FidelityConnects: Where is international growth heading next?

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<b>Subtitles are AI Generated</b>

 

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Hello, and welcome to Fidelity Connects.

 

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I'm Pamela Ritchie. Markets are navigating a mixed backdrop today with Asian

 

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equities pulling back a bit as investors reassess the next phase of

 

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global growth. For international investors, that search is opening up

 

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opportunities not always reflected in US benchmarks.

 

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One market that our next guest is eyeing is China where advances

 

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in robotics are reshaping the investment landscape.

 

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What did he learn from his most recent research trip there?

 

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Where is he finding the most compelling investment opportunities across

 

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international markets today?

 

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Joining us here today to discuss all of this and more is Jed Weiss.

 

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He is portfolio manager of Fidelity Global Small Mid-Cap

 

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Equity Fund and Fidelity International Growth Fund.

 

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Warm welcome to you, Jed. Great to see you again.

 

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Thanks so much for the time. Great to see you as well.

 

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We're delighted to have a chance to speak with you.

 

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Let's open this up, AI is all over the world, it's

 

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not the only thing to invest in but some days it feels like that.

 

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What's on offer, for instance, in China that investors

 

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wouldn't have access to right here at home?

 

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fair enough. You're quite right, AI is a theme that transcends the

 

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world. I think a lot of people think of the investment opportunity strictly in

 

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US terms. It's important to remember where

 

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are GPUs or TPUs or ASICs, where are these semiconductors

 

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manufactured?

 

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It's TSMC.

 

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Where does TSMC get its equipment?

 

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Often it's European or Japanese equipment providers, et cetera.

 

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The same with power equipment, et cetera.

 

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You asked about China specifically, I met with a number of the Chinese model

 

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companies while I was down there and in many ways they sound a lot like US

 

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model companies in the sense that demand hooked higher early in the

 

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year and continues to grow at a very rapid pace.

 

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The result is a significant supply-demand imbalance in

 

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favour of demand when it comes to AI infrastructure.

 

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So in that way, very much the same as sort of what's being grappled with

 

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here. There's an interesting moment, we'll

 

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come back to that particularly and sort of unpack that, in terms of

 

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even a consumer story, I mean, for a long time we've been hearing that China,

 

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for instance, is working on its own brands, everything from handbags

 

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to everything else that you can think of to compete kind of with European

 

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luxury and so on. Again, I'm just curious, after a visit what have you noticed?

 

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Is there a market for what they make there themselves or are they importing it?

 

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Totally fair point. Historically, the high-end Chinese consumer had a

 

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strong preference for European luxury brands, US to some degree but especially

 

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European luxury brands. One change that's happened in recent

 

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years has been the rise of a lot of domestic

 

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luxury brands in China, brands which, frankly, 5 or 10 years ago I'd never

 

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heard of. It's come out of nowhere and have become quite strong.

 

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As the head of China for a leading European luxury brand

 

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put it to me, the days of everybody winning

 

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in Chinese luxury are over.

 

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You need to have a really compelling product cycle, you need to

 

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have a really compelling distribution, you know, store where people really want

 

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to visit. Just being a strong European brand that's been there for a

 

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long period of time is not enough anymore.

 

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There is a general consumer shift towards domestic brands.

 

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That was certainly an important insight.

 

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When we think of growth, and tell us a little bit about your style, the way you

 

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approach running your fund and managing.

 

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It's a growth fund, we're talking about mostly the growth fund,

 

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that tends to be AI but it is also kind of shifting a little bit to other

 

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parts of what we used to call the old economy.

 

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Is that similar in China? What's growth mean?

 

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Fair enough. I mean, there is certainly a lot of growth in China.

 

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Some of it is related to AI, as you say.

 

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The domestic Chinese semiconductor cycle, for example, is very, very

 

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strong. I will say from a global perspective, though, even the

 

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most compelling domestic Chinese semiconductor companies are not necessarily

 

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yet competitive at the global leading edge.

 

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There can be good opportunities there but that's not to take away from the

 

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European and Japanese semiconductor capital equipment names that I mentioned.

 

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I do think there's some opportunities for the consumer brand, even within the

 

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context of a relatively weak Chinese overall consumer, I do think this

 

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move away towards domestic brands is an important one.

