FidelityConnects: UK & Europe Market Trends: What They Mean for Global Investors

[00:03:42] Pamela Ritchie: Welcome to Fidelity Connects. I'm Pamela Ritchie. As the world adjusts to what is deemed a new world order surfing through relevant facts and stats is tougher than usual. Over the weekend Japan's Prime Minister won a renewed mandate to move forward with her reforms which are helping shift the global approach to JGBs. As well, the bust-up of relations at the top of the UK government are also leading to questions even of a snap British election. The steady shifting of global investors' interest beyond US shores has all the makings of a brand new world of investment opportunities in regions not considered perhaps in decades, if ever. Joining us here today to provide the underpinning stories of some of these shifts and how to put investor money to work is investment director, Tom Stevenson, joining us live from London. Warm welcome to you, Tom, how are you? 

[00:04:35] Tom Stevenson: Hi, Pamela. All good, thank you.

[00:04:37] Pamela Ritchie: Delighted to have this time to speak with you. We'll invite people to send questions in over the next little bit. We'll begin in the UK. Certainly, we have seen discussions about whether the government will withstand the scandal that it's going through right now. I guess we just turn to you to say what's next or what's at stake?

[00:05:01] Tom Stevenson: Things are moving very quickly here in the UK, as you can imagine. The scandal relates to the former business secretary, former UK ambassador to the US, Peter Mandelson, and his relationship with Jeffrey Epstein and how that is sort of feeding through into assessments of the judgement of the Prime Minister. I say it's moving very quickly, just in the last 48 hours we have had two senior resignations, resignation of the head of strategy who essentially fell on his sword, took responsibility for the appointment of Mandelson as the ambassador to Washington. That was yesterday. Today the head of communications for the prime minister, Sir Keir Starmer, also left his job. Actually, there's one more development today which was that the head of the Labour Party in Scotland came out and publicly called for the Prime Minister to stand down. In less than 48 hours that's a pretty rapidly changing situation.

[00:06:22] I think there are real question marks about how long this government can survive. This is not how British politics is meant to be. If we have a change of prime minister we will have had five prime ministers in as many years. That's sort of Italian standard government from when I was younger. This is not what we expect in the UK. I think that there will be knock-on effects in the financial markets. We haven't really seen them thus far. Things are fairly stable. In fact, the UK stock market is riding high at close to a peak. There hasn't really been a big response in the bond market or the currency market yet but this is changing so quickly that I think we just don't know where it's going next.

[00:07:17] Pamela Ritchie: It's wonderful just to have your perspective on that and which directions it's going in currently. Over the weekend and yesterday we saw the prime minister in Japan win a brand new mandate. She has absolutely crushed it, really, in results and will take forward, we think, just a continued higher interest rate environment which makes JGBs more attractive basically to global investors.

[00:07:45] Tom Stevenson:  I think what we saw in Japan was Sanae Takaichi, the leader of the Liberal Democrats since last October, clearly she didn't have a mandate from the people, if you like, because she inherited that job so she called the snap election to get that mandate for a pretty radical policy program of fiscal expansion, lower taxation, investment in corporate Japan, quite a far reaching program. Not only did she get the mandate but she got an absolute landslide. It's the biggest majority for the LDP in the lower house in Japan since 1955 when the LDP was was founded. She has absolutely got the mandate to do what she wants to do with the Japanese economy. That's going to be very interesting and I think it will have repercussions in financial markets all around the world.

[00:08:52] Pamela Ritchie: China, we think, would not be so happy about that, President Xi. Japan has very strong alliances with so-called Western countries and is willing to be very vocal about things like Taiwan and so on. We did see some moves by the Chinese government to ask banks to have less exposure to US Treasuries and so on. I don't know if anything's related to the Japanese election but how would China be taking this election victory, do you think?

