FidelityConnects: Markets at mid year: CIO insights on what matters next

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<b>Subtitles are AI Generated</b>

 

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Hello, and welcome to Fidelity Connects.

 

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I'm Pamela Ritchie. Canada's economy has entered a technical recession and

 

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with most of the second quarter behind us it is still probably too

 

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early to tell how fully markets are pricing all of that in, if at all.

 

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Our next guest says with all of the geopolitical uncertainty that's unfolded

 

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through this year so far investors are treating markets a little bit

 

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like a glorified casino with short term moves masking

 

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perhaps what's really happening underneath.

 

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Where should advisors lean in?

 

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What's being misread? How is he positioning portfolios for opportunities

 

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beyond the headlines? Joining us here today for a mid-year check-in on

 

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global equities and the forces shaping markets is Fidelity Chief Investment

 

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Officer and portfolio manager, Andrew Marchese.

 

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Reminder just that today's webcast features live French, Mandarin and

 

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Cantonese audio interpretation.

 

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Welcome, Andrew, great to see you. Thank you for joining us.

 

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Great to be here.

 

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A very exciting moment to have you here to ask a few questions.

 

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We'll invite everyone joining us here to send questions in for Andrew over the

 

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next half hour or so.

 

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Can we just begin with getting the technical recession thoughts on

 

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this? It's a couple of quarters in a row not looking so

 

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great. There's other things going on though. What do you think?

 

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What I'm more concerned about is the corporate profit backdrop globally which

 

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looks ... it started the year looking very good, it's actually gotten better.

 

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I'm concerned about ... if you go back about 10, 11 years

 

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we were in a global profits recession even though the economy was

 

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not ringing recession, was kind of fine.

 

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You can have the opposite. I'm most concerned about profits.

 

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That's what actually fuels us from an investing perspective

 

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and kind of sets the foundation for opportunities to invest in.

 

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We'll leave it for now in that sense and sort of let it be a little bit.

 

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Give us a view of the world, the pieces that you're looking at.

 

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We'll take a look at all of them but there's lots of geopoliticals we were

 

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talking about. I want to ask you about inflation that goes along with some of

 

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the geopolitical story.

 

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If you had to rank sort of three risks that are out there that you are aware of

 

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what would they be?

 

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I think you start with the fact that on the positive side,

 

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as I said, the global profits engine is

 

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coming into the year doing very well and accelerating, but we've priced some

 

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of that in.

 

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Valuation is never a catalyst for a correction but

 

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it does make you wary in certain areas of the market, not all

 

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areas. Capital will go where you can kind of

 

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exploit a valuation discount or buy growth at a

 

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discount to other growth which is already being priced in for a blue sky

 

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scenario or a perfect scenario.

 

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That's one aspect. I don't look at that holistically for

 

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the market as kind of painting it with the same brush.

 

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I think it's all about finding and exploiting opportunities to invest

 

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in a disproportionate way.

 

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That's one of them.

 

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I've always maintained that the conflict in the Middle East is transient.

 

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It will resolve itself.

 

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Certainly, we would like the Strait open more sooner than later.

 

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It's probably gone on longer than it should.

 

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The longer it goes on that poses a risk to a

 

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supply shock to commodities.

 

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That has a knock-on effect to the economy as we kind of progress into

 

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the second half of the year.

 

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That deserves to be monitored.

 

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What are the ramifications for that from both a consumer

 

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demand perspective, so discretionary purchases, and what

 

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does that mean for industrial manufacturing margins.

 

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Your input costs go up, generally speaking, could

 

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that mean that margins fall and then earnings have to be negatively revised

 

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in the back half of the year or even into the first half of next year.

 

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That would be the other risk. This goes on too long and at

 

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some point the market kind of says, okay, we've maybe been complacent

 

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on this issue from a pricing perspective and we need to kind of price it

 

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accordingly. It's a smaller risk but a risk nonetheless.

 

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Really interesting. The backdrop being that companies are earning more

 

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and it's been astonishing to watch the earnings story play out much

 

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more on that. When you link the story of sort of a short termism

 

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in the markets, we mentioned the casinos which, actually, I think comes from

 

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you as sort of a feeling of that's in there.

 

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Again, that is sort of short term story, you're looking longer,

 

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but discuss the phenomena and really what it does to markets, maybe the

 

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psyche of markets and investors' maneuvers.