 

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I know humanoid robots is another area that is getting a lot of attention.

 

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There's a lot of YouTube videos out.

 

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I think within the factory automation context there's a lot of

 

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here and now opportunities, and that's growing very quickly.

 

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I will say when it comes to, you know, are we yet ready for

 

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a humanoid robot to take over household chores?

 

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There I'm not so sure. For example, I visited one

 

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such humanoid robot company and I saw the robot

 

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take a pair of folded jeans over on the couch and walk over to

 

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the laundry machine, put it in, press the button, and it

 

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looks very compelling.

 

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Then I said, well, what if I unfolded the jeans and put it on a different part

 

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of the couch and moved the washing machine from here to there, and then it was

 

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like, oh, well, probably won't work.

 

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The biggest reason is because a lot of these are effectively pre-programmed

 

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robots at this point. You really need a more compelling world model, which will

 

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come over time but it's not there yet, and it would be helpful to have a more

 

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dexterous hand.

 

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Again, we're getting there.

 

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The trajectory is impressive. A lot of these Chinese companies are incredibly

 

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impressive from where they've come to where they are now but don't

 

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hold your breath yet for the humanoid robot doing all your laundry.

 

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I think we're still a little bit a ways from that.

 

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It's interesting because one of the narratives in the marketplace is that

 

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China is moving so quickly that it will, in fact, you

 

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know, usurp in terms of getting to markers faster than the

 

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AI development in the United States and even in Europe, Canada.

 

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Did you come away thinking, yeah, that really is speeding along

 

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pretty quickly.

 

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Look, there's a tremendous number of very smart engineers in China.

 

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There's a lot of state effort to help support these

 

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local industries. There's a lot of domestic capital markets that are helping to

 

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fund these companies. There's lot of progress.

 

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Now, there's also headwinds, too.

 

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Access to leading edge compute is more limited both in terms of chips and

 

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equipment, as we alluded to earlier, largely

 

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due to geopolitics. Humanoid robots, again,

 

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tremendous progress just not quite ready for game time for general

 

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purposes, although very good for factories.

 

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I'd say electric vehicles is an industry where China's done a tremendous job

 

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and is stealing a lot of market share in Europe and emerging markets.

 

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You're not yet allowed to buy electric vehicles from China here

 

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in the US so there's not been much penetration story there.

 

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I did sit in a few vehicles.

 

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I trialled an autonomous vehicle around Shenzhen

 

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and the technology is very good and it's often much cheaper than global peers.

 

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For sure it's something to watch. There are some interesting investment

 

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opportunities coming out of it but I think the broader global implications is

 

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certainly something to watch.

 

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Do they have the insurance conundrum sorted out, who's at fault if

 

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the driverless car does something wrong?

 

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Have they got that yet? I mean, that seems to be holding back a lot of that.

 

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Fair enough. I think there's a reason why most cities in

 

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China, like the US, have not yet

 

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embraced full autonomous vehicles.

 

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I do think there's regulatory hurdles to overcome.

 

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On a selective basis you can certainly ride them.

 

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It's not so different from ... I'd say the Waymo experience is still probably

 

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a little bit better at this point but it's also the case that the price

 

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point for these vehicles is way cheaper than a Waymo.

 

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At what point does the technology get good enough where

 

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a significant cost difference makes a difference.

 

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Time will tell.

 

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Fascinating. It sounds like a fascinating trip and you, of course, have managed

 

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funds that go very global so this is kind of your bailiwick, and has

 

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been for some time. If we go around the world one of the things that we just

 

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read constantly about is the fiscal story for spending on defence,

 

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essentially, and in some cases bolstering internal

 

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infrastructure, basically. Some of it's defence infrastructure, some of it

 

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isn't. That must be a theme that you're interested in

 

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internationally. Is it quite investable still or have we kind

 

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of passed that?

 

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Yeah, I think so. It's a theme that is much more pronounced internationally

 

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than it is in the US. I mean, you have two active conflicts going

 

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on plus you have the

 

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overall military umbrella of the US being called into question somewhat when it

 

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comes to Europe or even Japan.

 

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These countries are concerned. They are spending a lot more than they did

 

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historically and at the margin, not even at the market, they have a stated

 

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preference to spend more on domestic European

 

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or Japanese defence companies.

