Jurrien Timmer – June 29, 2020
In his weekly update, Jurrien Timmer, Director of Global Macro, provides insights on the past week’s market trends.
Turn in the markets
The markets that bottomed back in March rallied 45% to a short-term peak on June 8, 2020 at 3233 on S&P 500. Jurrien believes the Robinhood day traders may have been a part of that short-term peak. Gold and FAANG have consistently been top of the leaderboard, while value and small caps are on the bottom. Since the June 8 peak, the spread has been widening and now even the FAANG stocks are under pressure.
$5 trillion in money markets
There is $5 trillion currently sitting in money markets. According to the AAII investor sentiment survey, millennials – such as the Robinhood traders – are investing, but the older demographic is where most of the money is. Jurrien believes that older retail investors are still very concerned about the market which correlates to the mountain of cash in the money market.
Jurrien notes that Trump’s numbers are worsening lately; his odds are down 30%, with Biden ahead double digits, but the election is still 4 months away so a lot can change in that time. Jurrien is looking at bets on the senate and less at the polling. He believes a democratic swing could mean higher taxes, fewer buybacks and less financial engineering – all which point to a lower P/E for the stock market. With that said, the election system is frequent, so even if the Democrats sweep, there’s only so much they can do. He doesn’t want to sound bearish and thinks the effects on the stock market will only last for a year or two.
Added fiscal stimulus
Jurrien thinks there may be something in the pipeline, but the timeline is unclear. Before any expansion of the payroll protection plan, there would have to be more significant setbacks in reopening. Ultimately, the Federal Reserve continues to make it clear that it is there to be the “remover” of the left tails (downside).
Gold currency vs. the U.S. dollar
There are lots of opinions on this argument, with many saying deficit spending is highly unsustainable and will lead to the end of the reserve status of the U.S. dollar. Jurrien begs the question: “what would the alternative be?” He thinks the dollar will continue to come down but isn’t confident that it would get replaced as the reserve currency. He continues to be bullish on gold, because all the gold in the world can “fit into two swimming pools” and won’t be able to serve the global economy.
Steve Buller – June 26, 2020
Steve Buller, portfolio manager for Fidelity Global Real Estate Fund, discusses how the commercial real estate sector is benefiting from the economy reopening.
Impact of reopening on real estate markets
Steve notes that the reopening of the economy has been very positive for the sector: most kinds of real estate are places where people gather, so the relaxing of quarantines has brought benefits. Apart from the retail sector and hotels, good rent collection statistics are still seen in most sectors around the world. Retail, hotel and some office space sectors have been hit the hardest by defaults on rent payments.
Retail real estate
E-commerce has been taking away from retail real estate every year, and Steve believes COVID-19 has accelerated this trend by about two years. Customers appreciate the ease of e-commerce and may not go back to brick-and-mortar stores once they have reopened.
There is a cross-current, with technology enabling working from home versus a desire to work with others and collaborate in person. This risk is that office space is related to GDP and job growth, which both may slow in the future. However, an increase in the number of people working from home could be offset by the need to have more office space for people who are in an office.
Steve believes there are opportunities in the data and logistical centres that are needed to support e-commerce, because every $1 billion U.S. in e-commerce sales requires one million square feet of logistics distribution facilities.
He is wary of the value trap in the retail sector, because some retailers may not recover from the lockdowns, but he still believes global property stocks may be a good inflation hedge over the long term (that is, decades). Short-term rentals are also seeing quite a bit of demand, due to people being unable to travel and keeping their vacations local.
Don Newman – June 25, 2020
Fidelity Dividend Plus Fund portfolio manager Don Newman discusses how he is allocating his portfolio through the economic reopening.
S&P 500 rally
In Don’s opinion, the 45% run-up on the S&P 500 Index was driven by:
- The monetary policy response from central banks: for example, the Federal Reserve added about $3 trillion to its balance sheet in order to provide liquidity to the market, and to push people into risk assets.
- Fiscal stimulus of about $200 billion in Canada, which helped stabilize consumer spending.
- Optimism related to reopening the economy.
Don classifies his holdings into three categories:
1. Companies for which there is a high level of certainty that they will sustain and grow their dividends over the next two to three years: these companies are trading at reasonable multiples and have low volatility. Sectors include utilities, consumer staples, health care and communication services.
2. Companies acquired in the downturn: cyclical names that were extremely beaten up in the downturn and priced for death (down 70%). Don thinks a number of these could be multi-baggers. He is looking in the energy sector and in the metals and mining industry.
3. Great-quality companies that Don couldn’t own in the past because they were trading at higher multiples. These are companies with high ROE, strong pricing power and good balance sheets, and can be found in any sector.
Don is looking for companies with less-than-optimal leverage on their balance sheets, that won’t spend the next couple of years paying off debt and that can continue to grow, as well as companies with sustainable dividends that will continue to trade at premiums.
Dividends to replace buybacks
Don believes share buybacks will be off the table for several companies for some time, because it doesn’t look good to lay off workers and then buy back stock. He believes dividends may replace buybacks over the next couple of years.
Advantage of bigger companies
Don thinks COVID-19 favoured bigger companies with better balance sheets, which had the resources to get their employees working from home right away.
Ayesha Akbar – June 24, 2020
Ayesha Akbar, portfolio manager of Fidelity Global Asset Allocation Fund, addresses the trends she is seeing and how she is allocating in global asset classes amidst volatile markets.
Portfolio allocation mix
Ayesha keeps to a neutral allocation that has a heavier weighting in equities (65% equities, 30% fixed income and 5% cash).
Ayesha believes there have been two main drivers of growth over the past few years:
1. China, which has played a big part in economic growth
2. The U.S. consumer’s willingness to spend
Ayesha notes that the general consensus is leaning toward the view that supply chains will be coming home. North American markets don’t want to be reliant on overseas production, with most supply chains being concentrated in China, and the pandemic has reinforced this feeling. The question is how the U.S., for example, would move supply chains: would it employ people, or use robots? This could have large implications for inflation and wages.
Overall, Ayesha believes the turmoil should not be viewed as a bad thing. A lot is changing around the world, but that is normal. She is currently focusing on emerging markets and Europe, and believes that the European Central Bank’s recovery fund could make Europe an attractive place to invest.
Value vs. growth
Ayesha doesn’t think value stocks have been a great area to invest in over the past ten years, and has preferred growth stocks. For value to outperform, the yield curve would need to steepen again, and yield curve controls will be needed (something we may in fact see the Federal Reserve apply in the U.S.). Nevertheless, she does think it is good to have some value exposure in a portfolio as a means of diversification.
Peter Bowen and Michelle Munro – June 23, 2020
Tax and regulatory experts Peter Bowen and Michelle Munro discuss the 2020 retirement survey and whether there are new rules for retirement post-pandemic.
2020 retirement survey
This was the fifteenth year conducting the retirement survey, and this year, COVID-19 was top of mind. Many investors are worried about their financial situation, creating a swing in results that isn’t normally seen year-over-year.
The biggest swing was seen among pre-retirees, with 40% saying they feel negatively about retirement. This was the highest percentage since the survey debuted in 2014. Many people have lost their jobs and are worried about their future finances. Michelle believes this drives home the importance of working with a financial advisor.
Impact of COVID-19 on retirees
38% of pre-retirees and 48% of working retirees said they have been negatively affected by COVID-19, and overall, Canadians are looking to invest more conservatively from now on.
Importance of having a financial plan
Peter notes that people who have a plan tend to feel more prepared (financially, socially, emotionally and even physically), but only 22% of pre-retirees indicated that they have a written financial plan.
Sustainable withdrawal rates
The number that has historically been used as an average is 4%–4.5%, and the current environment should not change this. Withdrawal rates tend to vary over time: the first few years of retirement might require more money than later on, and this should be factored into your plan.
2020 Fidelity retirement survey is available now
Jurrien Timmer – June 22, 2020
In his weekly update, Jurrien Timmer, Director of Global Macro, provides insights on the past week’s market trends.
Bear market rally
Jurrien’s research on bear market rallies has shown that the only time we saw a bear market rally facing the same strength and breadth as today was in 1929–1932, which he also found surprising, because bear markets don’t usually produce much breadth.
The U.S. dollar has come down: Jurrien believes this could be a great opportunity, because it makes the rest of the world more attractive. If the U.S. Federal Reserve (the Fed) continues buying more paper than the U.S. Treasury is issuing, the dollar will remain weak and continue to present opportunities for global markets. A weaker dollar favours emerging markets, a value tilt, commodities and gold. Currently, Jurrien’s favourite geographic areas are emerging markets and Europe.
Jurrien believes that companies that can deliver stable growth in dividends, not just payouts, will be rewarded by an older investor demographic that is seeking income but unable to find it in the bond market, except in corporate bonds. Jurrien believes that in areas with aging populations, such as Canada and the U.S., stable dividend payers will win.
If inflation rises and the Fed holds nominal yields down, Jurrien thinks that could be a tool all central banks might use to bring real rates down to more negative levels – which would be a perfect backdrop for higher gold prices. If inflation comes back in a structural way, he thinks we could see value outperform growth and commodities outperform corporates.
Jed Weiss – June 19, 2020
Fidelity International Growth Fund portfolio manager Jed Weiss joined FidelityConnects to discuss his investment approach and where he is looking for opportunities in international markets.
Jed’s buy discipline focuses around three main qualities:
1. Multiyear structural growth prospects
2. High barrier to entry businesses (with strong pricing power at all points of the business cycle)
3. Attractive valuations based on earnings forecast
When one of these qualities starts to fall out of line, Jed pivots to his sell discipline.
Areas of focus
Jed is focused on franchise businesses; looking for durable franchises, with great secular tailwinds and attractive pricing. He is looking three to five years out when making investment decisions, and turnover is 20-30%.
Positioning throughout COVID-19
COVID-19 created a lot of new opportunities and Jed was able to deploy incremental capital in three categories:
- Companies which were once too highly priced.
- Resilient business models where stocks were anything but resilient and it didn’t make sense that they were down.
- Businesses that got better as a result of the crisis, but stock was down.
Jed is aiming to keep cash between 1–4%. He keeps a level of working cash as to avoid having to become a forced seller in a downturn in order to buy other securities, but also wants to avoid his cash position becoming so high that the macro exposure is driving the performance of the fund.
Jed believes that while China has traditionally been the factory of the world, they are starting to price themselves out of the market for certain manufacturing, and as a result, we are starting to see factories pop up in other areas such as South East Asia and Vietnam. The deployment of new factories and automation has been beneficial for other countries but can also lead to mini dislocations – which in turn can present investment opportunities for the fund. He thinks deglobalization was a trend since before trade discussions started.
Themes within China
- Ecommerce penetration is growing very fast
- Consumer spending is increasing
- Cloud computing is growing
Ten to 15 years ago, we used to look at what was happening in the U.S. and apply it to China, but we have started to see a reversal and now look at China to see what could happen in the U.S.
Sam Polyak – June 18, 2020
Fidelity Emerging Markets Fund portfolio manager Sam Polyak discusses the types of businesses he is looking for in emerging markets and where he is finding areas of opportunity.
Sam is known for his GARP (growth at a reasonable price) investment style and believes stocks follow earnings. It is stock selection that drives his process, which leads to a portfolio that he keeps to around 50 holdings. Sam has strict investment “guardrails” in place for the Fund (country-, sector- and stock-specific) to increase diversification and boost strong risk-adjusted returns.
Countries and sectors of interest
Sam is allocating more than the benchmark to two countries: Mexico and Russia. He notes he has never had larger-than-benchmark positions in these countries before, and while he acknowledges they have been badly beaten up, due to their reliance on oil, he thinks there are still a few very good companies to be found there. Mexican banks are inexpensive, in historical terms, and so are materials companies. In Russia, a company similar to Google has done well, thanks to good management, which has enabled it to increase its positioning in Russia, as well as minimal competition.
Transparency and analysis in emerging companies
Sam notes that Fidelity has the advantage of a strong research team based in Hong Kong that is always on the ground meeting companies, suppliers, management and consumers, but what differentiates Fidelity most is a focus on corporate governance. Fidelity’s corporate governance team, based in Bangalore, completes analysis of all potential investments, performing background checks and making deep dives to avoid possible pitfalls.
Impact of the virus
Sam believes we may continue to see regional lockdowns worldwide, but not a repeat of what was seen in March, when the whole world stopped. He expects the world will slowly climb out of the lockdown and is increasingly confident that things will begin to get better in the second half of the year if we see a vaccine and travel starts up again. Some industries may continue to suffer more than others – commercial real estate, for example, as people continue to work from home – but others may continue to benefit, such as e-commerce and supermarkets.
Patrice Quirion – June 16, 2020
Portfolio manager Patrice Quirion believes that there are some good opportunities for contrarian investors at this time and shares which areas he is finding most exciting.
Patrice sees this as a great opportunity to rotate from growth stocks – which he dubs the “market darlings” – to good-quality, long-term businesses that have taken a hit. For investors who can take a long-term view, Patrice believes, there could be once-in-a decade types of opportunities. He believes we should be positioning ourselves to buy good cyclical businesses; if the economy takes longer to recover, these companies are more likely to make it through, and they could offer a lot of upside potential.
Health care and manufacturing
Patrice has steered clear of buying companies that are developing testing for the virus: they have high valuations already and can not be chased. He has found medical devices and elective surgeries to be a more attractive subgroup in the health care sector.
In Patrice’s opinion, manufacturing is one of the best positioned sectors at this time. Companies in the sector are hurting, and capacity has been reduced as a result of trade wars, Brexit and a slowdown in China, but they could provide a good contrarian buy for investors who are able to look a few years ahead.
Areas of focus
- South Korea: The country has a strong manufacturing economy and is a heavy exporter; Patrice thinks there could be lots of opportunities there.
- Automotive: Sales are down, but in the longer term a case could be made that fears of public transport could boost demand for automobiles. Patrice is focusing on the best companies that support automotive chains.
