FidelityConnects: Time to invest in Canada?

[00:05:02] Pamela Ritchie: Hello, and welcome to Fidelity Connects. I'm Pamela Ritchie. What is interesting about the Canadian investment thesis at this juncture? In the face of mixed signals, tariffs, fiscal stimulus and policy shifts markets are navigating a constant push and pull and the tension is showing up in sector performance. Resources have been standouts, banks are holding steady and cyclicals have been outperforming more defensive names. So why Canada now? What is our next guest hearing from our country's top CEOs that might help guide us our way through the next quarter? Happy today to be joined by portfolio manager, Reetu Kumra, for a look at the key drivers moving the TSX and what it may mean, ultimately, for you and your clients. Reetu manages several Fidelity funds including Fidelity Long/Short Alternative. Just a quick reminder that today's webcast features live French audio interpretation. Warm welcome to you, Reetu.

[00:05:57] Reetu Kumra: Thank you. Thank you for having me.

[00:05:59] Pamela Ritchie: Delighted to have you here and to talk a little bit about the fund itself and also about the Canadian economy that you're investing into, or the Canadian markets that you are investing into. What is kind of the overarching moment would you say in Canada right now? You can relate it to investment or just to sort of the broad economic story. What is this moment?

[00:06:20] Reetu Kumra: Good question. I think what I'll do is I'll start off by just talking about the markets in general and then we can talk about Canada specifically. We came into 2025 and there was very much a prominent defensive narrative in the market that's driven by the tariffs that we saw, lack of immigration happening, concerns about U.S. exceptionalism, to name a few other things as well. All of that led into Liberation Day and we saw the huge drawdown in the market. Shortly thereafter we saw a change in the narrative where it became very much cyclical in nature, where we saw tariffs becoming less bad as negotiations started coming out. There was more conversation about easing, whether it's monetary or fiscal easing. The U.S. exceptionalism narrative kind of came back into vogue. There was conversations about the tax cuts as well as the one Big Beautiful Bill. You saw the 35% rebound that we saw in the market effectively since Liberation Day.

[00:07:27] As we look forward in terms of where we go from here you still have the concerns about tariffs which are still lingering in the background but also the USMCA negotiation which is particularly relevant to Canada. You also have on the other side, and this is the push-pull that you had just mentioned, on the side you also have fiscal stimulus, one Big Beautiful Bill, tax cuts, monetary easing, and all the tailwinds that could potentially bring out the animal spirits. You try to quantify that, the S&P 500, the expectations are EPS growth of high single-digits. The index is trading at roughly 23 times earnings. In Canada we have high single-digit growth that's expected as well where the index is trading at 17 times earnings. What we're trying to do in the face of this atmosphere is stock pick our way through the market where we're just looking at where we see inflections in earnings, where we see certainty of earnings growth and marrying that with what we are willing to pay for it.

[00:08:32] Pamela Ritchie: Fascinating sort of approach of the fund itself and how it can help you do all of those things. Remind us, the genesis of it actually is kind of the research itself, isn't it?

[00:08:41] Reetu Kumra: Yes, absolutely. The Canadian Long/Short Alternative Fund is a 130/30 long/short product. It really effectively is a fund that packages together our breadth and depth of the research platform. The genesis, as you asked about, it came about roughly five years ago where we had done a study internally on all of the data that we have in-house. As you can imagine we have quite a bit. We went back to 2006 and we were trying to identify what do we do well as an investment team. What do not do well? How strong are we with our stock picking capabilities? We dissected that data. As you can imagine from 2006 up until about 2020 when we were looking at that data set we've had a number of analysts cycle through a number of different sectors and those analysts are PMs today. It really speaks about our investment process as a whole.

[00:09:36] What we found was that we're good at stock picking but what's interesting is that we do a really good job at our buy-rated names but we do even better with our sell-rated names. We are able to do that with really good consistency and accuracy. We thought about creating a strategy such that we can invest in our research and effectively go long on our buy-rated names and go short on our sell-names in order to really capture all the research opinions across the platform. We use a rules based approach in terms of putting this fund together. We're really trying to just maximize the alpha while managing the risks throughout the cycle.

