FidelityConnects: Global brands and consumer spending patterns

[00:04:08] Pamela Ritchie: Hello, and welcome to Fidelity Connects. I'm Pamela Ritchie. Tariffs or no tariffs, from an investment point of view the consumer wanting to spend, and due to some deregulation, being able to spend, perhaps, might present a coiled spring opportunity. Less onerous bank regulations and mortgage burdens could also free up spending ability after the twin hits of Liberation Day fears and the overhang of COVID price hikes. Consumer brands have had to adjust. To do this they are diving into the world of AI efficiencies. Through AI,  they may not already be deployed across businesses but our next guest says that AI inside the brands is clearly around the corner. Today we welcome back Fidelity portfolio manager, Aneta Wynimko, to help us understand what the consumer is spending on across all ages and budgets, and more on the Fidelity Global Consumer Brands Fund. Welcome, Aneta, great to see you. How are you?

[00:05:11] Aneta Wynimko: Very good to see you. Thank you for having me.

[00:05:14] Pamela Ritchie: Delighted to have a chance to speak with you here today. Let's go through a little bit, we've actually heard a lot of earnings across the globe including consumer brands, some of the big ones that cater to kids and to TV and to what we watch and what we don't watch so there's earnings fast and furious. What are you getting from earnings from your own research on the health of the consumer?

[00:05:38] Aneta Wynimko: Well, the earnings, obviously, they come in the middle of the summer holidays for most people, not for the investors. The consumer is going through a soft patch and it's quite visible in the earnings that are coming out. As you have said, the consumer has to deal with quite a lot in quite an extended period of time now, but I think there is hope because things are looking up from the perspective, on one hand, inflation, probably cooling off and interest rates coming down, maybe not immediately but even today we had a cut in the UK, and on the other hand, the employment market is quite healthy and likely to remain so.

[00:06:26] Pamela Ritchie: That's very interesting that there is sort of this hope. What would you say in terms of valuations? Then we'll go into some of the themes and discussions around it but a lot of valuations have snapped back very quickly after the Liberation Day announcements. We know this well. On the consumer sentiment side of things it's been rough. Tell us about the valuation story.

[00:06:49] Aneta Wynimko: Consumer sentiment has been beaten up but has been improving, especially when we look at the more kind of surveys of daily consumer confidence, it's moving up. I think consumers, they felt the pain, they kind of see the issues but they can see a way out of the current situation.  On the other hand, the valuations, it's all, at least in my experience, investing in consumer companies is less about the valuation where we are and much more about the trajectory of earnings. Those companies tend to work when we see upgrades of estimates of earnings. Obviously, when we look at the more traditional consumer companies we had quite a prolonged time of earnings downgrade. It's very different when we look at the Magnificent Five, maybe, not Seven, but Five today. The earnings have been very strong with the top line even in the second quarter, growing at 15%. Obviously, the momentum is there when it comes to the more traditional consumer-facing companies. They, obviously, are impacted by the current soft patch of spending by the consumers and the earnings momentum has been quite weak.

[00:08:16] The commentaries also, we all pay a lot of attention to what they say and, obviously, we are still at a time where yes, maybe there is more visibility what the tariffs will be but we are also at a point where companies haven't really quite passed through those tariffs. A lot of them, along with the suggestion of the U.S. president, are maybe trying to eat those tariffs because in the current weak consumer environment it is quite dangerous to increase prices and have a negative impact on volumes. It's a period of uncertainty and a period where companies are quite cautious. I think the fact that the consumer confidence is improving, I think should tell us quite a bit about the fact that consumers themselves, they are kind of seeing that maybe we are in the bottoming pattern as opposed to a situation where they are scared of a recession. That doesn't seem to be the case.

[00:09:25] Pamela Ritchie: That's really, really interesting. Within that, the discussion that you made about maybe the Magnificent Five, if you want to call it that way, looking at the communications, the consumer, we're thinking of the streaming companies and so on, what do they represent within the fund? They seem to be almost the defensive play, is that fair, within a consumer basket of what they might buy and spend money on in terms of consumption of things that are easy pleasures.

