FidelityConnects: European comeback and what it means for investors

[00:03:47] Pamela Ritchie: Hello, and welcome to Fidelity Connects. I'm Pamela Ritchie. Investors' shift to investing globally is only growing. It is growing, most notably at this point, in the emerging markets and particularly in China. According to a recent outlook report from Fidelity International in London, the story for equities across the world has proper momentum behind it though certain countries may be waxing and waning in terms of valuations. The push to invest outside of America chimes with calls that parts of the U.S. equity trade are getting a bit long in the tooth. With a view from the European height to address this moment in markets we're joined live from London by Fidelity Investment Director, Tom Stevenson. Warm welcome to you, Tom. How are you?

[00:04:29] Tom Stevenson: I'm very well, Pamela. Thanks very much for having me on again.

[00:04:31] Pamela Ritchie: Yes, delighted to have you here and to go through parts of this outlook and some of the prolific writing actually that you do. You're a journalist in your own right and we've been reading some of these articles. Let's talk a little bit about this moment that you've been capturing. The melt-up scenario is something we've discussed, you've discussed it certainly in articles, what are we meant to do with that?

[00:04:55] Tom Stevenson: Let's look at where we are. We've just literally come to the end of the third quarter, end of September. I was looking at the data for various markets around the world over the last three months, and indeed over the over the first nine months of 2025, and it's been a pretty extraordinary roller coaster. The last three months we've had extremely strong performance. You mentioned emerging markets there, China very strong but in the UK, pretty strong markets, the U.S. pretty strong. That builds on the first six months of the year which, let's not forget, included a pretty severe market wobble around those trade tariffs in April. Despite that, add it all together and we've got total returns of about 30% in Europe, about 20% in the UK, 15% in the U.S., Japan up by a similar amount, China up by a similar amount. Really wherever you look across the world the first nine months of 2025 have been pretty strong.

[00:06:04] We're building on two extremely strong years before that, 2023, 2024 were both good. You might have expected going into 2025 we'd have a slower year, maybe even a correction. There was a lot of concern at the beginning of the year about trade tariffs and other policies from the incoming Trump administration. It hasn't turned out that way. It's been another really strong market. I think that that is starting to raise questions. Parallels are being drawn. Echoes of the 1999 dot-com bubble are really beginning to be discussed seriously. Where are we in that cycle? It feels to me like if you draw that parallel we're somewhere in the sort of 1998 to 1999 period at the end of a long bull market. Whether we're in 1998 or 1999 is a big question. I mean, they are very different situations. At the end of a bull market it's a rewarding time to be an investor. No one wants to be out of the market at that point in the cycle. I think that's where we are. That's the question which investors are asking at the moment, are '98 or are we '99?

[00:07:17] Pamela Ritchie: This has a lot to do with the discussion of what's going on in the U.S. with those particular stocks that we know of, and various related ones as well. As you point out, the returns across the globe have been pretty extraordinary. Do we call it a melt-up in other parts around the world or are we just specifically talking about comparisons to certain types of bubbles? They're all a bit different but in the U.S., is this a global story, is it a contagion story?

[00:07:46] Tom Stevenson: I think that's a really important question. It's a really good question. The market is beginning to feel speculative in nature but it's in quite a specific area. It grew out of the the Magnificent Seven, the tech stock bubble, I think that was largely justified by strong earnings growth with those companies. What we're seeing now is it's broadening out, the speculative nature of the market is broadening out. We're saying quite a lot of sort of non-profitable tech stocks are beginning to perform really well. Over the summer we saw that in particular in the U.S. I think your your distinction between what's going on in the U.S. and what's going on in the rest of the world is really important. If you think about the valuation side of this, valuations in the U.S. are high, they're not super high, they're actually not as high as they were 25 years ago, but if you roll that out to the rest of the world and you look at where markets like the UK and Europe and Japan and China sit within their 20-year range they're sort of bang in the middle of their range. The markets are not too stretched outside the U.S. I think that's a very important distinction because when people talk about are we rerunning the dot-com bubble what they're really talking about is are we re-running a technology bubble? For Internet 1999 we're talking about artificial intelligence 2025 but it's really a U.S. story. It's not really a global story. I think the growth in markets has spilled out to the rest of the world but I think the overvaluation story, the excessive exuberance story, is not relevant to the rest of the word yet.