[00:09:27] Tom Stevenson: Obviously, I'm not an expert in regional politics but what it seems to me is that Japan and China have kind of been competing in quite sort of different areas of the economy for much of the last 25 years. I think as China is moving up the value chain, if you like, in terms of its investments, its innovation, this is a positive thing for investors in China but I think it brings it closer to Japan in terms of the area in which they're competing on the  geostrategic level as well. The Japanese prime minister has been very clear that she wants to revisit the constitution, the 1947 Japanese constitution, which effectively was a  pacifist constitution. It limited the the size and scope of Japan's military. She wants to revisit that for obvious reasons. I think in the economic sphere, in the geostrategic sphere, Japan and China become much more competitive, a competition of equals, if you like, and I think maybe that's the answer to your question. I think it's something which China is going to be watching really closely.

[00:10:57] Pamela Ritchie: For so-called rest of world investors, including those in the United States and Canada, all over the world, the opportunity of looking at Japanese bonds at this moment is very interesting. I mean, the local investors went abroad to find yield and Japan was essentially a carry trade for a long, long time. It now offers what, do you think?

[00:11:20] Tom Stevenson: Well, it feels to me like that carry trade, you know, borrowing in yen to invest in high yielding currencies, countries, it feels like that carry trade is finished now with long maturity Japanese bonds yielding 4% or more now. That has knock-on implications in other markets such as in US Treasuries. I think what it will lead to is a repatriation of much of that money which moved out of Japan in search of higher returns for many years. That, I think, has important implications for US Treasury bond yields because the Japanese were big buyers of US Treasuries. That, in turn, has potential implications for stock markets as well because if US Treasury bonds are high yielding, that affects the discount rate which is used to value especially high growth technology shares in the US, the shares which have driven the US market for many years. I think there are lots of implications not just for Japanese bonds but also for US bonds and US stocks as well.

[00:12:38] Pamela Ritchie: Bonds just become competitive to equity returns, essentially. It's another player on the field in terms of competition. You did an amazing report, I think you said to us earlier about a year ago, about taking a look at 10 funds for 10 years and kind of outlining how investment trends and exposure in different parts of the world and asset classes would change over the course of 10 years. Tell us a bit how you crafted that. I guess we're, what, a year in? Just tell us a little bit about that.

[00:13:14] Tom Stevenson: Absolutely. About a year ago I kind of asked myself what was quite a difficult question, which was if I could only buy 10 funds, make 10 investments ... it's like that Warren Buffett thing saying you've got a card, a punch card, which you're only allowed to use 20 times in your investing life, it concentrates the mind how you would use it. I kind have played with that idea and said, look, if I could only buy 10 funds for the next 10 years what would they be? I came up with a list of 10 funds. The funds themselves don't really matter for the purposes of this conversation but it's the thinking, really. I had sort of a number of different themes that I wanted to play. One of them was that I wanted to continue growth because, obviously, if you're investing for 10 years you would hope that there is continuing growth. I had a couple of sort of growth funds. I felt that there was a shift away from pure growth towards more of a value approach so I had a couple value funds in there.

[00:14:30] I wanted to play the changing world, I called it. I felt that investing over a 10-year period, the ongoing growth of emerging markets, I felt, was a continuing theme. It felt to me like if there was one theme which was almost certain to continue it was the continuing growth and importance of technology in the world. I also wanted to play what I felt was the beginning of a shift in markets, and we've kind of talked about it a little bit, this rotation away from US dominated markets towards a more diversified, a better spread set of investments around the world. That's where I invested in some of the cheaper markets around the word like the UK. A few different themes like that and that's how I came up with the 10 funds.

[00:15:29] Pamela Ritchie: It's fascinating and I want to just ask you about inflation and where inflation directed you in this story because if you think sort of a year ago that was, or a year and change, that was the beginning of the Fed rate cutting cycle. Other governments had gone ahead and started cutting earlier, so-called developed markets had gotten on that train faster and earlier because they had to in a lot of cases. What role did inflation play in your sort of 10-year view a year go?

