Brazil had done really well. Europe as a whole had done well. It leaves us to a point where that huge dispersion that we had seen was still there but had contracted somewhat. We were no longer at the same extremes. That was still ongoing essentially up until the conflict in the Middle East started about a quarter ago. I think the natural, and probably warranted, market reaction is let's reverse that a little bit. That trade, that reversion trade on the rest of the world worked well, now we're more of a risk-off environment. We don't know when oil flows and energy flows will go back to normal. We do need it. The market's ignoring it to some extent but it has real implications on the economy so let's de-risk and go back to the US, and let's go back on the trade that seems uncorrelated to all of that which is AI. This is essentially where we are now.

I think we are back at extremes in terms of sentiment positioning but it's less from a geographic perspective, it's more from a sector perspective where anything tied remotely close to the AI CapEx mega cycle that we're seeing now, which, by the way, is something like 35% of the S&P 500, obviously, a much higher percentage of the Nasdaq, and becoming a really big percentage of emerging market because of South Korea, because of Taiwan. You have this massive optimistic growth forever time of framework around AI Capex or data centre CapEx and at the same time we are in a world exaggerated or amplified by the conflict, the energy price that resulted from that, on a consumer which is really under pressure and consumer stocks that are not a very popular place to be looking at.

I think that, as difficult it might be to say maybe AI thematic is exaggerated, maybe the consumer is maybe getting pretty close to a bottom of the cycle type of environment, it's difficult to, not to advocate for that but difficult to implement that on portfolios. I think this is the time to really start paying attention to those parts that have been left aside, left for dead, no interest. It reminds me, yes, of the international trade of a year, two years ago but it also reminds ... there's always something like that happening in the market somewhere. It reminds me in a way of the industrial sector, capital goods in 2018, 2019. At the time we had the first trade war, the economy had slowed, we had an industrial recession, profit recession. A lot of these stocks got really, really cheap. There's good companies within that. As a contrarian investor that had become 40% of the portfolios tied to capital goods, mostly in the US but not only in the US. I feel we are sort of heading towards that for the consumer sector at large. Anyway, I talked a lot but that's how I would frame how things are today.

Agnes Doherty: Let's get into some of the themes in the portfolio. You mentioned the consumer, that's a big part of the portfolio right now. Where are you finding sort of mispriced opportunities within the consumer space?

Patrice Quirion: The consumer is a meaningful part and I want to make that a growing part of the portfolio, assuming that what we see today remains the case and the market exaggeration that might be taking place continues. Where do I see opportunities? I think it is increasingly synchronized. The consumer, especially the middle class and below, has been under a lot of pressure ever since the rebound post-pandemic in the US, ever since the Ukraine conflict in Europe and really ever since pre-COVID for the Chinese consumer, given the pretty severe contraction we've seen in the real estate market over there. All of these events are now multiple years in the making. Consumer confidence is all -low. Less so in North America but in the rest of the world the financial health of the consumer has improved a great deal. There's been a lot of deleveraging that took place. Real estate markets went nowhere for a decade. Savings rates are really high historically, especially in China. The missing piece is that confidence.

Confidence, while it's difficult to tell when we will get the catalyst to have all of that coming back better it is a mean reverting sort of like cycle over time. When you start from a more sound financial starting point with confidence being what's missing, whenever we'll hit that rebound on consumer confidence, could be something along the lines of a stabilizing/improving real estate market for China and Europe, and maybe we're getting closer to that. My point is buy it, it's going to start going up next week. I have no idea. My point is let's start accumulating those positions because I think, just like the GAA team mentioned, I think it was David Wolf mentioning, when you feel that the asymmetry is really in your favour, that there's not that much more downside risk and if things change you have a lot of upside potential, that's really what I'm trying to seek.

I always tell the greatest opportunity for contrarian investors in this market is, yes, markets are very efficient short term but markets tend to crowd and overreact, and it creates those opportunities if we're willing to look a little further out than most investors to start accumulating these positions. In my case it's consumer in China, notably around e-commerce, around service sector. I think the China story around infrastructure, real estate, manufacturing is the story of the past two decades. I think the story of the next two decades is a rebalancing of the economy more towards a consumption, developed market type of economy which should really help, the consumer being a bigger part of that. Today it's around 40% of Chinese GDP which is consumer driven as opposed to developed markets where it's more in the range of two-thirds of GDP. I think China needs to move this way. If we can buy good companies, either e-commerce leader, either service-oriented, travel-oriented companies that are not only domestic champions but that are also taking share outside China.

