FidelityConnects: North American equities: What’s driving markets now

[00:03:29] Pamela Ritchie: Hello, and welcome to Fidelity Connects, I'm Pamela Ritchie. North American equity markets continue to show positive broadening momentum despite ongoing geopolitical concerns and policy uncertainty in the US. How do strong AI-related earnings come into play in all of this and will we continue to see a rotation towards industrials, commodities and cyclical companies in some cases? Our next guest sees several opportunities across North America including the metals and the banking space. We're going to hear how his new Fidelity American Equity Fund offers investors opportunities across the US. Do welcome portfolio manager, Darren Lekkerkerker. And just to let you know that today's webcast features live French audio interpretation. Warm welcome to you. Nice to see you, how are you? 

[00:04:16] Darren Lekkerkerker: Hi Pamela. I'm doing great, I'm excited to be here.

[00:04:19] Pamela Ritchie: Excited to have you here. Let's talk a little bit about the fund that you've now taken over. You started running it in early January. Tell us just a little about it. You've been running North American equities for some time so it's nothing new in that sense in terms of the approach. The fund itself, tell us about that.

[00:04:37] Darren Lekkerkerker: The fund is called the Fidelity American Equity Fund. That naturally leads from the fund that I've been running, the Fidelity North American Equity Fund. Now I have both the North and the regular American fund. We've launched an ETF that's going to track the Fidelty American Equity Fund very recently in the last couple of weeks. The ticker for that is FCAE. It trades on the TSX. The idea is within the Fidelty North American Equity Fund, which is 70% US and 30% Canadian, I've run that for a little bit over 10 years, a 10-year anniversary was last year.

[00:05:13] Pamela Ritchie: Congrats.

[00:05:13] Darren Lekkerkerker: Thank you very much. Has achieved very good performance in absolute performance. I think the 3-year is mid-20% CAGR and both the 5-year and the 10-year is approximately 17% compounded annual growth per year on a gross basis.

[00:05:31] Pamela Ritchie: There's a couple of fistfuls of Lipper Awards that go along with that kind of performance.

[00:05:36] Darren Lekkerkerker: Thank you, it's been the best fund in the North American equity category for the past five years in a row, and it's above benchmark. I'm looking to use the same investment style, same investment process. The goal is to achieve a similar or better outcome on the American Equity Fund. If you drill down within the 70% of the portfolio that's American, that's done better than the S&P 500 during that 10-year. The goal is just to own similar stocks as I would on the US side of North American Equity Fund in the American Fund and to achieve a similar, or hopefully better, outcomes.

[00:06:15] Pamela Ritchie: Some of the style is very ... it's quite concentrated. How many stocks, roughly, or give a range of how many stocks are in there. This is in the American Equity.

[00:06:23] Darren Lekkerkerker: I would say it's approximately 45.

[00:06:26] Pamela Ritchie: I's a kind of narrow runway and you choose, obviously very carefully, everyone at Fidelity does, but it's meant to be rather concentrated in that sense.

[00:06:35] Darren Lekkerkerker: Yeah, I think that's the way that you achieve superior performance, you concentrate your funds in the number of stocks, but more so in your top 10 holdings which are typically between 40% to 50% for me. I think you have to do two things in order to achieve superior results over time. Number one, you have to make sure you own your best ideas. I hate it when I listen to one of these and someone can't pin down what's the best idea, or they give you 20. You've got to make sure you know what your bests idea are, you've got to own them. Secondly, you've got to be right in order to get the performance.

[00:07:07] Pamela Ritchie: Indeed. It's no small task and you have teams of people helping you with that. Tech companies largely are in the top 10 when you take a look at the North American Equity Fund, and I'm presuming that will transfer into the American Equity as well. This is a moment where tech companies and large hyperscalers are becoming, in a lot of ways, owners of hard assets. You've been running natural resources on sort of the material side of that for some time. This must be a rather perfect moment for you to launch into this, don't you think?