[00:09:57] Aneta Wynimko: Yes, and prime example of maybe a new staple in our life, maybe not in the stock market but in our lives is Netflix. It's very affordable, it's very essential to a lot of people's daily entertainment. The way the company has approached building its now dominant position in the space is by offering the consumers pretty attractive product at a very affordable price. It's all about hooking up the consumer and making sure that the consumer can afford it and that consumer is willing to subscribe and continue to use the service. It is a bit of an approach that I've seen in many consumer tech companies. Amazon is a good example of this approach where always since the idea of Prime came up, the purpose of subscription is that consumers get so much more than they pay for, and that gets them locked in.

[00:11:12] Other companies in the space, other consumer companies have maybe taken, not necessarily the advantage of the consumer but they have taken pricing too far. They felt very comfortable when the consumer was spending. Obviously, the consumer has been subsidized by the government. There have been shifts in the portfolio of consumption for a period of time and quite a few companies have moved pricing too high and now in the soft patch of consumption they are struggling. Obviously, with tariffs coming into the picture it complicates things further. I think investors are fully aware and looking for that. We really have to think, okay, what's coming next? How will things play out from now?

[00:12:01] Pamela Ritchie: That's so interesting that you think that investors can look beyond that, and should look beyond that, because it does seem like what do you do with the price story. Through COVID prices rose. It was exciting for companies at the time, being able to have an opportunity to raise prices that doesn't come along that often. They did but here we are in a bit of a sentiment slump. Did prices peel back? What is the response? You just send it to the discounters and invest in the discount brands? I mean, how does that get worked through?

[00:12:34] Aneta Wynimko: Different in different segments. I suspect it depends on how essential the products are, is there a substitute. Just this week I spoke to one of the suppliers in the pet food industry. They have increased the prices of protein, egg-based protein, quite substantially. But pets, they are a priority but doesn't seem like — there is price resistance so they actually had to cut down those prices back to the level of pre-COVID 2019, so quite a long way. I think the more commoditized the product, the more resistance and the more competition there will be, and we are seeing those adjustments back. For unique products, products that are quite essential but unique, I think companies can still keep pricing power but I think the clever companies are being very careful with pushing those prices further in this environment.

[00:13:40] Pamela Ritchie: What's an example of the ones that can keep their prices higher, maybe not a company but an industry or an area?

[00:13:48] Aneta Wynimko: A good example is probably a company or brand, maybe I can talk about brands, Cartier, Van Cleef, jewellery brands where they actually have been pretty more cautious or careful in pricing up in line with gold prices than they could have because for them it's very important that the consumer is not shocked by the price changes. I think as consumers we understand that price of gold has gone up. I suspect if we own gold or gold jewellery we are quite happy that the price has gone up, and if we would like to purchase a new piece of jewellery I think it's understandable. There's an element of investment not only in the brand but also in the raw material that the product is made of. Obviously, those products, they have resale value. They not only have the sentimental aspect to the product but also the value, the intrinsic value of the product.

[00:15:01] Pamela Ritchie: Do you think — the big question that all kinds of people are trying to grapple with is whether AI deployed across a company, any company, can create the kinds of efficiencies that can play into price, for instance, that can bring down prices. Tell us what you're seeing. There's been this long question about whether AI and its deployment within a company is actually accretive now, or is that coming, are we a long way from that? Give us a sense. You speak to the leaders of global brands all the time, what are they doing with AI? How close is it to actually creating efficiencies that term into probably lower prices or steady prices?

[00:15:47] Aneta Wynimko: The opportunity for AI and improving efficiency among consumer companies is quite vast. We are still very, very early in terms of adoption. Obviously, headlines and tech companies are making quite a lot out of the opportunity or the investments that they are making into AI and data centres, et cetera. But when you look at the users and companies adopting AI we are still very early, to the extent that quite a lot of global companies are realizing that yes, they have, for example, adopted SAP, but this SAP has been customized in different markets by different brands and now they have to unify, because you really need to have data in the right places to be able to apply AI to it. We are really at the time where the companies are trying to put things in order.

[00:16:58] But at the same time there are very exciting tools coming up. There are also tools coming up which are often more affordable. Big, big per cent of sales, especially for the branded, more discretionary companies, is spent on creation of content, is advertising agencies. Only yesterday I saw the CEO of Diageo. They have hundreds of advertising agencies and they have to streamline because it's too many and there's a lot of things that they can do direct much faster and in a much more personalized kind of locally adopted way. There is one space for efficiency there. There is an opportunity to also streamline supply chains. If companies can create products much closer to end demand, where it's more clear what consumers want and how much, obviously, the opportunity to improve the sell-through. You don't overproduce in expectation of demand, you produce to demand.