A few examples of that in the portfolio would be Alibaba. I own Prosus which is a holding company. Their biggest holding is Tencent. I own Trip.com which is a little bit like the Expedia of Asia, really. I own Anta which is like the Nike or Adidas of China that has displaced those Western companies to a good extent and now growing overseas. So all consumer-driven and all relatively cheap stocks, good companies, leaders in their fields. I think that's one opportunity.

Quickly to go in the other parts of the world, in Europe I think the consumer will be ... I think you need to have that sentiment coming back, what could be the catalyst if we ever get lower energy prices? I know Iran conflict did not help. The war in Ukraine is still going on. If we think that this is not the normal state of the world, that some point we get resolution on those fronts that will help quite a bit. Real estate market, the European consumer has been de-leveraging ever since the European financial crisis in 2013. Real estate is much more affordable in parts of Europe. Actually, if you think of at the time, you'll remember the countries, we called them the pigs at the time, like Portugal, Ireland, Spain, Greece, Italy, all countries that are actually doing relatively well right now. The issue is more France, Germany. I think there is potential for a more construction-driven recovery with the consumer at the centre of that that can take place.

You don't go by like Europe as a whole. If you buy the index on Europe you end up with a bunch of big global pharma companies. This is maybe not the thesis on Europe at this point. The banks, which I loved over the past number of years, have been just really strong performers, I don't think are mispriced or misunderstood anymore. If you can target companies that are very European consumer-focused or European construction-focused, this is where my focus is at the moment. Even in the US there's starting to be opportunities given the middle-class, low-income consumer that's been under tremendous pressure for the past four years now starting to lead to opportunities on dollar store, restaurants, et cetera.

Agnes Doherty: Do you find with Europe it takes a bit longer for themes to play out there or for recoveries to happen, and the market just tends to get a little bit impatient because we're so used to having such fast growth, especially in the US market, do you find that with Europe it just takes a little bit longer for things to play out?

Patrice Quirion: I would not necessarily agree with that view. I think in general those big thematics in cycles, they do take time to play out, regardless of where they take place, either from a geographic perspective or a sector perspective. So no, I don't think Europe is necessarily different. I don't think any geographic area is necessarily different on that. In general they take a while to play out, on both sides, right? I think that's where I would advocate maybe don't try to call the point where you sell all of your AI winners and buy all of whatever, like consumer-derived stocks and say this is the point where all of that will shift. I'm of the opinion where it's really difficult to pinpoint those moments. When those moments take place they can be very abrupt reactions on both sides. It could pay off to start leaning in gradually and start taking profits gradually on what has worked.

This is very emblematic of my investment style. This is what you should expect me to do and to say. That's really my approach. International, underperforming the US for the past decade. Increasingly I was to the point where when we talked last year the portfolio was around 20% exposed to the US market and closer to 80% international markets. It's not that I woke up one day and we totally reversed that. Now we're more getting closer to 35% of US. We're starting to find opportunities again here. As we said, there's a lot of sector dispersion. Sectors like healthcare, sectors like the consumer, even parts of the tech sector have become interesting again, in my opinion.

Agnes Doherty: Your US exposure now is a lot higher in the portfolio. You said it was 20% last year, I think it's closer to 40% as you said here today.

Patrice Quirion: Moving there, yeah.

Agnes Doherty: Maybe tell us a little bit more about the US companies that you've been adding to.

Patrice Quirion: It's very important to your point, Agnes. It's about companies, it's about being picky in that market. It's always the case. I think at a high level I do feel worried about not only the US market, I think the stock market in general has sort of erased a lot of the concerns. The conflict is still taking place. I think not all is as rosy as maybe what the market is doing right now. That said, I am finding an increasing number of opportunities, especially here in the US. It's, as I mentioned very briefly, healthcare has been a sector where if you feel a little bit more nervous about things, like a good, somewhat uncorrelated, more defensive characteristic sector  where the market has turned really quite negative on the healthcare sector for ... I think the main reason is post-COVID we've seen sort of a bump into system utilization. After a couple years of people being more worried of going to the doctor, to the hospital, it led to an accelerated organic growth profile for a lot of healthcare stocks that is now reversing back to normal.