[00:10:18] What's a little lesser known about the fund is actually tilt small-cap. That has to do with the portfolio construction. The average market cap of the fund is roughly 10 billion whereas the TSX is about 45 billion. All in all, what you're getting with this fund is it's a Canadian only 130/30 long/short fund. It offers that alignment to the market, the exposure to the market, and also exposure to our research platform. We go long on our buy-rated names, go short on our sell-rated names to really capture that research that has that accuracy, the consistency, the repeatability that I spoke about earlier.

[00:10:59] Pamela Ritchie: It's so fascinating. From there you then go into sort of the super sectors. Is that how you work that? That's sort of the next part of zooming into where you're going to actually invest.

[00:11:08] Reetu Kumra: Yes, absolutely. From a portfolio construction standpoint, I mentioned the directional alignment to the market so the focus is to be neutral the super sectors. The super sectors, as a reminder, are resources, financials, industrials and consumer. We're neutral those super sectors so we get that alignment to the TSX and we try to have our research stock pick within the super sectors. As a result the alpha should be generated within the super sectors. The way it's constructed and the reason we actually tilt small-cap is we go roughly equal-weighted both on the long side and the short side within the super sectors. As a result there ends up being a tilt towards the small-cap.

[00:11:56] What's good about this fund is that it is very diversified. We cover as a research team roughly 98% of the benchmark and there's an opinion of those stocks in the fund whether it's on the long side or the short side. At any given time we'll have between 130 to 190-ish positions in the funds. On the short side it would be within 40 to 80 at any given time. That really helps with risk mitigation. As a team, as a research team, to our knowledge we have the largest research team here in Canada so we have the ability to turn over more rocks and turn over more stones so that we can cover more securities than any other team which is actually represented in this fund.

[00:12:42] Pamela Ritchie: It's incredible. As you say, this is leveraging the research that you were doing anyway, that was happening anyway. From there take us down — why don't we go through the super sectors a little bit? It's a pretty cyclical market at the moment. We've got interest rates coming down. They have been coming down in Canada for some time. There's been some real slashing of rates. How is that married into the story of how you're looking at investments, the cyclical story in Canada?

[00:13:08] Reetu Kumra: Absolutely. Maybe I'll just talk about Canada as a whole and then I'll dive into the actual super sectors which are relevant. It's just really interesting, I think back to 12 months ago and consensus was love to hate Canada because of all of the headwinds that we have long talked about. It's interesting, fast forward to today and the market's up over 20% year-to-date which is incredible. You think about the headwinds that we've discussed...

[00:13:39] Pamela Ritchie: Almost 30%.

[00:13:41] Reetu Kumra: On a year-over-year basis, you're right. We think about the headwinds, they still very much exist. We still have a productivity issue here in Canada, levered consumer, the wall of mortgage maturities is still in existence although it's not as much of a concern as it was 12 months ago just given where rates have gone.

[00:13:59] Pamela Ritchie: We actually don't hear about it at all as if it doesn't even exist. It isn't a problem. I'm not sure that's true but it doesn't get much airtime.

[00:14:07] Reetu Kumra: You're absolutely right, it does not get much airtime. We also have the USMCA negotiation that we have to be concerned about. The headwinds are still very much there but then you look at what the market's doing, the market in Canada, the TSX, it's all about the makeup of the market. You have 40% that are interest rate sensitives where banks have done extraordinarily well, diversified financials, some select insurance companies. Then you have another 30% that are resources half of which is gold. The gold market, the gold sub-index itself has returned 100%. Some gold securities have returned up to 250%. Copper's also done remarkably well. You can see why the TSX has performed the way it has.

