FidelityConnects: Global Asset Allocation monthly update

[00:04:44] Pamela Ritchie: Hello, and welcome to Fidelity Connects. I'm Pamela Ritchie. As we begin today's webcast we want to remember and honour the courage and sacrifice of those who have served and continue to serve our country in times of war, conflict and peace. We are grateful for their dedication and remember those who gave their lives for the freedoms that we enjoy today on this Remembrance Day. In recent days Canada's Liberal government has tabled its 2025 budget unveiling $141 billion in new spending over the course of the next five years. That's the target. Investments will target housing, infrastructure and defence alongside a dedicated $925 million artificial intelligence fund, a priority flagged by Prime Minister Carney. With this ambitious fiscal plan now on the table what are the key messages catching the attention of our next guest? And how might this shape the Global Asset Allocation team's outlook on Canada's economy and markets going forward? Joining us here today to unpack and discuss all of this including potential implications for investors  is portfolio manager, David Tulk. Warm welcome to you, David. Good to see you on Remembrance Day.

[00:05:56] David Tulk: Thank you for having me.

[00:05:56] Pamela Ritchie: Yeah, delighted to have you join us here and we'll just remind everyone that you can join us with live French audio interpretation over the course of the next half hour, and send your questions in as well for David. Let's talk about Canada. On Remembrance Day we remember lots of different things. This country appears to be trying to go in quite a new direction with its investments in itself. A couple of broad comments on the budget and how far it's taken us in that direction if that is the focus.

[00:06:23] David Tulk: I think that's a really great place to start. When you think a bit about the budget it does show a very clear shift in priorities away from government spending more towards government investment. I think this is a really key development as we try to reimagine our place in the world. I think a lot of that does come, obviously, from the stresses that we're getting from our largest trading partner and next door neighbour but it also really catalyzes an opportunity for Canada to invest in itself and think about its role as a larger player in an increasingly diverse economy as well. I think from that perspective when we go through the budget the focus on long term productivity enhancing technology is really key. The devil will always be in the details and we need to see. obviously. the effective execution of a lot of the strategies that have been outlined in the budget but as a starting point this is a really positive step from our perspective. I think it hinges into the wider narrative that we see with Canada where we have a lot of challenges but there is a road to a better place and as we start to move down that road to a better place I think it does demand us to think a little bit more about allocating into the Canadian market. That's one of the major investment themes that we've undertaken this year, to trim pretty sizably the underweight we had to Canadian assets to a more neutral setting today.

[00:07:48] Pamela Ritchie: Just on that, you mentioned that I think mid-way through the year that was where you were going, maybe in the summer, there was that shift, that change, a lot of money has gone back into the U.S., almost filling a vacuum that as investors appeared international and otherwise jumped out after the tariff announcements. We're now X number of months past that and money has come back in. Are you rushing back in? You don't rush but tell us a little bit about that.

[00:08:16] David Tulk: No, we definitely tend to be very deliberative and very thoughtful in terms of the allocations that we make, especially across geographies. When we think a little bit about what's driving investors back into the United States, I mean, it really is AI and the AI-related themes. If you're a fan of the Lord of the Rings this is the investment theme that controls all other investment themes, I think. There's a great deal of focus on AI and we want to certainly be part of that theme as well. The way we're approaching the United States is to use managers as building blocks who are very close to a lot of those themes and can invest accordingly. We'll use Will Danoff, we'll use Mark Schmehl and they're bringing all of those themes into our portfolio. From our perspective we also want to be mindful of some of the wider risks that exist when you invest in the United States and that very succinctly is just the value of the U.S. dollar. We've seen a little bit of stabilization in the U.S. dollar.

[00:09:13] Pamela Ritchie: It has stabled out a bit, yeah.

[00:09:15] David Tulk: It has but I don't think anything really has fundamentally changed in terms of the underlying drivers that we would see that do point to a longer depreciation over a longer horizon as well. What we really want to do is we want to have that investment theme around AI reflected in our positioning but we really do, again, want to protect Canadian investors from that currency fluctuation. Finding ways to pivot our funds out of the U.S. accomplishes that largely to just, again, protect the currency side of the portfolio.