The market doesn't like those decelerating trends. Obviously, you don't buy that decelerated trend day one but now it has been a couple of years. I think it's pretty well understood the multiples are now very attractive again., I think, especially some sectors or parts of the sector are really underearning. Healthcare is one.

The consumer, we talked about this is more like recent additions. One restaurant stock that is clearly a category leader, competition is closing stores, they are still doing well on a relative basis, taking market share on a continued pace, and the stock is down probably around 40% now with a business where things have not changed all that much, would be one example. Maybe on tech, the ones who've heard me talk for the past number of years have known that my view around the AI CapEx cycle is nobody knows how long the investment wave needs to go for. We know we need more compute. We are adding data centres at a really incredible pace when we think about it. Just the US hyperscalers alone will be spending a trillion dollars into mostly AI data centre CapEx by next year. A trillion dollars.

To put that in perspective, it costs about $50 billion to build one gigawatt data centre, which is absolutely enormous, to put that in perspective, one gigawatt is the output of a relatively large nuclear reactor. We are building 50 of those every single year. That's the pace that's expected to take place. We've not built a nuclear reactor in the Western world in a really long time. It's not going to be nuclear power it's going to be gas-powered and increasingly even diesel generator powered, which we can debate what that means. Anyway, that's the scale we're at. You need to believe not that we need 50 two years from now, you need to believe we'll need 60 gigawatts and the year after 70. I know we need more but I don't know if we need more at an ever-increasing pace. Given that I don't know ... my style, I think very much on an absolute basis, if I don't know I don't want to put 35% of our clients' money into something that I don't know how long it's going to go for even though at the moment it's clearly still going.

I've been very nervous on that huge part of the S&P 500 which has become like derivative plays. It's not only semiconductor stocks, it's a lot of industrials like power related, cooling related, some utilities within that, even some commodities within that. It's all the same correlation and I own very, very little of it. We can talk on that. That said, there are other parts of the tech sector that are now seen as casualties, like software, that are seen as the payers of that, like the hyperscalers. The market has started to really push back on that. One of the big change versus last year is now Microsoft is the biggest position in the portfolio. Amazon has made it into the top 10 from a stock I didn't own. I think one of two things will happen. Either demand is truly infinite and those hyperscalers, the ones with the compute capacity, with the data centres, will really see a pretty strong revenue acceleration from here.

The market concern is revenues are not growing fast enough to justify the amount of CapEx being poured in, which is absolutely the case at the moment. So either revenues accelerate, which I think is probably the base case, but I feel even if they don't, now the pushback against Amazon and Microsoft is a little bit less over the past month but earlier this year was ... you turn those enormous profitability pools into now free cash flow neutral businesses by spending all of that cash flow generation into CapEx. If demand does not keep up and if revenues don't accelerate I think there is a risk that those companies, at some point the market will force them to start cutting CapEx, which might be positive for these stocks at this point. Would be terrible for the AI CapEx data centre ecosystem but I think could work for Microsoft, Amazon. That's why I added those and starting to selectively pick a few software names across that as well.

Agnes Doherty: Just a reminder to everyone, please do submit your questions through the app and I'll be sure to ask them to Patrice. I wanted to just pivot back to Europe for a minute. Speaking of things that are unknown and you don't have the answers to, obviously the geopolitical events that are happening in the Middle East are a significant impact to the European markets given they're so energy dependent. How do you sort of see the conflict impacting earnings growth within European companies specifically? Do you see that as a big headwind right now and are you worried about that?

Patrice Quirion: I'll frame it maybe a little bit differently if I can. It's impacting Europe but it's impacting Asia the most, especially Southeast Asia, emerging Asia, India. This is where most of these energy flows were going to. A little bit made it to Europe on the LNG side but the big impact is on Asia. This is we're talking about sort of jet fuel shortages and chemical plants shutting down because there's no feedstock. It's not the case at all in Europe, actually, right now. The way I would put it is if we're worried about outright availability of supply of energy Asia is most at risk. If we're talking about the impact of elevated energy prices you could argue North America is actually at risk because the consumer here has a bigger energy footprint than the consumer in the rest of the world. We have bigger homes, colder climate, bigger cars. I think that's how I would frame it.

