FidelityNow: Global equity diversification opportunities

[00:00:06.006] Hello, everyone. I'm Patrice Quirion. I manage some of our global and

[00:00:09.609] international strategies here at Fidelity.

[00:00:12.278] So it is just over five months ago that the markets were shocked by

[00:00:16.483] the tariff impact that was launched by the U.S. administration.

[00:00:21.554] Since April, the markets have put a pretty staggering rally, with most

[00:00:25.592] indices being up 20% to 30%.

[00:00:28.128] I think the market is, to some extent, got used to this

[00:00:32.165] uncertainty, to that constant news flow.

[00:00:34.868] Maybe a little bit numb to it, but potentially also a little

[00:00:38.872] complacent to the position that global markets find themselves

[00:00:43.276] into. So should we celebrate this rally

[00:00:47.313] here? I think the reality is the markets

[00:00:51.284] are maybe a bit more fragile at this point.

[00:00:54.454] So if we look at where we are now versus the beginning of the year, maybe the

[00:00:58.591] worst-case scenario around tariffs has been averted.

[00:01:01.795] But tariffs are, in general, very high at this point,

[00:01:05.832] higher than most would have expected, and will have an

[00:01:09.803] impact on the global economy.

[00:01:12.138] As of the second quarter, only about a third of the impact of

[00:01:16.176] those tariffs has been felt, either by companies in terms of profit margins

[00:01:20.280] or in terms consumer from higher price inflation.

[00:01:24.884] The reality is most of the impacts is yet to come.

[00:01:30.423] Despite only a part of the tariffs having been felt, I think we've

[00:01:34.527] seen the impact of the uncertainty,

[00:01:36.596] and we are starting to see, especially in the U.S., the economy slowing

[00:01:40.733] down. We're seeing PMIs inching lower, we're

[00:01:44.904] seeing unemployment starting to take up, and maybe more importantly,

[00:01:48.875] we are also seeing a bit of a confidence shock that's been inflicted.

[00:01:53.680] All of that put together as of now, although the markets are higher

[00:01:57.684] than we were at the beginning of the year,

[00:02:00.954] earnings estimates are down between 3% and 6%, depending on which

[00:02:05.091] sector or which geography we are looking at.

[00:02:08.461] And it leaves the market to being back at all time high valuation

[00:02:12.966] or just about, especially in the case of the U.S.

[00:02:16.336] When we look at Europe, the large discounted valuation versus

[00:02:20.340] its own history has been closed to a large extent and

[00:02:24.611] I would say globally only China still looks really underpriced

[00:02:28.748] or below long-term valuation levels.

[00:02:31.885] So I think the outlook may have changed in the sense that from

[00:02:36.289] my standpoint we've moved a little bit from an opportunistic

[00:02:41.528] environment as in April to now an environment that warrants a little bit

[00:02:45.532] more caution. The reality is there is still a lot

[00:02:49.669] of question marks, uncertainty around not only tariffs, but increasingly

[00:02:53.740] on the fiscal side for a multitude of countries,

[00:02:58.044] there's cyclical risks that are potentially building, inflationary

[00:03:02.182] risk potentially, as well as maybe an impact

[00:03:06.186] shorter term of pull forward of demand that we may have seen as companies

[00:03:10.323] try to buy as much as possible prior to tariffs taking

[00:03:14.327] place. So in this environment of caution,

[00:03:19.799] there is still opportunities from a stock picking standpoint, but maybe

[00:03:23.870] less of a broad, wide set of

[00:03:27.874] opportunities that we are facing.

[00:03:32.845] In terms of how the markets have been behaving, I think it's important

[00:03:36.783] to notice that this trend of leadership change

[00:03:40.954] away from the U.S. into increasingly international

[00:03:44.958] markets seems to be continuing under the surface.

[00:03:48.962] If we look at the S&P 500, it is indeed the case that it has put

[00:03:52.932] up a strong rally since the April lows.