[00:16:00] Tom Stevenson: That was one of the key arguments for my focus on emerging markets. It's not the only reason why I would invest in emerging markets. I think it's quite a complex case that can be made for emerging markets. Inflation was one of them because many emerging markets were quite early into dealing with inflation and they had raised interest rates quite high, and indeed real interest rates in many emerging markets were really very high. Interest rates were much higher than the effective rate of inflation. That made them important. The role of both inflation and interest rates was really very important when you take a 10-rear view because I think it's part of that rotation out of the US cycle which was a major driver of my thinking.

[00:17:00] Pamela Ritchie: It's just fascinating how that ultimately works. Is there anything that you were underexposed to that did better or something that you're exposed to that did demonstrably worse?

[00:17:15] Tom Stevenson: One of the problems with only coming up with 10 funds, or 10 themes, is that it's quite difficult to cover everything. I had gold in there, for example, and that also plays to the inflation theme that you mentioned, it felt that was something, but there wasn't room as a consequence of that for everything. I actually didn't have a Japanese fund in there, which I slightly regret not just because the last year has been so good for Japanese investments but I just feel that actually over a 10-year cycle, especially given what's happened with the change of government in Japan and the strategy which the new PM has set out, it feels like I would want to have some Japanese exposure. I actually did a review of my 10 for 10 just in the last week and I said, if there were two areas which I would actually have more of this year it would be more Japan and it would be more Europe. Those were the areas which I felt I was underplaying.

[00:18:31] Pamela Ritchie: The discussion of where Europe goes from here, and really since the invasion of Ukraine continues we've heard of defence budgets and projections for them ballooning over the course of the last couple of years, different types of energy being deployed, long contracts being written and so on, it seems much more cohesive. I just want to ask, is there more of a case for a Eurobond, especially in light of the fact that it might be interesting as investors are shifting long term money across the globe for different reasons anyway, does that sort of cohesion, a financial union of that sort, get any closer, do you think, or is that just still a background conversation?

[00:19:15] Tom Stevenson: I think there is certainly a case for more cohesion, there is a case for a Eurobond. Whether it's actually going to happen I think is another matter altogether. Europe remains frustratingly fragmented in terms of its politics and its economics. Your Prime Minister has been talking very eloquently recently about the need for the middle-sized economies in the world, middle-sized countries, to work together in a more cohesive way. I think over here in Europe we would be absolutely on board with that. We totally understand what he was talking about when he said that, and we definitely need it. We are beginning to see early signs, the German government, for example, has been very clear about the need to spend more heavily, to up its government budgets for things like defence, industrial renewal in the region. We are beginning to see the start of that but it's early days yet. I think that if you're making a case for investing in Europe that renewed spending and that need for us to pull together and to act as a unit within Europe is definitely a part of that investment case.

[00:20:45] Pamela Ritchie: Oh, here's a great question coming in, actually, to this. Could you speak a little bit about the possibility of changes in Japanese policy on carry trade and global liquidity? You did touch on the carry trade but it's obviously a very interesting topic right now, and the global liquidity story. There's actually a lot of money sloshing around about there, it just sort of depends where it's sloshing around.

[00:21:07] Tom Stevenson: I think, absolutely, and I think that for years the direction of travel of global liquidity has been towards the US. Obviously, the Treasury market has been the place where it's been easiest to park that liquidity. It is the most liquid asset class in the world. I think that we're seeing a reversal of that trend now and I think the rise in Japanese bond yields is just simply going to accelerate that trend, and not just Japan. You mentioned China as well, China and Japan and the EU, we've all been big investors in ... we've all been a part of that one-way traffic into the US and clearly that is shifting. That money has got to go somewhere and I think that creates lots of interesting investment opportunities all around the world. I think Japan is just one of those.

[00:22:08] It's fascinating to see how much the Japanese market has grown, and the Chinese market as well in terms of growth, in terms of performance in the last year. That is an early sign of this shift happening. There's a lot of catching up still to do because in terms of valuations the gap had got so big that there is plenty of room for more money to shift the other way. I don't think we should feel that, oh, the last year, or even two years, there's been a big shift upwards in those markets. Yes, but I think there's more to go.