[00:07:41] Darren Lekkerkerker: Certainly, it is. Actually, I was the mining analyst in Fidelity Boston in the mid-2000s during the super cycle from China. I'm very happy that those stocks are having a moment, more than a moment, they've been crushing it. It's kind of nice to be able to apply that skill to other companies as well. I think one thing that's very interesting in tech this year, I think that there's more dispersion than normal. I think what you're seeing is software stocks down. I think that internet stocks have been mixed, Google has done pretty good but some of the other ones have been weak on par, and then hardware and semi stocks have done really well. I think it's a different year than other years where you could simply own the index or own the top momentum stocks and hope to do well. I think it's something where our skill, which is stock picking, and our investment process could become more valuable because there's more dispersion and a better opportunity to outperform the benchmark, which is our goal.

[00:08:48] Pamela Ritchie: As you say, there's more stocks to look at. Would you call it a proper rotation at this stage?

[00:08:52] Darren Lekkerkerker: Well, it's definitely been a rotation in the market. One of the things has been that we've seen a rotation towards early cyclical stocks. Why is that? I think people are getting a little more bullish on the economy. I think the economy was very soft. I think, particularly following the ... if I go back to last April of last year when the tariff announcements came, people expected a recession, now there's not a recession and, in fact, we're actually seeing growth starting to pick up. Why is that? Lower short term rates, I think the Fed fund rate is about 75 bps to 100 bps lower on a one-year basis.

[00:09:22] Pamela Ritchie: It's working its way through.

[00:09:25] Darren Lekkerkerker: We expect to get the budget stimulus for both consumers and businesses in the US so I think you're seeing monetary and fiscal stimulus. If you look at the  Atlanta Fed, GDP nowcast, which is the forecast of the next quarterly GDP, it's up to approximately 4% from sort of 3 or 2% last year. I think because of that you're seeing people rotate out of some of the growthier names that tend to be more expensive into the cheaper, more cyclical names that could see a benefit from a stronger economy.

[00:09:56] Pamela Ritchie: Still big though, still large-cap, still bigger companies for you.

[00:10:00] Darren Lekkerkerker: That's right.

[00:10:01] Pamela Ritchie: You're not taking a look at sort of smaller companies.

[00:10:03] Darren Lekkerkerker: I do own a little bit but I would just say that the portfolio is more geared towards larger cap companies that I think are higher quality companies. By that, what do I mean? I think they've got a great business, they've got a strong competitive moat that, hopefully, can increase over time, they've got a high or accelerating return on invested capital. Just to review, I also look for strong management teams that have skin in the game, have executed well, really good at capital allocation, and I care about valuation too.

[00:10:35] Pamela Ritchie: Tell us a bit about policy. As you mentioned, you went back to the tariff announcements, the impact on that. Within that, implicit in that, and what's sort of rolled out over the course of the last year and a bit now is some real directives on where US policy is going. Some are harder to read, obviously, but there are certain things that the government wants to back. There's no question they're actually putting money behind it so you can see that. Some of it has to do with exactly critical minerals, natural resources, some of it has to do on chips side of things, how do you watch that? What do you do with that?

[00:11:10] Darren Lekkerkerker: There was a few questions in there but just to hit on your last question, which is the government preferences. For the White House, they've been more involved than past administrations in businesses and champions or sort of areas that they don't like. If you look at the past year, some of the sectors that they tend to like or have prioritized, you mentioned critical minerals so we can talk about copper, we're starting to see some stockpiling of copper in the US. We're also seeing the US, they've partner with a private equity company and directly invest it in some copper mining companies, which is not new. China's been doing this for like 10, 20 years.

[00:11:50] Pamela Ritchie: It's new in--

[00:11:52] Darren Lekkerkerker: It's new for the US.

[00:11:53] Pamela Ritchie: --a different type of economy where normally you let businesses do it.

[00:11:56] Darren Lekkerkerker: I think the reason the Chinese did it is because they consume 50% of the world's copper and the US is less than that. I think, as you mentioned, we're going into more of a hard asset world, I think they're signalling it has more importance so we are seeing that. I think for me, I want to be definitely aware of what the White House is prioritizing, or deprioritizing, and think through, hey, does this make sense? I think I would like to lean towards investing in those companies. As we've seen last year many of those industries and companies do well or not well depending on what they liked and didn't like.