 

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I do think it is a relevant investment theme.

 

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Of course, translating that theme into specific stock ideas, that's where

 

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art beats science.

 

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That's your job.

 

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That's right, work to be done, but I do think that continues to be sort of a

 

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big tailwind that we should see for a number of years.

 

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Even, frankly, if some of these conflicts are resolved, which as a citizen of

 

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the world I sure hope they will be, I still think these

 

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countries understand that their need to spend more has gone up a lot so I

 

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think this tailwind of spend will continue.

 

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If you take it in the European context, and maybe also Middle East, I don't

 

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know, I mean, there is going to be reconstruction.

 

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Do you look sort of specifically in that area where there

 

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are going to be needs there?

 

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Sure, sure. There's, of course, military reconstruction once

 

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the conflicts, hopefully, resolve.

 

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Then there's also, you know, a lot of this infrastructure spend, when Europe is

 

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increasing its military spend part of the increase in budget is improving

 

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infrastructure. There is a lot of spending going on to help

 

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build that out. Simultaneously, you have some interesting dynamics within

 

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carbon regulation within Europe which is raising the costs for

 

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cement and other energy intensive commodities.

 

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The result of that is there's a lot of high cost, you know, generally smaller

 

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producers with high cost production that are

 

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slowly but surely exiting the system, which is improving the pricing dynamics

 

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for larger producers that have been more proactive in investing in

 

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lower energy based cement.

 

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Actually, not only do you have a demand kicker in the form that you just

 

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described, which is growing infrastructure spending, you actually have a supply

 

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kicker, namely, supply is coming out of the system which has been very strong

 

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for pricing. You can see that, even in the context of the Russia-Ukraine

 

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war, that initial big step up in energy costs historically would have been

 

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a nightmare when it comes to European cement.

 

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Instead, what you saw was, yes, it was a headwind in the short term but these

 

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are companies that for the first time in decades were able to raise prices at

 

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or above inflation. You saw the same thing with the Iran war.

 

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Definitely the competitive dynamics within European cement, to pick

 

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on one example, have changed and changed for the better.

 

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We speak sometimes to your colleague, Jurrien Timmer.

 

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He has an interest, again, in the sort of diversification, the

 

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international story of how you look at things.

 

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He speaks a little bit more to the European banks, he'll tell some of the

 

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investors, I mean, part of what they're doing is funding, actually, things like

 

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reconstruction and some of infrastructure buildout.

 

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Do you look into the financials there?

 

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Are you interested in financials in other parts of the world that are also

 

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doing similar types of things?

 

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Absolutely. I mean, there's two elements there.

 

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One is what Jurrien's referring to, which is a demand kicker.

 

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You're seeing that, especially in Eastern Europe.

 

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Sort of the closer you get to the conflict and the more

 

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funding is coming from Europe to help with infrastructure buildout, the

 

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more loan demand that you're seen.

 

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It's also the case that Europe went through a very long period

 

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of, basically, a flat yield curve with 0% interest rates.

 

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It's very hard to make money as a bank with a flat yield curve at 0%.

 

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They didn't make much money and the bank stocks were severe underperformers

 

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coming out of the financial crisis for the next 10 or 15 years.

 

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You have seen real improvement in the last 5 years, basically, because the

 

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interest rates have gone up, yield curve has gone up and now you have demand

 

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picking up. Valuations which were extremely cheap have rallied quite a bit but

 

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I think that momentum continues.

 

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I think if you want to look further afield an interesting area is

 

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Japan.

 

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For banks or for...

 

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Yeah, for the banks, the banks specifically, because you had the same dynamic,

 

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actually the interest rate environment was as bad, if not worse, than it was

 

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for even longer.

 

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These are stocks that traded at very severe discounts and really

 

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were having trouble generating any kind of ROE, any kind of return.

 

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That's changing.

 

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In response to inflationary pressures the central bank has been raising rates

 

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so we're no longer talking about a flat yield curve, a flat yield curve at

 

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very, very low interest rates.

 

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Now you have a positively sloping yield curve at a higher level of interest

 

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rates which means suddenly these banks are starting to make more money which

 

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has enabled them to start to unwind their cross shareholdings.