 

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Sometimes you find that capital will flow into things that do make

 

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sense from an earnings perspective but the expectations down the road get

 

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priced in for some kind of real blue sky or perfect scenario

 

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and people are unaware that some of this stuff is actually cyclical.

 

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It's a CapEx cycle like every other CapEx circle.

 

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We have all read and done research on the fact that it is

 

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one of the most exciting and maybe most lucrative CapEx cycles that

 

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we've ever seen in history.

 

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That being said, all good things must

 

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come to an end at some point.

 

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The important thing to remember when investing is try to engage when that point

 

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will come.

 

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We've seen hundreds of billions of dollars invested into

 

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the area of artificial intelligence, by all accounts that may be

 

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going up in the year or two years to come but at some point that

 

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number does start to decelerate.

 

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Historically, when that number decelerates the market treats it very

 

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negatively. We just have to be aware of that.

 

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I think also with that, and the amount of liquidity that's in

 

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the system, you get speculation in certain areas of the market where business

 

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models are not yet well-founded, they're not robust, companies don't

 

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have really much of a hope of earning what their stock price would say

 

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they're going to earn.

 

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Speculation is all part and parcel of that.

 

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Some of the stuff is legit with real businesses, with real revenue and

 

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cash flow and profits and other parts is more hope.

 

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Every time we go through a market cycle, in particular if you have one or two

 

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themes that really break away from the path you're going to get that.

 

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You're going get that kind of euphoria and maybe things aren't

 

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always well thought out so you get pockets of what you term to be the

 

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casino aspect of it all. People thinking they can't lose in a certain area,

 

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they treat it all kind of homogeneously.

 

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That's really not a great way to invest.

 

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It can work for a short period of time.

 

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You benefit from an investment perspective thematically

 

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but eventually things get parsed aside and only the true companies

 

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with long term robust business models, great capital allocation stories,

 

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their stocks kind of survive and go forward.

 

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You've spoken before that ...

 

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and I think maybe over the course of several years at this point ...

 

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that the world is going through a deglobalization after globalizing for

 

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20-odd years.

 

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It's reverting, probably started in COVID, the supply chain story.

 

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Take Canada as sort of a case in point, ultimately, for investing within

 

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it, what it is doing right now to react to

 

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that, is trade a huge part of that?

 

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How is Canada sort of making sure that within that

 

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deglobalizing world is doing what it needs to do.

 

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How do you see that?

 

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I see kind of Liberation Day, April

 

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2nd of last year, as kind of the Minsky moment for nations to

 

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kind of move forward in a different path and the catalyst

 

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to think differently about their

 

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economies going forward.

 

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Prime Minister Carney has talked about the middle and the middle having to make

 

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new trade alliances as the US has embarked

 

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on more of an isolationist mentality.

 

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Their hopes, really, I think at the end of the day, for a weaker dollar.

 

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We've seen governments all

 

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over the world try to reduce

 

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their exposure to the US dollar, whether that means selling US Treasuries or

 

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buying gold as kind of a hedge against all of this.

 

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The world is changing. It is a slow march.

 

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The question I've often got is if there was a new administration

 

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post 2028 i the US would that change anything?

 

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History would tell you it's actually slow to reverse despite

 

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the intentions of some of these ...

 

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I think, as our Prime Minister said, it's incumbent upon us as a nation

 

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to figure out a way to form new trade alliances and grow faster

 

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than we have in the past. Maybe we haven't been as optimal on that front

 

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as we could have been and now we don't have the benefit of certainty

 

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with our partners to the US.

 

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I think necessity is the mother of all invention kind of thing.

 

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I think to that kind of point I think we've,

 

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April of last year kind of forced the hand of a lot of countries around the

 

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world. To the extent in Canada, and other nations around

 

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the word with respect to natural resources, what you have in the ground is

 

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going to become increasingly important.

 

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Your ability to spend both on the public and the private

 

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side is going to become vitally important to make sure that your nation is

 

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equipped to deal with those new trade

 

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alliances.

 

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In Canada what does that mean? New pipelines, maybe it means changing laws with

 

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respect to the ports in British Columbia and shipping goods out.

