Global equities: Where are the opportunities now?

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Hello, and welcome to Fidelity Connects.

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I'm Pamela Ritchie. Geopolitical headlines have been driving a ton of market

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conversation but how much of that actually filters into

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international equity returns?

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As the U.S. and China continue to exert influence globally

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where might those dynamics begin to show up in investable markets, even if

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at all? Joining us here today for a look at how global power shifts,

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political cycles and valuation differences could matter for international

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equities is portfolio manager Patrice Quirion.

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Patrice manages several Fidelity funds including Fidelity Global Fund.

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Happy New Year. Warm welcome to you.

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Happy New Year, pleasure to be here.

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Great to see you again.

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Let's begin with, we'll invite everyone to send questions in,

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what hasn't changed from last year? Actually, over the course of the last 10

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days it feels like it's been a barrage of changes.

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Investing wise what's not changed?

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The reality is we spend a lot of time at the beginning of every year sort of

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thinking of what will be the new story in 2026 or whatever year we're

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in. The reality is the market doesn't care that this is the beginning of a new

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year. As you should expect the reality is our thesis doesn't

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change overnight because we are in January.

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As a result, most of my investment views are unchanged versus where we were

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last year. My views remain that international markets are

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starting to gather more attention, flows are going back,

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interest is going back. The valuation differential remains.

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It is a little bit less than it was at this time last year but...

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Because it was such low levels at that point.

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Yes, last year we were probably peak negativity right after

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the U.S. election on international markets, that has changed in a big way over

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the course of the past 13,14 months

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but I think it remains. There is a valuation differential,

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positioning differential that can create opportunities in international

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markets. What has not changed in my case, through

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the course of last year I think Europe got a decent lift

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so we were more selective from a big overweight position.

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We've taken profit in many areas and we've allocated that

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to a good extent to Asia and particularly China.

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That has not changed. I still think there is a very good risk-reward potential

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towards the Chinese equity market, notably around the consumer

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sectors, the technology where there's some important breakthroughs coming out

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of there.

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Maybe one thing that is starting to change a little bit in my

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view of the world is after quite a few years of being significantly

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underweight in the U.S., notably around the tech sector,

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we are starting to find opportunities around the

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consumer sectors or the sectors

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that are going to benefit from lower interest rates, which I think

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could be something different about 2026.

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We'll see the lag effect of the rate cuts that did take place

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and could continue to take place maybe starting to lift the real

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economy. This is a thematic that will apply globally

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including in the U.S.

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I am spending more of my time looking at generally more

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consumer, real economy, housing,

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transports related cyclicals, everywhere

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across the globe. I think that's an interesting opportunity for the year ahead

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that is different than last year.

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And it sounds less regionally specific.

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Yes, I think that's fair.

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The past number of years there's been enormous regional

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differentiation given the weight of the

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tech leadership, which is so heavy in the U.S., much less present than the rest

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of the world, given the slowdown that we've

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seen in China and the repercussions that has on Asia and

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Europe to some extent.

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I think this is likely to have less of a continued effect

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and, if anything, maybe a risk of reversal on that.

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The pickup, or the hope for pick up, that we're starting to

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see signs of on the real economy largely driven

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by lower rates globally, that has the potential to

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bring a reemergence of consumer confidence

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on the traditional economy, traditional sectors.

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I think this is pretty much the case across all the big geographic

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continents.

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When you take a look at things that are related to the real economy,

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you can talk about defensives but the things that we use every day, we do every

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day. Companies that produce things that just are part of our waking and

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living our daily lives are sometimes smaller

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companies, you're also going down cap.

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That is one interesting thing that I'm increasingly tilting the

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portfolio towards.

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While the last few years have been really good for a global equity market,

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especially in the U.S., it's been a market that's been mostly driven by

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large-cap stocks, partly from a factor of

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the sectors where those companies add the momentum

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but also I think a little bit of

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investors less willing to to allocate towards those smaller companies,

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especially more cyclical ones, where they were impacted

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by that weaker consumer, by that slowdown in

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industrial demand and transports, etc.

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It leaves us at the point today where increasingly

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small-cap to me look interesting in terms of what expectations

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are baked in, how cheap are they on normalized earnings.