- European financials: Patrice has added some exposure to what he considers to be the better banks in Europe.
Jurrien Timmer – June 15, 2020
In his weekly update, Director of Global Macro Jurrien Timmer provides insights on the past week’s market trends.
Jurrien believes the correction was necessary and not something for investors to worry about, noting he believes the odds are in investors’ favour, and that throughout history the market has never recovered this much without being the start of a bull market.
Capital vs. labour
Jurrien notes that there is a sense that companies are rewarded at expense of “little guy”; if we have a reversion of this, corporate tax could increase in the U.S. A weaker earnings growth could mean fewer earnings are paid back to shareholders. Because of the capital to labour switch employees could be rewarded over shareholders which would result in lower valuations.
Jurrien believes if we see a transition from capital to labour, at lower levels minimum wage could increase. On the other hand, if companies see increased productivity having their employees working from home, would they still need to pay their employees “big city salaries” or could they potentially reduce salaries as people migrate out of cities or are living in areas where the cost of living is lower.
Data has been impressive, particularly in Chinese PMIs (Purchasing Managers Index), with a complete “V-shaped” recovery on the PMI front for China. This gives Jurrien hope that we can all recover from the impact of the virus from a goods-manufacturing perspective. China is a big part of the MSCI index and Jurrien believes this is a good reason why the index has done well and there could be good opportunity here.
The U.S. has less of a social safety net as compared to other countries such as Europe which have large pension plans to support retirement income. This could explain why the leadership combination in the past five years has been secular growers and stable dividend payers over deep value, due to the fact that these stocks provide cash flow in the low interest rate world that everyone needs.
Hugo Lavallée – June 12, 2020
Contrarian investor Hugo Lavallée shares his outlook on where he is finding opportunities that fit his mandate in reopening economies.
Hugo has a foot in both value and growth stocks and can tilt either way. The course of the pandemic has played into his investment style: looking for good businesses that are facing what are likely to be temporary issues (difficult quarters or years). While bad events come and go, affecting volatility in the now, Hugo is focused on the later. His top holdings right now are companies selling small-ticket items, such as 5below, Dollarama and Chipotle.
- Financials: Hugo allocates less than the benchmark to this sector and doesn’t own any Canadian banks.
- Oil and gas: Despite having had success in this area in the past, Hugo currently has no interest; there are too many headwinds for his investment style.
- Cyclicals and industrials: The portfolio manager increased holdings through the downturn and used them to gain beta in the portfolio.
- Canadian housing market: Hugo believes this area will be fine, given that it was able to recover from 2008–2009. He is more concerned about immigration, which is traditionally a great engine for economic growth.
- Tourism: Hugo is not currently buying in this sector, whether it be hotels, airlines or travel agencies.
- Gold: Hugo is optimistic about gold but doesn’t hold a lot right now.
Hugo’s main focus is on the “E” (environmental), but he notes that his peers at Fidelity do a great job looking at the “S” and “G” (social and governance). It’s also important to remember Fidelity has its own ESG ratings and doesn’t just follow the MSCI assessments.
Andrew Clee, Jing Huang and Andres Rincon – June 11, 2020
Andrew Clee, VP, ETFs, joined Jing Huang, Director, BMO Capital Markets, and Andres Rincon, Director, ETFs, to discuss how investors might incorporate ETFs into their portfolios.
April saw low inflows into ETFs of $650 million, but May saw inflows increase significantly, up to $2.5 billion, and a resumption of risk-on trading. Equity markets have been showing movement for value stocks, which are outperforming growth stocks, and small caps, which are outperforming large caps.
Current themes for advisors
Andrew and his associates note that advisors are inquiring about specific asset classes, with lots of interest in commodity-based ETFs and gold, and that they have recently seen a lot of smaller names in the gold space adding value to portfolios.
ESG investing continues to be a trend, particularly on the institutional side, with slower growth on the retail side. While COVID-19 has temporarily interrupted the conversation, prior to the pandemic ESG was a focus for many companies, and they believe it will return to the forefront once the pandemic passes. Through the most recent volatility, ESG funds performed well, and there is a lot of research that indicates ESG leads to alpha.
Another noteworthy trend is that for many institutional investors, ETFs are moving from tactical applications to core uses.
Current factor rotation
Mark Schmehl – June 10, 2020
Portfolio manager Mark Schmehl observes that things are getting better, but the real question on everyone’s mind is how quickly things will recover. His funds have performed well through the crisis, however, because they had been invested in many companies that benefited from the work-from-home trend.
Areas of focus
At the top of the tail, Mark believes working from home is a secular theme, and that related stocks will continue to perform well. He is looking at companies in this space that offer a lot of innovation (e.g., Zoom and Etsy), and is interested to see how ESG companies, such as Tesla, recover. He believes some of the trends he was invested in before COVID-19 are starting to come back but are still being overshadowed by the virus.
Mark notes that he owns companies in both tails, and at the bottom tail are mainly tourism-related stocks (e.g., cruise lines, airlines and booking companies). He notes that when a company in a really destroyed sector can come back to the markets and sell equity, it shows the company has probably bottomed; he is buying into some of these in the belief that they will go “un-bankrupt.”
Mark’s turnover rate is very low right now, as he already owned a lot of companies that have worked well in this crisis, such as Etsy, Slack, Zoom and Shopify, and he was therefore able to capture a lot more of the upside than expected. His process has been to stick it out with the companies that have worked well and to add to the more adversely affected ones.
Mark believes a lot will change over the next 12–18 months, and he is trying to determine which companies will benefit from these changes and which ones may lose out. When speaking to management teams, he is focusing on the trends they are seeing among their customers: whether consumer behaviour generally has changed, whether there are any data that companies are finding surprising, and whether a change in customer behaviour has affected business.
Sri Tella and Catriona Martin – June 9, 2020
Fixed income portfolio managers Sri Tella and Catriona Martin are cautiously optimistic about the recent reopening news, and are watching to see whether the consumer bounces back. Moving to a reopening phase is important to continue building confidence, but while indexes have improved significantly, and we are beginning to see people go back to work, we need continued support in moving through the ongoing volatility. Sri and Catriona are looking at:
o unemployment rates (temporary vs. long-term)
o high-frequency indicators (e.g., number of people driving)
o liquidity runway for companies (e.g., do they have enough liquidity to survive?)
Monetary and fiscal response
The Bank of Canada helped with the funding and liquidity of the markets, making it clear that the purpose of its programs was to improve market functioning, and the sheer size of the stimulus has allowed companies to raise money more easily. Canada entered this crisis in a strong position and maintains the lowest debt-to-GDP ratio out of all G7 countries, putting Canada in a good position to fund its debt.
Sectors in focus and high-yield opportunities
Risk assets were stretched coming into the current period, waiting for a catalyst to revalue the markets, and we saw unprecedented levels in bond valuations. The managers have found cable telecom and grocery stores to be attractive areas, both being essential and in high demand during this period.
The managers note there have been opportunities among both high-quality and high-yield names, and spreads had been the tightest seen during the current business cycle prior to the crisis. Catriona used wider spreads to increase exposure to high yield.
The managers note that inflation expectations are quite low for the near term, but it could be a good idea to have inflation protection in your portfolio for the long term.
Jurrien Timmer – June 6, 2020
Director of Global Macro Jurrien Timmer addresses the past week’s market activity.
- Last week saw forced capitulation brought on by the job report released on Friday, prompting some question about the accuracy of the numbers.
- Pieces have begun to fall into place to make it look like a cyclical bull market:
o The market is broadening from what was narrow leadership by a handful of growth stocks, adding fuel to an already impressive rally.
o The Russell Index hasn’t gone up as much as the S&P Index, and had a more meaningful retest, but in the last few weeks these companies are moving upwards and broadening the market.
- We are seeing people fight the rally, but this could be a good thing if it continues to provide fuel for the market to go higher while people sit on the sidelines.
o Money was taken out of equities as the market recovered.
o $4.75 trillion dollars is sitting in money market, but what has come out has barely made a dent in this amount.
- Hedge funds are pressing their bearish bets, which provides more fuel, because they must cover their shorts. Hedge fund indexes show daily returns, and calculating rolling returns against the S&P 500 can give a hint as to whether these products are long or short on equities. (A rolling beta below 0 suggests they’re short.)
- A declining U.S. dollar is also a bullish development, as a strong dollar suggests liquidity squeeze, which isn’t favourable.
Jurrien notes that this is a serious issue; it had been put on the back burner, but resurfaced when global supply chains demonstrated their fragility. Investors care about these issues, but the flattening of COVID-19 and the economic curve have taken up more bandwidth, because they move the needle faster.
Rise in treasuries
Treasuries were at 0.3% at the lowest and then got stuck around 0.6%–0.7%. They are now closer to 1.0%, which is another good indicator for the bullish case. Jurrien points to two indicators in particular that suggest rising yields are justified in the current environment:
- ratio of financial stocks to utilities
- ratio of copper to gold
Price vs. earnings
The market had priced in a much worse outcome than what we are getting, and earnings for 2020 are now flattening. Either prices are too high, and needs to correct downwards, or earnings estimates need to inflect higher. Jurrien believes earning numbers will start sloping up, especially this time around, where there is no guidance from companies. It is also possible that earnings numbers are just slower.
Jurrien thinks it is possible that headline economic numbers could be overstating the degree of economic weakness. This was seen in the release of payroll numbers that don’t add up to the number of jobless claims.
Ultimately, Jurrien stands by two statements about not getting in the way: “Don’t fight the tape” and “Don’t fight the Fed.”
Joe Overdevest and Lucas Klein – June 5, 2020
Directors of Research Joe Overdevest and Lucas Klein have been watching sectors and market trends. Joe notes that he is currently most excited about financials and resources, but because of the breadth of the Fidelity research teams, they are able to find opportunities in almost every sector.
Housing and real estate
Joe believes this sector has slowed down, largely due to high levels of consumer debt and the inability to make actual visits to properties in the current environment. In the U.S., the housing market has been under-building for the last 15 years, and Lucas believes once the market reopens, we could see a lot of pent-up demand.
Joe believes that there is a very low probability that Canadian banks will make dividend cuts, and from a sector perspective, the portfolio managers are seeing more attractive opportunities in this sector than they have for the last couple of years. And in the U.S. financial market, Lucas notes, brokers are down to less than one times tangible book; at recessionary levels like this, he believes it makes sense to invest in banks.
Historically, globalization has lowered costs. Joe notes that a trend towards deglobalization may increase inflation.
David Wolf – June 4, 2020
Portfolio manager David Wolf, a former advisor to the Governor of the Bank of Canada, manages over $65 billion in assets as part of the Global Asset Allocation (GAA) team. He notes several themes in the economy right now:
- The “Main St. vs. Wall St.” story.
- Stock markets nearing record highs present a market dichotomy: a buoyant stock market, but the worst economy in years.
- Policy responses to the pandemic mean governments are running deficits.
- Economic shocks, particularly to small businesses; larger companies are at an advantage because of costs going down in areas such as learning and development and employee wages.
- The highest unemployment rate since the Great Depression.
David notes that the forecast for the Canadian dollar is weak, as it is for currencies in many other economies. Underlying economic indicators and trade flows will be important indicators of future economic performance.
David believes companies will be deliberating cost-effectiveness versus reliability, but reliability has become more of an issue due to COVID-19 and trade frictions. He suggests we could see an increase in cost, to ensure reliability, but this might reduce production, efficiencies and growth as a result, due to the increase in expenditure.
The GAA team is maintaining a fairly neutral perspective overall: “We don’t want to chase this equity rally.” The team’s funds allocate less than the benchmark to Canada and more to emerging markets and Europe. David notes that Europe is becoming increasingly interesting in terms of companies showing potential for a promising recovery.
Investment point of view
David plans to steer clear of the domestic economy and is looking to emerging markets. Considering the markets as a bigger picture, he believes many companies still have some growth potential, due to the stimulus that federal governments is pumping out.
Market direction and trends
David notes that growth stocks have performed well, and while value was the place to be for several decades, it is less so now. Fidelity Managed Portfolios and Fidelity Private Investment Pools both offer balanced solutions, with both growth and value in the portfolios, and it can be helpful to avoid a large tilt either way.
Jason Kenney, Travis Toews and Tanya Fir – June 4, 2020
Alberta Premier Jason Kenney, Minister of Finance Travis Toews and Minister of Economic Development, Trade and Tourism Tanya Fir joined FidelityConnects to address recovery in the province and the outlook on oil.
Overall, they have been surprised by the quick recovery in energy, and while the industry is not necessarily profitable as of yet, it is still a good sign.
Global diversification strategy
The province’s government is working on ensuring that it has a presence in key global markets, but the U.S. will always be the most important trading partner; diversifying doesn’t change that.
Finance Minister Travis Toews notes that he is pleased with many of the projects they are working on. Their goal is to see additional pipeline capacity to every major market point, including one into central-eastern Canada to serve refinement capacity.
Premier Jason Kenney thinks that the huge global downturn is reminding people that we need policies to get everyone back to work, and the pipeline industry can help to create good, high-paying construction jobs. He notes it is important to have a North American strategy to ensure Canada is not dependent on oil from Saudi Arabia or other producers, and the Alberta government is advocating that Canada produces oil better, cleaner and safer than anyone in the world.
The premier believes that if ESG performance were assessed on a more objective basis, and on a company-by-company basis, Canadian producers would get much more credit in their scoring. He believes a lot of the decisions institutional investors have made to restrict investments are based on misinformed campaigns.
The province is launching a number of immigration programs based on startups and entrepreneurship. An immigrant entrepreneur stream, for example, could address the succession crisis for small to medium-sized businesses, by allowing willing prospective buyers overseas to tie their acquisition of those businesses to permanent residency.
Co-operation across provinces
Premier Kenney notes that there has been amazing co-operation between all the provinces and the federal government, and that the public would be amazed to see the level of collaboration on the issues of both the economy and public health.