[00:12:31] Pamela Ritchie: Whether they're investing and flowing with policy, essentially.

[00:12:36] Darren Lekkerkerker: Exactly.

[00:12:37] Pamela Ritchie: So you are kind of doing that. You mentioned software earlier, let's go back to that. I mean, if you want to really go there, some people talk there's an absolute bloodbath and there's lots of discussion about how private credit was overinvested, there's sort of a doomsday story, and there have been serious sell-offs. There's also probably some hunting and some interesting opportunities within there. How do you watch what we've watched and either stay away or lean in?

[00:13:03] Darren Lekkerkerker: I think all of our viewers get that the nervousness in the market is that AI eats software, whereas the tagline used to be software eats the world. Now we've seen that switch. What happened this year to accelerate that because we saw a lot of that last year, frankly. One of the generative AI companies, Anthropic, released a new model for Claude earlier this year which could do a lot more things which made people very nervous about the sustainability of software moats or the terminal value of the software companies. I think some of the key areas they worry about is the pricing or the seed-based model, whether there'll be less employees at these companies, and competition since it's easier to code.

[00:13:47] Pamela Ritchie: It was compared to a DeepSeek moment. I mean, I don't know if you go that far but it sort of felt like that to some investors.

[00:13:53] Darren Lekkerkerker: It certainly felt like. I think what happened a couple of weeks later was they introduced a plug-in for various industries including legal and that really hurt the information services group and we saw these companies [indecipherable]. I think this has freaked people out. I think you're right,  we kind of talked about this in the pre-show, it kind of reminds me of 10, 15 years ago when Amazon was the disrupter. Whenever they announced, hey, we're going to go into this industry, dollar stores--

[00:14:22] Pamela Ritchie: Books.

[00:14:22] Darren Lekkerkerker: --auto retailer parts, that industry got crushed. Books, yeah, obviously--

[00:14:27] Pamela Ritchie: That was in the beginning but yeah.

[00:14:29] Darren Lekkerkerker: --that was one industry that was disrupted. Other industries, I remember at one time it was supposed to be health care equipment, those companies are doing great. Also, auto parts retailers, those companies were doing great. There's some benefits and reasons for sort of the physical infrastructure or relationships. I think the same thing will happen here and I think that there will be some disruption. We did meet with one of the very large LLM-based companies that is leading to get their perspective on this and also learn more about gen AI. Their perspective specifically on the software was that software will be used more in the new world. There will be some disruption, not all of it will be disrupted.

[00:15:14] I think they had the view that software that is high use or critically important and/or inexpensive is probably fine because why redo it, but the opposite of that is at risk. So there are some risks. I think for the legal stuff, I think the issue is right now they don't have access to the proprietary data that the existing sort of legal software companies do have but I guess the market is nervous, will this change in 5, 10 years from now.

[00:15:43] Pamela Ritchie: Do you see, this might be a deeper question within that, but you could use legal, you could probably use lots of different industries, will there be sort of a, not quite an end of data but there'll be a point where the data has been consumed, put into models and the insatiable creation of data, will it keep up with sort of this initial phase of AI eating data, essentially? Will that slow down at some point, do you think, once it's done most of that transition, I guess.

[00:16:15] Darren Lekkerkerker: I think you're right. It seems like in terms of these names just getting crushed in the market, I think right now is a good time to pick through them all and see, okay, where do we think that there are opportunities. I would think back to the framework I just mentioned in terms of the risk, who actually has benefited and who has accelerating revenue on that.

[00:16:42] Pamela Ritchie: It's really interesting to sort of watch how that's being digested by the market. You kind of famously try not to look at geopolitical moves. That's one thing that you often and don't go too heavy into the macro. That said, we started off talking about early cycle and perhaps a transition to kind of a harder asset world, materials and so on, which is very much a geopolitical story at this stage. It's just kind of interesting how that all comes together. Do you have any views from sort of how economies are readjusting themselves in this so-called new world order?