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I think it's especially the case in Europe.

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It is across the board but I think it is more visible or the

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undervaluation seems more meaningful across

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European small-caps. So this is a part of the

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portfolios where I did rotate out or reduce the

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big overweights in Europe, notably through financials that have been just

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really good performers for the past number of years.

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I reduced that, moved the money, as I mentioned, a little bit more to Asia, a

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little more in the U.S., as we talked about, but

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trying to come back towards small-caps in general and

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maybe with a greater focus on European small-caps that are

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tied to a recovery of the consumer, of construction,

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industrial, transports, et cetera.

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The multinational story for companies headquartered in

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Europe versus multinationals headquartered in the U.S., for instance,

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are they still cheaper than the U.S. counterparts?

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Is that still there?

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I was doing a baby shark thing a while ago, has that closed?

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It partially closed but it certainly did not fully close

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and far from it. The international markets have done better than

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the U.S. market for the past year or so.

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It's not because earnings growth has been superior.

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The U. S. has still been leading the charge on earnings growth but

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that very excessive valuation differential that we

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got to in late 2024 partially closed

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and partially that is reflected on

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comparing multinationals very similar to

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U.S. multinationals either from Europe or from Japan that

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were meaningfully less expensive.

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For a global manager like myself where we don't have constraint in terms

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of where do we allocate on a geographic basis, if I'm offered

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two very similar companies, one meaningfully less expensive than the other one

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because it is in a different market just from a headquarter perspective.

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That is starting to close

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but I think there's still quite some ways to go on that so

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I remain overweight on the international markets

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in large part for that reason.

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The follow-up question to sort of the European versus U.S.

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multinational question is actually the Chinese multinational

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question. How do you view larger companies there and smaller

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companies? We'll start with large.

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There's a very limited list of Chinese multinationals.

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China is more at a stage where the big companies are domestic champions

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but with very limited out of China exposure,

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at least in revenues or earnings terms.

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That, in my opinion, will be a major change for the

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... I can't tell you it will be major change for 2026 but it will be a major

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change for the decade to come.

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They're building towards that [crosstalk].

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We are at that stage where the domestic champions out of China are

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slowly, and in some cases more quickly, trying

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to expand their power, bring their products to market,

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products that are increasingly very competitive

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not only in terms of price but in terms of quality of products as well, and

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trying to displace Western multinationals initially out of

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Southeast Asia, the CIS.

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Maybe South America.

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South America has been one of that.

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It's one of the calculations in some of the maneuvers we've seen

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geopolitically. It's just to make sure they knock out certain markets so that

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Chinese multinationals don't have as good a grip on those

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economies.

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Yes, and I think we can use that as a transition to what's happening in

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Venezuela. Before getting into the specifics of Venezuela

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I think it's important to understand that this Chinese-U.S.

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rivalry is certainly there.

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I think that we are at a stage where the

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circle of influence of China has grown significantly,

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especially in emerging markets.

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It's been the case for a longer time in Southeast Asia,

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clearly CIS, Middle East, Africa.

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CIS?

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The old Russia and the sphere of Russia.

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Latin America is in a way a little bit closer to home for North America.

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And more controllable in that sense from a calculation.

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Yes. This is where if we rewind the clock a

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decade or two ago all of South America was essentially

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under the sphere of influence of the United States.

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Over the past 10 years or so it has totally flipped

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where most of those countries now have...

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Ports. I mean, all things built and owned by China.

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Yes, and the reality is China has been their big customer

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mostly for commodities but also financing infrastructure

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as one example.

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China today has more influence on South America than the U.S.

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has. I think the Venezuela events here,

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a lot of the media puts the focus on this is for the

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oil reserves, which is probably part of

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the reality.

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I think the bigger construct here is I

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suspect there's an element of the U.S.

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trying to reverse that grip that China took

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on the continent.

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We are seeing it not only in Venezuela.

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We saw it with pretty direct support of the Milei government in Argentina.

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What does that mean for markets? The reality is Venezuela

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has no investable companies, Argentina, very limited,

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very small market cap company so that was not investable

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per se. I think where my mind is shifting is

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what is investable within Latin America.