[00:03:55.802] But it's been driven to a large extent by the AI

[00:04:00.106] hype that we are seeing in the markets, driven by the NASDAQ

[00:04:04.210] to a larger extent. But as it was the case late in

[00:04:08.181] 2024 and through Q1, it is still the case over

[00:04:12.485] the past five months or so that if you look at either China,

[00:04:17.156] Japan, or Europe, those markets continue to outperform

[00:04:21.961] the broad U.S. market

[00:04:23.963] as explained by the S&P 500

[00:04:27.967] equal weighted and the outperformance of

[00:04:31.971] other currencies as generally reduced but continued

[00:04:36.376] even since the April lows.

[00:04:39.679] So that has helped strategies like the ones I manage who

[00:04:43.816] have been advocating for international exposure

[00:04:47.620] over the past years that's been a large contributor to returns.

[00:04:51.924] But the environment we're in is also creating a lot of stock

[00:04:55.928] picking opportunities given all those forces that can be

[00:04:59.866] hard to precisely pinpoint and leads opportunities for

[00:05:04.470] greater than average surprises, which as active

[00:05:08.441] investors, we tend to thrive better in these sorts of environments.

[00:05:12.612] So where are the opportunities going forward?

[00:05:16.416] Although at the margin, I think Europe might be less interesting than

[00:05:20.420] it was, I think there is still evaluation discount there.

[00:05:24.691] There are still opportunities for broadening growth, potential sentiment

[00:05:29.095] boosts from an eventual resolution of the Ukraine conflict.

[00:05:33.566] So there remains like good stock picking opportunities in

[00:05:37.570] Europe. At the margins, we've been taking profits into some

[00:05:41.507] parts of the market that have performed really well.

[00:05:44.043] Notably around the financial sector and banks, for instance, where we've

[00:05:47.980] been shifting some of that to Japan.

[00:05:51.484] But I think the greater opportunity at this point might be in China.

[00:05:57.056] Expectations were low. So despite the tariffs have been taking place,

[00:06:00.993] earnings estimates are still trending at the same level.

[00:06:03.730] So there's been no downward revision.

[00:06:06.632] The market has rallied, but it's still on only 11 times earnings, which

[00:06:10.603] is still below historical levels.

[00:06:13.706] There's still potential for greater government stimulus package,

[00:06:17.944] notably around consumption and a starting point from the

[00:06:21.914] Chinese consumer being very cautious with very high savings

[00:06:26.119] rates, and if that optimism, that sentiment was to ever

[00:06:30.356] pivot more favourably, I think it leaves some pretty good opportunities.

[00:06:34.293] So I would say this is, in my opinion, maybe one of the standouts at the

[00:06:38.164] moment. After almost a year of under performance of the

[00:06:42.135] broad U.S. index excluding the technology sector,

[00:06:46.706] there's starting to be pockets of opportunities, notably around healthcare,

[00:06:50.777] maybe parts of consumer discretionary, that I am increasingly

[00:06:55.348] starting to spend some time looking at those opportunities.

[00:07:00.987] But overall, I would conclude by saying that

[00:07:05.024] the opportunity set, while still present, has probably

[00:07:08.961] shrunk versus earlier this year.

[00:07:11.097] I think we need to be a little bit more careful.

[00:07:13.800] And as a result, I think to pivot to a slightly more

[00:07:17.904] caution, defensive approach is maybe one

[00:07:22.041] to take at this point.

[00:07:24.410] And the role of this idiosyncratic stock selection might be

[00:07:28.514] greater than what we've seen over the past years where it's been a very

[00:07:32.785] macro-driven market.

[00:07:35.354] So, I hope that this is the kind of environment we can continue

[00:07:39.358] to thrive in,

[00:07:41.961] and with all our resources, I'll make sure to continue to

[00:07:45.965] tilt the portfolio towards where we see the most dislocated parts of the

[00:07:49.602] market. So thank you all for your attention and looking forward to talking soon.