[00:17:23] Darren Lekkerkerker: I like the way you framed your question. You're right, I am a bottom-up investor. What that means for our listeners is I try to focus on owning the best companies as opposed to trying to predict or forecast economic variables or different markets, as I think that that approach yields in higher returns over time. Just to answer your question, yeah, I am macro aware. I think the macro environment's supportive. The economy is stable and accelerating, inflation tends to be coming down from elevated areas. There's a little bit of risk there as Q1 will probably be the peak tariff pass-through but markets are forward-looking as to what the tariff rates are going forward.

[00:18:05] In terms of the overall market, short rates are probably coming down and you have double-digit earnings growth. Earnings growth has accelerated in the fourth quarter so far, 13% year-over-year. I think that's up from around 10, 11-ish% in the previous quarter. It seems like a pretty nice backdrop for stock picking. As I mentioned in my earlier point, I think there's higher dispersion that we're seeing now so I think there's a better opportunity for stock picking and stock pickers to beat the index.

[00:18:38] Pamela Ritchie: Let's go into maybe cyclical, maybe not, but we'll go into industrials. I know it's an area that you've long looked at. Tell us a little bit about what within that is again, is it all sort of a play on AI to an extent, the buildout so-called?

[00:18:53] Darren Lekkerkerker: I'm bullish on industrials and I'm overweight this industry within my funds. A couple of the areas that I tend to invest here, number one is I'd say machinery. I think machinery is seeing much stronger demand right now. I think we're seeing bookings order, it's from a variety of end markets, but you're right, it is also from AI data centres, is a big growth area. I think that is part of it. I also think some of the machinery companies that cater to the resource industries look really strong as well for higher demand. Another area within industrials is aerospace. Aerospace is one, it doesn't always benefit when we get the cyclical rotation because it's more of like a high quality structural theme, people want to travel more as they get wealthier. The large OEMs, Boeing and Airbus, are behind so there's this big sort of growth curve of deliveries that can come. I like these companies because they're amongst the highest quality companies within industrials. They've got sticky and growing revenues, high margins, and large parts of their businesses tend to be monopolies which, obviously, you can make a lot of money in over time.

[00:20:09] Pamela Ritchie: Do you worry about some of, I mean, they've been a bit rocked, actually, in the last couple of weeks, again, by headlines, and they may be nothing and it may just all be leading to trade negotiations that we have to have with the US no matter what, but you do see sort of a slightly changing nature there. Anything to worry about?

[00:20:25] Darren Lekkerkerker: First of all, I own the US one which have not been affected by that, as well as some of the Canadian ones. I think it tends to be more rhetoric and something that can be solved. We've seen some explanatory statements, I guess, from the Canadian government and some of the companies involved. That kind of leads us into trade renegotiation for the USMCA which will be a big issue later this year. It's hard to predict, as we saw last year with the tariffs. I guess my view is, if you were to ask, it'll probably play out like the tariffs. It will probably feel a little scary but eventually we'll get a deal. I think when we do get a deal I think it'll be very positive for Canada. I think you can see a rerate maybe a little bit for Canada in industrials, also financials, big banks in Canada and some of the consumer stocks.

[00:21:19] Pamela Ritchie: Let's go there to the financials a little bit and specifically certain things that you like about the area, knowing that we are now past — you have to get the Fidelity Connects showing out there, there you go, it's advertising — to being past the mortgage hurdle, I don't know what you want to call it. It seems like it's been ... it's really not something that investors seem to be particularly worried about, those that are looking at financials. Is that fair?

[00:21:46] Darren Lekkerkerker: I think that's fair. So, Pamela, I had a really good day, I think it was the second day, business day, of this year, in January where I was able to meet in one-on-one meetings with our team with the six large bank CEOs of the six large banks in Canada.

[00:22:01] Pamela Ritchie: That is a good day!