 

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Historically, and this goes back decades, a lot of Japanese corporates have

 

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owned equity shares in what were considered related

 

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businesses. Maybe their customer would bank with them and then in return they'd

 

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own a share of their customer, even though their customer maybe had nothing

 

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fundamentally, there were no strategic synergies, it was just they happened to

 

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be a customer.

 

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I think due to corporate governance reforms that we're seeing in Japan that

 

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tradition is being lessened significantly so these banks,

 

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now that they're no longer reliant on just dividends from these cross

 

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shareholdings to make money, they can actually make money with their underlying

 

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business, are starting to unwind these cross shareholdings.

 

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When they do so, due to corporate governance reform

 

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they are taking that capital and they're buying back stock, which is also

 

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something would have been unheard of 20 years ago and you're now seeing on a

 

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widespread basis. That can be extremely accretive if you're able to buy back

 

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stock at under book value, or very low valuations, which in many cases you

 

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can in some of these regional banks.

 

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I do think some similar dynamics ...

 

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there's different dynamics but somewhat related to what we're seeing in Europe

 

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but maybe a few years earlier in

 

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the progression. Time will tell, of course.

 

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That's super interesting. Would you say that a piece of the international

 

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opportunity right now is that a lot of companies are going to be doing some

 

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similar things that are going on with companies in the United States.

 

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The types of companies you're visiting are entirely

 

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different but they may just be earlier and are less expensive

 

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and an interesting entry point.

 

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Are you able to make a broad sort of point that way?

 

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I'd say three things related to that.

 

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One is even for themes that exist globally, often there

 

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are international businesses that are equally competitively

 

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dominant, similar or better growth opportunity

 

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but often trading at cheaper valuations.

 

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There's interesting international opportunities there.

 

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There's also these themes, several of which we've talked about, which really

 

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are only available internationally.

 

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There might be US companies that have small stakes but, really, if you want to

 

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play any of the things we just talked about, international is the way to go.

 

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I guess just stepping back, it's important for folks to remember that over

 

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70% of the world's securities reside internationally.

 

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In a way, ignoring the US ...

 

16:24.783 --> 16:28.253

and, by the way, a lot of international stocks are cheap relative to their own

 

16:28.253 --> 16:31.390

histories but also certainly cheap relative to the US counterpart.

 

16:31.390 --> 16:35.427

In a way, ignoring international investing is a little

 

16:35.427 --> 16:39.465

like if you wanted US exposure through an S&P 500 fund

 

16:39.465 --> 16:43.836

but you only wanted to buy S&P 500 stocks that were located

 

16:43.836 --> 16:47.873

east of the Mississippi, or some arbitrary geographic delineation.

 

16:47.873 --> 16:52.678

I do think it makes sense to look on a global basis for the global opportunity.

 

16:52.678 --> 16:54.580

There's an interesting question that's coming in.

 

16:54.580 --> 16:56.782

It sort of circles back to what you were talking about earlier.

 

16:56.782 --> 17:00.819

One of the advisors joining you here today is asking, the

 

17:00.819 --> 17:04.957

impact of agricultural imports on trade balance in China,

 

17:04.957 --> 17:09.528

it gets into the trade discussion but where it is affecting industries

 

17:09.528 --> 17:13.832

within China, the question comes in the wake of recent reports around China's

 

17:13.832 --> 17:18.070

5-year plan to modernize agriculture and reduce imports

 

17:18.070 --> 17:22.474

in the sector. Are there places that

 

17:22.474 --> 17:26.445

make that investable because certain doors are closing from an international

 

17:26.445 --> 17:28.380

perspective?

 

17:28.380 --> 17:32.451

Certainly, what happens in China affects the region, it affects the

 

17:32.451 --> 17:35.087

globe quite a lot.

 

17:35.087 --> 17:39.091

This isn't directly related to ag but I will say that

 

17:39.091 --> 17:43.462

the Chinese exports, the more compelling Chinese

 

17:43.462 --> 17:46.965

products come and the more investment that they're going in some areas that we

 

17:46.965 --> 17:51.303

talked about, that is causing significant export.

