FidelityConnects: Jurrien Timmer – The global macro view

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<b>Subtitles are AI Generated</b>

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Hello, and welcome to Fidelity Connects and a very Happy New Year to all of

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you. I'm Pamela Ritchie. Though new beginnings abound will the market

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pathway lead to a continuation of what investors experienced during the last

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months of 2025?

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Bullishness remains for the S&P 500 however many wonder if leadership

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within that bullish index might see changing of the guard.

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Do we see market breadth expand, for instance?

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If so, what are the investment opportunities to consider there?

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Do the less successful asset classes of 2025, namely Bitcoin

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and REITs perhaps, ride a pendulum swing back to the

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top echelons or stay put?

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What does guaranteed further AI capex spending

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along with lower rates brew for the global marketplace?

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We're very lucky to be joined by Fidelity's Director of Global Macro to dive

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into the state of affairs for 2026.

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Warm welcome and Happy New Year to Jurrien Timmer.

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Hello.

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Hello. Happy New Year to everyone watching today.

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Delighted to have you join us here today. I'll remind everyone joining us here

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that this discussion is available with live French audio interpretation

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as well.

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Jurrien, it's a new year. There are things that have come over from the

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previous year. I wonder if we might just sort of off the bat take a

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look at the discussion of oil quickly and leave it in the realms of

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oil because there's a lot going on due to the Venezuelan developments

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over the course of the weekend.

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For oil, specifically, the global markets, its place within it, how

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do you frame this?

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Oil is obviously a big part of the commodity complex.

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If you pull up slide 2 we can see the 2025 leaderboard.

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What happens to oil here?

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I mean, it's not really up that much.

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It's at $58 WTI.

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The commodity complex, which has done all right,

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remains one of my sort of favourite uncorrelated assets.

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Obviously, the news out of Venezuela was pretty

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shocking, especially for someone like myself who grew up

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in Aruba. Venezuela is in our backyard.

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It's certainly par for the course and it's

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a hell of a start to 2026.

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I guess the thinking is that Venezuela has one of the largest, if not the

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largest oil reserves and if that becomes a subsidiary

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of ExxonMobil or something like that more oil will be

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pumped and it will create more energy independence for presumably

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the U.S. or North America. In that sense it's hard to see

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something overly bullish for the price of oil happening

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if those reserves are indeed tapped in the future.

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And in theory provide some version of stimulus, actually, if it's cheap oil

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that you're running an economy on.

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Exactly.

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There are implications all over the place, we'll get into those probably at

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another time. Just sort of begin with what is

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continuing from last year because a lot of pieces of the story seem to

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be a continuation. I mean, it's just a calendar year in the end, it's just a

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changing of the actual calendar, it doesn't mean the market fundamentals

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change. What do we see from last year coming this way?

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Again, slide 2.

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The first half of last year obviously was about the tariff

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tantrum and pricing in sort of disaster,

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trade war, a capital war, all kinds of unknowns.

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We still have a lot of unknowns, of course.

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In the second half we got a pretty good trend where the markets rebounded

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very strongly from the April 8th low and

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the rest of the world ex U.S.

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equities really participated in that. As you can see Europe,

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EM, EAFE, Japan, all have posted very good returns,

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better even than the U.S., and they've done that in both

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U.S. dollar terms and in local currency terms so it is a very

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broad-based rally.

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You look at the chart, gold, international equities, U.S.

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Equities, even bonds put in a very respectable performance.

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For a diversified portfolio we had a lot of

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tailwinds last year. I don't know that we're going to continue to have

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all of those tailwinds. I do feel strongly that non-U.S.

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equities will continue to do well.

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Beyond that, as you mentioned in your opening, it will be, I think, for the

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U.S. a question of can the broadening be a bullish one?

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I mean, clearly, the consensus views right now are that the U.S.

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is going to run things hot here. We have this fiscal stimulus and

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we have potentially, well, we already have a somewhat dovish Fed

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and potentially even a more dovish one, so that's gonna

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run things hard and that should unleash kind of the

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493 of the S&P. Will that happen at the

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expense of the Mag-7 or in addition to, and I think that's one of the

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open questions for 2026.