[00:18:13] Obviously, as all those efficiencies are put in place and the supply chain becomes more efficient, the product design, the communication, the demand creation, as all those things become more direct from the best-in-class companies that know how to do it, there will be efficiencies. The question then becomes, what will happen to them? Will some of them pass through to consumers, maybe to apply the strategy of Netflix where you offer the best-in-class product at a price that doesn't allow competition to come in. Or will some of it go to the margin and we, as investors, will benefit. I suspect there will be a mix of those two, but clearly we are very early in ... we can see adoption of AI by the hyperscalers in their own business models but the more traditional companies are still very early in the path of adoption.

[00:19:22] Pamela Ritchie: It's interesting just in terms of size, scale, you mentioned Netflix there, but almost as an example of other companies as well where it is able to just create a larger moat, I guess, or any large company that has the ability to invest and use their own cash flow to put towards, I mean, capex in sort of the vein of AI, it seems like in any industry they would be in a better position to put that money to work to get it rolling. Just tell us a little bit about that, sort of almost owning the industry to an extent because you can through AI, rather than worrying about the pricing element. I'm just kind of curious the big versus small or big versus mid even, how that comes through in the next years to come.

[00:20:11] Aneta Wynimko: I think it's going to be fascinating because I suspect that in a lot of industries we are going to see a leader or a couple of leaders that really know how to use technology and how to innovate and they will be very kind of careful with pricing. Then we will see the whole tail of newcomers, new brands, new business models, new companies coming up, using technology, being very efficient, being very sharp on pricing and moving pretty fast. We're saying this in software, we're seeing it in technology but not yet so much in the more traditional sectors. I think it's also a dangerous time for companies which are maybe not as fast or companies that sell products or services that are overpriced and replaceable. Again, we see it in software and I suspect we'll see it in other sectors. It really is a time where I hope that searching for leaders and searching for those who are challenging maybe the leaders or the more kind of sleepy incumbents should pay off, and here at Fidelity we have a massive research team, boys and girls travelling the world and, hopefully, are quite well positioned to identify those.

[00:21:44] Pamela Ritchie: I want to ask about the consumer and sort of ages, stages and demands and so on but one other, I guess you'd call it a macro piece, it's the discussion of funds being available because perhaps the housing market is changing, because there's deregulation, you could even go into the interest rate discussion, the idea being if there's deregulation on sort of the banking side of things can more loans go out there? Can we have a rising sea brings up all boats, that sort of thing? It's tied to housing markets as well. If mortgages aren't at such high rates, for instance, maybe it just frees up the consumer a little bit to spend on other things. Where do you see that? We see big announcements. We've heard the rates announcements, including in the UK, is it meaningful to the consumer at this point or what are you modelling for later out?

[00:22:37] Aneta Wynimko: I think the interest rates is a serious pain point for the consumer. The consumer has been almost locked out of the housing market for quite a few years now. The affordability really is an issue. Prices are quite sticky. They are quite sticky in the U.S., maybe a little less so in the UK where I think the overall environment has been quite weak for a number of years. In the U.S., even though there is a supply of unsold houses or apartments the sellers are not budging because they don't need to, they don't feel the pressure. What can get the market moving is really interest rates. We can see the picture being a bit more muddled for inflation due to tariffs in the near term, but looking out further I think it really is quite constructive and I think there is scope for interest rates to come down and that definitely will free up quite a lot of spending. Obviously, people are kind of in this holding pattern, not being able to move to a bigger apartment or a house maybe. Maybe waiting to have a baby because they need to have the right set-up. I think getting the housing market moving will really kind of dynamize the whole economy and create quite a lot of positive effects.

[00:24:19] Pamela Ritchie: Within the universe of your fund and the way that you invest do you look at some of the financials, actually, for those very reasons that there would be more consumer focus, releasing money to consumers, is that an investment opportunity for you?

[00:24:35] Aneta Wynimko: Yes, yes, definitely. I like the space of financials. Long ago as an analyst  I did cover banks and I remember quite a powerful cycle of rates being cut and how it really fuelled the demand for mortgages and consumption in the early 2000s. There is an opportunity. Obviously, deregulation is going to help as well but I think as in other sectors the strong will get stronger. Obviously, J.P. Morgan has been always a strong franchise but it's becoming stronger, it's becoming better, it's spending a lot on technology and data. Obviously, the market in the U.S. is still very fragmented so the opportunity for consolidation is quite natural, but similar patterns to what we see in other sectors we also see financials, and at the end of the day it's about efficiency and kind of allowing the demand to flow through with an economy that is more efficient.