[00:14:57] Getting into the actual positioning of this fund I can start off with the interest rate sensitives. The way it's positioned ... right now with the interest rate sensitives we're overweight utilities, overweight some diversified financials, select insurance companies at the expense of telcos and banks. With the utilities they're very steady businesses. The valuations aren't hugely demanding. You could potentially have an AI kicker and select names as they have exposure to U.S. infrastructure buildout as well as power. We have an overweight there. Diversified financials through the cycle compounders, really good quality businesses. We try to stock pick our way through the valuations there. Insurance companies, very selective from within the insurance companies. This is all at the expense of telcos and banks. We recently met with the banks the first week of September, all the CEOs of the banks. There's cautious optimism there where they're seeing the earnings come through.

[00:16:10] Pamela Ritchie: It's just a litmus test for the economy.

[00:16:12] Reetu Kumra: Yeah. I think they're seeing a decent amount of loan growth. The fee-based businesses, whether it's capital markets or wealth doing really well, leveraging expenses, capital positions are good. No huge red flags on credit. I think they've all taken their provisions. There's cautious optimism but with the caveat that there's the USMCA negotiations that are coming up so let's see what happens. For this fund we also have to marry that with what we're paying for these stocks. We're trying to stock pick our way through the banking sector there. Telcos have just been challenged just given the competition and the pricing environment within that super sector.

[00:16:59] Pamela Ritchie: That's been that way for a long time. It's tied to the immigration story, as you said. Any light at the end of the tunnel there or is that a little bit of a just sitting there?

[00:17:10] Reetu Kumra: It's been a challenged sector for the last several years where not only do we have immigration coming back down we also had a fourth player come into the wireless segment. It increased competition materially. I would say that it's better than it was last year or two years ago but we're...

[00:17:37] Pamela Ritchie: There's been some assets that were shed and so on.

[00:17:38] Reetu Kumra: We're still out of the woods. These businesses are highly levered. Again, stop picking our way through it, trying to look for idiosyncratic upside and keeping in mind what payouts and balance sheets look like coupled with valuation.

[00:17:53] Pamela Ritchie: Let's go to sort of industrial side of things which encompasses so many different areas within. Transports also have been that story where it's almost like a COVID hangover that hasn't really lifted at some level.

[00:18:06] Reetu Kumra: Absolutely. Within the industrial super sector there's industrials in tech. The fund is largely neutral both those sectors. Specifically with industrials, had you asked me earlier on this year where our exposures were to it was likely a little bit of the capital goods space and more so the professional services space. Now I would say the exposure is more capital goods and transports. What we've done in the fund, and this is all led by the research, we've seen the move from a little bit more defence to a little bit more cyclicality. That's reflected in the industrial sector. It's interesting, just as we're talking about before we got on air is that if you look at the cyclical trade that's happened in the market the two areas of the TSX that has not participated are transports and lumber. Rails would fall within the transport sector. You're right, it's the COVID overhang. We've been in a freight recession for a number of years and the U.S. tariffs and the uncertainty around that, around USMCA negotiation doesn't help.

[00:19:22] Pamela Ritchie: On the lumber side, that's been a political football for some time, decades, actually, but does it have better prospects?

[00:19:32] Reetu Kumra: Lumber has been extremely challenged. You can see what the stocks have done year-to-date. That sector is an interesting one because the fundamentals are not great. We, in fact, just had the outcome of Section 232 come out last night. There's an additional 10% tariffs that are coming in on the lumber space but the outlook doesn't look great. I think the important thing to think about is at what point are you just paid to wait. You don't necessarily see where the stock or when the stocks are going to inflect but as long as you have balance sheet visibility and you're getting stocks at a discount you're just paid to wait. It's an interesting sector.

[00:20:22] Pamela Ritchie: That might be a better place to be paid to ... because, yes, as you say, other things became sort of value traps, ultimately, but that might be a slightly more interesting one.

[00:20:32] Reetu Kumra: I think valuation is on your side.

[00:20:33] Pamela Ritchie: Valuation's on your side, I like that, very good. Let's go into sort of the materials side of things within resources. You mentioned gold, you mentioned copper. I think when people have been thinking of Canada gold has been a massive part of that, obviously.