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The only real country of size is Brazil and

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we are going into an election year next year.

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Here's it's all totally speculation but I think it's not

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out of the possibility that the U.S.

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tries to bring closer relationship, greater control

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on Brazil and could do that by trying to

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support a more pro-business, more pro-U.S.

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government as we go into next elections which...

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And many other countries have already in South America voted

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that way.

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Exactly.

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Certainly, the U.S. had pretty big influence on the outcome in Argentina.

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If we were to see something similar then suddenly Brazil, which is seen as

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a country always flip-flopping between pro-business or

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pro-population governments,

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maybe the odds are shifting higher for a more pro-business,

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pro-U.S. government which could create a more favourable

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setup for a country like Brazil.

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I know this is sort of further out in the future, sort of second or third

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derivative impact of what's happening in Venezuela but in

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my mind as a global equity manager this is the kind of questions that

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will have an impact as opposed to something that is purely geopolitical

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but not really investable for the portfolios, like what happened in Argentina

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and Venezuela.

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Hello, investors. We'll be back to the show in just a moment.

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DialoguesFidelity podcasts available on Apple, Spotify, YouTube, or wherever

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else you get your podcasts. Now back to today's show.

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You mentioned commodities there and that certainly has a lot to do

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with what's going on with Venezuela recently.

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With commodities you invest, you put some of those into the portfolio, some of

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them are the producers themselves.

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Tell us a bit where tipping points are for various different ...

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we know the precious metals side of things has been extraordinary, is

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there a point where you take some of the chips

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off the table there?

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To walk through my framework, I typically don't love investing in

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commodities. They are lower quality, more volatile,

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not really what I'm typically looking for in a portfolio.

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If we get to extremes or very dislocated valuation

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I will make occasional exceptions.

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We did some of those not on the energy side but on

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the metal side and especially around copper going back a couple years

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ago when copper prices were $3

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to $4 a pound which was clearly insufficient

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to stimulate new mining development spending.

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CapEx, basically.

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The reality is with the world that is electrifying everything,

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despite the maybe lesser focus on ESG today, the reality

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is electrification of everything is still going ahead,

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plus the demand from data centres which is sort of adding to that

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trend, the reality is we need to continue to build electrical infrastructure

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at a pretty good clip. All of that requires copper.

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At a price where that was insufficient to stimulate new

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mining you could see an eventual, not an immediate,

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not a current deficit in copper production but an eventual deficit

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that will need to be answered with higher prices.

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That, I think we saw this happening, the market realized

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that in a way over the course of the past 6 to 12 months.

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We've seen metal prices including copper moving up

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materially to a point where now copper around $6 a pound

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as opposed to $3 and something, there is

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the incentive to build new mines. It is economic to build new mines at this

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price. I think it is less obvious to own the

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producer stocks because they already got the commodity price adjustment.

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I'm not saying it cannot go higher, it certainly can, but it

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doesn't have to, if that makes sense.

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They can just produce at this level and put money into their companies at this

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level.

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In the portfolio I have been reducing, exiting

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the producer side but what that leaves us

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with is a commodity price that is now supportive of new development.

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I think we will enter a phase of CapEx spending around commodities, especially

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around metals, certainly copper, certainly gold at these prices

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where every discovery is profitable, and

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we do, or we have kept the exposure to

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mostly industrial companies that are selling into the

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commodity CapEx cycle.

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So equipment to mine, to build new mines

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and we do keep those positions into the portfolio while

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we are exiting the metal producers that we've had.

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There's a great question coming in right now just coming back to the basics of

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international investing in many cases, and that is the U.S.

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dollar, the weakness, the perceived continued either weakness,

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either further weakening, or just even sitting at these levels for some time.

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That is expected.

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What does it mean for an investor who wants to make sure they have exposure

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internationally?

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There's been a lot of talk about the U.S.

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dollar potentially being weaker as we see potential

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for repatriation of capital outside the U.S.,

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potential for the U.S.

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interest rates to converge lower towards where the

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ECB or the Bank of Canada already is as an example, like interest rate

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differential is a big driver of currencies.

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The reality is the U.S. dollar has been pretty resilient, pretty stable through

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that.