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One of the other questions I'd like to put to you that has

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to do with the international trade and the tilt and this whole discussion

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there is, I mean, a lot of EAFE shares and

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international companies have already seen a huge run-up.

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I guess the question is it's one thing that they're cheaper, for sure, but is

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there still room for them to gain here and roughly by

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how much?

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I think so. If we go to slide 7, that's

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a chart of the MSCI EAFE Index so these are non-U.S.

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developed markets, mostly Europe and Japan.

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That's a nice looking chart. We broke out of this 15-year

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resistance line about six months ago

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and it hasn't looked back ever since.

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You see the momentum curves below, those are positive.

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EM has done very well also but for me the big story,

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or at least one that I can really kind of hang my hat on, is the

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EAFE story. If we go to slide 6 I'll show you why.

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I always talk about the discounted cash flow model so obviously earnings

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growth is very important but how much of that earnings growth investors

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get to keep, if you will, I think is even more important.

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The payout, which is dividends plus share buybacks,

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that in the U.S. has always been very very high, around 90%.

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More recently it's been closer to 75% so

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the payout has gone down as a percentage of earnings

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but in EAFE it's actually done the opposite. In this chart I show the 5-year

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growth rate, the CAGR, of the payout by country

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and region. For the U.S.

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it's a respectable 10%, nothing wrong with that,

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but EAFE's at 12, Canada is at 13, India is at 14, Japan's

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at 19.

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We have a big part of the world actually really

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competing with the U.S.

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from a DCF standpoint in terms of how much

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of the earnings story gets returned to investors.

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As you mentioned, this is happening at the same time that EAFE

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and EM are trading at 15, 16 times earnings while the U.S.

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is at 25.

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Together it provides a very compelling narrative.

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Again, EM is part of that but EM generally has a

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much lower payout ratio than developed markets for obvious reasons,

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because they are emerging companies they tend to be more dilutive rather than

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retiring shares but that doesn't diminish their story.

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It's just that for EAFE I can really point to something and say that's

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a big thing and it seems to have legs.

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That's absolutely fascinating how that ultimately works.

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In terms of portfolio construction, which is not exactly what you're

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providing us with each week, but just sort of that question of the barbell and

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the approach to making sure that you have the appropriate exposure

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to U.S. tech and to essentially the Mag-7 or however many numbers

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you want to put after that at this point, plus an international

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exposure. Is that still one of the ways of looking at things?

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Yeah, that's still my solution to the

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concentration risk in the U.S.

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The concentration risks, seven stocks being 30 to 40% of

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the market is great when those stocks are going up and you have all the passive

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investments that are just piling in there and elevating those stocks even

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more. It's great on the way up but at some point,

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maybe not anytime soon but at some point, you could argue

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that those stocks might be overloved, maybe overvalued,

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maybe their earning story starts to fragment, maybe the EI

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stuff ends up being kind of a cannibalistic thing where not

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all of them win and some lose and some win.

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Again, this is all speculation on my part but if you're just a

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totally U.S.-based investor how do you navigate that?

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Are you going to short the Mag-7

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Let's say you switch from a cap-weighted index to an equal weight or you go

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down cap or you go out of growth into value, to me all of those are

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very risky moves because then you're betting against the engine that has

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propelled the markets over the last 10 years.

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If you're a more globally oriented investor you can just say, okay,

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the U.S. has dominated the scene since 2014

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or so but now the rest of the world is competing

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at much better valuation so they have a lower hurdle.

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For me a global portfolio, we can throw EM in

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there but I like EAFE the best just because they have gotten

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the religion there on maximizing shareholder value, so

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a barbell of S&P cap-weighted and

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EAFE to me is a very good way to manage against

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concentration risk while also capturing opportunities that

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are happening in the rest of the world after really being dormant for

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the last 10, 15 years.