 

17:51.303 --> 17:55.407

The trade imbalances have been growing in many cases, especially

 

17:55.407 --> 17:59.344

with the currency that has been relatively favourable

 

17:59.344 --> 18:04.283

for exporters. That is causing some challenges for

 

18:04.283 --> 18:08.587

Southeast Asian companies and, frankly, global

 

18:08.587 --> 18:12.658

companies in general. I'd say ag specifically, there have been a

 

18:12.658 --> 18:16.628

little less in the way of investable themes that I've found, not

 

18:16.628 --> 18:20.599

for lack of looking, that I found for publicly traded companies in the ag

 

18:20.599 --> 18:23.936

sector but it's certainly something I'm looking at.

 

18:23.936 --> 18:28.040

Tell us a little bit more about what you're looking

 

18:28.040 --> 18:32.511

at from... really, if we go back to sort of the AI discussion

 

18:32.511 --> 18:36.548

and an earlier stage, and you made a real point of

 

18:36.548 --> 18:40.619

saying that there is a catch-up, things are moving quickly, probably they

 

18:40.619 --> 18:44.756

are breaking things and moving things quickly, moving fast, but it's

 

18:44.756 --> 18:48.760

just behind what's going on in the US which is priced for being

 

18:48.760 --> 18:52.998

ahead. I guess the question is just to go back to where

 

18:52.998 --> 18:57.102

is an earlier stage within the AI discussion for you to

 

18:57.102 --> 19:00.939

invest in China but in other countries too on AI.

 

19:00.939 --> 19:05.077

The most investable opportunities that I've found have really had to do with AI

 

19:05.077 --> 19:09.081

infrastructure. Within that, getting back to what I look for in a stock, the

 

19:09.081 --> 19:11.850

multi-year structural growth, the high barriers to entry, the attractive

 

19:11.850 --> 19:15.787

valuations, there are a number of areas within the infrastructure food chain

 

19:15.787 --> 19:19.825

where there may be one competitively dominant company that has pricing

 

19:19.825 --> 19:23.428

power at every point in the cycle.

 

19:23.428 --> 19:25.964

That's really where I've found the best opportunities.

 

19:25.964 --> 19:31.036

In semiconductor capital equipment

 

19:31.036 --> 19:33.338

there's a lot of areas that have been ...

 

19:33.338 --> 19:36.375

I was an old semiconductor analyst, believe it or not, 25 years ago.

 

19:36.375 --> 19:40.546

Back then a lot of the consolidation happened at the semiconductor level and

 

19:40.546 --> 19:43.549

then semiconductor capital equipment was relatively diffuse.

 

19:43.549 --> 19:47.819

What we've seen over time, due to tech change and consolidation, there's

 

19:47.819 --> 19:50.923

a number of areas within the semiconductor capital equipment food chain that

 

19:50.923 --> 19:55.160

have become very consolidated and that's really improved the pricing power

 

19:55.160 --> 19:56.962

of overall businesses.

 

19:56.962 --> 20:00.899

The other one has been power. All these data centres, wherever they're being

 

20:00.899 --> 20:05.103

built in China or the US or Europe or what have you, although

 

20:05.103 --> 20:09.341

the US has been a disproportionate amount, require a lot of water

 

20:09.341 --> 20:10.976

but they require a lot of power.

 

20:10.976 --> 20:15.314

We're hoping they might need some Canadian LNG or other things to

 

20:15.314 --> 20:18.984

help augment the overall effort.

 

20:18.984 --> 20:22.721

Totally fair. Now, I will say the gas turbines are a more consolidated market

 

20:22.721 --> 20:25.958

than the LNG market but, yes, the point is valid.

 

20:25.958 --> 20:29.995

Power demand historically

 

20:29.995 --> 20:34.032

in the US for 15 years really didn't grow and suddenly is so

 

20:34.032 --> 20:37.769

the the capacity that folks have built up ...

 

20:37.769 --> 20:41.707

have been built up for a demand environment that's changing quickly, which is

 

20:41.707 --> 20:45.410

why the lead times for a lot of equipment are extending out, the pricing is

 

20:45.410 --> 20:49.414

going up significantly, not just for turbines but also for

 

20:49.414 --> 20:52.851

all the electrical components that go into a data centre, et cetera.

