FidelityConnects: Geopolitics and growth part three: A shift to international equities

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<b>Subtitles are AI Generated</b>

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Welcome back to our final session today.

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We're turning our attention beyond North America and shifting market

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fundamentals to geopolitical forces shaping earnings.

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Our next guest will walk us through what's driving international and global

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markets right now and what that may mean for investors.

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I'm joined by Patrice Quirion, portfolio manager.

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He oversees global and international mandates working closely with a deep

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research team that gives him direct insight into companies and regions around

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the world. Patrice, great to have you here.

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It's a pleasure to be here.

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I'd like to start with you, as I did with Joe and Jin, how do you

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deal with news like we got over the weekend.

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How does it change your approach that's already a busy one and a

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thorough one but what does it do when something like this happens for your day

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to day?

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This is where I think the full resources of

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research, both internal, external, a decent amount of

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experience come into play as well.

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Obviously, it feels like a big event at any point in time.

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The reality is on a somewhat regular cadence

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we will get some of those big geopolitical events.

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There is a little bit of a playbook. The reality is there's always a lot of

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uncertainty. As a result, the importance of addressing different scenarios,

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this is where our fundamental research team plays a critical role,

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helping us understand what happens if.

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In most cases we don't know exactly what will happen.

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So it's playing with scenarios, trying to compare that with what has been

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priced in or not.

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But it goes way beyond just the fundamental impact.

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I think there is a large aspect of it which is more tied to portfolio

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construction than how do we react.

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By that I mean it's often the change from

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a risk-on to a risk-off moment.

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As a result, to understand, and this is where our trading

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desk, our strategic asset allocation teams can help us

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understand, and our own observations lead

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us to have a very strong view on that, what was the risk-on

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trade? What parts of the market were getting crowded?

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Usually when we get an event like this we see at least an initial, like

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first few, days unfolding of that and reversal of

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some of the trends that were taking place.

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I would say it's really a combination of making sure we understand what's

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happening, trying to form an opinion on what the scenarios are,

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leveraging our fundamental research to help us understand the sensitivities

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to those scenarios, and keeping portfolio construction, risk control,

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maybe position weights, et cetera in the event of a

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short term reversal of that.

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Ultimately, the big question tends to be something along the lines of

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how long will this last for before we go back to a

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normalized situation?

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It's not easy, and I won't claim that we are here standing with

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much better information than others knowing how long that will last for.

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I think it's just to control the portfolio as a whole, to

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be comfortable in the meantime, and this is where different

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strategies will have different approaches. In my case, and a lot of

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my colleagues' case, we keep our eyes on the prize

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of what does it look like once we are past that noise.

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I think more often than not these type

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of events tend to create opportunities as opposed to moments where we

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need to panic. Easier said than done.

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I think with a combination of resources, experience, having seen

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similar events in the past, we really try

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to stay cool-headed, stay focused on mid to longer term

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fundamentals and take advantage of where there may have been exaggerations in

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the market.

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You are a value-oriented manager, you're contrarian, you've got the world at

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your fingertips, if you will, so you also see where your models

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are saying, it's probably oversold, there's opportunity as well.

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I think the biggest call to action for me

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... we, obviously, on a daily basis, crisis or not, we keep track of

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our best estimate of what a given security is worth, estimates

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of fair value or target prices, whatever way you want to frame it.

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The reality is the market always has those movements, there tends to

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be exaggerations created, so if we have

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a combination of something that was starting to look quite interesting and

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it gets further exaggerated by a crisis

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moment it becomes much more actionable.

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On the flip side, if there are parts of the portfolio that we feel were

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becoming fully valued and suddenly you have an

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event like this taking place that propels relative performance of maybe

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some of those fully valued assets even further it creates great

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rotation of capital opportunities within the portfolio.

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It's usually less about what has just moved a few percentage

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points over the past couple of days and more so about where

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were we starting to witness some extremes and if that is propelled

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further let's use that opportunity to take action on it.