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It's so interesting because the word resilient was something that was used

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particularly for U.S. markets.

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Maybe it extends and that's really my question, the extension of the resilience

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for U.S. markets to plow through everything from wars, geopolitical overlays,

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new political realities and so on, the markets were resilient.

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How do you know that the global markets which, frankly,

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have been out of the picture for the last decade or so are just as resilient

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because there are still geopolitical overhangs to plow through.

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Those aren't gone.

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It's a great question. The U.S.

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has been very resilient. We can go to slide 5 and just show you that

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the 5-year earnings CAGR is now at 14%

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which is about the highest it ever gets.

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That will be a conversation for another show to think

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about what happens after you reach peak earnings like that.

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Ultimately, the fundamentals win and the fundamentals are earnings, the

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payout of those earnings and interest rates and the risk premium.

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Those are the four components of a DCF model.

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For the U.S. the earnings has been very good, the payout

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has been pretty constant or stable at 75% so that's

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fine too. The risk-free rate, the 10-year Treasury yield

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is at 4.16 which I'm still very much surprised

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at that it's this low.

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That's pretty benign.

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The equity risk premium which is like a sentiment indicator

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is around 4%. That's below average but it's not

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crazy below average.

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The U.S. is on a pretty sustained path and

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I think the hurdle is high to keep the kind of gains going that we've

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had. But again, there's nothing in that picture that

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tells me that this is something that's completely unsustainable

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or is going to break.

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If we then take the conversation to non-U.S.

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markets, in EAFE the risk-free rate is pretty

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low, in Japan as well, in EM they tend to be higher.

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The earnings growth numbers are pretty good.

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Fo EAFE the expected earnings growth is about 9%, in

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the U.S. it's about 12, in EM it's 14.

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The risk premium in

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EAFE is around 5 so better than in the U.S.

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In EM it's more like 6 or 7 which is typical, of course.

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EM tends to have a higher risk premium.

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None of these markets to me have a component in their

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DCF sort of valuation structure that says this is

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clearly not right, the market is smoking something.

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There's nothing in there that tells me this is an accident waiting to happen.

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Like you said, geopolitical tensions obviously are

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always there, Russia-Ukraine, the question

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now is whether China will look at what the U.S.

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is doing in Venezuela and say that gives us licence to take Taiwan and what

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happens then. There obviously are components

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there that are going to affect maybe all markets but certainly specific

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markets in specific regions.

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The resilience can sort of hold up in theory to sort

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of plow through some of those issues.

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You mentioned peak earnings, can we go there a bit even if it's a

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broader conversation next week. You have a great chart on this discussion.

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Let's go to slide 4 first.

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This is the market cycle since the October 2022 cyclical

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bottom. You can see the price action has been very, very strong, about

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100% over those three plus years.

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It was initially fueled by P/E expansion which

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you can see in the middle panel.

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That in 2025 has now taken a backseat to

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earnings which, as you can see in the right panel, have really accelerated.

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The AI story is part of that, the Mag-7 story is

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part of it but it really is a broad-based earnings advance and

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it shows you what's happening with CapEx from the one Big Beautiful Bill,

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etc., etc.

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What I like is that the baton was passed really

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as long ago as 2024 from

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being purely driven by P/E/ expansion to something

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more of a combination of P/E and earnings and now in 2025

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almost entirely earnings. That doesn't mean that the P/E isn't too high

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but the contribution to the returns are not coming from multiple

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expansion.

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If we then go to slide 5, again this is the chart that

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shows the 5-year CAGR of earnings, which is the blue,

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and the 5-year change in the P/E ratio, which is the pink.

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There's a little bit of a base effect story here because it's now

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2025, or it was a few days ago, and so you're

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measuring back to 2020 which, of course, was COVID but from 2020

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the P/E is actually down slightly and the E is

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up 14%.

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It is a very, very positive picture.

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Again, with the caveat that it never really gets better than 14%.

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Again, that doesn't mean the markets are going to fall off a cliff because this

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is the 5-year growth rate. We can go from 14 back to 10 and there'll be nothing

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wrong with that picture.