[00:09:44] Pamela Ritchie: It's so interesting to hear that and sort of the role of currencies going forward. When we come to where Canada is right now, you mentioned challenges, living amidst the tariff announcements, realities, layoffs all over the place, how do you think the Canadian economy is managing through these huge challenges? We've got the Bank of Canada cutting away, doing sort of what they can. You were at the Bank Canada for many years, actually, you're writing up some of those monetary policy reports that we've been reading. They're doing everything they can. How are we holding up?

[00:10:17] David Tulk: Yeah, I mean, it's a challenge. We've seen recent GDP reports that were pretty negative and that is really reflective of the world that we're existing in. Canada, again, is a small open market economy so trade is crucially important and as you see challenges on the trade front that will, not surprisingly, spill over into big parts of Canada's economy. I think as you go through the renegotiations of CUSMA hopefully we can come to a better place where at least some of the uncertainty that really is almost as dangerous as the shock itself when firms just step back and say, I can't hire, I cannot invest in this environment, I really don't know what's going to happen tomorrow. That is very destabilizing for an economy. If some of that source of uncertainty is alleviated, at least we know what the rules of trade are going forward, you can see some of that investment and that spending try to catch up to some degree. As we're working through the headlines and as we look through these negotiations we'll try to get a sense of saying, well, is that now painting a brighter road ahead? That can, again, start to stimulate a little bit more of a bounce to not only the Canadian economy but in the Canadian markets as well. That's something that, arguably, has been bad but is maybe getting a little better.

[00:11:29] Pamela Ritchie: From where you sit as an investor into the Canadian economy via all of the different portfolio managers that you will use within the funds are investors coming back to Canada? There's discussion that the pension funds, which have traditionally gone ahead and invested internationally — well, I think they're receiving pressure to invest in Canada but some of them are actually doing it and there is a pivot. That means more money. How does it look? How does this country look as an investment to you? More money means maybe good things, begats good things?

[00:11:57] David Tulk: Absolutely. I mean it's the story that you want to invest around and I think investors everywhere will look for the best opportunity. When you get a budget such as we had from the federal government I think it does speak to Canada investing in the right technologies and making it a more attractive investment landscape as well. I talk to my colleagues who are based in the United States who are managing portfolios with global benchmarks and they see Canada as an interesting opportunity. If you sort of extract that type of approach to other firms around the world that's a lot of money that can come to a relatively small market like Canada. That alone can really try to push the market higher. We've seen these flows come in and out of the Canadian market through time.

[00:12:42] If you try to think of the signals that investors are keying off of and you're looking at a positive growth impulse. potentially, you're looking at maybe commodity prices, and gold's a big part of that but has done well in the background so that's a tailwind into Canada. If you think a little bit about valuation Canada has been historically cheap. Canada also has been painted with sort of a fear brush when you think of investor sentiment as you try to think of who is most likely hurt by challenges with the United States and Canada would rank high on that list. As each of those things maybe gets a little bit better, again, those are things that can draw international capital into Canada, and especially if you have investors that want to shy away from a depreciating U.S. dollar the Canadian dollar by contrast can look a little more appealing. That's, again, part of the motivation for the positioning tilts that we've taken across our funds as well.

[00:13:36] Pamela Ritchie: You'll often look at interest rate differentials. Some of the other differentials that seem to be going around the so-called developed world are just the fiscal moment. The U.S. is kind of full to the brim. They've done their fiscal, they're just trying to get out of it at this point. If you follow the fiscal story around Europe, around Canada, obviously, the taps are turning on. What else do you see there maybe in Europe as well?

[00:14:01] David Tulk: In terms of just the fiscal impulse, I mean, we're seeing a fair bit of fiscal spending and then the question is, is that spending justified given what's happening in the wider economy? Just on the United States as well, now that we have the government hopefully reopening it's on track to provide a lot of stimulus early on next year, again, targeting the consumer and that, I think, is a very powerful source of stimulus. In Europe. Even you saw this with the budget here in Canada there's a focus also on defence spending, on infrastructure spending, trying to really revive parts of the economy that have been left a little bit less focused on in the past. All of that I think is really exceptionally positive. Europe is a really interesting story from that perspective because as you know one of our main investment themes has been an overweight into Europe and we want to test that theme. That theme certainly pushed European markets higher earlier on this year as we came out of the Liberation Day tariffs. This was the galvanizing moment that markets really ran with. Since then it's been a little bit light on the follow through.