[00:25:54] Pamela Ritchie: Tell us now a little bit about ... we used to just love having long conversations with you about the demographic story, demand, where some of the trends were going, different ages and so on. I wonder if we can go through a few of the themes of the consumer that are investible. I'm sure there's lots of themes out there, they're not all investible. What are the interesting investible themes that you notice across the consumer landscape?

[00:26:20] Aneta Wynimko: Well, consumers very much ... I think the mindset of consumers has been changing for a while, even more so after Covid. I think we personally know that as well. We take better care of ourselves, the well-being, health, looking good. Those things have become quite relevant and I think this will just continue. You have new businesses that are emerging on the back of it. A company that IPO'd a few years ago, and it was quite ... they tried to IPO a few times and the market was not very receptive. I'm talking about Galderma which is a market, it's a duopoly between AbbVie and Galderma in the esthetic treatments, basically Botox and the likes. There is the whole plethora of all sorts of injectable cosmetic treatments that men and women go for. In the past it was a bit of a taboo, people that used those, and now it has become something that I think big part of population is quite familiar with. Again, as we age we need help with the way we look, we feel. I suspect in the space of health and well-being, especially if technology allows us to come up with new products and solutions, there will be a lot of exciting opportunities.

[00:28:05] The adoption is global. It's not only one market or one demographic group. You would think those esthetic treatments would be more targeted to people in their 50s yet also younger consumers use it because maybe they believe that if you start earlier the outcome is going to be much better later on. I think the space of well-being and taking care of yourself is really quite a good investment opportunity that will last.

[00:28:43] Pamela Ritchie: It's got legs, as they say. It's got legs. What about the GLP-1 craze? I mean, it sounds like if you listen to sort of stock market commentary, it's peaked. That doesn't mean people aren't using it and weight loss drugs, ultimately, aren't popular. Again, what is the investment case, is this still a theme that's investible?

[00:29:11] Aneta Wynimko: In my opinion, yes. I think the stock market got very excited because the initial growth phase was very strong. Also, it happened to companies which are in the pharma space where I think investors are maybe not used to seeing. In consumer I see companies, there's a trend and then there's strong sales and the excitement kind of starts happening there, while in the pharma space I think investors are maybe not used to this kind of consumer driven fads that come and go. I don't think it's a fad because. The reason I believe in the opportunity for GLP-1s kind of goes to the main reason behind the issue of obesity. It is lifestyle and it also has to do with how humans, uh, how we struggle with self control, addiction. It really has to do a lot with mind and how we control our own behaviour. Those drugs, they help us. There's lots of papers on how they actually help people who have all sorts of addiction issues. I think in the life we live there are so many temptations and easy ways of doing the wrong thing that actually using solutions which are more medical probably is going to be necessary.

[00:30:48] The space has become very complicated because a lot of entrants, the so-called compounders coming out of India and China have been allowed to enter the market. The patents are expiring in Canada for the Novo Nordisk products, obviously, that will open the market in a big way, and it's, obviously, very near to the U.S. market which is a serious source of profit. It's a very complicated space but I think the space, we are still very early in the adoption. The number of people dealing with obesity is really huge and growing. Unfortunately, medical solutions is what we need. The price needs to be right for people to be able to afford it, for the insurance companies to be able to afford it. I think we are in the process of the adjustment. I think it's very hard for the stock market to really figure out where things will settle. I think we are still in early days of those products being adopted and being helpful.

[00:31:56] Pamela Ritchie: So fascinating, and the way that lends to some of the places that you invest. If we come back to sort of the consumer communications area, there's a big discussion about whether everyone will or won't be buying a new phone in terms of that type of consumption on the tech side of things. Do we wait for the killer app and whatever that device is for AI? What do you see from companies that you're investing in, or want to invest in, on this side of things?