Is that a supply risk, just pure availability, which in a lot of cases is more an impact to the industrial sector, especially the chemical sector, or is it like a price impact? Europe is somewhere in between. There's at the margin maybe a little bit of LNG impact we need to watch. If things don't get resolved soon we need to start getting worried about that to some extent. From a price impact the dollar of energy consumption per capita is actually much higher here than it is across Europe, for instance, or across most of the rest of the world. That's how I frame it. Is there earnings risk? Definitely there is. Is it captured in consensus today? No, because I think the market has taken the view this will not last. Before there is a real protracted impact on the consumer things will be resolved. But every week that goes by where things are not resolved that risk goes up. That's how I would frame it.

The energy companies have seen earnings upside revision. The AI side is continuing unabated, unimpacted. At the moment we're seeing earnings revision on the market climbing up. I am nervous/skeptical, maybe a little bit more defensive than at times on what if we are wrong here on assuming that this will resolve itself without much impact on the consumer, on energy availability. I cannot tell you a probability but I think there is a risk that this could be a trigger to a recession if that continues. And if there's a recession even the safe haven parts of the market could become at risk.

Agnes Doherty: You mean global recession?

Patrice Quirion: I think it can. If things don't get resolved I think we are in that continuous sort of grind higher on energy prices. With $105 a barrel today it's starting to have an impact. If things don't get resolved I think the 105 becomes 120 becomes 150, hopefully it doesn't become 200. We're just removing barrels from the system every day where traffic is not restored. I am maybe more nervous than the market seems to be on that at the moment. I don't think it's a European-only issue. That said, what are we doing in a portfolio? We're not only sitting here saying, I don't know, I'm worried about it. We're looking for things where where can you get a little bit of an edge? I think to say, well, I'll buy energy producers, yes, but everyone knows it in a way. Those stocks have already moved. If oil comes back down those stocks will come back down immediately. I've been putting a lot of focus on trying to find maybe smaller companies, sub-sectors that people are not thinking about it too much.

I'll give you an example. It's not in the top 10 but it is in the disclosed holdings. I own a company called Azelis. It's European based  it's a global chemical, specialty chemical distribution business. They don't have big plants that are running or shutting down if they don't have feedstock. They distribute. If you are a food company or a pharma company or whoever it is and you need chemicals, we need chemicals in everything, you go through these distributors to get your supply. The market hated those stocks, that sub-sector, that sector over the past few years because demand was weak, chemical prices were weak, there was oversupply because of Chinese supply coming into the market, cyclical business, just not well liked. The stock is down probably 70% from where it peaked a few years ago. Now you're looking at the situation where suddenly what you are distributing is becoming scarce, it's becoming scarcer by the day because a lot of that manufacturing footprint has been forced to shut down, especially across Asia.

If you're an Asian customer and you need whatever chemical you can imagine suddenly it's a real head-scratcher. That distribution business in between can suddenly start charging more for that ability to supply those clients. Margins, I suspect, will climb back up at a time where the stock was very undervalued, in my opinion, was really hated, not well-owned, had gone down a lot, and I think you're potentially inflecting fundamentals on that, as a result of not oil prices but as a result of oil prices causing chemical activity to shut down in parts of the world.

Agnes Doherty: You travel a lot. We've obviously got incredible research capabilities across the globe. Any recent trips? I know you were in China with Dan Dupont last year. You guys did a crazy, intense, I think it was two, three weeks in China. Anything recently that you've visited, any companies or any conferences that were particularly interesting across the globe?

Patrice Quirion: Always travel a lot. I think that's the beauty of the Fidelity model, the resources it brings to us. I don't travel because I like to, I actually don't mind, but it brings us incredible resources from meeting companies, meeting our local investment teams, not only the analysts but portfolio managers. In the case of Japan, we have Japanese portfolio managers running Japanese equity funds for Japanese clients so they are really experts on their market and I can tap into that knowledge base. A lot of trips all the time. I'll mention a couple that you'll see the parallels. Some of the trips are more general and almost on the schedule every year, generalist conferences in different parts of the world but there's also an element of more targeted ones on where we might see opportunities. Earlier this year I went to a German conference. I didn't go to Germany, there's a good conference organized in New York City so it's easier to travel. It can allow me to do other things as well during that week. I just met with a lot of the German industrial sector to see what's happening on that front. I think there might be opportunities there so we go and kick the tires and meet those companies.