[00:15:06] Pamela Ritchie: AI has taken over again.

[00:15:07] David Tulk: Yes, exactly. AI is that one theme that has reasserted itself. That's caused flows to kind of go the other way and there's a little bit less patience directed towards Europe in that regard. One of the tests that we want to really do as investors is to actually see what it's like in Europe. I just came back from a week overseas, it was one of these crazy trips, five countries in five days type of thing meeting...

[00:15:30] Pamela Ritchie: Oh, gosh. Where did you go?

[00:15:31] David Tulk: We spent some time in France and Germany and Belgium and in Spain and it was just a very good opportunity to meet with a lot of different policymakers, a lot of people that have a pretty good sense of boots on the ground in terms of what is happening within Europe. The conclusions that we came back with really was that things are happening. There is this collective realization that the role that Europe plays in the global economy has to change. A lot of that is defence but also a lot of it is just investing in infrastructure as well. Energy is a big part of that as well. There's this big push to do that but you also have to remind yourself it's Europe, things happen gradually and slowly.

[00:16:11] Pamela Ritchie: There's no rush.

[00:16:11] David Tulk: Exactly. The sense of just doing commissions and writing white papers, that's sort of the stage we're at.

[00:16:17] Pamela Ritchie: AI can do that now.

[00:16:18] David Tulk: Exactly. Well, that's, hopefully, the point. That was also a very interesting comment or observation as well is that the AI trade, I mean, it really hasn't shown up in Europe to any large degree. This is very much a U.S. phenomenon and at some point that will spread to other markets but it's still very early innings in Europe. Just getting back to the European sense of progress, it is happening and it's just a question of maybe the market being a little bit too impatient. It has to just take the recognition that this will take some time but it is constructive. If the market is now very negative on Europe that could maybe be a bit too far as a tactical trade. There's a sense that you could see once more policies are announced and some of this capital finds its way out the door and actually starts to show up in the economy, notwithstanding all the existing challenges, but that can help to maybe just on the margin tilt economies higher, markets higher  and sentiment higher as well.

[00:17:14] Pamela Ritchie: So it's an area that you're willing to be patient with it. Is there, I mean, even with the Canadian budget it's over a number of years which is the way it's going to work, probably in Europe as well. They are trying to put a bit of rush on it but it's still years away or will we see some of this pretty soon?

[00:17:29] David Tulk: It'll depend on the exact policy initiative. You've seen it already, pretty large announcements within the defence industry, in particular. That's really the pointy end of the spear in terms of a lot of the spending, the rest will happen more gradually. Some of the issues that are really tied to structural economic reform could still take years, if not decades, to try to implement. As an investor when you look for positive change you don't necessarily have to see the end result showing up in the numbers because usually when you get to that point it's already in the price. The sense that you are getting this impulse moving in that direction that can be, again, a pretty compelling investment theme that we want to certainly have reflected in the positioning we've taken in our funds.

[00:18:11] Pamela Ritchie: Does spreading out the currency risk play there as well, maybe more tilted to a euro or a pound or so on, again, with the U.S. dollar that maybe in the longer term [crosstalk].

[00:18:20] David Tulk: Exactly. That's really, I think, the high conviction view that we continue to have reflected in the funds, really just the direction of the U.S. dollar. It's an interesting notion because we've traditionally relied on the U.S. dollar  as that sort of safe haven.

[00:18:34] Pamela Ritchie: Safe at night.

[00:18:35] David Tulk: Exactly. It's your port in a storm type of currency. As we've seen with a number of policy announcements out of the U.S. that's really eroding the case for the U.S. to be that really important currency. At the same time it does have a pretty strong starting advantage in the sense that it's a very deep liquid capital market. You won't see a shift overnight away from the U.S. dollar but, if anything, I think you end up with a much more sort of multi-polar world of where people go for safe havens. Some will go into euros, some will go into Japanese yen, some will go into gold, some will go into crypto. That nuance I think is really interesting to try to look at. As a result it just demands us as asset allocators to be a little more geographically diversified because when something does inevitably go wrong you need to just have a better sense of where you need to go for safety. We're trying to, again, parcel those allocations out across those different asset classes to give our investors the best shot of staying diversified and also avoiding the big theme of the U.S. dollar depreciating.