 

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It can mean all of that. It could be investing in the defence industry or the

 

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aerospace industry or any number of new innovative

 

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industries to make yourself

 

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... you have to rely on yourself to a greater degree.

 

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I think April of last year put a spotlight on all that.

 

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With the defence industry, if you sort of go back in history and read

 

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all the histories of how wars and defence spending comes up, it's often to

 

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protect the assets that the nation has itself.

 

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As much as the people and the borders it is also what's inside.

 

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You mentioned those things that are in the ground inside the country broadly

 

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are going to be worth more.

 

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Just sort of take us there from an investment perspective.

 

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How do you lean in to that?

 

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I think if you look at the last natural resources bull market,

 

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which happened between 2000 and 2010, there was

 

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a lot of consolidation that happened globally.

 

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The assets ended up in the hands of fewer players.

 

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There's fewer ways to invest in this publicly.

 

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As we know, as commodity prices rise and things that

 

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were once not economically feasible

 

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from an exploration perspective become economically feasible.

 

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To the extent that new capital comes into the

 

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mining industry or oil and gas industry and any one number of

 

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commodities, and those things now meet the merits of, well,

 

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it actually does make economic sense to go mine for this,

 

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companies are going to be looking to do that.

 

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There are fewer companies than there were just 20 years ago to do that.

 

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There's a scarcity value around that, to the extent

 

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that those assets are in safer geopolitical places in the world

 

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they're probably inherently worth more just based on that.

 

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That puts Canada in a great spot.

 

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You mentioned there aren't as many companies because of consolidation last

 

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super cycle time round.

 

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There are lots of companies, and we saw the TSX go up massively last year

 

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because of the resource stocks, broadly speaking, certainly the

 

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gold side of things. Are we going to see more companies get made?

 

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Is the environment there, the landscape there for new companies to

 

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come public?

 

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History would tell you yes. If you embark down kind of a

 

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broader secular, I don't want to use the word super cycle but a secular cycle

 

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then, yes, all those projects that were once not economically viable

 

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maybe become economically viable.

 

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Companies will look for capital to exploit them.

 

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It'll be more issuance, secondaries.

 

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There may be more IPOs going forward.

 

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That's what history will tell you occurs during these types of cycles.

 

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It's exciting.

 

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Yeah, it could be.

 

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It could be really exciting. What do we need to know, going back to sort of the

 

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short term side of things, about rates?

 

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I mean, some of that's going to be expressed long term as well but inflation

 

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and rates, everything that you're discussing costs money to get it rolling.

 

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It, in theory, is inflationary for a period of time anyway.

 

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How do you protect against that as you're building out what you're discussing?

 

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I think about inflation more from a secular perspective than a

 

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cyclical perspective. I think the question becomes is the

 

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growth of M2 money supply over the better part of the last

 

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25 years or so and the mere fact now

 

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that you have, as I said, a supply shock to the system.

 

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If we become more fragmented as a global economy what kind of stress does

 

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that put from an inflationary perspective.

 

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You're seeing some of that in the bond market and yields are rising

 

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accordingly. Now, I think to some degree it's

 

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kind of interesting when you see bond yields move up the tech names actually

 

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move up with them for two

 

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reasons, I think. One, they can kind of outgrow ...

 

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some of them can outgrow the yield story.

 

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The other one is a lot of thought that the CapEx happens outside the general

 

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economy so they're going to grow independently.

 

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If you--

 

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They're not selling to the general economy if it goes up or down, collapses or

 

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whatever.

 

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--if you think that bond yields and inflation eventually slow an economy

 

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as an investor you seek out growth, growth opportunities that can grow

 

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independently over the overall economy.

 

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When you have tailwinds at your economic back you seek out more

 

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value, things that are more cyclical, that need a strong economic tailwind

 

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behind you to kind of get an increase in demand and so on

 

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and so forth. That drives the P&L of some of those cyclical value-oriented

 

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names. That kind of explains the behaviour on a day-in and day-out

 

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basis when tech's doing a little better and bond yields are reacting as such.

 

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I think we've had some people on this

 

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forum and other forums to suggest maybe we're never getting back to 2%.

 

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The question is do we kind of lurch into

 

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longer higher inflation, that will

 

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be the big thing to ask ourselves. That kind of dovetails into

 

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what Jurrien Timmer's talked about with a 60/20/20 diversified

 

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portfolio.