The province is looking at providing another form of financial liquidity for companies facing stress, on top of the federal government’s EDC/BDC credit programs.
In order to start the tourism industry, Economic Development, Trade and Tourism Minister Tanya Fir notes, it is critical to find a way forward to allow for safe travel again. Her ministry is working with Tourism Alberta to promote “staycations.” As they work toward the next reopening phases, and when travel across the country resumes, they plan to continue to grow relationships with airline partners.
Outlook on oil
The Premier estimates that it will take around 12–18 months before the excess inventory of oil will be drawn down to lower levels; for now, he is hoping that the market can get back to around $40/barrel, which is about a breakeven price. All in all, he believes that people should be bullish in the mid- to long term on Canadian oil, because Canada is more capital efficient, and competition is getting shut out.
Adam Kutas – June 3, 2020
Portfolio manager Adam Kutas is monitoring trends in globalization and what they could mean for investors as companies move out of China and into neighbouring emerging and frontier markets, and considering whether COVID-19 and the widening U.S.-China rift are accelerating these trends.
Adam notes that globalization has been one of the most consistent trends in world history, accelerating in China with the Belt and Road Initiative, and being seen also in the fiscal integration of European countries.
The world is evolving, and in the current market environment research is focused on supply chains. Many companies are rethinking their supply chains right now, due to the trade war, which had not previously been an issue, and are hedging their exposure to China.
China’s Belt and Road Initiative is helping the country to re-establish itself as a global power, creating a sphere of influence (through economic, political and trade relationships) in countries that trade more with China than the U.S., and by creating a dependency on China.
Areas of opportunity
On a structural basis, Adam believes the same countries (the Philippines, Bangladesh and Indonesia) are still the winners. He is watching where private money is going, looking for the best positions at a good price, and has been deploying capital aggressively.
Dan Dupont – June 2,2020
Portfolio manager Dan Dupont has a positive outlook and is excited about the upside potential of large-cap stocks over the next few years.
Since beginning to deploy liquid assets that accounted for 40% of the Fund in March, Dan has become bullish on oil and has increased his positioning in the sector. He doesn’t believe the long-term consequences of government stimulus in response to COVID-19 will affect equity investors very much, and is not veering from his core investment philosophy.
Dan notes that for Fidelity Canadian Large Cap Fund, he is seeing more opportunity in Canada than he has in the last five to eight years, and has increased allocations to oil and gas, and to banks, which had good book value back in March, and whose long-term success, he believes, will outweigh any upcoming short-term volatility. The foundation of the Fund, however, is largely made up of consumer staples and tech companies, which helps manage volatility.
Value vs. growth
The discrepancy between value and growth that has been trending for years, with growth outperforming value, has continued even through the coronavirus pandemic.
Oil and gas
Dan has used the low valuations as an opportunity to increase his holdings in companies that are well-positioned over a longer-term investment horizon (ten to twenty years).
Jurrien Timmer – June 1, 2020
In his weekly update, Jurrien Timmer shares insights on the past week’s events.
Indicators over the past week
- We have seen positive breadth and momentum, positive leadership, a falling U.S. dollar, a flattening earnings curve and a lot of skeptics in the market.
- Markets are up 40% from the lows and are down only 10% from the highs.
- Drawdowns in earnings estimates are still very weak, but are flattening.
- There was a recent increase in the savings rate, to 33%.
- The U.S. dollar is starting to weaken.
- 94% of stocks are trading within their 50-day moving average (highest in 20 years).
- This advance is happening despite negative market sentiment.
- $4.8 trillion is sitting in money markets.
U.S., China and Hong Kong
The market is more focused on the impacts of COVID-19 than the U.S.-China relationship right now, and this is an area to watch, particularly with an election approaching.
U.S. recovery outlook compared to other G7 countries
Jurrien believes the U.S. is in a unique position, with the Federal Reserve (the Fed) and the Treasury on the same page. In Europe, by contrast, the situation can be more complicated, due to a lack of central fiscal policy.
Disconnect between Wall St. and Main St.?
Jurrien believes that, as in the Great Financial Crisis, further-out earnings estimates may be too low during times like these.
Why are we seeing this recovery?
Virus containment and lockdown are some of the most important factors, followed closely by the U.S. Fed response.
Jurrien believes we can expect volatility to come down as the health care situation improves and economies reopen, but people will still be concerned that economies are reopening too fast and that we might have to lock down again. He is concerned this may turn the anticipated “V-shaped” recovery into a “W,” if a second wave were to disrupt the recovery scenario.
Emerging and frontier markets
He believes a weaker dollar is a positive development (and a bullish signal) for investing in emerging and frontier markets; it is important for U.S. markets, and could be even more important for non-U.S. markets that are shorting the U.S. dollar.
HyunHo Sohn – May 29, 2020
HyunHo Sohn, portfolio manager of Fidelity Technology Innovators Fund, addresses current trends in the technology space and explains where he is finding opportunities.
HyunHo notes that from a consumer perspective, online shopping and platforms used to connect virtually have benefited from increased usage, as well as from digital entertainment options such as Netflix, streaming platforms and gaming companies. On the corporate side, there has been a shift to get employees connected and working from home, in order to ensure companies could sustain their productivity.
Fidelity Technology Innovators Fund
HyunHo believes his mandate is different from other tech funds in the market:
- He has a close focus on important long-term industry trends, for example, AI and the cloud, although he remains conscious of valuations and spends time considering market and consumer sentiment.
- He goes against the market, compared with other tech funds’ investment horizon.
- HyunHo understands the volatility of tech stocks; when market sentiment on these stocks deteriorates for a short period, his focus on long-term trends can be beneficial.
The Fund allocates more than the benchmark to small/mid-cap stocks, where HyunHo finds more interesting ideas; other firms don’t have the research capacity that Fidelity has to find great ideas in smaller spaces. HyunHo is finding opportunities outside of North America, most notably in Japan and other parts of Asia.
Global trade tension
Overall, HyunHo is optimistic about the U.S.-China relationship; he believes the countries will find common ground, because the trade war doesn’t benefit either party, particularly given China’s reliance on U.S. semiconductors.
Software and cyber security
The Fund allocates less than the benchmark to these industries, whose stocks trade at high multiples that HyunHo has difficulty justifying. HyunHo notes that it has been difficult to find investment ideas in the area of cyber security, due to a rapidly changing landscape, but he does own a few companies that are indirect plays.
Alex Gold and Dr. Judith Finegold – May 28, 2020
Alex Gold, portfolio manager for Fidelity Global Health Care Fund, and Dr. Judith Finegold, health care equity research analyst and portfolio co-manager, are assessing the future of the health care sector amid the pandemic.
Health care-focused research has become incredibly important not only to the sector but to the overall market, and the health care sector is very defensive. However, there is an increasing concern that people are not going to the hospital for procedures, because of fears of the pandemic. Due to unemployment, an increasing number of people are also without insurance, which also means that fewer people are having medical procedures. This is causing some problems in the sector.
The Fidelity advantage
Finding resilient companies to invest in is crucial right now, and Fidelity has an edge, because it has better access to many companies, in real time, than other companies that invest in health and medical industries.
Alex and Judith have increased their holdings in treatment companies, and already had good exposure to diagnostic and lifestyle tool companies, both of which they believe have benefited the Fund.
Darren Lekkerkerker – May 27, 2020
With the continent gradually reopening its economies, portfolio manager Darren Lekkerkerker discusses where he’s uncovering opportunities for long-term growth.
Seeing opportunities during the indiscriminate sell-off
During this period, Darren looked at the defensive companies that he owned and slowly started to sell them and to buy great names that were badly beaten up during the March volatility.
The consumer discretionary sector – particularly retail and restaurants – was an area of focus, especially fast food. These companies were not hit as hard, so long as they already had takeout and delivery strategies, and they have tended to have higher year-over-year sales because people are not frequenting dine-in restaurants.
Darren focuses more on large-cap stocks, which tend to do better because of their larger amounts of cash flow, and which are therefore less affected by liquidity issues and generally less volatile than small-cap stocks.
Many large-cap companies were set up better for the lockdown, in terms of being able to have employees work from home, due to their early adaptation of cloud platforms.
What we may see next in the Canadian landscape
Darren believes that many cyclicals that did not fully participate in the market recovery, relative to growth stocks, may perform better.
He notes we could see improvement in the Canadian dollar, because Canada has a lot of cyclical companies, compared with the U.S.
Reopening economies can be a risk, but Darren is focusing on the data – which are positive in the U.S. He is seeing markets continue to react positively to reopening and encouraging news about a potential vaccine.
Over the medium to longer term, Darren believes oil prices will start to climb from their current levels, because at present the oil price is below marginal cost for many producers.
Commodities markets look at supply and demand: we are starting to see producers shut down production and limit supply; at the same time, as economies begin to reopen, demand is increasing.
Jurrien Timmer – May 26, 2020
Surveying the past week’s market highlights, Jurrien Timmer, Director of Global Macro, is optimistic; he notes that the market has never recovered this much of a decline without marking the start of a new bull market.
The stock market is a discounting mechanism that went from pricing in a 2020 earnings decline to pricing in a much smaller earnings decline in 2022. From an earnings perspective, it is pricing in a “V-shaped” recovery.
Even though the Federal Reserve has added $3 trillion to its balance sheet, Jurrien thinks that if the dollar stays strong, that might be a sign of a continuous global funding crisis, because a weaker dollar is an important bullish indicator.
Money market and investor sentiment
Based on the amount of money sitting in money market funds, and on last week’s investor sentiment survey, it appears there were more bears last week than there were at the bottom in March.
Jurrien believes these indicators tell us two things:
1. If you have a diversified portfolio and the tolerance to ride out the storm, that has proven to be a positive investment strategy.
2. The market is front-loading a lot of good news; this doesn’t mean a bubble. Sometimes fundamentals are in line and sometimes they are not, but it is always important to remember that the market is a discounting mechanism.
Jurrien’s belief is that this rally will not run out of gas until more bears have come out, and that the market is focusing more on the trajectory of the pandemic and the shape of the recovery than on the upcoming U.S. election or tensions with China.
Jurrien views COVID-19 as another “nail in the coffin” for globalization – the first being tariffs – and speculates that companies will now be more motivated to bring supply chains closer to domestic markets. A lot of this news has already been priced in.
Value vs. growth
In order to see a rotation, Jurrien believes we need to see a regime change in terms of inflation. Historically, periods of rising inflation have favoured value over growth.
Catherine Yeung – May 25, 2020
As China enters its recovery phase, investment director Catherine Yeung believes there are a few major factors that may influence the recovery.
Catherine believes that China – and investments in China – may come out of this environment better than other economies. She sees three main factors influencing the Chinese economy at this time:
1. COVID-19: The curve is flattening, and while there has been a bit of a second outbreak, it is being well contained by immediate shutdowns and shifting medics to areas where there is a concentration of cases.
2. Policy response: Catherine believes the Chinese government has not yet thrown everything it has at the economy: there are still tools it can use as stimulus.
3. Economic recovery: China is mindful of its action plan, focusing its efforts on the labour market and reducing unemployment numbers.
Catherine believes rising geopolitical tensions, especially between China and the U.S., will continue to add volatility.
Chinese policy makers released a road map to roll out 5G, new health care reforms and a plan to place a greater emphasis on China’s domestic recovery by putting its domestic market first.
It will be challenging for other markets to replicate the efficiency China has in terms of its supply chains, and other regions are experiencing bottlenecks as they try to compete.
ESG is becoming a driver for Chinese corporate investors. The social factor has been a key priority, but environmental responsibility is starting to gain traction.
Andrew Clee and Paul Ma – May 22, 2020
Andrew Clee, VP, ETFs, and Paul Ma, VP and lead portfolio strategist, outline the fundamentals of ETF portfolio construction and the pros and cons of different types of portfolios in today’s volatile environment.
ETF portfolio construction in today’s markets
Active management is important, because it addresses secular views, which can account for up to 80% of a portfolio’s long-term performance, whereas ETFs can address tactical views, which can account for up to 20% of a portfolio’s long-term performance.
Andrew and Paul suggest that it may be beneficial for investors to rebalance their portfolios annually, using a 5% threshold.
Asset allocation and portfolio construction
Factor ETFs allow advisors to customize a client’s portfolio based on their objectives and the outcome they are seeking. For example, if a client needs income, then a dividend ETF might be the best complement for the investor’s portfolio.
It can be a good strategy to step away from cookie-cutter portfolios and focus instead on a “core and explore” strategy.
Core and explore strategies
The Canadian market is biased toward banks, miners and energy producers. To address this concentration, a good way to add exposure to non-core sectors is through factor ETFs, which can offer broader diversification benefits that are sustainable over the long term.
Does fixed income threaten 60/40 portfolios by not providing the safety it has in past years?
Bonds are not only for income; they can also be used for downside protection. Over the long run, a balanced portfolio can lead to higher returns – and a smoother ride – making a bond component a key part in portfolio construction.
Rebalancing can also help outperform a simple buy-and-hold strategy.
Max Lemieux – May 21, 2020
Max Lemieux, portfolio manager for Fidelity True North® Fund, says the Fund was in a good position prior to the virus. Max believes the crisis has been a great stress test for the portfolio, allowing him to gradually change positions in the Fund; slowly reducing defensive positions, but not leaving this “bucket” completely.
Max believes that the economy in Canada is no worse off than in the other G7 nations, or indeed in other countries across the globe.
He is looking at indicators that will paint a picture of what reopening the economy and a potential recovery could look like, such as:
- countries hit first by the virus that are now reopening
- copper, as an indicator that the industrial economy is reopening
- the global automotive industry, because it is a large user of metals and materials for production, which could indicate that the economy is reopening
Fidelity True North® Fund
Max reiterates that Fidelity True North® Fund was well positioned prior to the volatility caused by the virus, due to its tilt toward higher-quality companies with healthy free cash flow, solid balance sheets and strong management teams.