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I think the argument is maybe not so much on

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a guaranteed reduction in the value of the

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U.S. dollar, although the interest rate differential could close

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further so could be in theory supportive for other currencies

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relative to the U.S.

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dollar, but I think there's maybe increasingly a need to think about

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the rest of the world or other currencies offering an

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entrance policy against maybe a less likely scenario

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but a more dramatic scenario of concerns

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bubbling up around the viability of the U.S.

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fiscal position which could lead to

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weakness on the U.S. dollar, especially if that was to lead to

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— this is all speculation, those are opinions, those are not base case, this is

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more the insurance policy again, but if the solution to the

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current deficits in the U.S.

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is to have interference at the central bank depress interest

19:42.147 --> 19:45.784
rates as inflation moves back up into an economic recovery scenario--

19:45.784 --> 19:45.918
That's a concern for the U.S. dollar.

19:45.918 --> 19:50.088
--that would be a very negative

19:50.088 --> 19:52.524
outcome for the confidence in the U.S.

19:52.524 --> 19:56.628
dollar. We're not talking about a scenario where it

19:56.628 --> 20:00.599
goes down a few percentage points and therefore you want to be in the

20:00.599 --> 20:04.036
rest of the world to capture that 2,3%.

20:04.036 --> 20:07.005
This is more like insurance against the scenario where the U.S.

20:07.005 --> 20:11.410
dollar comes down materially, I can't tell you how much,

20:11.410 --> 20:15.380
but well over 10%, this

20:15.380 --> 20:19.484
unlikely event, we would be extremely pleased to have

20:19.484 --> 20:23.655
exposure to not only gold, what is

20:23.655 --> 20:28.026
happening right now, but to other currencies, especially currencies that

20:28.026 --> 20:32.431
are maybe on an economic basis

20:32.431 --> 20:36.535
undervalued, and the obvious one is the renminbi rate where every

20:36.535 --> 20:41.540
Chinese company competing across the globe is extremely competitive,

20:41.540 --> 20:45.110
probably as a reflection of the renminbi being too weak.

20:45.110 --> 20:48.580
And kind of on their way up fundamentally in a lot of ways.

20:48.580 --> 20:52.784
Exactly. In the past one would have argued that China needed a weak renminbi

20:52.784 --> 20:56.722
because their companies were solely competing

20:56.722 --> 20:59.891
on cheap products.

20:59.891 --> 21:04.296
The reality is today they are not only competing on the cheap products,

21:04.296 --> 21:07.165
the products are very cheap.

21:07.165 --> 21:11.737
The Chinese corporate sector could still be extremely competitive

21:11.737 --> 21:15.340
even with a much stronger renminbi.

21:15.340 --> 21:19.144
Gold could be an insurance against that tail scenario on the U.S.

21:19.144 --> 21:23.248
dollar but so can other currencies,

21:23.248 --> 21:26.351
notably the renminbi, in my opinion.

21:26.351 --> 21:28.487
Let's actually stick with the U.S.

21:28.487 --> 21:31.123
but on a slightly different note.

21:31.123 --> 21:35.127
Lots of things are happening. We've got the stimulus that's sort of being

21:35.127 --> 21:39.031
dumped into the economy via the one Big Beautiful Bill, and that's ongoing and

21:39.031 --> 21:41.767
happening. What about the march to midterms?

21:41.767 --> 21:43.568
That also is happening.

21:43.568 --> 21:47.372
If we take a bit of a step back, the markets have been strong for the past

21:47.372 --> 21:51.209
number of years but the economy has not.

21:51.209 --> 21:55.614
It's been that K-shape economy, the top few per cent of the population

21:55.614 --> 21:59.885
had a huge wealth effect mostly driven by

21:59.885 --> 22:03.989
the AI and AI derivatives lately, but at the

22:03.989 --> 22:08.627
same time you had the main street economy or the majority of consumers

22:08.627 --> 22:11.930
feeling the brunt of cumulative inflation.

22:11.930 --> 22:15.434
Yes, inflation is lower percentage but we still had that massive run-up that

22:15.434 --> 22:17.502
left the [indecipherable].

22:17.502 --> 22:19.805
We had the impact of higher interest rates.