 

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With alts sort of breaking up the bond side of things a little bit.

 

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Alts can be many different things, and Fidelity offers alternatives to

 

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take advantage of things generally within stock markets, what

 

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else is in there from sort of a global perspective of what belongs in that

 

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other 20.

 

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Hard assets to preserve any negative ramifications that come from inflation.

 

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I agree with Jurrien, that 20% should come from fixed income.

 

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It's not a prediction in so much as it's a probabilistic

 

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exercise that with all the money supply, with everything

 

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that's going on in the geopolitical landscape, there is a

 

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non-zero risk here that we just lurch and grind forward from an

 

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inflationary perspective, and what does that do to bond yields longer term?

 

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For all the reasons I mentioned with respect to the world is changing and

 

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you want assets in the ground, to the extent that they're hard assets,

 

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industrial commodities like nickel and copper and the like, diversification

 

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away from the US dollar. If the US really wants a weak dollar, and I think

 

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they do, then the hedge on the other side is gold.

 

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What does it mean for land, arable land?

 

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Yeah, get into the agriculture piece of this.

 

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Right. That was a theme we heard way back in the early 2000s

 

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as well. Some of these things kind of come back and it's all because

 

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of the changing landscape, the abundance of

 

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money out there in the system, and the knock-on effect would then be

 

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there's a non-zero risk here that inflation just kind of grinds higher.

 

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Now, the opposition to that viewpoint would be artificial

 

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intelligence and other technological advances--

 

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Will take care of it.

 

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--will take care of the inflationary aspect of it and dampen it

 

17:17.870 --> 17:22.341

down so we don't need to worry. We'll be able to exist in a

 

17:22.341 --> 17:26.311

2% CPI world because inflation will take

 

17:26.311 --> 17:30.416

care of any undue pressure that is

 

17:30.416 --> 17:32.618

caused from an inflationary perspective.

 

17:32.618 --> 17:36.789

The other thing, just to kind of finish up on the inflation area front, is you

 

17:36.789 --> 17:40.826

start to get into this kind of world of people

 

17:40.826 --> 17:43.028

talk about affordability versus inflation.

 

17:43.028 --> 17:44.029

If you talk--

 

17:44.530 --> 17:46.231

It's two separate things almost.

 

17:46.231 --> 17:50.035

--if you talk about affordability, then affordability is really much more of a

 

17:50.035 --> 17:53.005

gross problem than inflation is.

 

17:53.005 --> 17:57.743

How do we address affordability for certain assets that

 

17:57.743 --> 18:02.014

we need to live in? If you're talking about the regular CPI

 

18:02.014 --> 18:05.384

you're not talking about a lot of things that affect consumers on a day-in and

 

18:05.384 --> 18:09.855

day-out basis. Is it more appropriate to look through

 

18:09.855 --> 18:13.859

things with that lens as opposed to the garden variety statistics

 

18:13.859 --> 18:16.562

around CPI.

 

18:16.562 --> 18:20.732

There usually is an investment for that to make sure that you have some pricing

 

18:20.732 --> 18:24.803

flexibility. You could either go through dividend strategies or you have other

 

18:24.803 --> 18:29.875

ways of investing to sort of help you with some of those.

 

18:29.875 --> 18:34.613

Is it fair to say that you look at the world as that possibly, or at least

 

18:34.613 --> 18:39.818

probably, being a way you should look at your investments, that inflation

 

18:39.818 --> 18:42.521

is there, it's here, might be around for a while.

 

18:42.521 --> 18:46.158

Yeah, I think you get a partial hedge through equities.

 

18:46.158 --> 18:50.229

Obviously, fixed income, you have potentially a very

 

18:50.229 --> 18:53.799

deleterious effect if inflation runs rampantly.

 

18:53.799 --> 18:56.535

Bond yields back up a lot.

 

18:56.535 --> 19:01.406

The ultimate is just to have that 20%

 

19:01.406 --> 19:05.377

invested in commodities, hard assets to a degree.

 

19:05.410 --> 19:09.548

That kind of gets you through. I think treat it kind of

 

19:09.548 --> 19:13.519

under that scenario, 80% of your portfolio,

 

19:13.519 --> 19:18.524

60% you would have a partial hedge, 20% you have a pretty decent hedge.