[00:22:46] Pamela Ritchie: More to go and, of course, the theme that touches literally every person on earth is that we are at the jumping off point, if we're not already sort of in mid-air, of the AI transformation globally. That money is going to shift along with a very interesting theme for investors to invest in all over the world because it will affect everyone. I wonder if you can just sort of speak to putting capital to work in new places but to what extent does that come into some version of an AI play as well?

[00:23:19] Tom Stevenson: I think AI is crucial to everything that you've just said. Look at the Chinese stock market as the investment opportunity. A year ago we had the DeepSeek moment when we realized that actually China has, and continues, to make enormous leaps in terms of technological innovation. I don't think that investors had really grasped that until a year ago. I think that was a major driver of what happened with stock prices last year. When I talk to our investors in the region, in Hong Kong and China, they talk a lot about the remarkable power of Chinese innovation. I think this is a massive opportunity. The whole AI focus has been really on the Magnificent 7 and US technology stocks. Over the last six months they have gone sideways, they've done absolutely nothing and so....

[00:24:36] Pamela Ritchie: But they've not interrupted the equity market by doing so which is great for people.

[00:24:41] Tom Stevenson: This is really interesting because that was the fear. Six months ago, a year ago, everyone thought if the pin pricks that bubble, that AI bubble, in the US it's going to drag the indices down with it. What we've seen is a sort of slow deflation of that Magnificent 7 technology story without affecting the rest of the market. Magnificent 7 have done nothing. S&P 500 as a whole has gone up marginally. Markets in the rest of the world have gone up really strongly. I don't think anyone a year ago would have really predicted that. I think that's been a very benign outcome for three investors.

[00:25:27] Pamela Ritchie: How on earth did that get managed? You feel like that's the sort of thing that you need a Fed or you need someone to manage that but it just did because I guess...

[00:25:37] Tom Stevenson: It's just happened naturally, yeah.

[00:25:40] Pamela Ritchie: It's incredible. Get the humans out of there, just let it happen.

[00:25:44] Tom Stevenson: Let's keep our fingers crossed that it continues because it has been, as I say, a much more benign outcome than I think we could have hoped for.

[00:25:51] Pamela Ritchie: Let's talk a little bit more about ... EM, you've mentioned there but the other side of it is sort of, I think you mentioned in one of your articles in the Telegraph, the sheer size of the outstanding debt of developed markets, the Canada's, various countries that seem to have room to do fiscal spending, which is exactly what they are planning to do and then some, but that doesn't mean it won't all catch up with everyone. We also have a declining population. I'll just quote Canada, got a number in I think last week, so you have many countries around the world that are developed, have lots of debt and declining populations. It's the demographic story. Again, sort of how that balances out to look probably further afield for investments.

[00:26:36] Tom Stevenson: Actually, I think it plays into the emerging markets story because you're looking at countries in the world which have more attractive demographics than many of the developed world countries do and actually have more robust and less stretched public finances than many countries in the West do. I looked at an interesting chart recently which is just a very simple chart, really, just tracking the relationship, the performance of US markets against other markets in the developed world but also developing markets as well. You see these cycles, they don't happen over a year or 18 months, these are multi-year cycles. I think it feels to me like we're at a watershed moment in which that sort of US exceptionalism is over and we are moving into a phase, which could go on for several years, in which emerging markets, other developed markets around the world actually outperform the US. I think it requires a complete rethink of asset allocation norms which we've taken for granted for many years. Makes it a very interesting time to be investing at the moment.

[00:28:00] Pamela Ritchie: It's just fascinating watching all of this. You have some terrific articles in the Telegraph every week, read through some of them. The discussion of inflation, certainly, and this terrific article, a little bit about your family, sort of daughter, where you are and where your parents are, ageing beautifully in place and so on but just the discussion of how inflation ultimately will affect each generation. It sort of goes to what we're talking about here. I wonder if you could just sort of expand on the worries of perhaps the next generation to come and what they need to be thinking about as they invest.