I talked about the consumer, a month and a half ago or so with some of our colleagues, we went to Boston and met, basically, CEOs of the majority of the largest consumer companies in the US, really, to get a better feel of what they're seeing. It's just a constant part of the work. A lot of it is talking to the analysts, trying to find our edge, trying to find better data, better opinions on what's normalized earnings which matters a lot in my style like Excel spreadsheet. There's a huge amount of it which is gathering information, talking to people, talking to industry experts including management team of some of those companies.

Agnes Doherty: Question here from the audience. You just mentioned Japan, any segments within Japan that you currently find attractive? Maybe you can also just speak to the research edge that we have there and how that's helpful.

Patrice Quirion: I'll give you two, one that I've been talking about for a while and I'll give you a new one. I've been talking about banks for a long while. Banks is a big part of any global index, a little bit less in the US but for the rest of the world bank is a bit part of any market, including in Canada. I think the biggest driver for bank's profitability and swings in profitability is swings in interest rates, especially when you come from high level to low levels, which is negative, or when you come from low level to higher level, which is positive. I've expressed that in a big way into the portfolios after the COVID pandemic, especially in Europe. I think that played out. Now I look at Japan over the past couple of years, the country is finally moving away from deflation. I think there is a sticky inflation problem allowing interest rates to move higher. The BoJ I think is behind the curve. This has great favourable impact for Japanese banks. We own two of them, big positions across the portfolios. One which is a smaller regional bank, Yokohama Financial, and one which is Mitsubishi Financial Group, one of the big groups.

I's not only about that. I think also in Japan what's interesting is there is a change in corporate governance, corporate efficiency, better return on capital, better deployment of balance sheets which historically has not been the case. I've been looking for years now at companies where this is a positive optionality that the market maybe doesn't fully price in.

When we can find that into sectors where the fundamentals are getting interesting or better that's obviously sort of gravy on top of it. I think while there's a lot of the Japanese corporate sector, which is at risk from Chinese competition, especially in emerging markets, I think that's the big story. Keep that in mind. The China sphere of influence is growing. They are now taking some of their domestic champions, pushing those companies into emerging markets mostly where China has built a lot of influence, Africa, Middle East, Southeast Asia. If you're a US or European or Japanese company that control those domestic emerging markets your profit pool is at risk. That's a problem for Japan, for a lot of Japan. But there are some leaders or some industries where Japan is really like a global leader where there's less of a risk of that happening. I think factory automation as an example. When we think of robotics Japan comes to mind, came to mind, still comes to mine, especially at the high end more consultant-driven side. Those are the kinds of things I'm looking at in Japan right now.

Agnes Doherty: As we go into the final two minutes I just wanted to ask a final question. We're seeing lots of flows continuing into international equities, what is the benefit of buying a fund like yours versus just a passive international ETF?

Patrice Quirion: I think the argument for international diversification, GAA team touched on the currency benefit, diversification benefit. I think we're starting at a closer point to the bottom of the cycle as opposed to the US which seems still a little bit elevated in its overall economic cycle. All of that is good. You get that through funds or ETFs. I think a key difference is what are you really trying to target as exposure? If you buy an ETF on EAFE or EM, just like is the case in the US the big market caps, the big weights in those indices, are increasingly AI CapEx cycle-driven. If we take the case of Europe I talk large pharmas as an example of that. In China you'll get the large bank, the large real estate companies which I don't think is where we want to be. I think where we want to be is more targeted, like consumer, recovery, industrial, construction, more defensive pockets that we're finding here and there. That's really what we're trying to do. The portfolios look very, very different than the indices.

As I mentioned earlier, I try to think about it on an absolute basis, not too much on a relative basis. Obviously, the markets will have implications but it's not because 30 to 40% of the market is invested in one thematic right now that I feel I don't have a strong view so I'll own 40% of it to be neutral. I'd rather just go find things where we have greater conviction. Increasingly it's smaller cap companies, mid, small-caps that are misunderstood, depressed in some way where the market's not paying full attention. This is what gets me excited, to find those where the risk-reward feels very favourable. It may require a little bit of patience but ultimately it plays out. Last year was a great example of that. After COVID was a great example of that. After Brexit was a great example of that. After the first trade war was a great example of that. I think for investors who are looking for that sort of diversified approach that will protect or do better on a relative basis at those big inflection points I think this is where those strategies really fit in.

Agnes Doherty: Patrice, you've always got lots of wonderful ideas to share with us so thank you for sharing them this morning.