Why global diversification is back in focus: Insights from David Wolf - February 12, 2025
Portfolio Manager, David Wolf, discussed the Global Asset Allocation team’s latest white paper, Five Questions in 2026. The conversation explored how shifting geopolitics, inflation dynamics and changing market fundamentals are reshaping portfolio positioning, with a particular focus on the evolving role of U.S. markets, renewed interest outside the U.S. and the implications for diversification.
Here are some of the key points from his commentary.
Reassessing U.S. market exceptionalism
David described what he views as a turning point in the long‑running narrative of U.S. market exceptionalism. After years of outperformance, the U.S. had come to represent roughly 73% of global market capitalization. While this dominance was supported by strong earnings, investor confidence and expectations around tax cuts and deregulation, David said his team concluded that this period marked “peak U.S. exceptionalism.”
He pointed to concerns about the erosion of foundational strengths such as the rule of law, property rights and predictable governance, which he believes have historically underpinned U.S. market leadership. In response, Fidelity’s Global Asset Allocation team moved quickly, selling approximately $15 billion in U.S. equities, fixed income and U.S. dollar exposure and reallocating capital toward non‑U.S. markets. This included reducing U.S. Treasury holdings to zero over the course of last year.
Importantly, David noted that U.S. markets have continued to perform well in absolute terms. However, from a relative perspective, the team believes future opportunities may increasingly lie elsewhere.
Canada: From persistent underweight to a more balanced view
Canada has long been underweight in Fidelity’s portfolios, a position David said had been in place for roughly 12 years. That stance has recently changed. While he acknowledged ongoing economic challenges, including housing market pressures, high household debt and subdued growth, David highlighted several factors supporting a more balanced outlook.
One key driver has been commodities, particularly gold. Fidelity has held physical gold for years as a diversifier, and Canada’s relatively high concentration in gold‑related equities has provided leverage to rising gold prices. He pointed to early signs of policy reorientation in Canada, including increased focus on infrastructure investment, reducing interprovincial trade barriers and seeking trade opportunities beyond the United States.
Taken together, these developments led the team to close its long‑standing underweight position, moving Canada to a more neutral allocation.
A more fragmented global landscape
He discussed how the global geopolitical environment has shifted toward a more multipolar structure. Compared with the period following the pandemic, alliances and trade relationships appear less predictable, with changing dynamics between the U.S., Europe and other regions, alongside ongoing geopolitical tensions.
This increased uncertainty complicates traditional investment frameworks that rely on stable policy environments and predictable economic relationships. As a result, David emphasized the importance of flexibility and reassessing how geopolitical developments can influence growth, inflation and asset returns.
Inflation, commodities and portfolio protection
Inflation remains a central theme. He argued that deglobalization, supply‑chain restructuring and geopolitical competition have made the global economy less efficient and more costly, creating persistent inflationary pressures. At the same time, competition for resources has supported higher commodity prices.
Fidelity anticipated these dynamics earlier in the cycle, launching an inflation‑focused fund in 2021 (Fidelity Inflation-Focused Fund). The fund’s performance, supported by allocations to commodities and gold, has supported his view that inflation risks may remain elevated.
Monetary policy and the evolving role of fixed income
The discussion also touched on U.S. monetary policy and the potential appointment of Kevin Warsh as Federal Reserve Chair, who has historically been hawkish on inflation and interest rates, while acknowledging the uncertainty around how policy might evolve amid political pressures and a large U.S. government debt burden.
From a portfolio perspective, David highlighted challenges facing traditional fixed income allocations. Bonds have become more correlated with equities, reducing their effectiveness as diversifiers. At the same time, heavy issuance from governments and corporations, including debt used to finance AI infrastructure, may require higher yields to attract buyers.
To address this, Fidelity has diversified its defensive allocations, including exposure to emerging‑market local‑currency debt. David explained that for Canadian investors, these investments can offer attractive yields with comparatively lower currency volatility, and they have made a meaningful contribution to portfolio returns.
Conclusion: The case for diversification
David reflected on conversations with advisors who previously questioned the need for international diversification. He suggested the past year has underscored why exposure beyond the U.S. remains important. While U.S. assets continue to play a central role in portfolios, he believes broader diversification across regions and asset classes can help manage risk and capture opportunities in a more complex global environment.