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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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It's incredible. Take us to the U.S.

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dollar story a little bit and we'll get into probably the discussion of what

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the Fed needs to do and what they're likely to do and some of the influences

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swirling around there. Did we see the discussion of sort of

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U.S. dollar trajectory continuing to be lower?

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Did we see international investors, I don't think we did,

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sell Treasuries essentially to move assets or move their money away from

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a currency that is predicted to be on a downward turn here.

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We really have not ...

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remember, when was it, in March of last year or early April we

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were all pondering ...  when we saw those boards with the tariffs

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that the president was holding we were wondering are

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we going to have a trade war and if we have a trade war is that going to turn

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into a capital war where foreign investors, either private or

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institutional or governments, will withdraw their

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U.S. assets as a form of protest against

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what I think probably many of them would consider an unfair

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trade policy.

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We really have not seen that. We have not seen it at all on the equity front,

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flows have continued to be positive.

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I think that has more to do with the Mag 7 and the AI boom

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which has somewhat of a home base in the U.S.

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I don't think it's necessarily foreign investors feeling patriotic

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about the U.S. but it's just they go where the profits are, as well

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they should.

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Even on the bond side we really have not seen

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any withdrawals.

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It is true that the Chinese central bank,

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that its holdings of Treasuries has continued to come down but it's been

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doing that for a long time and I think that's a strategic thing rather than a

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tactical thing. We have not really seen an exodus and as

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a result, slide 13, we can see that the dollar really

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hasn't done anything over the last six to nine

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months. It fell earlier last year as investors

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were afraid of that and then it's been sitting in a range, and if we look at

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the nominal effective exchange rates by country, this chart

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goes all the way back to the 1970s, you can see that the U.S.

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is pretty much the strongest currency other than the Swiss franc, of course,

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Switzerland has its whole unique set of things going on, but

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the dollar continues to reign supreme even though

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another reserve currency, namely gold,

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is taking market share away.

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This chart shows all fiat currencies

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not gold.

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We can show, actually, slide 14 real quick.

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I've shown this chart before, since the financial crisis

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central banks have been adding gold to their portfolio, that's

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the bottom panel there.

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It's been a lot of China and Russia and other emerging

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markets. You can see in the pink line that the value of

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gold, and these are at national valuations not at the market valuation,

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is now above the value of all euros as a

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reserve currency and getting towards ...

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I mean, it's still a long ways away but it's taking market share from

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all fiat currencies and it's now the second place after

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the U.S. dollar.

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It's really interesting that the euros are being replaced so much by gold

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because you would think it would be the other alternative.

[00:20:31.597]

Well, the euro has been fine. It's just that the euro was in

[00:20:36.535]

the laser sights of gold just because their

[00:20:40.639]

market values are similar.

[00:20:42.941]

Gold has not gone up at the expense of the euro, it's just going up at the

[00:20:47.045]

expense of all fiat currencies.

[00:20:49.081]

Can we talk a little bit about Bitcoin?

[00:20:51.650]

It was a rough final quarter for Bitcoin,

[00:20:55.954]

certainly.

[00:20:58.523]

They go so far as existential questions get asked and then it switches

[00:21:02.561]

back. What are some of your thoughts, ultimately, on

[00:21:06.531]

where Bitcoin goes in the year to come?

[00:21:11.503]

We can go to slide 16. I find it fascinating.

[00:21:14.773]

I'm into Bitcoin, I've been following

[00:21:19.044]

it very closely for the last five plus years.

[00:21:22.381]

I've done a lot of research on it.

[00:21:25.217]

I also like to follow what sort of the Bitcoin natives, if you will,

[00:21:30.055]

say about it. In recent years a

[00:21:34.059]

lot of focus was put on the halving

[00:21:38.130]

cycle. You've got that four-year cycle where the growth

[00:21:42.100]

rate of supply gets cut in half and that tends to produce these massive

[00:21:46.438]

rallies.