[00:19:42] Pamela Ritchie: When you take a look at central bank policy across the globe there's been lots of movements. Canada got out front and just started cutting much, much earlier, obviously, than the Fed and others as well. There seems to be a lot more discussion not moving as a monolith within central banks. Dying to get your commentary on that, what it means. It's probably good but what do you think about that?

[00:20:05] David Tulk: It's an environment that creates opportunities, certainly, for us. You are generally seeing interest rates around the world that are fairly close to their neutral levels which means that you're not ... obviously, need to tighten from various stimulative levels. You're meaning to loosen from really extreme levels of tightness. It really comes down to sort of the idiosyncratic conditions in each underlying economy. In some central banks there's a huge political overlay, most notably the case in the U.S. when you think of the Federal Reserve. You can make a very strong economic argument to say that the Federal Reserve should probably stop cutting at this stage. The economy generally is fairly healthy. Inflation is still a little bit elevated. Just putting on your economics hat and ignoring the politics, that's probably a pretty good place for policy to rest. That was sort of, I think, the message from Jerome Powell at the last meeting. Then when you do inevitably have to incorporate the political overlay there is a sense that there's a lot of pressure on the Fed to potentially cut further. As Jerome Powell retires next year and as we see the composition of the committee maybe becoming a little bit more politicized you might see a policy reaction that is less driven by economics and more driven by politics, so additional cuts that may not be entirely warranted.

[00:21:24] Pamela Ritchie: And watch the currency.

[00:21:26] David Tulk: Exactly. That could certainly weaken the currency. It keeps borrowing costs low which is sort of what the administration wants as well. It juices the economy, it juices financial markets but there's also inflationary consequences to that. As a theme that we're also, again, reflecting in our portfolios we still want to have protection against inflation. The Fed, I think, is a really unique example there. Then you get to the Canadian market and think about the Bank of Canada, they moved early and that was entirely appropriate just given the rate sensitivity of Canada's economy around housing. That's a theme that I think is, hopefully, getting a little bit better as well. As the Bank of Canada looks at the outlook the, I think, see policy as reasonably appropriate from where it sits now. I mean, they may need to cut further should there be more evidence of labour market weakening but generally speaking I think they're in a reasonably good place. Then you can move to the Bank of England where it's a very close call. I mean, they paused...

[00:22:17] Pamela Ritchie: That was really interesting. Was that last week?

[00:22:20] David Tulk: Yeah, that was last week and it was fascinating because it basically came down to one vote as opposed to having to cut versus hold steady, and they chose to hold steady. They do have another meeting in December which they probably will cut. It just reflects, I think, how reasonable economists can disagree when looking at the outlook because there is a lot of countervailing factors that are influencing decisions that central banks make.

[00:22:42] Pamela Ritchie: Fascinating. Are you fascinated to get more data now that the U.S. shutdown looks like it's wrapping up, should be over, and therefore data.

[00:22:50] David Tulk: I'm so excited for data. I cannot tell you.

[00:22:53] Pamela Ritchie: It's been a desert.

[00:22:54] David Tulk: I'm literally a fish when it comes to data and data is my water. As an economist flying blind without data is very challenging. I'm really excited to get the dump of data that will come as the BLS and the Census Bureau open up again.

[00:23:07] Pamela Ritchie: It may be negative, we're told. I mean, this is sort of what you hear. What do you think about that?

[00:23:12] David Tulk: We'll see. This is where something actually ... we have a really good edge at Fidelity where we have the number of private data sources that we can get at through the relationships we have with companies and with other entities in the United States and elsewhere. We've been able to try to have at least some shadow data that we can use to try to just mark where things are without actually having official corroboration from statistical agencies. The message still points to us that, yes, there is some normalizing in the U.S. labour market. I think we can best characterize it as a low hire but low fire type of market. It's kind of in equilibrium. We could...

[00:23:50] Pamela Ritchie: The data that you have and generate and have access to is telling you that already, even without the government data.

[00:23:55] David Tulk: Absolutely. When we think about it from purely a cycle analysis perspective we're still in maybe mid to late-ish cycle. There's nothing in the data that screams recession risk at this point, which is entirely encouraging. Again, once you overlay some fiscal stimulus early on next year the U.S. is still staying in a pretty good spot. That as a domestic theme, again, is something that we're pretty comfortable having reflected in the funds. It's just, again, the currency is the big issue we want to be mindful of.