[00:09:40] Pamela Ritchie: That's so interesting and so important, as you say, because it goes to where things can go from here. You've mentioned in one of your articles or in the report itself that actually a baton has been handed off in terms of taking a look at the rest of the world, specifically emerging markets. We know a little bit the story of Europe. It's been actually extraordinary for a long, long time. Some people wonder if that may be just cooling off for a bit because it had its run. EM, let's go there, we'll discuss more about China but sort of the EM story, it's been gathering pace as well.

[00:10:12] Tom Stevenson: Absolutely. One of the reasons why emerging markets have done particularly well in the last three months has been to do with the fall in the value of the U.S. dollar. Typically, a decline in the U.S. dollar is good for emerging markets. It reduces the burden of dollar denominated debts which are still ... a very significant proportion of debts held by emerging market countries are dollar denomination so a falling dollar helps on that. It boosts spending power in emerging markets so it's good for the domestic side of those economies. It helps commodity prices which is another important export for many emerging markets. It also reduces imported inflation in emerging markets. For three or four pretty important reasons a falling dollar tends to be equated with outperformance of emerging markets. Certainly in the third quarter of this year we've seen that. The U.S. dollar has depreciated by something like 10% against a basket of international currencies. That's a pretty significant change and it's been a real boost for emerging markets. That is on top of all the other sort of positives in terms of policy stimulus and improving, or at least stabilizing property market in China. It's a combination of factors all at the same time.

[00:11:51] Pamela Ritchie: As you were pointing out, I think, in one of your articles the catalyst may well be the U.S. dollar because the structural story underneath it has been there for some years and it's not the same emerging market story that it was 10 years ago. Structurally these economies have strength in their domestic economies. There's a demand story there within in a lot of cases. They're not necessarily dependent on trade with just one or two developed countries. I mean, there's sort of a structural story that's been sitting waiting for a catalyst, basically.

[00:12:24] Tom Stevenson: Yeah, it is a structural story. If you roll back 30 years and you look at the exports from emerging markets they were 75% to the U.S. and maybe 25% to other emerging markets. If you look at it now the two have really converged and it's a kind of 50/50 story now. That's a very significant difference. In terms of policy actions by countries they were very quick to see the threat of inflation as we came out of COVID. Interest rates were hiked much more quickly in the emerging world than they were in the developed world. As a consequence the emerging world is in a position where it can cut interest rates quite substantially. Real interest rates are still pretty high in the emerging world. Inflation is not such a problem. The debts in the emerging world, public sector debts, government debts are nothing like as high in the emerging world as they used to be. The balance of payments is much better in the emerging world than it was 10, 15 years ago. For a combination of reasons I think that emerging markets find themselves in a better position.

[00:13:49] Pamela Ritchie: There's a couple of questions coming in. We're going to go to more of the pieces that you have in your outlook here but just a comment, if you would, on the buildup of Canada and U.S. trade agreements. There do seem to be new partnerships for the whole world being created. Canada's out there trying to make new partnerships as well. Just kind of a view from where you sit at this plethora, it seems, of different types of agreements and partnerships and so on.

[00:14:17] Tom Stevenson: I think this is part of a broader picture which has really emerged over the last year about the U.S.'s relationship with other countries. Obviously, the trade policy is less favourable than it was. I think many countries are approaching this in a pragmatic way and they're saying, well, you know, I mentioned those figures of sort of 75% exports to the US. The U.S. has historically been a very important end market for a lot of countries, and not least Canada, obviously. I think that world has changed and that all countries, including Canada and European countries and China and Japan, we're all rethinking what the structure of the new world looks like in terms of those trade relationships. It will be different from in the past. I think the U.S. will play a less important part than it has done in the past.