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Although you're not an economist I'd love to ask you a macro question, and I'll

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preface that by saying that Denise Chisholm, who's familiar to our viewers, she

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just put out a note today and it talks about the fact that global events like

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what we're seeing, it's the exception not the rule that they create a headwind

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for the market. Can you comment on that?

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Yes, a few thoughts on my end.

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I think the first one to ask is to what degree, no

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matter how bad it may look for a given country or situation,

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to what degree is that having meaningful global economic

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consequences?

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In a lot of cases like wars or unfortunate

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events taking place more often than not

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they will be affecting small parts of the market

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that don't have dramatic overall economic implications and

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don't have the power to really change the larger cyclical

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structural economic forces at play.

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In this case there is a potential

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if that ... which is not what I would necessarily call

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a base case, far from it ... but if that goes on for too long

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or gets into an order of magnitude greater than

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what we envisage right now, given that so much of the

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energy flows through that region

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through the Strait, as Jin and Joe just talked about,

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there is a scenario where this could have broader implications than

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maybe a lot of similar events that tend to be making news for

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a few days and then we move on.

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Let's keep in mind also, I think in the current situation

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the vast majority of the world is incentivized to have energy

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that keeps flowing through the Strait of Hormuz.

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If most of the large superpowers in the world have that incentive we

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can probably gain a little bit of comfort that maybe other

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than a short period of time we will go back to

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a more normal situation around that.

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So this is where politics outweighs concerns.

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Right, and incentives. I think that's it's really important to understand

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incentives because that dictates a lot, who has which incentive,

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who has the most power, now I think all large players have

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the incentive to make that a temporary event as

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opposed to something that has the potential to really change like long term

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cyclical or structural trends that we're seeing in global markets.

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Thank you for the perspective on what we've been seeing, and I'm sorry to throw

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you an economics question but we had to go there and you had a wonderful

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answer. I'd like to go now to where are you seeing opportunities outside

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of North America?

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That thematic has been, I think, at play for the past almost

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two years, since the US election where I do think that

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we come from a point that historically looks quite extreme

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in terms of US expectations,

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valuations, starting point on the economic cycle versus the rest of the world.

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The US, in my opinion, on many fronts, consumer spending, corporate spending,

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government spending, is closer to a peak, maybe with

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the exception of the middle class and below consumer, we can come back to that,

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but where the rest of the world, being either Europe,

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China and as a result, quite a number of emerging markets,

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are starting much more towards a mid or

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troughish starting point on their economic cycles.

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That on its own creates, I think, very divergent

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potential risk-reward looking a

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few years out.

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It was not only that. It was the fact that it was combined simultaneously

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with very historically divergent valuation on those

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earnings streams, divergent expectations about trajectory

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of those earnings dreams, I think it created that

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extreme that in my opinion shifted the risk-reward balance

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towards international markets at large.

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We can come back to that, it's important to differentiate

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international markets is not one market, there's very different dynamics

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taking place, but if we generalize I think international

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was looking more favourable.

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You never know what exactly the catalyst would be to create that change.

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You can have an opinion on a situation being

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maybe out of proportion or stretched but what will cause it to

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reverse.

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I think what caused it to reverse is a combination of

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maybe weakening confidence into

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the US as an economy for global investors.

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We see that manifested not only on equity evaluation but we see it through

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the currency as a great proxy for that as well.

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We also started to see signs of hope from a depressed

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level on either government spending in Germany,

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on either maybe signs of stabilization on

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the China front from real estate, from the AI

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side that brought optimism, also saw that with maybe

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an accelerating pace of corporate governance change

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in Japan that was eventually followed by

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election there which were quite favourable.

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We saw, as all of that was happening, sort of a resurgence

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of commodities, especially on the metal side, that typically tends to

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help a group of emerging markets much more so than

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the US. You start to have the combination of all these events that led to

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international markets outperforming by a nice margin over

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the past 18 months.

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The question is, where are we on that transition?

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I will bring it from two aspects.

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I think on one side those cycles tend,

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historically speaking, looking back, not that it's a guarantee for the future,

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but those tend to be relatively long cycles.