[00:20:49] Reetu Kumra: Absolutely.

[00:20:49] Pamela Ritchie: It's been the trade, or one of the trades. Any reason to see that interrupted?

[00:20:56] Reetu Kumra: We are within a stone's throw of $4,000 gold which is we're effectively at all-time highs at this point which is why you've seen the gold index, the sub-index do extremely well year-to-date. Why is that? The list is long. We have real rates that are going down. We have fiscal stimulus. We have potential monetary easing cycle ahead of us. We have questions of Fed independence coming into play. We have a de-dollarization theme. We have central bank buying across the board. When you have an environment and a set-up like that where there's a movement away from the U.S. dollar, or fiat currency, investors tend to want to go into real assets. That includes gold, includes other asset classes like Bitcoin. That's why you've seen the performance that you have. You name off all of the items that I just mentioned, if there's a view that that will continue then gold looks interesting.

[00:22:07] Pamela Ritchie: So there's no real reason to go into that. Let's go to sort of the AI theme which is in everything. For Canada it's probably much more of, at this point, a power generation to actually power the AI data centres, basically. Uranium has been much discussed over the course of the last year. You almost wonder if that's sort of over because it sort of rose and then, gosh, it's going to take 10 years actually to build certain reactors. Do we kind of wait a little bit on the valuation side but what do some of the uranium linked and reactor linked stocks look like?

[00:22:41] Reetu Kumra: That's a really good question. I used to cover uranium way back when. It was such an interesting commodity because there has been no supply that has come on for decades, since the unfortunate events of Fukushima. When you have a situation where you have no supply and then all of a sudden there's this demand tailwind it's a good set-up for the commodity, which is what we've seen in uranium. Fortunate for Canada, being resource based we have one of the best ways to play uranium globally and from a publicly traded company standpoint. I think the set-up for uranium continues. You just heard the Trump administration talk about wanting to bring on more reactors, I believe it was 10 more reactors by 2030, if I'm not mistaken, if my numbers are right.

[00:23:38] Pamela Ritchie: That's a quick turnaround, I understand.

[00:23:42] Reetu Kumra: Uranium itself is considered a green commodity and it's one of the most densest, most efficient forms of power that you can have right now. I think the set-up looks quite attractive and I think the rate of change is positive.

[00:24:00] Pamela Ritchie: But is there a lull, I guess, that's sort of the question, it seems. You could even expand this discussion out to perhaps the Canadian hope for major projects. We don't know where exactly all of that is going at this point but it seems to be that if we can get through a period of time things are going to pick up with some spending, some government spending and maybe investment on the other side. AI is a big theme within that, sort of buildout for that. Is there a gap here? We've got the stock market sort of on fire here but do we have a period where there's a bit of a lull, I guess, is the question.

[00:24:35] Reetu Kumra: It depends. It's difficult to say. It depends on permitting, it depends on construction, it depends on so many different things. I think for now the theme is quite alive. It also depends on hyperscaler spend on data centres. There's a lot of moving pieces to be considering but I think over the medium term there might be a lull but if you think kind of in the medium term I think the rate of change is positive.

[00:25:02] Pamela Ritchie: What do you think of sort of those ideas of things hanging out there as projects and things to be built to sort build up the infrastructure of Canada? Are they of interest?

[00:25:10] Reetu Kumra: Yes, absolutely. That's particularly relevant in the industrial sector where there's a number of different ways to play that, potentially even the energy sector as well. If we end up getting more public infrastructure spend, which looks like will be the case based on some of the projects that were announced a few weeks ago, that could be really interesting theme to play and something we're definitely analyzing and looking out for.

[00:25:35] Pamela Ritchie: You're getting a question just on that right now, your thoughts on the energy sector, specifically with the development of power demand of the AI boom, where it all goes, how it gets used.

[00:25:44] Reetu Kumra: With the energy sector specifically we have oil and we have gas. With oil, I just think we have too much of it.