 

20:52.851 --> 20:56.588

Again, a lot of those companies, people think, oh, it's a US data centre, that

 

20:56.588 --> 21:00.025

demand must be going to US companies but often that's not the case.

 

21:00.025 --> 21:04.396

There's a lot of European and Japanese companies that are big winners from this

 

21:04.396 --> 21:08.233

data centre buildout but because they're a little more off investor radars

 

21:08.233 --> 21:12.204

because of where they're geographically domiciled, often these valuations are

 

21:12.204 --> 21:17.042

cheaper for similar growth prospects, or even in some cases better.

 

21:17.042 --> 21:21.847

If we look through sort of the beginning of last year, even in 2024,

 

21:21.847 --> 21:25.484

there was a huge ramp up of the international trade, the so-called

 

21:25.484 --> 21:29.688

international trade. It really caught wind in its sails

 

21:29.688 --> 21:31.356

through much of last year.

 

21:31.356 --> 21:35.227

Then there was the question at some point, I think earlier this year, probably

 

21:35.227 --> 21:39.731

to do with oil and military action going on,

 

21:39.731 --> 21:43.669

that it just seemed to be a trade back to the

 

21:43.669 --> 21:47.706

US. I'm curious about where that discussion for

 

21:47.706 --> 21:51.710

you is now, where both are helpful

 

21:51.710 --> 21:56.782

to have in one's portfolio it becomes a question of where does everything fit

 

21:56.782 --> 22:00.285

and where there's sort of a balance between there.

 

22:00.285 --> 22:04.022

Can you just talk a little bit about having the diversification, maybe adding

 

22:04.022 --> 22:08.160

in the discussion of correlations one way or the other, but what's there that's

 

22:08.160 --> 22:12.197

protected from higher valuations here, which is a question.

 

22:12.197 --> 22:14.900

Yeah, totally fair.

 

22:14.900 --> 22:17.602

There's no doubt these things move in cycles.

 

22:17.602 --> 22:21.740

I remember 15 years ago, almost 20 now,

 

22:21.740 --> 22:25.744

when international markets had done extremely well

 

22:25.744 --> 22:29.848

for the prior 5+, 5, 10 years, the question I

 

22:29.848 --> 22:32.484

would often get is why should we even bother with the US?

 

22:32.484 --> 22:36.054

The US dollar goes down every day and the US market always underperforms, why

 

22:36.054 --> 22:40.058

bother with US? We should go where the majority of securities are,

 

22:40.058 --> 22:43.295

which is international. Then, you know, we went through a long period, a decade

 

22:43.295 --> 22:45.764

plus period, where international underperformed.

 

22:45.764 --> 22:47.866

Then you're getting the opposite question, why should we bother with

 

22:47.866 --> 22:52.204

international? The US always outperforms, the dollar goes up every day.

 

22:52.204 --> 22:55.040

The reality is these things move in cycles. It could be hard to predict the

 

22:55.040 --> 22:59.277

future but one can make general

 

22:59.277 --> 23:02.447

observations, like the ones I was alluding to earlier, which is you need to

 

23:02.447 --> 23:05.417

remember international securities are a big part of the globe.

 

23:05.417 --> 23:09.621

There's a lot of opportunities that are uniquely internationally and even in

 

23:09.621 --> 23:12.457

opportunities that are present in the US there may be better versions

 

23:12.457 --> 23:16.395

internationally, and on a historic basis versus their own history

 

23:16.395 --> 23:20.232

and versus their US counterparts valuations look attractive.

 

23:20.232 --> 23:24.102

That doesn't mean that international is going to outperform in the short term.

 

23:24.102 --> 23:28.473

I don't know. It just means that the starting point setup is

 

23:28.473 --> 23:32.811

maybe more attractive than it was 15 years ago when international

 

23:32.811 --> 23:37.149

had had a huge period of prolonged period of outperformance.

 

23:37.149 --> 23:41.286

Is there anywhere to discuss the idea that internationally

 

23:41.286 --> 23:44.823

which sometimes, you're talking more developed.

 

23:44.823 --> 23:47.926

It's not that China isn't EM because it is, but you're taking about countries

 

23:47.926 --> 23:50.529

that are on a road, certainly.