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It's not something that lasts a few quarters and reverses.

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Those geographic or pockets of leadership changes, assuming this

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is one of them, can last from a few years to

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a decade. We just are basically coming out of

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a decade of US exceptionalism, outperformance

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on many, many aspects.

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I think from that standpoint can keep on going, potentially, if history rhymes.

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From a valuation differential the gap did close but is

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still more favourable to valuation of most securities

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in international markets relative to comparables in

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the US. Then there's that notion of where are we

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in the cycle, cycle that is in a lot of cases driven

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by the consumer, by real estate and construction

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and autos and transport, call it the old economy, if

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that was to improve, if we have sort of a Main Street economy

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recovery from lower interest rates, savings rates that

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are maybe overly elevated in other parts of the world, if that

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comes back there's simply more leverage to that in

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most international markets than there is in the US.

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If we go from a decade of

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technology, software, non-capital intensive parts

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of the economy leading the charge for growth, and if we move to

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something that becomes a little bit more sort of asset intensive,

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generally speaking the rest of the world is maybe better positioned to benefit

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from that.

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Putting all of that together is I think why there is that

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maybe need to consider international markets again,

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very different between different countries or regions, but

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maybe to have that to a greater extent than global indices

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that would be still today weighted sort of well above two-thirds of

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weights in the US market.

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There's a few points I want to unpack from what you were just saying.

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One was Japan. I know Japan is an area of focus for you, you were there

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in 2025.

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Japan has shown itself as a great diversifier.

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I think as of last year three years in a row of 20% growth in that marketplace,

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in that exchange. What are you seeing in Japan and is it true that it's a

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very good diversifier for investors?

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I think there's definitely an element of diversification across international

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markets but Japan specifically. The yen, it's

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less the case now than it was in the past but it still acts as a risk-off

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currency in most cases.

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The economic outlook, the valuation, the money flows, there's a lot

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of what's causing the benefit of that diversification which is

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simply markets that are becoming increasingly correlated,

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or inversely correlated, when money flows somewhere it

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tends to come out of another part of the market and vice versa.

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Japan is still a pretty good diversifier on that aspect, in my opinion.

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Yes, it's been three years of strong performance for the Japanese market.

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I think it's a good reminder of what can happen when

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sentiment gets overly negative.

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If we go back three years ago the picture on Japan was

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extremely out of favour, was seen as to some extent not really

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investible, negative interest rate, terrible demographic

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outlook, poor governance in a

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lot of cases.

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You introduce a little bit of change and it's incredible to what extent the

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market can react to it, especially when valuations are coming from fairly

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depressed levels.

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Clearly Japan is not in the first month of

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of that. It's been going on for some time, the market has done well.

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I think we need to start to be a lot more selective about what do

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we own in Japan but keep that

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parallel in mind when we think of China today, which has

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a lot of the same concerns that Japan that a few years ago.

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When you hear too much negativity,

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a market being obviously

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structurally challenged or obviously non-investible

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according to some, I think it's a sign of an

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extreme taking place that could be worth starting to

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look more closely at. That's certainly what I'm trying to do with our

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[crosstalk].
That's the contrarian in you, isn't it?

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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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Absolutely.

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Another point you mentioned was about the consumer, and if there was a letter

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attributed to a consumer it would be the letter K.

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Can you comment on this K-shaped sector?

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The reality is although markets have been relatively good

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over the past few years the middle class,

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especially the bottom part

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of the consumer population, has been under tremendous pressure

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from higher interest rates,

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the inflation shock that just eroded a lot of purchasing power.

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At the same time the consumer has been, especially

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in the rest of the world, especially in Europe given the war in Ukraine,

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especially in China given what happened to real estate, the consumer has been

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extremely nervous, careful, elevated savings rates

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in a deleveraging mode for a number of

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years in the case of China, for a decade in the

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case of Europe. As a result, we sit today at a point where

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I think we are starting relatively close to a bottom,

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cyclically speaking, on consumer spending, especially on larger ticket

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discretionary spending. Think of autos,

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large goods.