[00:15:20] Pamela Ritchie: It's really interesting, we're seeing lots of headlines about this. Let's go through some of the asset classes. We mentioned in the introduction that equities, according to your report, still very much a go. There's lots of reasons to enjoy it as a global statement about where equities are. There's a fiscal, there's a monetary and, of course, there's an AI structural trade in there as well. When you break it down into the countries themselves, let's go a little bit through, if it's all right, your outlook for this quarter and how you see equities in certain markets.

[00:15:55] Tom Stevenson: I think there's certainly a valuation argument for a lot of countries at the moment. Let's focus on the UK, for example. The UK economy is not in a great place at the moment. GDP growth has been up and down. The government's fiscal position is not great. We've got a very important budget coming up in November in about a couple of months' time, just under a couple months' time. Frankly, you wouldn't want to be the Chancellor of the Exchequer trying to balance the books at the moment. The UK economy is not in great shape but the stock market really reflects that. The valuations in the UK are extremely attractive, probably more attractive in the UK than in any other major market around the world. I think there's a valuation argument in some countries.

[00:16:59] Then if you go somewhere like Japan, for example, that's not really a valuation argument because the Japanese stock market has actually done very well. If you roll back since those Abe reforms in 2012 which really marked the bottom for the Japanese stock market, it's really had a strong run so valuations are no longer as attractive. But if you look at everything else that's going on in Japan, if you look at the governance reforms, for example, they started a decade or so ago, they are still ongoing. Companies are really treating their shareholders in a very different way, winding down cross shareholdings, thinking about return on capital, buying back shares, using their balance sheets more effectively. The reforms, the governance reforms in Japan are very, very influential. Then you look at the inflation picture in Japan, years and decades of deflation. That's really sorted itself out now. Japan has a very healthy rate of inflation, wages and salaries growing at a useful pace and that's boosting consumption and consumer confidence. Japan is in a very different place.

[00:18:25] We just had, bringing it right up today, the changes over the weekend with, potentially, the first female prime minister of Japan. Interestingly, that's a big deal having a female prime minister in Japan but it's not what the markets are focused on. What the market is focused on, actually, is the fiscal stimulus which is likely to follow, the lower interest rates which are likely to follow, the weaker yen. It all sounds very familiar, it all sound like a mirror image of what's happening in the U.S., actually. There were long term structural reasons to like Japan and then now I think there are short term reasons as well.

[00:19:11] Pamela Ritchie: I mentioned sort of a little bit off the cuff but I'd love a little bit more detail on Europe. Europe was absolutely out of the gates at the beginning of the year and it caught the April downturn and sort of fleeing from U.S. assets. That also got reversed. It was an extraordinary year for European share prices for some time. Did it get overdone, I guess, is the question. There's a lot of promise of fiscal spending. It will happen, probably, but maybe the valuations got a bit over their skis, would you say?

[00:19:45] Tom Stevenson: Yes, I think that's true. What we had at the beginning of the year was really a change in the whole sort of landscape in terms of the relationship between the U.S. and Europe in terms of the sort of security backstop which America has provided for Europe, really, in the whole post war period for the last 70 or 80 years. That has changed and I think in some ways it was almost like a sort of tough love gift to Europe. The change in the willingness to take on debt, to invest and to spend in defence capability, in industrial capability in Germany, for example, has been seen as a real boost to the stock market, and rightly so stocks responded to that. The defence sector, in particular, has seen some pretty extraordinary rises in share prices, particularly in that first quarter. Europe was far and away the best performing region in that first quarter and it has fallen away since.

[00:20:56] I think you pinpointed the reason there, I think it just went too far too fast. All of these changes are real. There's no doubt that Germany is committed to spending more seriously on its own defence, on its productivity, on its industrial investment but it's not going to happen overnight. This is a multi-year project. I think markets just got ahead of themselves. At the moment when it happened it tied in perfectly with this desire for investors to diversify their portfolios away from what looked like a sort of overheating U.S. market. It wasn't such an enormous leap to go from one developed market on one side of the Atlantic to a developed market on the other side of the Atlantic that didn't look that different but was massively cheaper.