[00:24:27] Pamela Ritchie: It's so fascinating the way you look at it, just slightly differently than is it a bubble, isn't it a bubble? You make sure that the [indecipherable]. We'll come back to that. A couple of questions coming in. This goes back to investing in Canada. Apart from resources and oil which sectors in Canada are you finding attractive?

[00:24:43] David Tulk: Generally speaking when we think about investing in Canada we're using all of our building block managers, all the managers you know and love across Fidelity. Here we really want to make sure we have a diversified exposure. We want managers that skew a little bit more value. We want managers that skew a little bit more growth. We want a nice sort of all-cap representation within Canada as well. It's really up to those individual managers to go through their research process, use all of their bottom-up signals, all of their company meetings to try to figure out what are the best individual names they can bring into the portfolio. Then when that bubbles up to a geographic allocation we can be comfortable with how that looks.

[00:25:19] Pamela Ritchie: But ultimately you're making decisions to put money to work for those managers to do their work.

[00:25:25] David Tulk: Exactly. We're not out there in the trenches trying to pick individual securities. What we're really trying to do is just allocating among the managers. Then we have some futures capabilities and some other overlays to try to enhance different themes. Generally speaking we have a great active management engine behind us so we want to make sure that those individuals just have all the capital they need to make those decisions.

[00:25:46] Pamela Ritchie: We've got a tariff question coming in. This is really the revenue that's being raked in by the U.S. government and being put to work the way they want it to be. Do you see inflationary pressures to continue if the U.S. administration follows through on the recent tariff revenue announcements? How are you positioning in response to that? I mean, there's just so many tariff revenue announcements right there.

[00:26:10] David Tulk: I think that's a really interesting story because that actually hinges into the case that's currently in front of the Supreme Court in the United States, whether the IEPA tariffs are constitutional or not. If those prove not to be constitutional then that's going to create this huge bureaucratic issue of offering refunds and everything else. That's just a mess.

[00:26:27] Pamela Ritchie: It's like a proper rebate system they're going to have to get going. That's something.

[00:26:30] David Tulk: So we're going have to see through that. We have political strategists that are helping to understand those risks and we're thinking about it. But if you just take a step back and just look at tariffs and recognize that those IEPA tariffs are part of a bigger tariff package, and there are a number of other tariffs with all these number codes that I always get confused in my head. There's enough of those other ones where I think substantially the bulk of the tariffs I think still remain in place, or if IEPA tariffs are deemed non-constitutional they can find other things to try to make up the difference. All that aside, tariffs, I mean they're a revenue source, that's the question identified.

[00:27:02] Pamela Ritchie: It's hard to give that up for any government, company, whatever. They don't want to give that up.

[00:27:06] David Tulk: If you partner that with a wider tax policy, if you use tariff revenue to sponsor or at least fund individual tax cuts or corporate tax cuts, however you want to come up with your policy mix, that again is all part of that fiscal impulse that you see really hitting next year. At the end of the day if the U.S. economy is still reasonably healthy on its own, then you add on top of that additional fiscal stimulus. If you get on top of that some extra cuts from the Federal Reserve then, yeah, that inflationary story is something that you still have to be very mindful of. Again, in the funds that we manage we still have inflation-protected government debt. We still have a gold allocation. All of these are really important to protect the portfolios against the risk of inflation really eroding returns through time.

[00:27:57] Pamela Ritchie: Which is sort of the key to everything, isn't it? When you're taking a look at that fiscal stimulus, tax cuts, other things too, the deregulation story is obviously there in the U.S., how does Canada compete? I mean, this was one of the big things to address, the corporate tax structure.

[00:28:11] David Tulk: Absolutely. I mean, for companies that have the option of choosing one country or another, I mean, they're motivated in part by tax differentials. There's a whole host of other things that they want to be motivated by as well in terms of pools of labour and the rest. I think, and this is probably beyond sort of my expertise, but I would try to think at least notionally that Canada as a small market we shouldn't try to compete with the U.S. on every issue or on every industry. I think finding ways to specialize and figuring out what we do best, and obviously we have a lot of natural resources that are something that we can work towards understanding and using as part of our economic makeup. So I think playing to our strengths, understanding where we can add value and not try to complete in every market. I think that is something where that specialization can certainly benefit not just Canada's economy but you could see it reflected in Canada's market as well.