[00:22:03] Darren Lekkerkerker: I mean, very nice gentleman but also a great update on a very large and important sector for the Canadian economy and stock market. To answer your question, I think that credit costs are elevated and expected to normalize, or come down, which will benefit earnings over the next couple of years. I think that they have navigated the mortgage rate reset well. I think it's less punitive now for borrowers and it's a little bit of a tailwind for the bank's earnings just because five years ago mortgage rates were zero and they're a little bit higher today. Other fundamentals of banks appear strong and so, you know, what's that? The capital markets and wealth management, as you're mentioning, like IPOs, M&As, equity trading, debt trading, all that, because revenues are going up faster than expenses they're managing expenses while they're getting operating leverage. I think the regulator, I think the sentiment towards the regulator is better than it would have been a year or two years ago just given that in the US we have a business-friendly government that wants to deregulate versus increase it. I think that over time could mean increasing capital returns to shareholders through higher dividends and share buybacks.

[00:23:26] Pamela Ritchie: It's really interesting. You sort of hear that the piling on of more regulations has sort of stopped in Canada. Is that fair? I mean, you know much more deeply than I do but is that fair.

[00:23:36] Darren Lekkerkerker: Yes, and I think it's because we went from a very regulation-heavy standpoint to something that's a little lighter where it seems like the government also ... obviously, the government's same party by different leader so the government has changed, and I think they've had to prioritize economic growth much more than the last party, in part because of the threat from trade from the US. We've seen all these project announcements. I don't think we've seen the shovels hit the dirt yet, there's still submissions to solve for that, but the sediment appears much better.

[00:24:10] Pamela Ritchie: And sort of the capital raise discussions are all around, it sounds like. At least they're in discussion moments for some of those big projects.

[00:24:18] Darren Lekkerkerker: I think so. I think also the other thing for Canada that's obviously important is resources are booming, gold, copper prices...

[00:24:25] Pamela Ritchie: Let's talk about that.

[00:24:28] Darren Lekkerkerker: We're seeing some M&A and some capital raises there which benefits these banks. In terms of resources, I feel similar to how we spoke last year when I said I like resources, I'm bullish. I think I said I prefer gold, uranium, copper and wasn't keen on energy when we spoke, we would have spoken like maybe middle of last year. I'd say now it's similar but I prefer the metals over energy. I would probably switch copper over gold. I still like both so it's a little hard to ... I find silver is very volatile and high beta. Obviously, it went up a ton, I think it went to like $120 an ounce and now it's back to $80 an ounce which is still up yea-to-date. I generally like it just because I think if you like gold, I think of silver as it's like high beta cousin of gold, maybe. Without going too deep on silver, supply tends to be inelastic because it produces a byproduct. In terms of gold, let's focus there more. So I think that...

[00:25:37] Pamela Ritchie: Because it was so important to the TSX last year, it was incredible.

[00:25:41] Darren Lekkerkerker: I think it's volatile. It's had a run, it's had a little bit of a pullback. It's a little bit hard to forecast, it's actually really hard to forecast. I think just generally the demand drivers of US dollar diversification, elevated geopolitical risks and countries around the world, monetary stimulus and larger budget deficits of populist governments probably set to continue. I think that demand will still be there for gold. It's gone up a lot recently so it's hard to see what it does in the near term but I think  generally I still like it. For copper, I think it's also a hard asset play.

[00:26:19] We mentioned earlier about stockpiling in the US, US government directly investing, so that seems quite bullish. The supply side is very bullish. There's been four large mines that are not producing due to political reasons or mine operations issues. The demand side could be a little better, 50% comes from China, that demand tends to be a bit softer. I think the price of copper is up a lot. It's above its fundamental price, I think, in my view, but at the same time there's other bullish characteristics of it. I like it. I think on energy, it seems there's too much supply. Last year I was right the commodity, wrong on the stocks. The stocks went up a lot despite the commodity being down 25% this year.

[00:27:06] Pamela Ritchie: It seemed to be, not decoupling quite but there's less correlation in the way that there was.

[00:27:12] Darren Lekkerkerker: I have some positioning, but it's more modest versus metals and mining.

[00:27:16] Pamela Ritchie: Let's talk about the consumer, the consumer probably in the US and in Canada. In the US lots is discussed about the K-shaped economy. I think probably Canada has that as well, I'll ask you that, do you see that there's something with the deregulation, the One Big Beautiful Bill and so on in the US, that will help sort of the bottom piece of the K lift a bit in terms of the consumer story?