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The consumer has still been spending on services.

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Some of that is structural, won't change.

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The large goods all the way up to housing, ultimately,

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has been under a number of years of relatively depressed

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fundamentals.

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On the other end the high-end consumer has

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been faring relatively well but is not

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as willing to spend the additional dollar of

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wealth, a lowered propensity to spend.

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I think for a lot of the economies, including for upcoming election in

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many parts of the world, we need to address that middle class which has

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been under pressure. We are starting to see, or we

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will start to see, the delayed impact of lower interest rates which

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will help. We will see the rebuilding,

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maybe slowly, but rebuilding of the real disposable income spending

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power from wages that are still growing at a pretty healthy clip.

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While prices are high the inflation rate has reduced so now wages

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are outpacing general inflation.

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If you get that combination of confidence coming back from a delevered

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perspective with excess savings, with real disposable income

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coming back and lower interest rates you can start to dress a picture which I

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think is not fully acknowledged, or certainly not priced into the

19:40.045 --> 19:45.083
market, where we get that discretionary spending coming back.

19:45.083 --> 19:49.121
It will positively impact very different sectors than what

19:49.121 --> 19:52.391
has been working for the past number of years.

19:52.391 --> 19:57.129
Again, given the different weights and different market indices

19:57.129 --> 20:01.300
could benefit some of the European and Asian markets more so than it

20:01.300 --> 20:05.204
would benefit the US market if that was to take place.

20:05.204 --> 20:08.407
It remains a base case for me, hard to tell exactly when it happens, obviously,

20:08.407 --> 20:12.411
the events of this past weekend

20:12.411 --> 20:16.415
with potential energy shock, a shock of confidence that's introduced,

20:16.415 --> 20:20.752
maybe it delays things a little bit but back to what we discussed

20:20.752 --> 20:24.990
starting this segment I think it's important to keep our eyes

20:25.023 --> 20:28.961
on the long or midterm fundamentals and not be

20:28.961 --> 20:33.398
overly distracted and not totally changing our positioning

20:33.398 --> 20:36.168
or playbook based on what happens in the short term.

20:36.168 --> 20:40.539
I do think that scenario remains likely over the next

20:40.539 --> 20:42.407
number of quarters ahead of us.

20:42.407 --> 20:46.044
When you say long term and distracted it makes me think of tariffs.

20:46.044 --> 20:50.015
Tariffs are, or at some point will be, an effect to the consumer.

20:50.015 --> 20:52.150
Could you explain to us ...

20:52.150 --> 20:56.388
companies that you're talking to globally are faced with volatility

20:56.388 --> 20:59.491
when it comes to tariff rates and implementation.

20:59.491 --> 21:03.595
How are they discussing balance sheets and forward

21:03.595 --> 21:07.466
thinking to people like yourself as a portfolio manager when there's so much

21:07.466 --> 21:09.134
uncertainty today?

21:09.134 --> 21:13.038
The reality is for a lot of corporate management teams

21:13.038 --> 21:17.876
that uncertainty around where do we set our production base

21:17.876 --> 21:21.913
is definitely in the forefront since April but has been on their minds

21:21.913 --> 21:23.582
since a number of years.

21:23.582 --> 21:28.253
Actually, a lot has been done, mostly ever since the first

21:28.253 --> 21:32.324
Trump presidency where I think

21:32.324 --> 21:36.395
a lot of companies have been rethinking their supply chains

21:36.395 --> 21:40.599
globally. There's been that notion of China plus one, which is

21:40.599 --> 21:44.803
nothing new, it's been going on for 10 years where let's keep the production

21:44.803 --> 21:49.041
base in China where it makes sense but let's have another centre,

21:49.041 --> 21:53.779
either in Mexico or Eastern Europe or Southeast Asia.