Opportunities across sectors
There are opportunities to find great, well-managed companies across every sector.
Max keeps 10% of Fidelity True North® Fund open to exposure outside of Canada, in order to buy into sectors that are not well represented in Canada, such as technology.
Max believes human habits are strong and resilient, and that when the current environment normalizes, old habits such as air travel may return.
Nicole Connolly – May 20, 2020
Head of ESG and portfolio manager for Fidelity Women’s Leadership Fund, Nicole Connolly has been following ESG performance during the market downturn. Because the data available for ESG reflect the earlier bull market environment, it has been interesting to see how these companies perform through a downturn – and to see that investors sticking to their investments, which suggests that ESG investors are long-term investors and committed to the causes they invest in.
ESG investors sticking to it through the market downturn, with positive overall flows in ESG funds
Since early 2019, quarterly flows into ESG products have been very strong, and flows into ESG products from the market peak on February 19 to its recent bottom continued to be positive.
Nicole believes the crisis has changed individuals’ priorities, and that this shift has the potential to influence the way people think about their investments and the type of companies they choose to invest in.
High-scoring ESG companies have outperformed the market by more than 1% per year over the past six years.
Looking at the period from the February 19 peak to the bottom, ESG funds outperformed their non-ESG counterparts by about 80–100 basis points (adjusted for sector bias).
Pillars of inclusion
We have now screened 700 companies globally for diversity inclusion, considering 25 categories. (For instance, how do they navigate the gender pay gap? Female board member numbers? Diversity?)
Opportunities in the market: Small caps and value seeing attractive risk reward
We are seeing a valuation dispersion in value stocks that hasn’t been seen since 1985. The Russell 2000 (which is also a proxy for small caps) is down 20%.
Nicole has been leaning toward high-quality small-cap and value names with good return on capital and good cash-flow allocation.
Fidelity’s approach to ESG: Quantitatively driven, and using a proprietary ESG rating
One of the research tools Nicole is excited about is a proprietary ESG rating that Fidelity has developed, for internal purposes, to apply to companies.
Jurrien Timmer – May 19, 2020
Jurrien Timmer, Director of Global Macro, reviewing the past week’s market activity, highlights that it was a tough week of headlines in the U.S., particularly as trade tensions with China continued, and the conversation began to shift from geopolitical concerns to what comes next in terms of fiscal stimulus.
Jurrien believes that the market disconnect between declining earnings estimates and economic measures, such as GDP, has left market participants divided into two categories:
1. bulls, who believe price leads fundamentals
2. bears, who believe in a money illusion created by the Federal Reserve (the Fed)
He believes the truth is somewhere in between, because price is operating on a different schedule than earnings. According to Jurrien, if you look at earning estimates for 2021 and 2022, prices are up; the market could be pricing in an earnings recovery.
Cash on the side
In the U.S., there is currently about $4.7 trillion sitting in money market funds. This could be fuel to drive the markets, although investors are still fearing the unknown.
The Fed and the U.S. dollar
Jurrien doesn’t think the Fed is the only buyer; people will still need income, because the demographic trends that preceded COVID-19 are still in place. What the Fed is doing is providing liquidity to the bond market, and it has done a good job fixing the plumbing; the Fed will continue to be a buyer.
Jurrien believes the U.S. dollar might be a concern – specifically, if it doesn’t start to come down. A rising dollar means that there is still a massive global funding crisis, and that’s something no one wants to see.
Possibility of retesting lows
If you look under the hood, you can see a retest here and there (e.g., on Russell 2000 Value Index). Depending on which sector you look at, we can find instances of retests, but volatility has not gone back up.
Matt Siddle – May 15, 2020
Matt Siddle, portfolio manager of Fidelity Europe Fund, is encouraged by the decreasing number of cases of COVID-19 in Europe as a result of the lockdown, and recent developments in the countries that were hit hardest, but are now able to begin to return to work.
As far as trade tensions go, he sees that while the U.S. is facing off against China, the E.U. has been less vocal. This has led to some European businesses doing better and having exposure to more opportunities. Within the E.U., Brexit has taken something of back seat to the ongoing health care crisis, and he believes that it is currently difficult to guess what the outcome will be.
Right now, Matt is looking for good businesses with attractive returns and strong balance sheets. He doesn’t consider himself to be an aggressive growth manager, but is still looking for good-quality companies with attractive valuations. In the short term, he believes we will see more volatility; however, his long-term outlook is very positive. His current portfolio contains positions in food businesses (e.g., food delivery businesses) and health care, with a large allocation to companies in the fight against the virus. He is cautious regarding European financials, because while they are exceptionally cheap at the moment, they are a greater risk in terms of profitability. He sees more opportunities in insurance, an area that has been hit hard, but where the fundamentals remain. Valuations in this area are extremely cheap, but the risk/reward ratio looks good compared with different cyclical areas of the stock market.
Ramona Persaud – May 14, 2020
Portfolio manager Ramona Persaud divides the last four months into three phases. The first phase – before we knew there was a crisis – started back in January when, through the extensive research of Fidelity’s analysts, she was able to sense the possibility of a global pandemic before it developed fully.
During the second phase, which Ramona calls the “re-risk” period, she believes it was an incredible time to be an investor. It was a time to “go hard” and buy as much cyclicality as a portfolio could handle, because valuations were on an investor’s side.
The third phase, which we are currently making our way through, is a rapid rerating, a tug of war between a great bull case and a great bear case. Phase three returns us to a market that oscillates between hope and fear. Contending with rolling dislocations, investors must be nimble so as not to miss buying or selling opportunities.
Ramona’s current portfolio positioning involved pivoting across the three phases of this crisis. In phase one, she went hard into de-risking her portfolio. In phase two, when valuation spreads were 80% of those during the global financial crisis, she re-risked the portfolio, adding more defensive positions. Phase three is an interesting balancing point, with a wide range of outcomes; depending on the data coming in, she is ready to pivot again.
Like her peers, Ramona believes that trends already in motion have been accelerated by the crisis. On a more macro level, she believes populism will continue to grow, because low-income, densely populated communities with less access to health care have been disproportionately affected by COVID-19. Supply chains, particularly for PPE and medicine, have also revealed themselves to be extremely vulnerable. Because of this, Ramona is focusing on domestic businesses, such as technology and industrials, which have benefited the most.
On the topic of sustainable investing, Ramona believes ESG (environment, social and governance) strategies tend to outperform in a crisis environment, because they are closely linked to many quality factors. There is more disclosure for governance factor companies, but not as much for environmental and social factor companies. Environmental and social factors need to be measured qualitatively, and it is important to look for companies with an “all stakeholders” approach – which generally tend to be ESG friendly.
With so many companies cutting their dividends at present, Ramona is looking at yield, but being flexible and dynamic in her exposure to it; she notes that valuation is the best alpha factor over time. She spends a lot of time on credit analysis, avoiding the “cutters,” and looking at balance sheets, cash flow and credit. She notes that the rules regarding reactions to dividend cuts are changing during the crisis: there is more forgiveness, and some companies are cutting offensively from a position of relative strength, and shoring up their balance sheets, if necessary, to make it to the other side.
In the financials sector, U.S. regulators are toying with the idea that if they provide support to banks, they must eliminate bank dividends. The markets may look beyond this if it happens (unlike during the 2008–09 crisis, when the banks were at fault). Ramona is most interested in banks with a lot of fee income, or banks that are improving their fee income streams. She notes that Fed interference and interest rate suppression have caused uncertainty, leading to dislocations between price and value: her job is to capture those dislocations.
Dan Kelley – May 13, 2020
Dan Kelley, portfolio manager of Fidelity Founders™ Class, notes that because founder-led companies are heavily exposed to “new economy” sectors – for example, technology, health care and communication services – the Fund was already well positioned coming into the recent crisis.
Digitization was a trend Dan thought would be a tailwind for the next decade, but having been accelerated by the pandemic and working from home, it has become a theme for the next four to five years, he believes. Many enterprises were already moving to the cloud, and the ones that have been successful in the work-from-home environment are the ones that had already laid the groundwork for leveraging the cloud to conduct their applications. Similarly, in e-commerce, consumers had already been shifting to online retail, and now online demand has accelerated significantly. These are just two examples of themes the Fund had been following, and that have been leveraged for digitization and seen accelerated demand.
Dan believes that once consumer habits and routines switch online, it is unlikely they will go back to traditional operations. The value and convenience of online has been realized, and the companies who have been investing in online infrastructure for years – when others were not – have an advantage.
As mentioned, the Fund is heavily exposed to the “new economy,” with 50% of assets in information technology and health care. Information technology has largely taken the lead during the recent period and has helped to facilitate growth across various industries. No one expected the rates of return for some of these tech companies, which speaks to the scarcity of growth. Because we are in a period of tremendous uncertainty, Dan states, it is easier to underwrite companies that are growing than companies whose earnings might decline. Right now, in many cases, valuation relative to growth does not seem egregious to him.
Health care has been another outperformer. Dan looks in particular at the areas of diagnostics, therapeutics and innovative R&D platforms for opportunities. He has also found opportunities in gold – specifically, gold miners – because the tremendous amount of fiscal and monetary stimulus has been supporting underlying gold prices. Communication services has also been a huge area of opportunity as investments in 5G accelerate. Dan holds tower companies that could benefit from this accelerated growth. He has also seen an opportunity in companies that cater to changing consumer tastes (e.g., wellness), and notes that the Fund is exposed to some names leveraged to that trend.
While spending power may be reduced in the short term, due to unemployment, Dan believes the shift to e-commerce will propel growth, and potentially offer a solution to unemployment as companies seek to fill roles to answer growing demand.
Dan notes that the Fund has seen drawdowns before – but notes that they can be periods to invest more in the Fund’s mandate. Eventually those periods of volatility may be recalled as being less severe than they felt at the time.
Jeff Moore and Michael Foggin – May 12, 2020
Portfolio managers Jeff Moore and Michael Foggin are monitoring fixed income and the global markets. For Jeff, the top three issues to consider are currently the support of federal banks, how we will exit high volatility and what role demographics will play. Michael, meanwhile, is looking for opportunities with equity market activity and rating agency updates.
Michael states that he is not altering his expectations based on what the central bank will do. He believes the European Central Bank will be able to defend its position and that quantitative easing programs will continue. Jeff sees large capital gains on the way, which we will see as we leave high volatility. He believes these gains will be in credit, and that now is the time to buy.
Jeff’s three key bond funds use a global approach and look for reliable yield: Fidelity Global Core Plus Bond ETF, Fidelity Investment Grade Total Bond Fund and Fidelity Multi-Sector Bond Fund. When buying bonds, Jeff looks for entities that are sovereign champion banks and that have positive cash flow and liquidity for years to come. Michael favours property and logistics, which continue to show strength as investment opportunities.
Jeff and Michael point out that demand for fixed income based on demographics (among other things) will remain. When it comes to emerging markets, Jeff and Michael look at a range of different volatilities, opportunities and drivers. They don’t allocate to an emerging market pool, but rather to individual emerging market investments that are singled out by their research.
Jurrien Timmer – May 11, 2020
Jurrien Timmer, Fidelity’s Director of Global Macro, notes that while we are seeing a 50-year high in unemployment rates, stock market prices are still going up in anticipation of an economic recovery. He cautions, however, that markets may have rallied too much.
Jurrien currently sees interesting action on the commodities side, and believes that commodities can make up more ground, compared with stocks. Jurrien notes that oil is still an attractive commodity and that we will continue to see a demand for it, with a gradual increase as markets recover. Although we may use less of it, he believes, we are still going to need it, today and in the future. As for gold, Jurrien thinks investors who are bullish on gold are correct, in that the markets would appear to have recovered less, as measured against a hard asset such as gold, than as measured against dollars. However, he observes, this has been seen in past economic downturns, when the market eventually caught up with and outpaced gold.
Jurrien compares the current U.S. economic situation to historical scenarios in Japan, seeing parallels between the U.S. and Japanese economies. While he acknowledges there are many differences between the two economies, Jurrien looks at demographics as an indicator: he thinks Japan offers a cautionary tale, in that we may not see the inflation many are expecting, because debt and demographics will overpower it.
Jurrien notes that there is a risk to markets if the economy reopens too soon and we then get a larger-than-expected second wave of COVID-19 cases. There is also a risk of overwhelming the health care system if we reopen too quickly. Jurrien shares two mantras: “Don’t fight the tape,” and “Don’t fight the Feds.” The first is meant to suggest that the market amounts to the collective wisdom of anyone who’s ever been in it; the latter, that the Fed will work to regulate the markets.
Jurrien notes that the European market is limited by fiscal response, which is highly fragmented. Conversely, the U.S. has an effective cooperation between different sides of the political spectrum on fiscal relief. Europe, accordingly, is at a disadvantage, being unable to act as quickly as the U.S.
Denise Chisholm – May 7, 2020
Sector strategist Denise Chisholm says it is more likely than investors may think that we will experience a full-scale global recession in the span of a month. For investors who want to wait for a signal to reinvest, what is important to know is that most gains from the low (which can occur anywhere in the first quarter to halfway through a recession) are already realized by the time a recession is over. It is important to remember, she notes, that stocks do not follow earnings, and sharper, faster recessions tend to have stocks bottom earlier on. The conflicting thoughts investors may feel after seeing what the stock market just did – going down 30%, discounting some sort of recession, and then going up 35%, discounting some sort of recovery – are quite understandable.
Denise’s focus is on sectors that show a defensive rotation. This happens when investors sell anything they think is economically sensitive or cyclical from a sector perspective (e.g., financials and energy) and buy things they believe are defensive and stable (e.g., consumer staples and utilities). During April alone, we saw as much of a defensive rotation as was seen during the entirety of the financial crisis – and that took over a year to play out.
Looking at history, we can draw a few conclusions: stocks can bottom early in short and sharp recessions; recovery may be conditional on the stimulus received; and it is important to look at valuation spreads and defensive indicators, which suggest a higher probability that we can discount a recession, given the speed of events in a little under a month.