 

19:18.524 --> 19:22.628

If it doesn't come to fruition you still have the strategic

 

19:22.628 --> 19:26.598

importance of those hard assets because

 

19:26.598 --> 19:31.270

longer term if we're becoming less global, if the deglobalization

 

19:31.270 --> 19:35.340

theme continues to march forward, any way you cut it those have

 

19:35.340 --> 19:39.311

strategic importance whether or not you think of it as a

 

19:39.311 --> 19:40.312

inflationary hedge.

 

19:41.346 --> 19:44.950

We're approaching, obviously, the sort of various dates for the CUSMA

 

19:44.950 --> 19:47.119

discussions and final dates and so on.

 

19:47.119 --> 19:51.790

What does trade look like, you can use Canada as an example, in

 

19:51.790 --> 19:54.059

a world like that? There's still going to be trade. People are still putting

 

19:54.059 --> 19:56.828

things on lots of great big ships that are all over the world and sending them

 

19:56.828 --> 20:00.232

across the world. It's still there but it looks different.

 

20:00.232 --> 20:04.203

I look at CUSMA as like you're trying to solve a

 

20:04.203 --> 20:07.372

problem for the here and now.

 

20:07.372 --> 20:11.476

This alliance that we have in place and the flow of goods that

 

20:11.476 --> 20:15.547

happen across these borders, somebody threw down the gauntlet,

 

20:15.547 --> 20:17.950

now we've got to go back to the table and figure it all out.

 

20:17.950 --> 20:22.020

That's a here and now problem. I don't know how it gets resolved

 

20:22.020 --> 20:25.991

but you're going to

 

20:25.991 --> 20:27.793

figure it out in some way, shape or form.

 

20:27.793 --> 20:32.130

It probably results in no one party being exceptionally

 

20:32.130 --> 20:36.335

happy but everybody can kind of just go, okay, we're mostly the way there.

 

20:36.335 --> 20:38.637

Does it resemble what we have?

 

20:38.637 --> 20:40.572

I have no idea.

 

20:40.572 --> 20:44.676

I'm very quick to point that. We don't know.

 

20:44.676 --> 20:46.979

We're not privy to those discussions and what have you.

 

20:46.979 --> 20:50.916

The bigger one I think from an investment standpoint is coming back to the

 

20:50.916 --> 20:54.019

new alliances that are formed.

 

20:54.019 --> 20:57.956

You deal with the here and now but the growth, the future,

 

20:57.956 --> 21:01.893

is based on everything that this country and others can do with each

 

21:01.893 --> 21:06.198

other in a way for whatever reason we didn't pursue before

 

21:06.198 --> 21:10.335

but maybe, as I said earlier, the Minsky moment occurred in April of last

 

21:10.335 --> 21:14.873

year and it requires a

 

21:14.873 --> 21:19.011

very strict disciplined approach to a new strategic way of

 

21:19.011 --> 21:21.847

thinking about the country.

 

21:21.847 --> 21:24.149

Hopefully, we address that.

 

21:24.149 --> 21:28.520

It's gonna take many, many years, if not decades, to do it but

 

21:28.520 --> 21:32.524

I'm more optimistic on this country than I've been in a long, long

 

21:32.524 --> 21:35.193

time. I think we have the...

 

21:35.193 --> 21:36.194

It's really cool.

 

21:36.695 --> 21:40.098

I think we're not only saying the right things but there's signs that we're

 

21:40.098 --> 21:44.036

doing the right things. I think you have to remember this takes a

 

21:44.036 --> 21:46.872

long time. You're not going to see it immediately.

 

21:46.872 --> 21:51.009

The CUSMA stuff, you see it more immediately.

 

21:51.009 --> 21:53.979

There's a journey here but there's ways to invest at which you've addressed.

 

21:53.979 --> 21:57.949

There's a couple of questions coming in on the impact of the

 

21:57.949 --> 22:02.220

three quite well telegraphed big IPOs that are coming,

 

22:02.220 --> 22:03.922

the excitement around them.

 

22:03.922 --> 22:07.926

I might ask you sort of a question on that but more broadly what's

 

22:07.926 --> 22:13.265

the market effect? You've got these behemoths coming in, it's pretty exciting.

 

22:13.265 --> 22:17.235

What should investors know about it sort of around the edges and maybe

 

22:17.235 --> 22:18.470

for investing within them?