[00:28:40] Tom Stevenson: Absolutely. We've kind of shifted gears from a sort of macroeconomic analysis of what's going on in the markets to just a sort of personal financial planning thing. One of the things I've been writing about, I mean, you rightly point out that my parents are still alive, in their 90s, my children are in their 20s and 30s so I sort of sit in between those. I'm in this fortunate position of being able to see, well, for one thing, I'm lucky enough to have, I hope, reasonable genes, fingers crossed. If my parents are in their 90s I might be living and investing and managing my money for another 30 years. My daughter, who's 30, might be doing it for another 60 years. The analysis that I've done of markets and investments shows to me the absolute crucial importance of inflation over that period. The difference between inflation meeting central bank targets of, say, 2% and only just missing them, maybe being the high 2% or 3% or something like that, is enormous over a 30-year time period. I just think that we worry a lot about which markets to invest in, other sort of macro features, the one thing we really need to be worried about, I think, over the next 20, 30 years is inflation. We need to manage our personal finances, our financial planning, to cope with that.

[00:30:25] Pamela Ritchie: It's brilliant. Everyone should be taking a look at the Telegraph, if not subscribing all the time. Well, why not subscribe? In any case, take a look at Tom's articles. On the subject of newspapers, I'm only going to bring this up because I thought it was interesting, Fleet Street, one of their stars was Will Lewis, is Will Lewis, and he was the head of the Washington Post until just days ago when they did a pretty massive cut and they had reasons to do that. Interesting character from what I've read in various media reports. Is there anything you can enlighten us on?

[00:31:01] Tom Stevenson: I know Will Lewis very well because he actually hired me 20 years ago onto the Telegraph.

[00:31:09] Pamela Ritchie: He was at the Telegraph.

[00:31:12] Tom Stevenson: He was the editor of the Telegraph, and an interesting character, a very far-sighted visionary leader of a media organization. Actually, he saw 20 years ago the way that things were going with the print media, the move online. The Telegraph was essentially a dying publication because it had an ageing readership which was largely paper-based. He recognized that the world was changing and he created a digital- first Telegraph group and was very successful in doing that. That brought him to the attention of Rupert Murdoch and latterly Jeff Bezos at the Washington Post. Now, it clearly hasn't worked out at the Washington Post, 300 job losses was taken pretty badly by the workforce, and I don't think there are many tears being shed in Washington about his departure. Pretty remarkable and sort of inspirational leader in some ways, well, certainly 20 years ago.

[00:32:22] Pamela Ritchie: He  chose well with you. It'll be interesting to see where he lands, I mean, just to see on the other side of that where that kind of mind goes. Anyway, thank you for taking us around the world and through some of the massive shifts that are transforming in the headlines we read each day but also just sort of quietly taking hold across the globe. We look forward to our next catch-up with you, Tom Stevenson.

[00:32:47] Tom Stevenson: It's been my pleasure. Thanks.

[00:32:48] Pamela Ritchie: All the best. Tom Stevenson joining us live from London to help catch us up on where the world of investment may be going. It's really fascinating to hear his views. Tomorrow, portfolio manager, Darren Lekkerkerker, who's very on top of where things are changing too, he'll be joining the webcast for an in-depth discussion of what's driving North American equity markets today and where opportunities ultimately are emerging. It'll feature live French interpretations, so do join us, of course, in both and either official languages.

[00:33:16] On Wednesday you don't want to miss our exciting live interview with Louis Têtu. He is executive chairman of Coveo, a pioneer in AI-powered digital experiences, and Canadian. We're going to hear about his perspective on the next wave of AI breakthroughs and practical strategies for leveraging these advancements. Charles Danis will go live with Louis at 10:30 a.m. Eastern for a French language webcast and then we'll catch up with him at 11:30. en anglais. Thank you so much for joining us to kick off the week. We'll just point ahead to Thursday.

[00:33:49] Their first white paper of 2026, the GAA team tackles five critical questions shaping global markets. Portfolio manager, David Wolf, shares the team's perspective on what these questions could mean for investors, how they might influence asset allocation, which we've just been discussing with Tom, in the months ahead. This webcast also will feature live French interpretation. We'll see you in the days to come. I'm Pamela Ritchie.