Historically, a few sectors usually outperform during the six months before a recession starts, during the six months going into a recessionary stock market trough, and during the six months coming out of a recessionary stock market trough. Information technology, consumer staples and utilities are some of the more classically defensive sectors. Throughout the current period, information technology and consumer discretionary have hung in quite well, and information technology remained a leader even through the correction. The question investors often pose at this point is whether to rotate out of what worked. Denise believes, however, that there are “evergreen” sectors worth owning, such as information technology and health care, that pose the best potential risk/reward in terms of fundamentals coupled with valuation. She notes that at this time the market has broadened, seeing several sectors outperform, so it may be worthwhile giving more risk to your portfolio as other sectors join the party. Denise believes many secular trends that were already in place before the crisis may now have escalated, and growth in those areas could come at a faster and more furious pace in the next decade than in the past decade.
While there has been talk of another correction, Denise thinks it is highly unlikely, based on the volatility we have seen. The market can look through things it has already experienced. That is not to say a second wave won’t create some level of sell-off, but she believes it will be less than we anticipate. Now that the market knows there are solutions to containing the spread of the virus, and that the interruptions are temporary – and because we are already seeing the market start to reopen – the peak-to-trough contraction may be less. It may, in fact, present more of a buying opportunity than a panicky selling opportunity.
Steve MacMillan – May 6, 2020
Steve MacMillan, portfolio manager of Fidelity American Equity Fund, Fidelity Small Cap America Fund and Fidelity CanAm Opportunities Class, believes the more defensive sectors of the stock market will lead more than they have in the last few months. He notes that during the stock market sell-off in March, companies across all market sectors went down. In health care, however, Steve observes that while some elective procedures can be deferred, it can only be for a finite period of time; regardless of the economy, the demand will still be there. As a result, he sees lot of health care companies with potential for long-term stability. Also, with regard to education, he perceives the aftermath of COVID-19 has been an eye-opener about how people are able and willing to learn. Steve believes that online education will create opportunities for the sector. Looking out to 2021 earnings, Steve thinks that stable companies in health care and education may outperform other sectors.
Historically, Steve has considered supply chains mainly in terms of finding ways to lower costs. Now he anticipates the focus may shift to geographical diversification, and that companies will seek to be less dependent on one country to produce their products. Steve is curious to see how close manufacturing jobs will come to the U.S., and whether or not supply chains become domestic will come down to the cost of capital.
Steve expects the U.S. elections will matter more for some sectors than for others. The difficulty is that there is a lot of uncertainty, which makes it difficult to make investment decisions that hinge on a political outcome. Steve looks for companies that will outperform regardless of political outcomes, focusing on long-term businesses that will withstand political elections and pandemics and provide long-term shareholder value. During the financial crisis, Steve was a bank analyst for Fidelity. One of his key learnings from the last recession was that companies then realized the consequences of having all their debt due the same year. Now he sees companies staggering their debt, so if a time arises when debt markets close, companies can use their cash flow to deleverage their debt. Steve seeks companies that have a debt level that is sustainable for their earnings; this has been a long-term focus for his portfolio.
This year there have been material changes to Steve’s top ten holdings for Fidelity American High Yield Fund and Fidelity Small Cap America Fund – a shift that started before the effects of COVID-19. Typically, the Funds tend to perform similarly, due to some overlap in the sectors they invest in. This year, however, Steve saw a major difference in the performance of large-cap companies and small-cap companies. He continues to have a positive outlook for large caps, and he is excited about opportunities that are surging in the small-cap space as well. Overall, Steve sees opportunity in staying invested in defensive stocks, both large cap and small cap, throughout this year. In the future, he hopes to find higher-growth opportunities that may be more cyclical. Steve acknowledges that this is a difficult time for investors, because there are cheap stocks on the market with poor fundamentals, as well as stocks with strong outlooks for fundamentals but that appear to have overly high valuations. To avoid both fundamental risk and valuation risk, Steve is looking for the middle ground. He seeks companies with high earnings visibility and reasonable valuations.
Andrew Marchese – May 5, 2020
Andrew Marchese, President and Chief Investment Officer at Fidelity Canada Asset Management (FCAM), is proud to work with a team that is diverse and highly skilled at what they do, thriving on the solid foundation provided by a strong research staff.
Andrew wants FCAM’s portfolio managers to adhere to their investment process at all times. Growth managers, for instance, should continue to ensure that certain characteristics in their funds skew toward growth; value managers should make the same effort to seek value characteristics. The reason is that clients will know what they are getting at all times – and he believes it is also the best way to get a predictable outcome for a fund. In working with portfolio managers, Andrew and the risk management team constantly try to highlight the characteristics of their portfolios. This is to ensure they have all the characteristics where they want them, and also to verify whether there are any unintended risks in a fund that need to be addressed. Andrew explains that this allows for a diversity of products to meet the unique needs of different clients.
Inflation could rise, although Andrew believes it would be part of a longer-dated phenomenon. Before COVID-19, Andrew had assumed investors would have to start talking about inflation again. Demographics, the amount of debt in the world, and technology were disinflationary headwinds. However, Andrew notes, COVID-19 has been followed by unprecedented global monetary stimulus, fiscal stimulus and, now, special stimulus. Andrew’s assumption is that at some point, when normal economic growth resumes, central banks may have to let inflation run up a little bit. His reasoning is derived from the precedent set following World War II, when the U.S. went into a recession, interest rates were capped at a very low level, and inflation was high. Andrew does not see inflation as being a threat in the next few years, but as time passes it will become more and more of a concern, because, Andrew thinks, the only way to get out of a government debt problem is to inflate it away.
Andrew believes gold has its closest correlation with negative real yields. He explains that when inflation is high, real yields are either low or negative. At the moment, he notes the yield curve is suppressed, and gold prices allude to the fact that at some point inflation will pick up. Nominal yields are low enough to suggest that gold is correlated, and explain why gold stock prices are rising. If we don’t get out of this disinflationary problem for a long period of time, the economic environment may become normalized, which may result in stimulus being withdrawn. In such a scenario, Andrew sees the potential for gold prices to fall, in a low-growth environment where those disinflationary forces continue to be headwinds.
Andrew manages Fidelity Canadian Disciplined Equity® Fund, Fidelity Canadian Equity Private Pool and Fidelity Concentrated Canadian Equity Private Pool. From a risk profile, he sees them in a position similar to where they were on January 1, 2020. He has been looking at select securities that have taken a big hit over the last 90 days. In those value areas of the market (financials, materials and consumer discretionary) he has been very disciplined on price.
He uses price-to-book as a cheap valuation metric to find securities with strong financials at almost a floor price. The second the market starts to take off, he has noticed, the liquidity of the market has not been that great. Andrew counsels his portfolio managers to not chase securities too eagerly when liquidity is not that great, because the market impact may be high. The “implementation shortfall” may be high: Andrew explains this by observing that you might believe you are buying a stock at a price “x,” but that you are actually paying 10% more than that price because of market movements. Andrew notes that FCAM is fortunate to have a great trading desk that knows the investment teams’ intentions and executes them accordingly, which benefits performance and clients.
Jurrien Timmer – May 4, 2020
Recently, in his annual report to shareholders, Warren Buffet explained his decision to pull out of airlines altogether. Jurrien Timmer, Director of Global Macro, shares the view that this appears to be a general indictment of the airline industry, and one that Jurrien sees as understandable, on Buffet’s part. Although Jurrien is personally excited about eventually being able to fly again, he recognizes that capacity reductions to allow social distancing may have a negative impact on airlines’ business models. Jurrien reminds investors that Buffet implied that one of the reasons he is currently so liquid is that the markets have yet to make the discounts that will create what he truly considers to be bargains. Jurrien believes this is taking longer because the Fed intervened so quickly to provide liquidity and safeguard “the plumbing” of the markets – so even someone like Warren Buffet was not able to take advantage of lower prices. Jurrien perceives this as positive, but it can be interpreted in several different ways.
J. Crew recently filed for Chapter 11 bankruptcy protection, but Jurrien notes that means the company is not shutting down forever; it is a way for the company to keep its doors open while it reorganizes its business. Jurrien doesn’t know enough about J. Crew’s financials to locate its competitive place in the market, but the pandemic in general has accelerated trends that were in place before the market downturn: brick-and-mortar retail was not strong before COVID-19, and it is uncertain how it will perform after the pandemic.
Jurrien believes the market has so far avoided the “left tail abyss” scenario, which he believes is largely due to the speed of policy intervention. In his opinion, the market has not yet embraced the consensus earnings numbers, because that would imply a rapid recovery – which does not seem probable at the moment. Jurrien expects the market is pricing in a sharp decline and a gradual recovery, with earnings getting back by late 2021 to where they were during the pre-COVID-19 peaks. Jurrien’s focus is currently on calculating the effects of reopening of the economy. Will there be a second a wave, and what will be the effects? Will the U.S. and other countries be able to navigate the balancing act of wanting to reopen the economy, to avoid permanent capital destruction, but not so soon that we get a big second wave? He believes the markets are trading in anticipation of a scenario somewhere in the middle.
From Jurrien’s perspective, it is positive for the economy that the Fed is not buying high-yield bonds. If yield spreads have come down, liquidity has returned, the plumbing of the markets is working, and the Fed did it all while holding barely any bonds, Jurrien considers that a success. He cautions that the Fed is buying lots of Treasuries, among other bonds, showing that the Fed is very powerful. Jurrien believes the curve is already bending: some states are already reopening, Austria is fully open, the Netherlands are reopening – some of the COVID-19 curves are down 90%.
He notes that markets discount the future – they look ahead – and this is one of the things that confuses many investors. In Jurrien’s view, the most significant current risk is that the economy might come back and then see a relapse, not that the market has not priced in significant economic destruction. He believes we are in a race against time, not only on the medical treatment side, but also on the economic side, because the longer we stay locked down, the more permanent damage we do to the economy.
Andrew Clee and Bobby Barnes – May 1, 2020
Andrew Clee, VP of ETFs, and Bobby Barnes, quantitative analyst, have been monitoring ETFs during market volatility due to COVID-19. Andrew notes that over the last month, international equities have been a major winner in the Canadian ETF space, and in the U.S., value equities have seen traction. He believes that trends occurring in the U.S. tend to spill over into Canada, so value equities may see more favour in the Canadian ETF market. Bobby notes that the U.S. market’s pickup in value might reflect bullish investment sentiment and hopes that the stock market has reached a bottom. But he cautions that timing the market is extremely difficult, and there is still uncertainty.
Andrew says pairing investments that are based on different management styles (passive, factor-based or active) varies for each investor; it is important to consider financial goals and life stages. Andrew summarizes the different types of ETFs as follows. Passive ETFs mimic the movements of an index (e.g., the S&P 500 Index), so the ETF will perform similarly to how the market performs. A factor ETF is more specific, as it mimics a custom index, in contrast to a broad market index. Factor ETFs seek companies that have a specific factor (e.g., low-volatility companies). By comparison, actively managed mutual funds are run by portfolio managers who use both quantitative analysis and their insight from meeting with company executives. Andrew notes the particular benefits of factor ETFs, which allow investors to focus on a specific outcome they desire for their investments, based on their unique needs.
Bobby sees this as an interesting time for dividend-earning companies, given unique circumstances due to COVID-19. During non-recessionary periods, Bobby observes, dividend cuts hint that a company’s financial health is potentially deteriorating, and that it may underperform in the future. During a time like this, however, Bobby believes dividend cuts may indicate that executives are managing their cash flows to continue operations during the economic uncertainty. Bobby reminds investors of the financial crisis in 2008, when some of the companies that performed best in the recovery were those which cut their dividends during the recession. He also mentions the importance of diversification – which is also an asset of Fidelity’s suite of dividend factor ETFs.
Andrew is excited to see how the factors and ESG sector will perform in the future. He believes that during this market volatility, businesses that score well for environmental, social and governance (ESG) performance tend to be high-quality companies, which means they have the potential for high cash flow. He anticipates that ESG-related companies may have more potential for sustainability during this uncertainty than other companies.
The oil shock over the last couple of months and its potential causes are a matter of concern, because some ETFs owned a good portion of the sector. Andrew offers a simple account of how ETFs leveraged to the oil industry are constructed, noting that the managers of the ETFs do not buy barrels of oil directly; instead, they purchase derivatives of oil contracts. Andrew notes that when an oil contract is purchased, it has an expiry date, and if the purchasers don’t sell it off before that date, they are responsible for storing the barrels. Because oil storage capacity may not be easily available, it may be preferable to pay someone to take the oil rather than to store it – hence the recent negative prices. He observes that ETFs that owned derivatives of those vulnerable oil contracts started to see huge sell-offs. Andrew cautions that these ETFs may be better suited to professional traders, as they are not intended to be held for long periods of time.
Steve Buller – April 30, 2020
In the wake of the pandemic, Steve Buller, portfolio manager of Fidelity Global Real Estate Fund, has seen real estate for places where people gather as being hit the hardest – specifically, hotels, malls and health care facilities. Fidelity Global Real Estate Fund had been positioned relatively defensively coming into the crisis, with larger-than-benchmark allocations to sectors that have continued to perform well, such as industrials, data centres and apartments, and Steve continues to keep it that way. The current trends in industrials and logistics are only being accelerated by the pandemic as we see a trade-off to e-commerce from brick-and-mortar retail, particularly in countries such as the U.S.
Steve is most optimistic about industrials and logistics REITs, because it is estimated that US$1 billion of online sales requires one million square feet of distribution. The increase in online sales demand means an increased demand for logistics infrastructure. The just-in-time supply chain we are so used to has been broken, furthering the demand for increased storage. Steve also believes that there will be an increased demand for “onshoring” as companies try to move production away from Asia to protect their supply chains, again increasing the demand for logistics.