[00:21:49] Pamela Ritchie: There was also sort of an expectation of peace being if not around the corner at least somewhat visible down the road within Europe. That still is a lingering discussion. I don't know if that plays into it necessarily, sort of some disappointment on some level.

[00:22:06] Tom Stevenson: I think there's an element of that, yes. It was a part of the bullish argument and it hasn't quite worked out as people hoped it would so there's been a delay there.

[00:22:19] Pamela Ritchie: There's a delay there. We go to sort of other asset classes. We can also go around the world further. Gold, bonds, bonds, obviously, is fascinating because we've had this lowering of interest rates. The environment is a global story. The Fed moved and sort of the market certainly expects it to be moving again soon. Inflation is still there though so there are lots of voices that say you can't lower them as much as you think you can. Who knows who will win out on that one but what do you think of the case for bonds?

[00:22:56] Tom Stevenson: Do you know what, there are a lot of moving parts within the bond market. You've got both short term and longer term bonds and then you've government bonds and corporate bonds and they all march to a slightly different beat. Yes, in the short term short bonds, yields are coming down but at the longer end long bonds are influenced by a different set of factors. It's not just about interest rates. It's about how confident are you that your money is going to be paid back? How confident are you that when it is paid back it is not going to be worth significantly less in real inflation adjusted terms? I think that what investors are doing is they are demanding, quite rightly, greater compensation for lending to governments for a long period of time. We're seeing this steepening of the yield curve. We're seeing long bond yields being higher than short bond yields. That is a negative for bond prices.

[00:23:54] Then you have the corporate bond element to this. The added factor here is default risk and how confident are you that individual companies are going to be able to meet their obligations to lenders. That is determined by the ongoing health of the companies, obviously, but also the background economic environment. What price are you paying for that extra risk of lending to a company? At the moment the extra income that you're receiving for doing that is pretty small. The spread between a government bond yield and a corporate bond yield is as low as it's been for years and years and years. I think probably investors are saying, I'm not sure that I'm being adequately compensated for that risk. You mentioned bonds and gold and I think it's important to think about them, actually, in the same sort of bucket, the same category. They are both diversifiers away from equity risk. Traditionally, people have talked about the 60/40 portfolio, 60% in equities, 40% in bonds. Increasingly people are now talking about a 60/20/20, 60 equity, 20 bonds, 20 gold. That's a very significant.

[00:25:17] Pamela Ritchie: That's a big change, isn't it?

[00:25:20] Tom Stevenson: That is a huge change because if people are genuinely thinking about gold in the same — the bond market is an absolutely massive pool of assets around the world. It can handle that role as a diversifier. The gold market is not able to handle that role as a diversifier. If central banks are buying gold to diversify their assets away from the U.S. dollar and if increasingly ordinary investors, pension funds and ordinary personal investors are buying gold as a safe haven then the weight of money that potentially goes into that gold market I think could seriously distort it. I was looking just this morning, actually, at what happened to the gold price in the late 1970s. Between 1976 and 1980 the gold prices rose 7 1/2 times. Now, the gold price this time around has doubled in three years and everyone's saying, wow, the gold price has doubled in three years. Yes, that's a significant move but you compare what happened in a previous moment of unease about what was going on in the world and a move into gold and there was a very significant change. I'm not saying that that's going to repeat itself but I'm saying just be cautious before you say, oh, the bold price has gone too far.

[00:26:47] Pamela Ritchie: So there could be further room to run, essentially. It could have a lot more room to run. It is certainly increasingly spoken as a safe haven, which it's always been, but as you say next to bonds it seems to be catching those investors.

[00:27:05] Tom Stevenson: Yeah, and I think the two do play a part. I talk a lot about diversification. I think there is no substitute for diversification and bonds increasingly can't do the work by themselves so you need other assets. It may be a bit of gold, it may be some infrastructure, it may be some property, it may be cash. I just think that gold has a role to play in that diversified portfolio.

[00:27:34] Pamela Ritchie: In terms of the geopolitics which the markets have tuned out to a very large degree is there anything that you particularly watch, worry about? There are lots of things to worry about in the world, there always are, and there seems to be a lot more today. In terms an event rocking markets, I mean, we've got OPEC+ trying to boost capa-, we don't really know what that's going to do exactly but there are geopolitical risks all over the place. That said, deals power on. Is there anything in particular that you watch?