21:53.779 --> 21:57.949
A lot of progress has been made on that to the point where

21:57.949 --> 22:02.688
today the reality is what is still manufactured

22:02.688 --> 22:07.492
outside the US or in China specifically

22:07.492 --> 22:14.232
tends to be made there for very good and very hard to change reasons.

22:14.232 --> 22:18.337
There is still maybe an element especially in higher value

22:18.337 --> 22:21.506
added goods of production that could shift around.

22:21.506 --> 22:27.312
I think the highly strategic sectors like semiconductors,

22:27.312 --> 22:31.450
like batteries for electric vehicles, to name a

22:31.450 --> 22:35.520
few examples, that will probably come back to the US, and

22:35.520 --> 22:39.157
was already coming back to the US.

22:39.157 --> 22:43.228
For a lot of the rest I think the corporate world

22:43.228 --> 22:47.165
is on hold of not knowing where do we shift

22:47.165 --> 22:51.303
that production. The uncertainty despite the tariffs

22:51.303 --> 22:55.140
that was trying to maybe bring clarity of where should you bring your

22:55.173 --> 22:59.044
production is not having that impact at this point.

22:59.044 --> 23:03.081
I think more often than not in our discussions with

23:03.081 --> 23:07.252
companies it is more in a mode of let's wait

23:07.252 --> 23:11.623
and see until we have clarity on stability of

23:11.623 --> 23:16.194
policies around tariff, and in some cases

23:16.194 --> 23:20.966
as long as stability of those policies through different administrations,

23:20.966 --> 23:25.203
so potentially waiting for the next election to see if those stick

23:25.203 --> 23:26.204
or not.

23:26.204 --> 23:30.175
I'd like to leave a message. I think there is

23:30.175 --> 23:34.112
maybe an increasing realization that

23:34.112 --> 23:38.483
tariffs might be needed to protect

23:38.483 --> 23:42.821
an increasing number of industries from what I would describe as

23:42.821 --> 23:48.226
I think an increasingly competent, competitive

23:48.226 --> 23:52.264
Chinese multi-national that has

23:52.264 --> 23:56.701
sort of won their domestic markets and are setting their eyes on taking

23:56.701 --> 24:01.406
share of exports or of local presence in

24:01.406 --> 24:05.744
international markets, and the rest of the world where

24:05.744 --> 24:09.815
that Chinese competition is not welcomed will need

24:09.815 --> 24:14.719
to protect itself. I think as a result I am in the camp that

24:14.719 --> 24:18.924
tariffs are probably here to stay from that

24:18.924 --> 24:20.759
standpoint.

24:20.759 --> 24:25.096
Emerging markets may welcome that increased competition

24:25.096 --> 24:29.468
but I think for most Western markets there

24:29.468 --> 24:33.538
will be that reaction mechanism in place and tariffs is probably

24:33.538 --> 24:36.308
how it will manifest itself.

24:36.308 --> 24:41.346
,I think what's been going on for the past number of quarters is

24:41.346 --> 24:45.450
in a way the symptom of that maybe to

24:45.450 --> 24:49.554
some extent loss of competitiveness of an increasing number of

24:49.554 --> 24:53.525
industries in Europe, in the US, in Japan

24:53.525 --> 24:57.462
relative to fast coming, increasingly better

24:57.462 --> 25:01.833
quality, still cheaper price, in some cases better technology

25:01.833 --> 25:04.369
competitions from other markets.

25:04.369 --> 25:08.607
Patrice, you have a keen eye on today and short term

25:08.607 --> 25:11.443
but you also have a key eye going out a decade.

25:11.443 --> 25:14.980
What are some things that you are thinking of over the next decade and that we

25:14.980 --> 25:16.948
as investors should be thinking of as well?

25:16.948 --> 25:20.118
I think there's a long list and there's always uncertainty around that so I

25:20.118 --> 25:24.289
won't claim to have perfect visibility on it but things that I like to

25:24.289 --> 25:28.226
reflect on when we have discussions with companies, we ask a lot of

25:28.226 --> 25:30.929
questions and we touch on a few of those.