Steve notes that over the next while, overall dividend growth may likely be subdued, due to being pulled down by the “bad” sectors (hospitality, traditional retail and health care). Hotels and retail have seen a huge degradation of potential value and prices, but there is also a lot of capital waiting to pounce, so their value may not fall as much as we think. With that in mind, he isn’t in a rush to pivot the portfolio into more offensive sectors quite yet.
Bruce MacDonald – April 28, 2020
Bruce MacDonald, portfolio manager of Fidelity Far East Fund, sees this crisis potentially unfolding in three waves. The first wave, a lockdown of profit structures, is already being seen globally. He believes the second wave will be a recession. Companies will stop investing; however, he has yet to see the effects of this on China, where companies are just starting to report first-quarter results. While the data isn’t there yet to fully support the view, he believes companies are only starting to worry about liquidity, because they were in a relatively strong position ahead of the shutdown, due to demand to stock inventory. The potential third wave could be a banking credit crash, although he sees this being less likely than the first two.
Bruce notes this crisis is incomparable to others, as it is driven by government-imposed supplier constraints. With so many unknowns, it poses unique challenges for those trying to look beyond each wave, so he is focusing on companies that have a visible response to demand trends and that offer some certainty and long-term potential for earnings power. Coming into the current situation, the portfolio was positioned defensively, and he is now looking for more offensively positioned opportunities.
Bruce is categorizing potential opportunities into three groups. The first group is made up of what he sees as compounders – stocks that will compound value over a three- to five-year investment horizon. These companies have higher earnings power and will likely benefit as competitors fall out of the market, or they are companies with the capacity to invest during this period to position themselves more strongly on the other side. In the second group, he groups companies with strong market positions and business models he liked before the drawdown, and that just require capital. In the third group, because he anticipates inflation will be a consequence of the current conditions, he includes quality cyclical companies that stand to benefit from inflation.
Bruce believes the model of global supply chains is fragmenting, and that we will slowly start to see supply chains become more localized because of the crisis. As the portfolio manager of Fidelity Far East Fund, he is focused on finding companies that are switching from overseas suppliers to local, Chinese-manufactured components. Asian countries have always been used as a cheap manufacturing location for the world, but if they evolve to produce the components they previously imported, and become higher value-add, we will begin to see China move up the value curve, accelerating the development of the Asian economy and creating good opportunities for investors in this region.
Jurrien Timmer – April 27, 2020
Jurrien Timmer, Director of Global Macro, sharing his perspectives on falling oil prices and the global economy due to COVID-19, notes that the U.S. is seeing oil prices decoupling. The large stake the energy sector has in the capital expenditure of the S&P 500 Index is probably the reason oil prices have had a negative effect on the Index. Jurrien notes that oil may no longer be as systemic as it previously was. He remembers the recent fall in oil prices to negative prices as a surreal event, and considers what happened in the energy sector to be almost a flash crash. Jurrien reminds investors that it is all due to the fundamentals of the sector: there is daily demand destruction, as a result of everyone staying home. When the lockdown is lifted and the economy reopens, Jurrien believes, there is going to be pent-up demand and a potential “cabin fever” effect. However, he cautions that any changes for oil may be gradual.
Recent flows into the S&P 500 have been notable. Jurrien doesn’t believe they are driven primarily by individual investors or companies buying back shares, but attributes the recent flows mainly to institutional investing (for example, company pension plans) and programmed trading. He believes the market saw high sell-offs once it reached a bottom. During the selling climax in late March, good companies went down with the bad companies, as a result of what Jurrien sees as indiscriminate forced liquidation. As active managers, Jurrien’s colleagues are now analyzing lots of opportunities to buy stocks with good leadership.
Jurrien believes the rate of change in the overall health crisis is starting to improve, despite COVID-19 still being prevalent globally. Jurrien notes that China reopened its economy a while ago, and Europe is starting to do so, with Germany, Austria, Denmark and the Netherlands among the first European economies expected to reopen in the next few weeks. Also, in mid-May, construction and manufacturing may start up again in New York State. Some other U.S. states are already starting to reopen, although, as Jurrien mentions, there are concerns about reopening too fast and seeing new surges of COVID-19 infections. Even if that should happen, however, he does not anticipate another severe, global lockdown, because he believes that the reopening of economies will not be instantaneous, but gradual.
Jurrien notes that going into this exogenous event, the financial markets were in a late cycle. He cautions that in comparison with other market downturns, this is a “different animal,” because the hit to the U.S. economy was predominantly in the service sector, not manufacturing. For China, however, Jurrien believes the country did see more of a goods-producing cycle, because the country’s supply chain was disrupted. He recognizes the potential for emerging market economies to do better coming out of the market downturn, because it is a cyclical downturn in some ways. Jurrien anticipates a major part of the outcome for emerging markets will be driven by the potential devaluation of the U.S. dollar: because emerging markets tend to borrow in U.S. dollars, a devaluation might end the funding crunch in those economies. Most of the indicators Jurrien follows are moving in the right direction, but he sees the U.S. dollar as being stubborn and staying at high levels. He is following the U.S. dollar closely to see which economies will take the lead coming out of the downturn.
Joe Overdevest and Darren Lekkerkerker – April 24, 2020
Joe Overdevest and Darren Lekkerkerker, portfolio managers for Fidelity Global Natural Resources Fund, share an optimistic perspective on the recent negative WTI pricing. The broader implications of the negative pricing for equities markets and other commodities futures markets has created opportunities for the two portfolio managers to find new positions at a cheap price.
Joe, who oversees the energy sleeve of the Fund, is focusing on watching for renewed demand, which would make him more bullish on energy. Coming into the current environment, the portfolio was positioned in lower-cost producers and names with bigger balance sheets, so Joe is confident the ingredients are there to benefit from a more positive oil environment. That would be connected with an improved environment for many goods and services: it is only a matter of demand coming back, and how quickly and to what extent. Many of the energy companies in the Fund are large-cap companies, which Joe favours for reasons of capital preservation and attractive valuations.
Joe notes that for the first time, he has added a renewable energy company to his top ten. That is because the biggest demand for renewables is when oil prices are high, as renewables offer an alternative. Beyond that, however, he has seen an increase in secular demand for ESG investments and renewable sources, and he doesn’t see this trend changing, which should support these types of assets.
Darren, who manages the materials sleeve of the fund, is continuing to look for opportunity in three specific categories. The first is gold, the commodity that is the mirror opposite of oil. Gold responds positively to low nominal interest rates and negative real interest rates (when we subtract inflation). Darren believes the current environment is good for gold, because gold tends to be defensive and has a low correlation with other financial assets. Darren notes that he prefers to own gold miners rather than the metal, because as gold prices rise, miners’ earnings generally increase faster than the rate of appreciation on gold itself.
The second category is defensive businesses that could benefit from lower oil prices. One of Darren’s major positions is in a paint company. A major input of paint is a derivative of oil, making companies like this beneficiaries of lower costs and stronger gross margins.
The third category is made up of commodities leveraged to China, rather than the U.S. He sees opportunities here because China is recovering sooner, so he expects demand there will also return sooner.
Darren notes that the other fund he manages, Fidelity North American Equity Class, is also defensively positioned, with low direct exposure to oil, while owning some of the same equities as Fidelity Global Natural Resources Fund that are expected to benefit from lower oil prices through lower costs, higher margins and greater demand.
Darren observes that regardless of oil, there are plenty of less obvious potential winners in the market. Many companies could benefit from weak competitors in this environment (those with weak balance sheets, weak e-commerce capabilities, etc.). This market offers active managers a great opportunity to try to outperform the broader indexes.
Jurrien Timmer – April 22, 2020
Jurrien Timmer, Director of Global Macro, compares COVID-19 to traditional bear markets. During a traditional bear market, Jurrien notes, there is typically a business cycle event such as overcapacity, or tightening monetary policy, that can lead to an inventory cycle. In this type of scenario, he believes, it is favourable for commodities, such as oil, copper, industrial metals, etc., which can all participate in a potential recovery. Jurrien sees a correlation to an upside in oil prices with the Canadian, U.S. and global markets. He offers a caveat: since this is not a traditional bear market, the timing may not be the same as in previous cycles, because the stock market uses a discounted mechanism for stock prices, while commodities reflect supply and demand in real time.
Another difference Jurrien expresses between the market effects of COVID-19 and traditional recessions has to do with sector leadership. Historically, different sectors take the lead through the different phases of a market cycle. In a late cycle, Jurrien notes, inflation starts to increase, so the energy sector may perform well. Then, during a recession Jurrien believes stable dividend-paying sectors, such as utilities and consumer staples, tend to outperform. Coming out of a recession and into an early cycle, Jurrien would expect financials, consumer discretionary, industrials and materials to improve. However, during COVID-19, Jurrien recognizes a continuation of sector leadership throughout the phases of the market cycle. He notes that technology continues to lead from the previous market cycle, along with utilities and consumers staples, both stable-dividend paying sectors. Jurrien disagrees with the speculation that we may be seeing a fake rally in the markets. He reminds investors that this is not a man-made cycle, but a reaction to an act of nature.
Jurrien anticipates that it will get increasingly easier to differentiate between companies that are and are not receiving government relief, by examining data on share buy-backs and earnings per share. Companies not restricted by government assistance rules may continue to buy back shares, using free cash flow generated by normal business operations. However, companies that might previously have used government relief to buy back shares, to boost their earnings per share, will no longer be able to, restricted from doing so as a condition of continuing to receive government relief. Jurrien believes this will generate opportunities for active managers, because they may be able to discriminate between companies that are restricted by government intervention and those that are growing organically.
In comparison with the great depression, Jurrien sees major differences in the current market situation. Currently, he perceives the U.S. economy to be more service-focused than product-focused, which gives the economy more options to continue functioning in some sectors (for instance, online alternatives). Jurrien believes one of the contributing factors to the great depression was a lack of policy response and unemployment benefits. Jurrien considers the current deciding factors for a potential recovery are how quickly can the U.S. economy reopen and how quick is too quick, given the health risks.
Adam Kutas – April 21, 2020
Adam Kutas, portfolio manager of Fidelity Frontier Emerging Markets Fund, is focused on investing in parts of the world that are poised to grow over the next decade. Adam’s goal is to create differentiated, structural growth that will diversify a portfolio into markets that are growing on a structural basis over time. He is focusing effectively on finding today’s “new China” opportunities, which are currently where today’s emerging markets were 20–30 years ago.
Today, most emerging markets have effectively “emerged” (e.g. China) and no longer follow the traditional profile; however, they continue to be classified in this category due to limited access to their capital markets. Similar to a mid-cap stock, they offer some growth, but with less risk. By contrast, frontier markets are early-stage economies (e.g. Vietnam) that are light on manufacturing but starting to move up the economic curve, and which offer structural growth, albeit with a higher risk profile. Adam sees growing opportunities in frontier markets as emerging countries such as China move up the value curve, graduating from producing low-value items to focusing on the production of higher-value items and creating sector-specific competition and friction with G7 nations.
In light of the pandemic, Adam believes we could start to see some “deglobalization” in certain strategic sectors going forward (for example, health care and pharmaceuticals) as governments seek to hedge against the risk of potential events. However, it is unlikely that the kind of low-value production that is generating growth in the frontier markets would ever be returned to Canada, where the costs associated with production would be much higher.
Adam notes that the impact of the COVID-19 crisis could be more short term in frontier markets than in developed markets. While there will be earnings risk for companies, frontier market governments do not have the balance sheets to offer stimulus and take on debt. These frontier markets may also gain from the recent oil crisis, because they traditionally are importers of oil, and therefore stand to benefit from plunging prices – particularly in Asia – that could directly affect their bottom line.
Will Danoff – April 20, 2020
Will Danoff’s investment mandate is focused on capital appreciation, with a growth bias. He believes stock prices have a strong correlation to earnings-per-share, which is why he seeks companies that have a positive long-term outlook for earnings. During the market downturn due to COVID-19, Will has made little to no change in his investment process. He notes that the market has become very short-term-oriented; he thinks in terms of three- to five-year time periods, as opposed to what the market may be focusing on.
Will notes that e-commerce is a major trend that has benefited from the pandemic, as seen by the accelerated growth in the sector for companies such as Amazon. Will also sees a long-term opportunity for social media platforms such as Facebook, which also owns Instagram and WhatsApp, which have around 2.5 billion users[i].
He says the technology sector’s barriers to entry have never been lower, but barriers to scale have never been higher, due to market retention for established companies. He believes health care tends to do well during market downturns, and many big pharma companies have been outperforming recently. As well, health maintenance organizations (HMOs) in the U.S. have been showing positive performance, due to declining medical costs, because elective surgeries are on hold.
Currently, there are stocks in travel and retail being offered at a favourable price, but previous downturns have made Will aware that for his investment strategy, it is better to wait for improvements in market conditions or in a specific company’s outlook, rather than impulsively buy stocks based on a good price. In the current circumstances, Will reminds investors of the benefits of working with an advisor to reflect on their investments and financial goals.
ETFs: Andrew Clee and Vivian Hsu – April 17, 2020
Andrew Clee, Vice President, ETFs, and Vivian Hsu, Director, ETFs, note that the Canadian ETF industry started off at an all-time high in 2020 that continued into February, and even with the drastic market correction seen in March, ETF inflows have remained at net positive levels, particularly due to inflows coming from equities.
There has been much discussion as to whether the market correction was caused in part by the ETF industry, but Andrew and Vivian do not believe that is the case. As Andrew explains, the high level of ETF trade volumes may have confused the markets in March, but it is important to remember the distinction between primary and secondary liquidity. Secondary liquidity involves the direct trading of ETFs, and the underlying security does not get traded; primary liquidity goes through creation and redemption facilities, the same way mutual funds would. In March, the primary market saw net buyers of equities. As investors were selling down securities to get out, the ETF industry was buying them, and providing liquidity in that environment. Fixed income showed a different story, but overall, ETFs behaved well given the acceleration and depth of the sell-off.