[00:27:41] Darren Lekkerkerker: I think every country has some aspect of the K-shape. I think our K-shape is more modest here. As you know, Canada tends to be more of a country of the middle. In the US, I think you said it well, I think that we could lift the bottom part of the K. Why is that? Lower rates and fiscal stimulus, I think the tax returns or refunds are going to start in March so that's coming up and sentiment could improve and we could see it in better consumer spending data. I think these stocks were bombed out last year and so they have cheaper valuations so it is an area that I'm interested in. Where am I interested? Retail, I'd say autos, also other sort of...

[00:28:28] Pamela Ritchie: The auto parts or more...

[00:28:33] Darren Lekkerkerker: The parts, I'm interested in less because the parts tend to do well when the overall number of autos does the best. There is some concern there that they could get hurt on these memory chips going up, the DRAM price. I have a little bit of exposure to the parts in my Canadian fund. I still think they're cheap and they could get some rebound but I think there's a better opportunity to own the auto manufacturers and some of the more related industries. Also, as I mentioned, I like retail and hotels as well, just as a play on consumer spending.

[00:29:05] Pamela Ritchie: The consumer spending story, that's really interesting. What would you kind of like to go back to give investors a message of sort? I mean, I came in with this sort of question mark of there's a bit of a barbell with early stage and these large hyperscalers becoming essentially hard asset owners. It's an interesting moment for your style of investing. I'm sure there's more to it. What would you want to leave investors with?

[00:29:35] Darren Lekkerkerker: In terms of fund positioning, I would say that that's right, I do continue to like tech and communications. I'm trying to be very selective in what I own in these industries. As I mentioned, there's higher dispersion but I think there's some opportunities here. I like the early cyclicals. I tend to have increased my exposure in consumer, industrial and financials, and then I own mining and metals. That's what I would say in terms of fund positioning. I think overall I would say I'm excited to run the new fund, the Fidelity American Equity Fund, and the new related ETF FCAE, which trades on the TSX. I'm exciting to try to get the same outcome as I have in the North American Equity Fund. I'm happy that the fund has had strong performance and I'm working hard to try to continue that.

[00:30:26] Pamela Ritchie: You're the biggest shareholder in which fund?

[00:30:29] Darren Lekkerkerker: North American Equity Fund.

[00:30:30] Pamela Ritchie: That's always a good thing for investors to know. Darren Lekkerkerker, thank you for joining us and sharing your investment view and what you're leaning into for this year. Thank you very much.

[00:30:39] Darren Lekkerkerker: Thank you very much. Thanks, great questions.

[00:30:41] Pamela Ritchie: Darren Lekkerkerker joining us on Fidelity Connects. Coming up tomorrow, don't miss our exciting live Q&A with Louis Têtu. He is the executive chairman of Coveo. This is a pioneer in AI-powered digital experiences in Canada. You'll hear his perspective on the next wave of AI breakthroughs, practical strategies for leveraging these advancements. Host Charles Danis, he'll go live with Louis, that's at 10:30 Eastern for a French language webcast, and I'll be speaking. with him at 11:30, the regular time, 11:30 Eastern.

[00:31:13] On Thursday of this week, portfolio manager. David Wolf. He takes a look and takes us through the GAA's perspective on five critical questions that are shaping global markets. Many of them you'll probably want to know his answers to, ultimately what they mean for investors across the board, how they could influence asset allocation strategies in the months ahead. That will feature live French audio interpretation.

[00:31:36] On Friday we'll be speaking with Bobby Barnes, he's Fidelity Head of Quantitative Index Solutions, for a discussion on the advantages of Fidelity's Quantitative Research team factor investing. He has some fascinating new thoughts on which factors are playing different roles at this moment. Fidelity ETFs, also he'll be discussing that might be favourable in the marketplace today so you'll want to hear Bobby Barnes' perspectives. Thanks for joining us here today. We'll see you soon. I'm Pamela Ritchie.