FidelityNow: Ilan Kolet: What’s shaping interest rates?

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Hi, this is Ilan Kolet, Institutional Portfolio Manager with the Global

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Asset Allocation Team here at Fidelity.

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For the better part of a generation, the world was driven by growth

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shocks. But now we're in a new regime, one dominated by

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inflationary shocks, and that changes everything for interest

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rates. Let me break down how we see those three factors,

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geopolitics, commodities, and inflation working together.

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Geopolitical risk is no longer a theoretical issue or problem.

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As we saw with the conflict in Iran, these events are now directly

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impacting markets. It's fueling what we've called a global scramble

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for resources.

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This instability creates supply concerns, which in turn drives the second

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factor, higher commodity prices.

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When stocks and bonds were both falling at the start of the year, commodities

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were rallying. This leads directly to the third factor, which is inflation.

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The surge in commodity prices is a primary driver of the inflationary

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shocks we're now facing.

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And for central banks, this is a much more difficult problem to solve than a

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simple growth slowdown. They are pressured to raise rates to fight inflation

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even if the domestic economy doesn't feel great.

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And here is where it gets really interesting for us as investors.

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On one hand, the U.S. Is facing challenges that we believe could even

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weaken its over the long term.

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But for Canada, the story is the opposite.

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As a reliable commodity producer, Canada is a direct beneficiary

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of this new environment.

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Higher commodity prices are bullish for our economy and our currency.

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Markets have started to recognise this and are now pricing in interest rate

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hikes in Canada this year, even as they expect the U.S.

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To begin cutting rates again.

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We believe the historical link between a strong Canadian dollar and high

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commodity prices and high-commodity prices, rather, could re-emerge.

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So how are we positioning our funds based on this?

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First, we've acknowledged that the traditional 60-40 portfolio is

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really less reliable in a world of inflationary shocks where stocks and

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bonds can fall together.

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Second, we have increased our exposure to the asset classes that do well

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in this environment.

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This includes diversifying with commodities and gold, which act as a valuable

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hedge. And most importantly, this has led directly

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to Canada, where we sit today.

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We believe the country is favourably positioned in the global business cycle,

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and after a decade of being underweight Canadian assets, we've

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shifted to an overweight position in both Canadian equities and

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the Canadian dollar. With nearly 40% of the Canadian stock market

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in the materials and energy sector It is a direct beneficiary of

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higher commodity prices.

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The prospect of rising interest rates here at home only

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strengthens our conviction in that positioning.

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Thanks very much.