[00:28:09] Tom Stevenson: I watch all of these things as we all do. You mentioned the oil price there, the oil price is extremely weak at the moment. Some of the announcements over the weekend about production may be changing that. The oil price, it's less of a driver than it was. We've mentioned the 1970s, the oil price, of course, plainly was a key driver then. Stock market investors at the moment just seem to be viewing the glass as completely half full. By definition, what comes out of left field to unsettle this bull market is unpredictable. The things that we know about, the wars in various parts of the world, the threats to stability in the Far East, all of these things, we kind of know about them and so the markets in a sense would have priced that in. It's almost a silly thing to say but the thing that unnerves this market will be something that we don't know about currently.

[00:29:24] Pamela Ritchie: Yeah, and therefore the diversification story as sort of a message. I wonder if we just go a little bit more to investing for a melt-up. It's sort of the way we started the conversation here. You had one great little piece in your article, of a very good article, it said, any fool can know. It's sort of this market goes up, market goes down, sure, we all know that. It's more what to do in it. I think you're mentioning the diversification piece but any just sort of final thoughts on that. We're watching this unfold, it's just remarkable.

[00:30:01] Tom Stevenson: Just coming back to what I said earlier about no one wants to be out of the market in this final push, if that's what it is. Now, I'm not saying that we are in the final push but this three year bull market that we've enjoyed since October 2022 sits within a longer term bull market, it's been going for 16 years now. Now, bull markets have gone on longer. We had two very long bull markets in the post-war period in the '50s and' 60s and in the '80s and '90s which went on for 18, 19 years. I think that there is scope for this bull market to continue but as a bull market matures it's really important that you as an investor become more cautious, more sensible, more prudent, more diversified, and you put in protections and that might mean that you hold more cash than you held before.

[00:30:58] You don't want to be out of the market because trying to time the tops and the bottoms of the market, as we know, is impossible and no one's going to do it effectively so you want to remain invested, especially if you are investing on a longer term time scale, but you can't do it without half an eye on where we are in terms of valuations and the market cycle. Clearly, this bull market is maturing and I personally want to be a little more cautious, a little more prudent at this stage in the cycle.

[00:31:29] Pamela Ritchie: Tom Stevenson, it's always wonderful to get your perspective and to take us around the world a little bit in terms of asset classes but also countries. The EM and China discussion, we look forward to updating that soon. Have a good day.

[00:31:41] Tom Stevenson: Thanks very much, Pamela.

[00:31:43] Pamela Ritchie: Tom Stevenson joining us live from London today. Coming up on Fidelity Connects tomorrow, Fidelity Director of Quantitative Market Strategy, Denise Chisholm. She joins us to discuss her latest sector thesis. We're going to take a deep dive into the earnings story and what it is telling you. It looks pretty bullish from what Denise has been studying, she'll share that with you. The webcast will be presented in English and also feature live audio interpretation.

[00:32:09] Then as we turn to Wednesday of this week, portfolio manager Jed Weiss will be giving us an update on international equities, how big market movers like AI and geopolitics are affecting companies in Europe and Asia. We'll dive in a bit deeper on the actual companies and types of areas within sectors that he likes to invest in.

[00:32:27] On Thursday, first at 10:30 a.m., this is Eastern Standard Time, for a French language webcast. Host Charles Danis will be sitting down with Antoine Guilmain. He is partner and co-lead of National Cybersecurity and Data Protection Group at Gowling, the law company, for a detailed discussion of a range of data protection and cybersecurity issues that may affect your business and how to add more value and better protect your clients.

[00:32:51] On Thursday at 11:30 a.m. Eastern host Lauren Gardy is going to be chatting with Bobby Barnes, he's head of Quantitative Index Solutions, for a look at where we are in today's business cycle, the factors that come into play, ultimately, and which ones of those he favours. Thanks for joining us. We'll see you soon. I'm Pamela Ritchie.