[00:21:48.540]

Following that you get these kind of winters where the price of Bitcoin goes

[00:21:52.110]

down 80% or something.

[00:21:55.213]

We are at the point where that should be happening, and maybe

[00:21:59.451]

is happening, not 80% but we've gone from 126 to

[00:22:03.955]

80, we're at 94 right now.

[00:22:08.060]

At this point these Bitcoin natives, if you will, are saying,

[00:22:12.230]

well, the four-year cycle is dead, we're now in a super cycle, a structural

[00:22:15.500]

cycle. I get a little skeptical when I hear

[00:22:19.504]

that. I do agree that the halving cycle matters less and less

[00:22:23.608]

and less as more and more coins have been minted

[00:22:27.679]

because the delta, the change in the production

[00:22:31.950]

really doesn't have the same effect as 5 or 10 years ago.

[00:22:37.356]

I do think that maybe that curve flattens out and we can see that in this

[00:22:41.326]

chart, right. The blue line is the power law curve, the pink

[00:22:45.530]

line is the S curve model that I created

[00:22:49.568]

based on the internet adoption curve and we're kind of following

[00:22:53.572]

that S curve model pretty closely.

[00:22:57.008]

In that sense I think Bitcoin is probably near fair value, 65,000

[00:23:01.780]

would be kind of a place where I would want to buy more because that's the

[00:23:05.250]

previous high. If we go to the power law stuff for a moment

[00:23:09.321]

on slide 17, this is really fascinating.

[00:23:12.090]

If you go on Twitter or X and

[00:23:16.528]

you read some of the Bitcoin stuff there's a lot of very strongly held views

[00:23:20.699]

here that Bitcoin is following this immutable

[00:23:24.970]

power law which it has.

[00:23:28.206]

In this chart I'm showing the price and the time

[00:23:32.477]

on the horizontal but expressed on a logarithmic scale.

[00:23:36.782]

You get this straight up line and Bitcoin has followed that beautifully

[00:23:42.053]

regardless of what the sample size was that you used to

[00:23:46.124]

create the chart.

[00:23:47.893]

If you take that regression line, which is the blue dotted line, and then you

[00:23:51.530]

kind of create a parallel line under all the lows that

[00:23:55.700]

becomes the power law sort of support line.

[00:23:59.638]

That is to me the real line in the sand.

[00:24:02.240]

It's at 47,000 so that's really far away at this point.

[00:24:06.912]

To me if that line was ever to be broken you could argue that the

[00:24:10.949]

whole power law has been rendered obsolete.

[00:24:14.219]

I don't expect that to happen  but that to me is kind of an interesting

[00:24:18.423]

way of thinking about where would you want to buy Bitcoin if you don't already

[00:24:22.360]

own it, what would need to happen for the bullish thesis to

[00:24:26.364]

be proven wrong, things like that.

[00:24:28.900]

If we go to just slide 18 for a second and then I'll wrap up on Bitcoin.

[00:24:31.803]

The power line, sorry, the power line is the floor, is that...

[00:24:37.409]

If you take a parallel power line, and on slide 18 we can see it,

[00:24:41.446]

it's the same chart but now the time

[00:24:45.383]

axis, the horizontal axis is on a normal

[00:24:49.721]

arithmetic scale rather than a log scale, so now Bitcoin looks more

[00:24:53.692]

like the way we think about it.

[00:24:56.361]

Again, I think Bitcoin probably is going to take a year off because

[00:25:00.332]

that is where we are in kind of the four-year cycle.

[00:25:03.201]

I think 65 will probably hold.

[00:25:06.671]

The more time we're there the closer we'll get to that trend line on the power

[00:25:10.842]

curve. To me, again, I don't want to make too many predictions

[00:25:15.080]

here but if six months from now or nine months

[00:25:19.217]

from now Bitcoin is sitting at 65 or 70,000 to

[00:25:23.855]

me that's going to be very compelling as a place to say, okay, another winter

[00:25:27.993]

has passed and each winter gets less and less cold, just like

[00:25:31.963]

each summer gets less and less warm when it comes to Bitcoin because it does

[00:25:35.200]

follow that flattening upward slope.