[00:29:05] Pamela Ritchie: Finding new people to sell to, clients, customers, around the world for all kinds of things that Canada can sell and play to its own strengths, do you see in this a pivot to Asia? I mean, this is much talked about for lots of different policy in the U.S. and Canada but do you follow that line? Are there interesting opportunities within that?

[00:29:22] David Tulk: I think there's pivots to Asia, there's pivots to Europe. That was one of the questions I asked when I was overseas last week, just getting a sense of willingness to sort of partner with Canada and opportunities.

[00:29:32] Pamela Ritchie: Not just Eurovision, other stuff too.

[00:29:35] David Tulk: Exactly. There is something. I mean, obviously, you're constrained by geography and infrastructure and logistics. It's much harder to get stuff across an ocean relative to just across the land border. There are things that will need to be done to help to improve the infrastructure in terms of Canada's port infrastructure, rail infrastructure, to try to diversify trade. These are not just things that you will solve in the next quarter or two. These are multi-year type of projects. As a going theme, we as investors know and love diversification so we as an economy should know and love diversification as well. So finding opportunities to export into these other markets is really important. We start with trade agreements and then you work through the logistics of making it happen. We won't fully be able to divorce ourselves from the United States, that's just logistically impossible, but the sense where you get positive growth on the margin, again, it's all in the margin but that can help at least not only an economy but a market too.

[00:30:32] Pamela Ritchie: Are Canada's companies that you speak to, leadership within these companies, lots of people at Fidelity do, they're ready and excited about selling elsewhere and ready to do the ramp-up with perhaps stimulus from the government or help from the government and the catalyst discussion, they're on, they're ready for this.

[00:30:52] David Tulk: I think any corporate leader wants to see a customer and a good customer is even better than any customer. Looking for those opportunities and having the assistance in the direction of the country from a policy perspective should be welcomed pretty enthusiastically by all Canadians.

[00:31:07] Pamela Ritchie: What would be a final message for investors navigating through this and the way that you're managing? I mean, there's so many funds, actually, you can't count them that you oversee but how would you kind of tie things up in a bow?

[00:31:20] David Tulk:  I think at the end of the day I've probably said this at the end of every webcast but just maintaining that degree of diversification. That's something that's very core to our process. We want to identify the themes that are very compelling but try to see the themes in the wider context. I think that's another way to express diversification, to really put things into as large of a basket as you possibly can. To understand AI is compelling and potentially transformational technology but you can't get necessarily AI without U.S. dollars, for example. So having ways to just understand each of these exposures and giving an investor a holistic experience is what we're trying to do every day.

[00:31:57] Pamela Ritchie: We're counting on you to give us that broader context. David Tulk, thank you for joining us here today.

[00:32:01] David Tulk: My pleasure, thank you.

[00:32:02] Pamela Ritchie: David Tulk here in studio today. Tomorrow on Fidelity Connects Fidelity Director of ETFs and Alternative Strategy, Étienne Joncas-Bouchard. He is back for his monthly ETF roundup. Étienne is actually going to join us at 10:30 Eastern Time, this is for our French language webcast. He'll then sit down with us here at Fidelity Connects at 11:30 en englais.

[00:32:22] On Thursday you don't want to miss our special financial literacy webcast. Rob Carrick, who you probably have read, maybe met, I don't know, Canada's trusted personal finance columnist alongside some key voices from our charitable partners is going to dive into why investment literacy matters more than ever. Discover practical tools that you can use to help clients and their school-aged kids build smart money habits. Don't miss this chance to boost your expertise and empower your clients, ultimately, any age of clients. Let's make investment literacy your competitive edge. Thursday's webcast will be presented in English, this one we're talking about, and feature live French, Cantonese and Mandarin interpretations so we hope you'll join us in any of those languages.

[00:33:10] On Friday portfolio manager Peter Khan, he's going to be discussing where he is finding high yield bond opportunities around the world in today's market environment including his overall bond outlook as we wrap up 2025, and just the story of risk, how that works for what he does on a daily basis. Thanks for joining us. We'll see you soon. I'm Pamela Ritchie.