22:19.805 --> 22:23.909
I know this is reversing right now but the reality is today we stand

22:23.909 --> 22:27.846
at a point where the markets have done well but the majority of

22:27.846 --> 22:32.184
the population, majority of voters are not feeling great.

22:32.184 --> 22:36.254
That needs to change going into the midterms if the current

22:36.254 --> 22:41.259
administration wants to have odds of keeping power.

22:41.259 --> 22:42.694
That usually means spending.

22:42.694 --> 22:44.730
Exactly. I think it means combination of a few things.

22:44.730 --> 22:45.364
And policy.

22:45.364 --> 22:50.535
Lower interest rates. I think that is why we are seeing so much

22:50.535 --> 22:54.573
interference or talks of suggestions of much

22:54.573 --> 22:56.942
lower interest rates at the Fed.

22:56.942 --> 22:58.777
I think we are likely to get those.

22:58.777 --> 23:03.281
We can debate magnitude but rates are likely going lower because

23:03.281 --> 23:07.252
they are needed. The mainstream economy, everything tied to

23:07.252 --> 23:12.290
interest rates is seeing very weak demand at the moment.

23:12.290 --> 23:17.028
The employment situation is

23:17.028 --> 23:21.032
getting gradually worse so we could get

23:21.032 --> 23:26.938
things like that, we could get stimulus measures, don't

23:26.938 --> 23:31.109
know what form it may take but could we get a tariff

23:31.109 --> 23:35.147
dividend cheque in the mail or something along those lines, could we get

23:35.147 --> 23:39.151
policies around housing a little bit like what's starting to trickle like

23:39.151 --> 23:43.655
yesterday's announcement trying to limit ownership of residential

23:43.655 --> 23:46.758
real estate by institutional investors.

23:46.758 --> 23:50.796
I think we will see more of these measures but ultimately the goal,

23:50.796 --> 23:55.634
no matter what's the measure, is to get the Main Street economy

23:55.634 --> 23:58.303
improving from pretty depressed levels.

23:58.303 --> 23:59.871
So invest in that.

23:59.871 --> 24:04.009
If we can find companies that are tied to the

24:04.009 --> 24:09.214
80% of the population, mostly consumer stocks,

24:09.214 --> 24:13.251
mostly tied to housing because housing in any geography has

24:13.251 --> 24:17.389
a huge impact on the consumer confidence on the real economy.

24:17.389 --> 24:21.193
If we could find housing plays, if we can find transportation plays, if we can

24:21.193 --> 24:25.497
find restaurants or retail that would benefit from

24:25.497 --> 24:29.668
that sort of cyclical bottom and eventual rebound of

24:29.668 --> 24:33.805
the real economy, the market is starting

24:33.805 --> 24:36.041
to hint at that.

24:36.041 --> 24:39.711
Some of those stocks have clearly made their bottoms.

24:39.711 --> 24:44.082
Clearly, it's not a guarantee but appear to have made their bottoms.

24:44.115 --> 24:48.520
A lot of them are still inexpensive on a normalized economic

24:48.520 --> 24:52.824
environment type of profitability potential.

24:52.824 --> 24:56.828
This is why I was mentioning earlier, I think there is starting to

24:56.828 --> 24:59.464
be a subset of opportunities opening up in the U.S.

24:59.464 --> 25:03.568
which is very far away from the composition of

25:03.568 --> 25:07.906
the index given the tremendous weight of the tech sector.

25:07.906 --> 25:12.177
If you look at the S&P 500 equal-weighted that will

25:12.177 --> 25:15.080
be more representative of the real economy.

25:15.080 --> 25:19.050
I think that after a few years of tough performance there

25:19.050 --> 25:23.255
we can start to see some green shoots starting to

25:23.255 --> 25:24.256
form over this year.

25:24.256 --> 25:27.726
As you say, it's sort of a global story which is part of the thing that you

25:27.726 --> 25:29.861
started out saying.

25:29.861 --> 25:34.232
As we close out this discussion just remind

25:34.232 --> 25:38.270
investors perhaps where your style of investing and the

25:38.270 --> 25:40.906
way that you're investing benefit ...