 

22:18.470 --> 22:21.807

I think just from a market mechanic standpoint, you're right, it creates a lot

 

22:21.840 --> 22:22.808

of euphoria.

 

22:23.775 --> 22:27.913

You get more supply, you could, you may,

 

22:27.913 --> 22:31.883

in situations where there is a lot of excitement and high

 

22:31.883 --> 22:36.188

valuations flows move

 

22:36.188 --> 22:39.858

in that area and as a result you've got to sell something to buy something.

 

22:39.858 --> 22:41.259

Potentially within the equity market.

 

22:41.259 --> 22:45.364

Right. You cause a price dislocation in other aspects of

 

22:45.364 --> 22:49.401

the market which for the patient and the astute

 

22:49.401 --> 22:51.870

could be a great buying opportunity.

 

22:51.870 --> 22:56.007

I think that it's very interesting from a liquidity

 

22:56.007 --> 23:00.479

perspective. If you back out the investment theses for the companies that

 

23:00.479 --> 23:05.550

are being issued and you really look at it from a liquidity standpoint

 

23:05.550 --> 23:09.688

and the causal effect, it's always very interesting to see

 

23:09.688 --> 23:11.957

what else is behaving the way it is.

 

23:11.957 --> 23:14.059

That's where the opportunities ...

 

23:14.059 --> 23:17.295

you can run with the herd if you want to, and that's fine.

 

23:17.295 --> 23:20.198

There's plenty of people who do it and there are plenty of who are successful

 

23:20.198 --> 23:24.169

at it. The more intriguing thing for those who are patient

 

23:24.169 --> 23:28.407

and diligent can be is there anything else being sold to

 

23:28.407 --> 23:30.609

buy what's being issued.

 

23:30.609 --> 23:31.710

It's a great company.

 

23:31.710 --> 23:36.381

Right. Great company, it got dislocated, now when I look at it I can be patient

 

23:36.381 --> 23:40.852

and my 5-year compounded annual return will be

 

23:40.852 --> 23:44.489

tremendous. Like I always say, those are the ones that are interesting because

 

23:44.489 --> 23:48.493

you just have to make one decision, which is buy it and wait, as opposed

 

23:48.493 --> 23:52.464

to being kind of almost like a

 

23:52.464 --> 23:55.934

high frequency trader, to a degree, in the other stuff.

 

23:55.934 --> 23:59.938

It goes back to the casino nature that we're seeing in some areas of

 

23:59.938 --> 24:04.309

the market. Let's go back to one of the geopolitical discussion points, you

 

24:04.309 --> 24:08.380

were talking more about the Straits of Hormuz need to open, the oil story

 

24:08.380 --> 24:12.517

there. Lots of thoughts on don't chase oil when it was

 

24:12.517 --> 24:15.353

circling up. It's still up high.

 

24:15.353 --> 24:18.690

What happens on the way down or where it could land?

 

24:18.690 --> 24:22.093

I mean, is it a land of opportunities, really, is the question.

 

24:22.093 --> 24:27.399

I think the question is how does the whole situation get resolved?

 

24:27.399 --> 24:31.336

Does it get resolved in a somewhat messy way that everybody

 

24:31.336 --> 24:35.907

is not quite pleased with and so do you have an embedded

 

24:35.907 --> 24:39.010

war premium in the price of crude going forward?

 

24:39.010 --> 24:40.011

You don't...

 

24:40.145 --> 24:42.447

It could always flare up again, sort of thing.

 

24:42.481 --> 24:48.386

Yeah, and just like it's messy where

 

24:48.386 --> 24:51.289

nothing is operating like it used to.

 

24:51.289 --> 24:55.327

Things are operating but it's not as efficient and painless

 

24:55.360 --> 24:59.564

as it used to so you would have some kind of premium embedded in the price of

 

24:59.564 --> 25:02.968

crude for that reason.

 

25:02.968 --> 25:07.005

I think that's basically kind of my take on crude.

 

25:07.005 --> 25:08.006

The concern there.

 

25:09.140 --> 25:11.810

In the meantime you've got to have a balanced approach.

 

25:11.810 --> 25:12.911

You can't really...

 

25:12.911 --> 25:16.915

I've been doing this for 28 years and my approach has always

 

25:16.915 --> 25:18.617

been balanced.