Vivian notes that while passive fixed income ETFs still play a big part in the industry, their market share has started to decline, and actively managed ETFs are increasingly popular. Andrew points out that the stress seen in fixed income markets in the month of March shows why investors favour active management: portfolio managers were able to get out of the way of high yield in January and February before the sell-off really started, and then were able to add it back when the opportunity was right. Active management in the fixed income space has a lot of opportunities when volatility presents itself.
While it’s hard to predict how the market will perform in the coming months, factor ETFs can give investors more targeted exposure. Investors uncertain about where we are in the market recovery may find quality factor ETFs a good place to sit tight. Quality has performed well on both the downside and the snapback. ESG funds may also be attractive, offering quality companies and an opportunity to do right, socially, by investing in your values.
More bullish investors who believe we are at the start of a market rebound may find dividend, value and small cap factor funds attractively priced. Value, dividend and small cap all underperformed in the initial March sell-off, so valuations came down. Investors may find it is still possible to pick beat-up stocks with a huge potential for rebound that are trading below book value. On the other hand, those in the bear camp, who think things may get worse before they get better, might expect quality and low-volatility factor funds to be rewarded in that market. Quality and low volatility have both outperformed benchmarks in recent months, and low volatility is also a good option for investors with a shorter time horizon.
Patrice Quirion – April 16, 2020
Patrice Quirion is a portfolio manager focused on global investments for Canadian investors. There are three phases of market downturns he believes are likely to be seen over the course of COVID-19. The first is the realization of a negative event, followed by immediate high-level of uncertainty and panic, which was seen in the sell-off of securities during the first two weeks of March. Investors were seeking to build up liquidity and there was a general contraction across all risk assets. This phase culminated with a very sharp decline in stock prices, around mid-March. Patrice is confident this phase is over, and that markets are now in the second phase, which gives markets more room to analyze what is occurring.
In this second phase, markets look at which companies will perform negatively, positively or show no change during COVID-19. Markets also start to price in large discrepancies around how stocks may rebound during a recovery. The past month we have seen the effects of this phase, where defensive stocks and video conferencing companies were outperforming. One tactic the market uses during a downturn is stress-testing balance sheets, identifying which companies may have weak balance sheets and potential issues with liquidity over the next quarter. These companies may see strong sell-offs. The third phase will be looking at stock prices in comparison to their long-term fair value. Patrice is preparing himself for this phase by balancing his portfolio and taking advantage of opportunities.
Patrice believes the magnitude of the reaction to COVID-19 does not reflect prior market downturns. The short-term shock may be larger than what was anticipated a few months ago. He is focusing on long-term horizons: after COVID-19 has subdued and the economy reopens, how long will the recession last? How sharp is the recession? There is still a lot of uncertainty for the economy.
Patrice is looking at which companies held up well, are benefiting from the situation or have positive long-term outlooks. For example, the grocery sector is benefiting, because consumers are eating from their homes. Food catering, which serves workplaces, cafeterias, stadiums, is currently seeing a decline in market prices. However, the returns are not expected to diminish the same way stock prices currently are, because those services will be needed again. Different sectors of the economy may take longer to recover. After 9/11, travel had slowed down and there was speculation that consumers may not fly at the same frequency again, but around a year following the tragic event, the sector rebounded and there were all-time high levels in travel. In emerging markets, some countries have currencies tied to oil prices, Patrice is seeking exporters of industries unrelated to oil that may benefit from a weaker currency due to the oil price shock. Patrice reminds Canadian investors that they should not panic, stick with their plan and try to incrementally take advantage of the market situation. The key is to remember that the long-term free cash flow generation of these companies may not be impacted to the extent of their stock prices.
Kyle Weaver – April 16, 2020
Kyle Weaver notes that despite the current environment, his investment philosophy and process haven’t changed; they’ve only gone into hyperdrive. His approach is to build a portfolio of growth stocks that have a set of secular business model drivers which he believes will create value over a multi-year investment horizon. He is focused on reviewing business models and what earnings potential could be several years out and looking for dislocation between those business models and current stock prices. He isn’t looking at obvious opportunities either - such as a Netflix - where their position has obviously been strengthened from the current situation. Rather, he is looking at stocks that may be strengthened but the market has deemed as weakened, creating a more extreme dislocation.
With each opportunity, Kyle’s focus is whether the potential for earnings power is more or less the same on the other side and assessing whether the secular tailwinds are as strong. He then assesses the likelihood of the company to make it through intact or whether it is more likely to go through a transition period. If there’s a “V” bottom to the market, it can sometimes be wise to look through it, however, there will be companies that are not well positioned and won’t have that opportunity. Kyle is adding to positions he thinks will come out stronger or with earnings power intact, and trimming around the edges of stocks he believes to be less resilient and doesn’t carry the same degree of conviction for, or where the dislocation isn’t as great because the companies aren’t as misunderstood as others.
Kyle says that the portfolio he has today is the same one he wanted 1-2 months ago, and that many of the trends which were in place before, have only been accelerated by the current crisis. He believes that the names in his portfolio are justified and well positioned looking out on a 3-5 year basis.
Harley Lank – April 15, 2020
Harley Lank notes that the two black swan events we are currently experiencing – COVID-19 and the oil crisis – have been followed by a surge in downgrades to investment-grade bonds. These “fallen angels” now make up a sizable portion of the overall market and have added a multi-billion-dollar surplus of additional supply to the high-yield marketplace. He believes that as the U.S. Federal Reserve takes steps to instill confidence again in capital and credit markets, the high-yield market will find its balance.
Earlier this year, Harley had started to de-risk his portfolio, because of valuations. This put him in a good position for the market dislocation and sell-off, and allowed him to make some opportunistic buys. Since then, he has been regularly speaking to management teams to get real-time data on what businesses are seeing in terms of demand destruction, and what they are doing to manage their cost structure and liquidity. He wants to be sure his team is protecting investments, minimizing the risk of long-term capital loss and spotting the opportunities available as a result of the market dislocation.
Harley anticipates a “checkmark-shaped” recovery: slow and gradual, with some industries and sectors recovering more quickly than others. At this time, because we don’t know the duration of the virus and what its impact on the economy will ultimately be, he is investing with a greater margin of safety than he did before.
Jurrien Timmer – April 14, 2020
Jurrien Timmer, Director of Global Macro, summarizes how the market is now moving from pricing in worst-case scenarios, which were seen during the market dip three weeks ago, to more moderate pricing. He explains that equity prices continue to rise despite an expected weak earnings season because future scenarios are continually being priced in. Although less guidance is expected from executives this earnings season due to the uncertainty of COVID-19, Jurrien is still interested to hear what information CEOs will provide. He notes that from now and into the future, the interplay between prices and company earnings will be critical.
Jurrien commends both fiscal and monetary policymakers for the work they have done to keep the market afloat. He mentions the fiscal side of the U.S. government and the Fed have a key role to play to help investors look over the “abyss” and into the recovery, by keeping the market’s plumbing intact and liquid. Jurrien notes that the stimulus relief from the government will be an important driver of the pace of the recovery. He believes COVID-19 compares to a natural disaster rather than the credit crisis in 2008, the Fed knows this is not a traditional credit cycle and will support the markets to avoid unnecessary collateral damage.
Jurrien reminds investors that when broad market indexes dip, like they did three weeks ago, every holding in a passive fund declines as well, because those funds track the index. He attributes algorithms and machine buying in the S&P 500 as one of the factors behind the sharp volatility not only seen last quarter, but also in Q4 2018. He considers a combination of high frequency trading, algorithms and liquidity drying up, to potentially emphasize the decline of a market and a recovery. Jurrien sees computerized trading as a blessing and a curse, but he believes that in the end, fundamentals win. For actively managed funds, a dip like this one creates opportunities for portfolio managers to easily discriminate between winners and losers in the stock market. Jurrien highlights how this is not only happening for equities, but also in the fixed income market: high-yield and investment grade.
David Wolf – April 9, 2020
David Wolf, a portfolio manager on the Global Asset Allocation team, is adopting a contrarian methodology at this time; as bond market liquidity becomes available and equities search for a bottom, the team is shifting gradually from defensive to more offensive assets.
David believes the Canadian macro environment is going to be challenged unlike ever before and is mitigating portfolio risk by diversifying more broadly in global markets, adding defensiveness by going into more counter-cyclical currencies and reducing portfolio volatility by getting out of the cyclical Canadian dollar.
With banks taking uncalibrated measures, and what is likely to be a less globalized world (meaning fewer efficiencies and higher costs), David expects we’ll see some inflation on the other side of this. He believes it is likely we will come out with more debt than we went in with, and because it is unlikely we will grow our way out, or default our way out, inflation seems to be the path of least resistance. He believes we will have higher and more volatile inflation, and he is shifting assets from nominal bonds that aren’t as defensive into real, inflation-linked assets (including gold), which he thinks will hold up better as hedges and as a defence in the portfolio.
David notes that high yield has struggled during this time, and pricing – whether for benchmark securities or ETFs – does not necessarily reflect actual pricing. It’s a corner of the market that has been illiquid, with few transactions, so it is hard to know where high yield is. He cautions against thinking of high yield as a single asset, but suggests instead it be considered a market of high-yield securities. There will be companies that issue in the high-yield sector that won’t make it over the bridge, and others that are a bargain right now. High yield as a whole is a riskier asset market, and right now, in contrast to a number of other asset classes, there is no screaming buy for high yield. The team plans to scale in over time, once it has examined which issuers are likely to make it.
Don Newman – April 8, 2020
Don Newman, a portfolio manager focused on high-quality dividend-paying companies, is currently looking at the durability of businesses. He emphasizes that Fidelity’s analysts are continually examining the potential duration of COVID-19 and assessing how long a company can continue to generate decent returns and pay dividends. Going into the current market volatility, his team of analysts were avoiding companies with high payout ratios and high debt. As a dividend investor, his goal is a total return focus: decent dividend yield,a strong balance sheet and good earnings growth. He has a particular focus on balance sheets, due to his belief that companies generally go bankrupt because of bad balance sheets, not earnings. Don has observed that when companies pay out capital, it is typically in the following order: paying off debt, continuing operations, paying out dividends and making capital expenditures. For companies with good balance sheets and low costs, liquidity is not as large a risk as it is for other companies.
Don notes that March was the busiest month of his career at Fidelity, with stock prices moving from peak price points coming into the market volatility to a trough of over 30%. During March, he moved a lot of capital in his funds from liquidity to fully invested in high-quality companies that were available at a substantial discount. For example, Canadian banks were listed at almost book value, which has only happened twice in the past 20 years. The U.S. utilities sector went down almost 35% at one point. As an active manager, Don works with analysts daily to find the outlying securities with strong fundamentals that are being sold down indiscriminately. Don’s focus on Canada and the U.S. stems from his philosophy that great opportunities closer to home have easier access to resources and management, which creates less of a need to go elsewhere (e.g., emerging markets).
Salim Hart and Naveed Rahman – April 7, 2020
Salim and Naveed emphasize that the goal of their portfolio is to find stocks that trade at their intrinsic value, but that are still cheap, placing an emphasis on companies that are high quality in nature, generate above-average returns, are less leveraged and are found at the intersection where value meets quality – in other words, companies one would expect to hold up in a period of volatility and that are defensive by nature. The managers believe that they do well at protecting investors in down periods, relative to their benchmark, while outperforming over long periods of time, but with lower levels of volatility than the market. Salim and Naveed are classifying potential opportunities and currently held stocks into three buckets during this time: companies less severely impacted by the downturn; companies severely impacted, but which they think can bounce back relatively quickly; and companies permanently impacted and that may not make it back over the bridge. They note that they haven’t had to delve too deeply into the third bucket for the portfolio.
Fidelity Global Intrinsic Value Class, which is typically positioned more defensively and comprises high-quality companies, outperformed its benchmarks in the first quarter, when it was protected by a combination of high-quality companies, a heavy weighting in Japanese companies with substantial cash on their balance sheets, and the overall portfolio’s elevated cash levels. In the first half of the first quarter, Salim and Naveed saw a lot of opportunity in Asia, while in the second half, a lot of names opened up in health care, home builders, the auto supply chain and industrial companies. They believe that right now they’re finding some of the best value in energy and financials, which have been particularly hit. They also note that there may eventually be some interesting opportunities in consumer brands on the other side of the current situation, when weaker competitors that don’t have the wherewithal to withstand the crisis may be washed out, allowing remaining companies to come out better positioned with less competition.
Both managers note that one of the hallmarks of Joel Tillinghast’s process is his large number of holdings. During a downturn, when liquidity is hard to source, it is easier to trade small positions and increase diversification. This can provide good upside with less downside capture, and allows the managers to diversify and to take risks in small ways, rather than have to make large bets for the portfolio in the face of so many unknowns.
David Tulk – April 7, 2020
David Tulk, portfolio manager on Fidelity’s Global Asset Allocation (GAA) team, says we need to be patient to see if the existing policy response is enough. The GAA team’s current investment approach is to look through the volatility and estimate what the markets will look like after COVID-19. They are still being cautious and investing selectively, analyzing both the policy response and the effects of COVID-19. The team adheres to a philosophy that balances equities and fixed income.
The Canadian market could potentially see a more gradual and volatile economic recovery than other regions. David notes that this is one of the reasons the GAA team is currently less invested in, or “underweight,” Canadian equities. High yield, an asset class; in which, David notes, investors will benefit from having a portfolio manager actively select securities, rather than passively tracking an index. An index might not capture pockets of value that may emerge outside of the energy sector, because indexes tend to be more invested in, or “overweight,” the energy sector. A defensive asset class the GAA team is focusing on is gold, which also picks up on other economic factors as a result of the pandemic, such as an increase in inflation. David also notes that the team is using currency management to protect investment returns. Given the recent depreciation in the Canadian dollar, the GAA team gravitates towards the U.S. dollar, Japanese yen and Swiss franc. Looking at global markets, the GAA team continues to be overweight emerging market equities, which is where they see the most opportunity from a regional perspective.