25:40.906 --> 25:44.876
who's it for? You've got a Canadian investor that's probably traditionally been

25:44.876 --> 25:48.780
overweight U.S. and maybe particular stocks in the U.S.,

25:48.780 --> 25:53.184
at this moment walking into this new year

25:53.184 --> 25:57.956
where do you think your fund fits? For whom does it fit in particular ways?

25:57.956 --> 26:02.160
The quick pitch is, essentially, I think we are, or have just

26:02.160 --> 26:05.330
passed this inflection point of leadership between the U.S.

26:05.330 --> 26:07.065
and the rest of the world.

26:07.065 --> 26:11.136
The rest of world is much closer to the bottom of their economic cycles.

26:11.136 --> 26:13.605
The valuations are less demanding.

26:13.605 --> 26:17.642
While the U.S. is closer to the peak of its cycle, mostly because

26:17.642 --> 26:21.546
of the tech sector and the impact it had, the valuations are much more

26:21.546 --> 26:23.415
demanding.

26:23.415 --> 26:27.218
There's the currency tail risk, as we talked about.

26:27.218 --> 26:30.422
But we need to be careful about what we buy in international markets

26:30.422 --> 26:34.359
because if you simply go and look at the broad European

26:34.359 --> 26:38.396
or Asian indices you'll end up with a lot of large

26:38.396 --> 26:44.402
multinational consumer companies, pharmaceutical companies,

26:44.402 --> 26:48.440
banks, that are maybe not giving you the type of exposure

26:48.440 --> 26:49.107
you want.

26:49.107 --> 26:53.612
I think what we are searching for, what I am building a portfolio to,

26:53.612 --> 26:56.982
is to get exposure on the parts of the market and the rest of the world and in

26:56.982 --> 27:01.286
the U.S. that are depressed, where expectations

27:01.286 --> 27:04.889
are low, where fundamentals have been bad for a long period of time and where

27:04.889 --> 27:07.325
we see potential of that improving.

27:07.325 --> 27:11.529
This is very much tied around the consumer, certainly in China, increasingly

27:11.529 --> 27:14.132
in Europe, increasingly in the U.S.

27:14.132 --> 27:18.003
It's tied to housing in a lot of ways or the construction derivative plays on

27:18.003 --> 27:22.207
that. It is tied to all of what's

27:22.207 --> 27:26.311
driven by that, some on the industrial side,

27:26.311 --> 27:31.316
some on transport side, as I mentioned, and bringing an element of

27:31.316 --> 27:33.885
discipline around price.

27:33.885 --> 27:37.956
The funds look extremely different from the indices and I think trying

27:37.956 --> 27:41.693
to pinpoint the exposures of what we really want to have.

27:41.693 --> 27:45.764
I'm not going to buy large banks in China.

27:45.764 --> 27:49.768
I'm targeting consumer travel stocks or tech stocks that will

27:49.768 --> 27:54.339
benefit from the trends. I'm not buying pharmaceutical companies in Europe

27:54.339 --> 27:58.376
like most of the index. I'm targeting retailers

27:58.376 --> 28:02.313
that will benefit from an eventual recovery of consumer confidence.

28:02.313 --> 28:05.517
This is really different, actually, to a lot of investing out there.

28:05.517 --> 28:09.521
It just has to be said. Patrice Quirion, we're going to thank you very much for

28:09.521 --> 28:13.558
sharing your outlook for this year, where you're investing and just

28:13.558 --> 28:15.960
how different it is. I think investors really appreciate that.

28:15.960 --> 28:16.628
Thanks for your time.

28:16.628 --> 28:17.962
Pleasure to be here. Thank you.

28:17.962 --> 28:21.900
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28:21.900 --> 28:26.037
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28:55.567 --> 28:59.404
The views and opinions expressed on this podcast are those of the participants,

28:59.404 --> 29:03.341
and do not necessarily reflect those of Fidelity Investments Canada ULC or

29:03.341 --> 29:07.345
its affiliates. This podcast is for informational purposes only, and should not

29:07.345 --> 29:09.881
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29:09.881 --> 29:12.183
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29:12.183 --> 29:16.521
Or an endorsement, recommendation, or sponsorship of any entity or securities

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29:28.733 --> 29:31.035
Thanks again. We'll see you next time.