 

23:50.529 --> 23:54.599

The idea that AI will actually be easier

 

23:54.599 --> 23:58.537

for certain countries, companies around the world to just ...it becomes

 

23:58.537 --> 24:00.439

a leapfrog question, doesn't it?

 

24:00.439 --> 24:04.443

It's just easier, rather than retooling a labour force, for instance,

 

24:04.443 --> 24:08.947

in certain parts of the world, that it will just become incredibly

 

24:08.947 --> 24:13.084

useful immediately and easier to implement and create

 

24:13.084 --> 24:16.822

companies off of it, off AI, in other countries.

 

24:16.822 --> 24:19.658

Do you have a comment on that? I mean, you've looked around the world at these

 

24:19.658 --> 24:22.928

trends for a long time.

 

24:22.928 --> 24:25.864

Fair question. Let me unpack that a little bit.

 

24:25.864 --> 24:30.068

I do think AI is making certain types of businesses much

 

24:30.068 --> 24:34.506

easier to enter, software being the most notable example.

 

24:34.506 --> 24:38.543

There's a lot of new business creation that's happening internationally as

 

24:38.543 --> 24:42.180

well as the US. The implication there is, yes, these are exciting new

 

24:42.180 --> 24:45.617

opportunities but it also means you got to watch out for the incumbents.

 

24:45.617 --> 24:49.621

There may be incumbents within software, a lot of data

 

24:49.621 --> 24:53.425

services businesses that haven't had to face competition in 15, 20 years.

 

24:53.425 --> 24:57.462

They've had tremendous pricing power and now the sands have shifted and we've

 

24:57.462 --> 25:02.133

seen a lot of underperformance for that category of

 

25:02.133 --> 25:06.204

names. I'll also say, one thing that

 

25:06.204 --> 25:10.575

gives me a little bit of comfort when it comes to the duration of

 

25:10.575 --> 25:14.746

the AI trade, if you'll call it that, although the future is uncertain

 

25:14.746 --> 25:18.717

for sure, but one thing that gives me some comfort is when I talk to businesses

 

25:18.717 --> 25:22.988

that are deploying AI

 

25:22.988 --> 25:27.125

they continue to see a lot of positive returns

 

25:27.125 --> 25:29.361

on their investment.

 

25:29.361 --> 25:31.329

Sometimes those are tech-related companies.

 

25:31.329 --> 25:35.300

There's a semi-cap company that I talked to back in December who said,

 

25:35.300 --> 25:38.503

hey, we're gonna need to increase our R&D as a percentage of revenue a lot

 

25:38.503 --> 25:42.941

because there's different technology transitions upcoming.

 

25:42.941 --> 25:46.545

I checked in with them six months later and they said, well, two things have

 

25:46.545 --> 25:50.181

happened. One, our business has gotten better so as a percentage of revenue it

 

25:50.181 --> 25:54.119

won't go up as much. But importantly, AI has led to such a

 

25:54.119 --> 25:56.922

productivity boost in our engineers that we don't need to hire as many people

 

25:56.922 --> 26:01.860

as we thought. That's a tech-related example but you also have

 

26:01.860 --> 26:06.665

business that have nothing to do with tech, a UK kitchen manufacturer

 

26:06.665 --> 26:10.602

that's seen a 50% increase in productivity for their design engineers.

 

26:10.602 --> 26:14.639

When you go in, you talk about what kind of kitchen you

 

26:14.639 --> 26:18.076

want, they're able to roll out a kitchen plan for you much faster.

 

26:18.076 --> 26:22.347

Then you say, well, but I want a marble countertop and I want

 

26:22.347 --> 26:26.551

silver knobs, not gold knobs, I want this and I want that, it

 

26:26.551 --> 26:29.421

used to take quite a bit of time to say, okay, thank you, we'll get back to

 

26:29.421 --> 26:33.458

you, we need to sort of redo the whole plan and come up with a new price

 

26:33.458 --> 26:35.293

point and see what products we're going to source from.

 

26:35.293 --> 26:39.464

Now AI is making that process incredibly quickly,

 

26:39.464 --> 26:43.168

dramatically increasing efficiency for this company.