[00:25:54] Pamela Ritchie: From a pricing perspective. There's just a glut.

[00:25:58] Reetu Kumra: There's just a lot of it. OPEC just came out this morning talking about accelerating the hikes. I think there's a lot of spare capacity, although demand has been hanging in there just given...

[00:26:10] Pamela Ritchie: There's been a few interruptions here and there.

[00:26:12] Reetu Kumra: Yes, of course, there's geopolitics that we have to keep in mind. In general that's my view on oil. With...

[00:26:21] Pamela Ritchie: I mean, gas is rock bottom prices but that said there is sort of we think a future in terms of the infrastructure to get it out [crosstalk].

[00:26:28] Pamela Ritchie: Absolutely. We're just waiting on LNG phase one to come on. That's expected to come on in the coming months but in the meantime we have a glut of gas here in Western Canada. The good news is that with some of the projects discussed there could be a phase two of LNG coming in the future. Let's see but in general...

[00:26:47] Pamela Ritchie: Does that become a picks and shovels story a little bit, how to get those terminals built to then get rid of the LNG to Europe or wherever it's going?

[00:26:57] Reetu Kumra: Any of this infrastructure spend is great for Canada. This is great for our GDP, it's great for job growth. I think that to the extent that we're able to get LNG phase two that would be good for Western Canada as well. That's kind of a medium term story, I would say, because if you think about how long LNG phase one has been in progress for it's been a while.

[00:27:20] Pamela Ritchie: Take us back to the positioning, and I just want to ask a little bit about crypto because this is one of the funds that you manage as well, and something you've spoken about a lot of the past four or five years. Take us through the positioning. It's a long/short fund, if you're overweight something and underweight something does the underweight mean that's kind of the short side of the portfolio? How does that work? 

[00:27:42] Reetu Kumra: It could be. If I'm overweight then it's long. If I'm underweight it could just be I'm overweight just a smaller position than the benchmark or it could be that it's the short. So it just really depends. Your other question was crypto.

[00:27:58] Pamela Ritchie: Yeah, let's get into crypto for sure. Bitcoin has been extraordinary. Along with gold.

[00:28:04] Reetu Kumra: Absolutely. I think Jurrien Timmer puts it so nicely where Bitcoin and gold are two players on the same team. Interestingly, Bitcoin and gold actually don't have that much of a high correlation but the drivers are the same. What I would say is Bitcoin is kind of that emerging store of value whereas gold is just very much a store of value, and it's been around for quite a long time. The drivers are the same. Everything I talked about in terms of gold...

[00:28:36] Pamela Ritchie: Sopping up the liquidity that's out there.

[00:28:38] Reetu Kumra: Yes. The M2 money supply, it drives Bitcoin. What I would say is that there's a little more of a story to Bitcoin. We just talked about the demand perspective from a developed market perspective but there's also the undeveloped markets that we don't necessarily have visibility to like just here in Canada. What we don't know and what we don't necessarily see on a daily basis is 22% of the globe being unbanked. The residents of countries that are more developing, not necessarily having a currency or a central bank or--

[00:29:15] Pamela Ritchie: That they can depend on.

[00:29:16] Reetu Kumra: --having runaway inflation. So you want something outside of the fiat currency system that drives the demand of Bitcoin. On the supply side, which is interesting, the inflation of Bitcoin is just under 1% after the last halving. That supply is going to go down every four years. The next halving is expected to be in 2028.

[00:29:36] Pamela Ritchie: There's a scarcity.

[00:29:37] Reetu Kumra: There's a scarcity value there. On the demand side you can see why there's demand for Bitcoin and on the supply side it continues to go down so the volatility of Bitcoin is more of a feature but not necessarily a bug.

[00:29:52] Pamela Ritchie: You also manage the Ether fund as well which we don't talk about as much but I've heard someone, I'm curious to hear your comments, to talk about Bitcoin as almost being like fixed income or there's a scarcity it sort of holds and then the actual currencies that we spend will be more stablecoins connected to Ether and that side of things. Does that sit right with you?