[00:32:28] Aneta Wynimko: Interesting question, especially that I just had a meeting today with one of the leading tech companies and we talked about that, and they are a supplier. There is a number of companies working on all sorts of consumer electronics. Apparently, Meta in its pipeline has 50 SKUs, so new products that are all sorts of gadgets and devices using AI. Obviously, what we have seen so far, and it seems to be doing quite well, is the Ray-Ban Meta or Oakley Meta, the intelligent glasses which are affordable and the sales are going really strong. Consumers, the reviews are quite good. I think that's one space that has already picked up. W.

[00:33:22] We also have Jony Ive working on the device that he has in mind, and what I hear is it's some kind of a pendant that you can wear on your neck, I suspect, with a camera, a microphone. I think the people in Silicon Valley, they have this idea that using phones is maybe not good for you, whether it's your eyesight or the posture it's not very comfortable. If you can change the form factor and come up with different ways to communicate and use technology but, obviously, we'll see how fast the consumer adopts. Are we all going to wear those pendants on our neck and record each other? That might not be...

[00:34:19] Pamela Ritchie: People talk more and type less, talk more and type less, I don't know. That's what it sounds like. We just have a couple of minutes left, I'd love to ask you broad strokes on positioning. I know that you've mentioned, again, some of these consumer communications companies have always almost acted like staples. You started out telling us that at the beginning of the discussion. Give us a sense of your overall positioning.

[00:34:42] Aneta Wynimko: I'm trying to find, obviously, the winners, the companies that are adopting technology and that are well positioned to be the winners in their space, whether this is in financials or discretionary spending, beauty. There is a group of them, they have a history of being innovative, creative. I spend quite a lot of time trying to figure out what are they really doing and how things are progressing. Are they trying to reinvent themselves for the future or are they just trying to cut costs and make sure that in this soft patch of demand they are looking good? That's a big part of my time and really trying to identify those winners in each of the segments where I am investing. Obviously, leisure is still a very attractive space. Maybe the consumer demand has moved away from going to hotels to going on cruises but still I think the consumers want to spend time, they are more price sensitive but still want to spend time on leisure, time and money on leisure.

[00:35:56] There is big opportunity investing in the space of communication, whether it's Netflix or Spotify, there is the whole group of companies that are actually coming up with services and products that really are quite daily essential to our lives. Financials, there is a group of companies that really are taking share, innovating, becoming stronger in their positioning. Companies like EssilorLuxottica, the leader in eyewear that managed to become now the leader in the intelligent glasses by teaming up with Meta and being their strategic partner in the space. There's always plenty of opportunities, whether these are traditional companies or more tech savvy, tech driven players.

[00:36:48] Pamela Ritchie: It's fascinating to hear your views on how companies are adjusting and changing, and also the stalwarts that are there that we continue to have demand for. Would there be just a final comment that you'd want to leave with investors today about this space?

[00:37:06] Aneta Wynimko: The consumer space has been challenged, has had lots of headwinds. But at the end of the day, those those companies are well positioned to really benefit from what's happening. Some of them will become stronger. Some of them will come up with new avenues of growth, new products. On top of that, there are plenty of newcomers, companies that will create businesses. We are just at the beginning because the new technology and tech is really quite in its early days. I think we'll see some big winners and some big trends develop globally. It happens really fast and, obviously, the market prices those quite quickly. I think for investors  it should be a space where they are looking at quite carefully.

[00:38:01] Pamela Ritchie: Aneta Wynimko, we learned so much from speaking to you. Thank you for sharing your time with us here today on Fidelity Connects.

[00:38:08] Aneta Wynimko: Thank you.

[00:38:10] Pamela Ritchie: Have a good weekend ahead. That's Aneta Wynimko joining us from London today. Coming up on the show on Monday, Vice President of Product, Andrew Clee, joins us. He'll be sharing his latest views on markets, the ETF landscape, we'll really zero in on that and what product innovations are coming down the line for Fidelity Canada.

[00:38:29] On Tuesday of next week we dive into the global equities playbook. This is with portfolio manager Patrice Quirion. He's going to be sharing emerging opportunities with you that he's keeping a close eye on and what advisors can do to stay the course during some of these uncertain times across the marketplace globally.

[00:38:46] On Wednesday we'll dive into a discussion about best practices when it comes to cybersecurity chips with Imran Ahmad, who is senior partner at Norton Rose Fulbright Canada, and co-head of information governments, privacy and cybersecurity. He'll be joining us and be back to share what clients can do to develop and implement strategies related to cyber threats. All of that ahead on the show. Thank you for joining us. We'll see you soon. I'm Pamela Ritchie.