 

25:18.617 --> 25:21.553

Make less decisions not more decisions.

 

25:21.553 --> 25:25.790

It's easy to get caught up in the euphoria of certain aspects

 

25:25.790 --> 25:30.295

of the market and that's been true every year that I've

 

25:30.295 --> 25:36.001

spent here at Fidelity. There's always something really running

 

25:36.001 --> 25:40.906

or thematic in nature and you just gotta kind of always remember that

 

25:40.906 --> 25:44.943

balance generally wins. I always think of it

 

25:44.943 --> 25:49.014

as your investment is kind of like you're flying a plane

 

25:49.014 --> 25:53.018

to get somewhere and ideally you want as little

 

25:53.018 --> 25:54.419

turbulence as possible.

 

25:54.419 --> 25:57.055

Land gently.

 

25:57.055 --> 26:00.926

It's fine if we get you there but if we get you in a bumpy and all over the

 

26:00.926 --> 26:03.895

place way that's not a fun ride.

 

26:03.895 --> 26:07.866

When it's not a fine ride I think you're more apt to make less

 

26:07.866 --> 26:12.037

optimal decisions. I think from that perspective, yes, the return

 

26:12.037 --> 26:14.906

matters but also the path to return matters.

 

26:14.906 --> 26:18.777

It's very good to be reminded of that, ultimately.

 

26:18.777 --> 26:22.847

Let's go in just quickly to inflation but the rate story.

 

26:22.881 --> 26:26.818

We've got someone new at the Federal Reserve, lots of interest

 

26:26.818 --> 26:31.056

around that. I think everyone knows the headline stories there.

 

26:31.056 --> 26:33.291

It's really the direction of rates from here.

 

26:33.291 --> 26:35.493

We heard a lot about the US. They'll just sit on hold.

 

26:35.493 --> 26:38.797

They're high enough. It's not like they came down to rock bottom.

 

26:38.797 --> 26:42.867

Other parts of the world did come down in a rate cycle, cutting

 

26:42.867 --> 26:45.570

cycle much lower.

 

26:45.570 --> 26:49.608

What's your rates outlook? Give us a few countries broader take.

 

26:49.608 --> 26:52.377

When we started the year, Jan.

 

26:52.377 --> 26:56.481

1st, I think the US was kind of the outlier in saying we haven't

 

26:56.481 --> 26:59.784

cut enough, we would like to.

 

26:59.784 --> 27:05.056

I think since the conflict started in late February,

 

27:05.056 --> 27:09.027

and we're seeing some of the economic numbers continue to get better

 

27:09.060 --> 27:13.932

in North America on the manufacturing and service side,

 

27:13.932 --> 27:17.902

combined with all the discussion we had about inflation earlier, job

 

27:17.902 --> 27:21.873

market's fine, you can't

 

27:21.873 --> 27:25.710

really point to cutting anymore. That's been the stepwise change.

 

27:25.710 --> 27:29.714

Now the question is for a lot of economists out there, not only with

 

27:29.714 --> 27:33.718

respect to the United States but other countries, who's gonna

 

27:33.718 --> 27:35.787

tighten first and by how much?

 

27:35.820 --> 27:36.021

Australia broadly.

 

27:36.021 --> 27:40.091

Right, Australia did it. Who goes after them

 

27:40.091 --> 27:42.193

and by how much?

 

27:42.193 --> 27:47.032

I think really for many developed nations right now

 

27:47.032 --> 27:51.136

market implied policy outlook is for flat, don't

 

27:51.136 --> 27:55.473

touch it, wait for something to develop.

 

27:55.473 --> 27:59.411

The bias, I think if you took a sample size of

 

27:59.411 --> 28:04.849

economists out there the bias is towards tightening.

 

28:04.849 --> 28:08.653

One could point to the inflation argument but the other argument is growth has

 

28:08.653 --> 28:11.656

been good, particularly in North America.

 

28:11.656 --> 28:16.127

Which is a good reason to hike says Denise Chisholm, for instance.

 

28:16.161 --> 28:19.631

Well, yeah. If you start overheating then, yeah, you have high oil plus high

 

28:19.631 --> 28:25.003

growth. There's probably a good reason to say the bias is towards tightening.