[00:25:39.037]

It's like the environment.

[00:25:43.241]

Let's finish, if you don't mind, with what the Fed needs to do over the

[00:25:47.279]

course of the next little bit. This is sort of one of the big stories of this

[00:25:50.582]

year, the leadership change.

[00:25:53.051]

If we look at the minutes it's sort of the division story, I guess, is

[00:25:57.022]

almost a bigger story. The minutes show that there were big divisions on

[00:26:01.259]

how many rate cuts essentially need to happen in 2026.

[00:26:04.663]

Take us there and just your thoughts for how we should follow this story in

[00:26:08.366]

2026.

[00:26:10.869]

Let me start with slide 8 and just give the

[00:26:15.040]

economic growth backdrop.

[00:26:16.841]

We know that inflation continues to be kind of stubborn at around

[00:26:22.647]

2 1/2, 3%. It's not terrible but it has not reversed any of

[00:26:26.685]

the big inflation we saw after COVID.

[00:26:29.955]

At the same time the U.S. economy, even though we look at the labour

[00:26:34.125]

numbers and they're kind of soft and obviously we have a big affordability

[00:26:38.430]

crisis for the younger generation in this country, but if you look at actual

[00:26:42.601]

GDP minus the potential GDP

[00:26:46.771]

growth, that's the bottom panel here, the output gap,

[00:26:51.142]

so the economy is running ahead of its potential, is the highest now since

[00:26:55.213]

the year 2000, so that's 25 years.

[00:26:57.449]

The economy, I wouldn't say it's running hot but it's above its potential

[00:27:01.720]

which generally should mean that it's going to be inflationary,

[00:27:05.757]

and of course it has been and maybe the AI story changes that, we don't know.

[00:27:10.895]

If we take that as a template and then go to slide

[00:27:15.033]

9, enter the Fed.

[00:27:17.402]

The Fed raised rates significantly back in 2022 into

[00:27:22.374]

2023 and has been dropping rates since then,

[00:27:26.511]

so 175 basis points since its peak of

[00:27:31.149]

5 3/8. The various iterations of the Taylor rule, which I show in the top

[00:27:35.153]

panel here, are all supporting lower

[00:27:39.224]

rates but they are just not supporting the degree of

[00:27:43.361]

how much rates have fallen and how much the market expects them

[00:27:47.532]

to keep falling.

[00:27:49.100]

The market is expecting the short rate to go down towards 3%.

[00:27:53.405]

The Fed seems to be in agreement over time.

[00:27:56.675]

We obviously are going to have a leadership change.

[00:27:58.677]

The Fed, as you mentioned, is becoming more fragmented.

[00:28:02.047]

You have the status quo academics on the Fed who want to look

[00:28:06.017]

at things like the Taylor Rule and say things are not in order yet

[00:28:10.188]

for us to go to neutral because inflation is above target.

[00:28:13.892]

Then you have sort of the, I hate to say it, Trump loyalists who are

[00:28:17.862]

going to always push for lower rates because they want to score political

[00:28:20.899]

points. I think that will create some tension at the Fed,

[00:28:24.903]

especially when the new Fed chair comes in, and you're gonna see more fractured

[00:28:29.207]

rate outcomes where the FOMC will vote but it won't be unanimous,

[00:28:33.144]

it won't even be like one dissent.

[00:28:35.413]

It might be like a Supreme Court ruling like a nine to six or something

[00:28:39.484]

like that. I do think that that's very likely to happen in

[00:28:43.621]

the coming few years.

[00:28:45.390]

It's fascinating. Jurrien Timmer, no one else would we like to start off the

[00:28:48.827]

year with than you. Thank you for sharing your thoughts, your incredible graphs

[00:28:52.831]

and charts and we wish you a very Happy New Year to you and your family.

[00:28:57.302]

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[00:29:00.138]

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