[00:30:14] Reetu Kumra: Absolutely. Maybe we should take a step back and talk about what's been happening in the crypto market a little bit. Back in 2024 we really saw it go off to the races because we had the halving events but we also had ETFs, all the ETFs come about. It became an easier pathway in order to invest in crypto. You saw a little more in the way of institutional involvement as well. Then you fast forward into 2025 and you've had deregulation, which has been great. We got SAB 121, that was repealed, that's what I mean by deregulation, but you've had more regulation in the sense of the stablecoin bill, the Genius Act was approved.

[00:30:56] Pamela Ritchie: The whole summer was full of layers.

[00:30:59] Reetu Kumra: Right now we're trying to work on the Market Clarity Act. We had the Bitcoin Strategic Reserve announced, the crypto stockpiles. You're seeing a more friendly administration coming out of the U.S. which has really driven the crypto market. With the stablecoin bill, stablecoins are effectively ... Ethereum has the dominant market share of how stablecoins have transacted so that's why we've seen the tailwinds of Ethereum.

[00:31:27] Pamela Ritchie: It's an interesting sort of comparison. Where does that belong, ultimately? We talk about the fund itself but also an amount of crypto. Where does that belong, do you think, in an investor's portfolio today?

[00:31:39] Reetu Kumra: We've done a lot of work, Fidelity as a whole, on how to think about Bitcoin in terms of its placement in a portfolio. What we've seen is that if you just put a slice of Bitcoin, whether between the 1 and 3% range, you rebalance it quarterly in your traditional 60/40, it could increase your Sharpe ratio, which is a measure of risk- adjusted returns, by over 30%. There's times where it's correlated with other asset classes but if you look over a long period of time it tends to be uncorrelated. Jurrien Timmer has historically talked about the 60/20/20 as being a new way of balancing portfolios where 60 is equities, 20 fixed income, 20 liquid alts. I think Bitcoin could fit into that, a slither of that liquid alts piece right there.

[00:32:33] Pamela Ritchie: And the fund that you manage, the Long/Short that we've been mentioning, do you think of that as ... where does that fit within that continuum of 60/20/20?

[00:32:41] Reetu Kumra: It's considered a liquid alts portfolio because of the ability to short within the fund. I personally consider it very much a core Canadian fund. Again, just going back to the value proposition of this fund, it's a core Canadian, 130/30 long/short fund, offers directional alignment to the TSX and really, really owns our research platform by going long on our buys, short on our sells and really owning the strength of our research.

[00:33:12] Pamela Ritchie: It's brilliant. It's really fantastic to speak to you at this particular moment, Reetu. Thank you for joining us here today.

[00:33:17] Reetu Kumra: Thank you for having me.

[00:33:18] Pamela Ritchie: That's Reetu Kumra joining us in studio here today. Coming up on the show for the next couple of days, tomorrow portfolio manager, Max Lemieux, he'll be here on the program at 10:30 a.m. Eastern for a French language webcast, that'll be hosted by Charles Danis, then at 11:30 Eastern in English at the regular time for Fidelity Connects. Max is gonna be taking us through what is moving Canadian markets, how he's positioning the Fidelity True North Fund, we'll dig into those details with him tomorrow.

[00:33:45] On Thursday, join Director of Research and portfolio manager, Steve MacMillan, this is along with equity research associates, Connor McGrath and Christian Ghezzi, as they share research notes on small and mid-cap companies across the U.S., what role these companies can play in diversifying investors' portfolios and where investment opportunities may lie. This also will be live French interpretation on Thursday.

[00:34:10] On Friday, sitting down with analyst and portfolio manager, Ben Holton, for a chat on the latest in AI, where innovation is opening new doors and the outlook for U.S. software overall. All of that will be tied together at the end of the week. Thanks for joining us here today. Have a good rest of your day. I'm Pamela Ritchie.