 

28:25.003 --> 28:25.303

I think the...

 

28:25.303 --> 28:27.872

And the economy can handle it because there's growth.

 

28:27.872 --> 28:29.574

You would think so.

 

28:29.574 --> 28:33.578

The only way that that argument fails on itself is probably if there

 

28:33.578 --> 28:36.948

is a material downgrade in employment.

 

28:36.948 --> 28:41.152

If employment numbers, for whatever reason, were to come undone

 

28:41.152 --> 28:43.321

then it's hard to justify that.

 

28:43.321 --> 28:45.457

It might keep you on the sidelines a little longer.

 

28:45.457 --> 28:49.627

Do you want to finish up with just sort of the long term opportunity of AI

 

28:49.627 --> 28:51.863

in the markets? We've all been looking at it.

 

28:51.863 --> 28:55.166

There's certainly the story of the resources that go into making sure we can

 

28:55.166 --> 28:59.537

power it all. We all know about data centres.

 

28:59.537 --> 29:03.374

What's the opportunity as an equity investor right now in AI?

 

29:03.374 --> 29:05.777

We're a couple of years in now, long way to go, though.

 

29:05.810 --> 29:09.948

I think what's been very clear since last

 

29:09.948 --> 29:14.619

year is that the AI theme has outperformed

 

29:14.619 --> 29:16.888

the broader market.

 

29:16.888 --> 29:20.859

Even within that AI theme the leader has been the semiconductors in chip

 

29:20.859 --> 29:23.328

space.

 

29:23.328 --> 29:26.364

That reminds me a lot of 1999.

 

29:26.364 --> 29:30.401

It was the equipment guys that we all knew were cyclical but you

 

29:30.401 --> 29:32.070

wait for the CapEx to kind of--

 

29:32.070 --> 29:34.205

Peter out.

 

29:34.205 --> 29:38.643

--exhaust itself. People point to a shortage of supply in fabs

 

29:38.643 --> 29:40.378

and the ability ...

 

29:40.378 --> 29:42.981

you're always going to have more chips and need more chips and so on and so

 

29:42.981 --> 29:47.018

forth. Endless demand and not price sensitive at all from

 

29:47.018 --> 29:50.722

the people who are buying these things. It paints a very, very blue sky

 

29:50.722 --> 29:53.091

backdrop.

 

29:53.091 --> 29:57.095

As I said, we know all this ends and then the longer term, multi-year

 

29:57.095 --> 30:01.266

beneficiaries of it still remain to be seen, who they are.

 

30:01.266 --> 30:05.837

I always like to kind of think to myself,

 

30:05.837 --> 30:10.875

in '99, 2000 we talked about WorldCom,

 

30:10.875 --> 30:15.413

Nortel, Qualcomm, Dell,

 

30:15.413 --> 30:15.513

Cisco.

 

30:15.513 --> 30:15.547

Some of them are still around.

 

30:15.547 --> 30:19.717

I was gonna say, Qualcomm

 

30:19.717 --> 30:22.954

I think is the only one we still really talk about in terms of being a nouveau

 

30:22.954 --> 30:26.191

company, even then.

 

30:26.191 --> 30:30.228

We talked those companies but the real beneficiaries of the

 

30:30.228 --> 30:32.931

internet buildout were none of them.

 

30:32.931 --> 30:36.267

Some of them weren't even companies at that point in time and some of them were

 

30:36.301 --> 30:40.371

privates who didn't have more to a shingle to their name.

 

30:40.371 --> 30:44.375

You have to wonder if artificial intelligence will be the

 

30:44.375 --> 30:47.712

same way, will it spawn new industries, new companies that are...

 

30:47.712 --> 30:49.380

That are the real winners, ultimately.

 

30:49.380 --> 30:53.318

Maybe that's it. The winners right now are quite apparent

 

30:53.318 --> 30:57.288

and evident before us, are they the winners in 10 years?

 

30:57.288 --> 30:57.922

Time will tell.

 

30:57.922 --> 31:01.459

We need to have a chat ongoing about that one in particular.

 

31:01.459 --> 31:04.329

Andrew Marchese, thank you for enlightening us, bringing your views and

 

31:04.329 --> 31:06.231

insights to Fidelity Connects.

 

31:06.231 --> 31:08.867

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31:42.567 --> 31:46.404

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