 

26:43.168 --> 26:47.238

I think that will shine through in terms of, you know, the early adopters

 

26:47.238 --> 26:50.709

will start to gain market share which will encourage the late adopters to sort

 

26:50.709 --> 26:53.945

of embrace these AI products.

 

26:53.945 --> 26:58.149

At least to the degree to which the competitors don't follow suit that's

 

26:58.149 --> 27:00.885

a margin opportunity for those who are on the leading edge.

 

27:00.885 --> 27:04.823

In an example like that, Jed, does it bring more customers through the door.

 

27:04.823 --> 27:08.960

Because you can do that faster for each customer

 

27:08.960 --> 27:11.997

does it drop the price for the customer and then you can just get more ...

 

27:11.997 --> 27:15.767

does it become a question of scale?

 

27:15.767 --> 27:19.804

I think it does both. You're seeing big share shifts in industries where

 

27:19.804 --> 27:21.773

you haven't historically seen a lot of share shifts recently.

 

27:21.773 --> 27:25.710

The UK housing market is nothing

 

27:25.710 --> 27:28.580

to write home about right now and the UK kitchen market is nothing right home

 

27:28.580 --> 27:32.584

about, but that hasn't prevented significant

 

27:32.584 --> 27:36.588

market share shifts towards companies, for a variety of

 

27:36.588 --> 27:41.359

reasons, but I certainly think forward thinking AI deployment is one of them.

 

27:41.359 --> 27:45.697

A final thought for investors who may well be entirely stuck in in

 

27:45.697 --> 27:49.801

Canada, attached to US companies and funds

 

27:49.801 --> 27:52.337

and so on, what's the case?

 

27:52.337 --> 27:55.373

We've got about a minute.

 

27:55.373 --> 27:59.611

Fair enough. I guess two points just to

 

27:59.611 --> 28:04.315

summarize again, you know, 70% of the world's securities,

 

28:04.315 --> 28:08.486

a lot of important thematic opportunities that are really only available

 

28:08.486 --> 28:12.557

internationally. In my case, someone who's sticking

 

28:12.557 --> 28:15.527

with their investment process, you know, the multi-year structural growth, the

 

28:15.527 --> 28:18.229

high barriers to entry, the attractive valuation.

 

28:18.229 --> 28:22.267

I do think international continues to be a very interesting area to

 

28:22.267 --> 28:23.268

invest.

 

28:23.268 --> 28:25.103

We've got one more question coming in from an investor.

 

28:25.103 --> 28:27.305

Sorry, that was the end but here's just one, if you don't mind.

 

28:27.305 --> 28:32.143

How significant are data centres as part of the infrastructure buildout

 

28:32.143 --> 28:35.547

that, in part, you're invested in?

 

28:35.547 --> 28:39.651

I think they are important. They are big drivers when it comes certainly to

 

28:39.651 --> 28:41.686

power and power equipment.

 

28:41.686 --> 28:44.823

Inside these data centres you're filling them with chips.

 

28:44.823 --> 28:46.925

Those chip companies are then buying equipment.

 

28:46.925 --> 28:50.929

Yes, when it come to the AI infrastructure trade the sustainability of building

 

28:50.929 --> 28:55.400

out data centres is important. To the degree to which either

 

28:55.400 --> 28:59.437

end demand for AI adoption slows, like the examples

 

28:59.437 --> 29:03.475

I gave you become less pronounced over time, or there are

 

29:03.475 --> 29:07.712

regulatory headwinds that come for data centre buildout,

 

29:07.712 --> 29:12.217

et cetera. There are certainly risks out there that one must be

 

29:12.217 --> 29:16.321

concerned with but data centre buildout is one of the key factors

 

29:16.321 --> 29:20.024

that's helping to drive AI infrastructure adoption.

 

29:20.024 --> 29:21.860

Fascinating to get your international views.

 

29:21.860 --> 29:24.662

Jed Weiss, thank you so much for joining us on Fidelity Connects today.

 

29:24.662 --> 29:26.164

All the best.

 

29:26.164 --> 29:28.633

Terrific. Thanks so much for the wonderful questions, as always.

 

29:28.633 --> 29:28.867

Good to see you.

 

29:28.867 --> 29:30.502

Great to see you. All the very best.

 

29:31.703 --> 29:33.805

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