25:30.929 --> 25:34.966
I think are we in a world of a growing Chinese sphere

25:34.966 --> 25:39.004
of influence globally. I think the events of the past

25:39.004 --> 25:42.941
few years is playing along that potential

25:42.941 --> 25:47.145
for China that could emerge as a potential beneficiary of

25:47.145 --> 25:51.416
all that uncertainty that took place, notably around the US for

25:51.416 --> 25:55.287
the past number of quarters.

25:55.287 --> 25:59.224
This is one thing. If they gain that sphere of influence it

25:59.224 --> 26:03.662
opens the door to bring their products, to bring the companies,

26:03.662 --> 26:08.199
and I think it's going to be most visible initially in emerging markets, to

26:08.199 --> 26:12.370
ask the question of what happens to Western companies' profit pools

26:12.370 --> 26:16.007
in those markets when they are suddenly maybe subject to much more intense

26:16.007 --> 26:17.742
competition is one thing to keep in mind.

26:17.742 --> 26:21.813
I think the underinvestment

26:21.813 --> 26:25.884
in the real economy at the

26:25.884 --> 26:30.221
trade-off of investing heavily into the technology

26:30.221 --> 26:35.093
economy, software, et cetera, AI at the moment, has

26:35.093 --> 26:41.066
potentially led to a number of those old economies'

26:41.066 --> 26:45.036
manufacturing capacity, notably in resources, to maybe have

26:45.036 --> 26:47.739
been underinvested over the past decade.

26:47.739 --> 26:52.510
If that comes back, if demand comes back there and we are facing

26:52.510 --> 26:56.581
lack of production and lack of investment for a period of

26:56.581 --> 27:00.518
time I think it could dress a relatively positive commodity

27:00.518 --> 27:04.556
story or commodity CapEx story for, I

27:04.556 --> 27:08.593
don't know if it's a decade but call it for the next five years to come.

27:08.593 --> 27:12.864
There again, a lot of international markets or emerging markets

27:12.864 --> 27:17.769
are really well positioned as big commodity producers, exporters, and

27:17.769 --> 27:21.573
this is another element that we've tried to express in the portfolios.

27:21.573 --> 27:26.177
Lastly, if I can leave one element of maybe not

27:26.177 --> 27:30.382
opportunity but the diversification across sectors but also across

27:30.382 --> 27:34.686
geographies is not only to benefit from what can work but also

27:34.686 --> 27:38.790
to protect ourself from what could no longer be a

27:38.823 --> 27:41.259
positive contributor.

27:41.259 --> 27:45.397
For investors who have some degree of fears

27:45.397 --> 27:49.134
around the sustainability of the CapEx boom we're seeing around artificial

27:49.134 --> 27:53.238
intelligence, semiconductors, data centres, et cetera, obviously

27:53.238 --> 27:57.175
the US market is extremely heavy on these components in

27:57.175 --> 28:01.212
the indices, if we were to fear an

28:01.212 --> 28:05.250
end of that I think the benefit of diversification in

28:05.250 --> 28:09.521
other markets that are much less exposed to that, not only for the

28:09.521 --> 28:13.858
companies and their indices but also the second derivative of

28:13.858 --> 28:18.129
less wealth that is tied to that, which may lead to

28:18.129 --> 28:23.368
a lesser negative wealth effect if that was to unravel,

28:23.368 --> 28:27.338
maybe more capacity for other industries to pick up, for the government to

28:27.338 --> 28:31.376
step in, I think you can dress a picture where parts of

28:31.376 --> 28:35.346
the world certainly have the potential to offer a great

28:35.346 --> 28:39.317
diversifier in the case of an adverse scenario on what has really been leading

28:39.317 --> 28:41.152
the markets for the past number of years.

28:41.152 --> 28:43.588
Excellent. Patrice, the world is in front of you.

28:43.588 --> 28:46.191
It's all opportunity and it's exciting to you and exciting to us.

28:46.191 --> 28:48.359
Thank you for educating us on it today.

28:48.359 --> 28:50.995
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28:50.995 --> 28:55.300
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