David reminds investors of the risks of pulling out of investments impulsively. History has shown that when you decide to exit the market, the issue immediately becomes when to re-enter the market. It’s essentially impossible to time when the market will reach a bottom, and the potential speed of a recovery is still unknown. If investors stay the course and stay invested, they have the opportunity to participate in the upside once the markets start to improve. David notes that younger investors are generally in a good position at this time. They have the advantage of having longer investment horizons than those reaching retirement, and the history of equities has shown that being invested over a longer period of time may reward investors as returns are compounded.
Jurrien Timmer – April 6, 2020
Jurrien Timmer, Director of Global Macro, reiterates that the current economic focus is on – apart from new COVID-19 cases – the upcoming earnings season. Normally, company executives will guide earnings to show where the company might be in the future. However, this quarter’s guidance may be pulled back. Jurrien mentions that until the market finds a bottom, and there is reassurance about the speed of a potential recovery, companies may struggle to present a long-term outlook of their company on their own, given how much is still unknown.
As a result, there will be an opportunity for active investment managers to get the appropriate information from meeting with executives and analyzing financial statements to find which companies will be the winners and losers. Reflecting on the market volatility seen in the last quarter, Jurrien observes that for active investment managers like Fidelity, there were lots of opportunities created. During this period, strong-performing and low-performing companies alike were discounted, which means there were lots of buying opportunities, especially for value managers.
Companies are starting to realize that the supply chain system is a fragile ecosystem, which may lead to the establishment of more domestic supply chains. If deglobalization continues, it may bring more inflation. Jurrien is also considering possible scenarios if demand for treasuries diminishes. The Federal Reserve (the Fed) is more than capable of buying outstanding treasuries. The result would be a “modern monetary theory” regime, which consists of a combination of large deficits, low interest rates, negative real rates and a sharply expanding Fed balance sheet. He suggests comparing the current U.S. policy response with the response in the 1940s, when the Fed bought back almost all the outstanding treasury bills; the economic recovery then may offer some parallels with the recovery in this market cycle.
Hugo Lavallée – April 3, 2020
Hugo Lavallée reconfirms that despite these tough times, it is a good time for active management and to be a contrarian investor. His investment watchlist has opened up, and he is able to start looking at companies that were previously of interest but perhaps had been too pricey to invest in; he is focusing on companies that are now struggling, but whose strong balance sheets and liquidity position them to be profitable over the next year or two.
Hugo is positive on the amount of fiscal support being offered by government, but because of the amount of wealth and income being lost during this time, he believes a recovery will be tougher than initially anticipated, and he is rearranging his portfolio with this expectation in mind. He is paying more attention to diversified financials than banks and industrials, but his main focus is on sectors that are really hurting, such as consumer discretionary. In retail, his preference right now is for value retailers, because he believes there may be a tradeoff from high-end luxury items to good-value bargain merchandise as the economy begins to come back.
Stephen DuFour – April 2, 2020
Stephen DuFour has a growth at a reasonable price (GARP) investing style. Historically, he has spent his time looking at the income statements of reasonably priced companies to find earnings growing faster than the market. However, in this market cycle, he is going to the balance sheet first, and looking at how much cash and debt companies have. He focuses on their liquidity ratio over the potential course of the virus outbreak, whether it be a month or a year.
This quarter will probably be one of the most important earning seasons in coming years, Stephen says, because it will gauge what the outlook for the year will be. Before earnings are released, it will be crucial to see how quickly the U.S. government can execute the relief package it has announced, because this will dictate whether another bailout will be needed.
Stephen aims to hold 40 stocks at a time, which he views as his soccer team: the goal during this period is to come out of the market cycle with a better team than when he entered. His largest holdings are in technology, which is disrupting most industries, so technology overlaps with other sectors (e.g., online payments overlap with financials). The new work-from-home dynamic is creating benefits for the technology sector, which is why it will continue to be a big part of his Fidelity U.S. Focused Stock Fund during this market cycle.
Catherine Yeung – April 1, 2020
Catherine Yeung says that China is back to work and that it has entered its economic recovery phase. The Chinese government is currently implementing supportive policies, targeting specific sectors and regions to drive consumption. However, companies in the supply chain function are likely to face challenges as global demand slows. Up to this point, China has not been as aggressive as other central banks in terms of stimulus, but Catherine believes that monetary and fiscal policy will be providing bigger and bolder measures in the coming month.
Catherine notes that up until last week, China had not seen the same trends in investing as other parts of the world. While other regions were gravitating toward value investing and sectors such as telecommunication services, investors in China had been skewing toward growth names with big brand power, and are only now starting to make a shift to value investing. She believes there may be a movement toward online services, such as education and cloud-based applications, but strong brands in technology, consumer goods and services, and e-commerce with good market share are likely to maintain a competitive edge.
In this period of volatility, Catherine believes it is key to focus on a company’s balance sheet, its cash flow and its plans for mitigating challenges ahead, because most sectors will inevitably see a decline in revenue in the coming months. Although China is on the way to recovery, it is not immune to weakened global demand, and should expect to see some bumps along the way.
Joe Overdevest – March 31, 2020
Joe Overdevest says he is confident the Fidelity ecosystem is built for this type of unprecedented disruption, thanks to Fidelity’s global reach, access to CEOs and technological capabilities, and he notes the current situation has not disrupted, but energized, the existing processes. With the type of indiscriminate selling the market has been seeing, he and other Fidelity portfolio managers have been leveraging each other’s insights to ensure no potential opportunities are missed.
Joe is generally positive on Canadian banks, because the government has been cooperating and acting fast to support the economy. While there is no certainty about dividend cuts in any sector, he believes there is a low probability that banks will cut their dividends, thanks to this government support. In contrast, he believes the energy sector is more likely to see dividend cuts, particularly by companies that are leveraged and have high cost structures.
Joe is focusing on three main questions when analyzing companies during this time:
- Does the company have a balance sheet that can bridge it to the other side?
- Does the company’s business model change on the other side?
- What could its valuation look like on the other side?
In global natural resources, companies with strong balance sheets and low valuations have been subject to the same indiscriminate selling, and this could lead to potentially great opportunities in pipeline companies and renewable energy names.
Jurrien Timmer – March 30, 2020
Jurrien Timmer’s focus for the upcoming weeks is watching the COVID-19 infection growth rate. He has hopes for a quick recovery once the growth rate of the virus peaks. He expects companies with high dividend yields that can withstand the current market volatility could be strong performers during the market recovery. Jurrien says the government response, both fiscal and monetary, during the past quarter has been a lot faster than during the financial crisis in 2008. The Federal Reserve has been working hard to try to stabilize the U.S. dollar and stop it from rising.
Once a recovery begins, marking the start of a new market cycle, Jurrien believes the consumer discretionary, financials and energy sectors are expected to do well. Also, with the current market volatility there is potential for a shift from growth to value, and the emerging markets sector traditionally does well on the value side. Overall, Jurrien is hopeful that after the recent policy response and with the potential for a COVID-19 peak in the upcoming weeks, the market will soon find a bottom and a recovery can begin.
Jing Ning – March 27, 2020
Jing Ning, portfolio manager of Fidelity China Fund, notes that while the COVID-19 outbreak has hurt investor confidence, the stock market sell-off has been indiscriminate and has created interesting opportunities.
Jing continues to adhere to her value contrarian investment style, maintaining exposure to positions that could provide earnings visibility over a three- to five-year horizon. Jing believes that attractive valuations and high dividend yields will better help investors make their way through this period of market volatility, and she is focused on finding well-managed businesses that have a long runway for potential growth and are beneficiaries of the structural shifts in China. She believes the Fund remains defensively positioned for a slowdown in China’s economic growth momentum that will become more apparent in forthcoming months.
The response by the Chinese government and policy makers to the black swan event was noteworthy. The Chinese economy had already been facing headwinds from the U.S.-China trade dispute, and the Chinese stock market, which had been experiencing a liquidity-driven upswing, had corrected sharply in response. However, on a relative basis, perceived growth stocks continued to be a preferred area of the market, with value stocks reaching a substantial discount to their growth counterparts.
Jing believes China will continue to experience actively managed stimulus support. Policy makers are expected to step up investment in infrastructure, and the opening of capital markets could also prove rewarding.
Mark Schmehl – March 26, 2020
Mark Schmehl’s current focus is finding companies that will perform well during the downturn of COVID-19. This includes technology companies and other businesses that will bounce back after a solution is found. These goals stem from a long-term perspective when looking at investments, because he expects the virus could have a potentially long-term impact on consumer behaviour.
He is actively looking at how technology companies can enable this new working world. These include video conferencing companies, such as Zoom, that have been performing well during this downturn because of increased telecommuting among the workforce. In health care, Mark sees companies working more as a team rather than as competitors in the fight to find solutions to COVID-19. When looking at the broader market, Mark says this is going to be a different economy, and that it is a time when active management is an asset for investors. Portfolio managers have the opportunity to find winners in these uncertain times and to position investors well for a market recovery. Aside from the technology sector and health care, he sees potential in sectors that were well positioned before COVID-19 and that will do well after, including home building and the financials sector.
Andrew Marchese – March 25, 2020
Andrew Marchese is optimistic that this unprecedented market correction, which has resulted in many securities being sold off precipitously, is an opportunity to look at companies with a clean slate and examine the true earnings power of a company relative to what has been priced into its valuation. Fidelity’s shopping list has expanded as a result, allowing for an increase in the breadth of potential for return from securities over the next few years.
Andrew believes earnings will be tough in 2020. The unknown trajectory of the virus will affect demand, and he believes it’s best to avoid focusing on earnings for the next two quarters, and possibly to year-end. He reminds us that the market knows how to respond to good and bad news, but not to uncertainty. While he notes it is human nature to want to move to cash in times of volatility, doing so crystalizes losses and forces investors to make another critical decision about when to get back into the market. This leaves investors with the difficult task of trying to time the market, allowing room for poor decision making.
As countries continue to implement measures to contain the virus, Andrew is focused on its impact on future earning potential. He is assessing balance sheets, making sure to not get involved in insolvency risk or material covenant breaches that would be a cause for concern. His investment focus is two or more years out, and if he can find opportunities that are disproportionately exposed to upside rather than downside, he believes these would make for a great investment scenario. He notes that all the portfolio managers at Fidelity are actively engaged and similarly viewing the sell-off as an opportunity.
Joel Tillinghast – March 24, 2020
Joel Tillinghast believes macro events like the current one will usually, but not always, result in stocks reacting correctly from a directional standpoint but overreacting in a magnitude perspective. If this is the case, he may find opportunities to buy stocks that he likes at discounted prices, based on an assessment of risk/reward, and how the change in price compares with changes in company fundamentals. Joel is staying rational and prudent and continues to let valuation and company fundamentals be the compass for his investment decisions.
Kyle Weaver – March 24, 2020
Kyle Weaver notes that the market has punished companies with lower or negative profitability, higher debt or a connection with travel or leisure, and many of the more aggressive growth stocks he favours do tend to be in one or more of these categories. In the past, however, this type of market dispersion has created buying opportunities as attractive businesses go on sale. Accordingly, Kyle believes volatility provides opportunities to buy companies with good business models.
Jeremy Podger – March 24, 2020
Jeremy Podger, portfolio manager of Fidelity Global Fund, believes the current market environment will evolve in three phases: escalation, consolidation and recovery. Jeremy notes that the first stage is upon us, and in his opinion, many shares have gone down more than their fundamental outlook would warrant. However, he notes that it is important to understand how resilient companies are to the current challenges and to assess their long-term franchise value. Jeremy thinks that the next stage will follow shortly. He believes that in this next consolidation phase we will get a much clearer idea of who will bear the costs, how much bad debt will be recognized and how much long-term damage has been done to the economy. He believes that in the last stage, recovery, it is unlikely that the market will recover in a straight line, because it will have already anticipated economic improvement, and as it occurs there will probably be revelations of unexpected bad debt that had been hidden during the crisis period.
Looking at Fidelity Global Fund, Jeremy notes that he started the year with relatively low cash levels and relatively high economic sensitivity. When the coronavirus outbreak started in China, he started to change this position. Jeremy raised cash and brought down sensitivity to market moves by reducing high-beta positions. As the market fall accelerated, the risk in these positions was further heightened. In the past several weeks, Jeremy has further reduced exposure to financials, transport-related names and energy companies most exposed to the sharp fall in oil prices, which he does not expect to recover meaningfully in the near term. In contrast, Jeremy has added companies that are likely going to be most resilient and those that could see a near full recovery after the current downturn.
Overall, Jeremy is keeping a reasonably balanced profile for the Fund. New names have been added, including staples and health care companies, and additions have been made to the Funds’ e-commerce exposure. Jeremy believes that he has significantly reduced exposure to weaker companies and increased exposure to potential long-term winners at reasonable prices.
Ramona Persaud - March 24, 2020
Ramona Persaud believes that in volatility there is opportunity for equities, and that there is no better time to see that than now. She defines the equity market as getting value from wrapping top human talent to create products and services into the form of a company that services others. She notes there are some moments in time when you can get that value of a product or service at a discounted price, and that time is now. Ramona is seeking to invest in discounted companies that have “survivorship bias”: they get stronger over time, while others fade away.
During the financial crisis in 2008, there was much more unknown compared to now. The issue this time is a virus, scientists have decoded that virus and are now working toward a vaccine. Ramona is taking a mosaic approach to problem solving during the current market volatility, by leveraging input from both Fidelity’s global research team and health professionals around the world.
Ramona’s investment strategies are designed to achieve three goals: produce global investment returns, outperform markets during periods of downturn and provide a reasonable level of income. Her funds have already performed to achieve the second goal of downside protection relative to their benchmarks. Right now, her funds are moving toward the first goal, producing investment returns. She is continuously finding companies that are discounted but can still deliver on these three goals.
Dan Kelley - March 24, 2020
Dan Kelley is looking at the current economic situation through a lens of opportunity. Dan is looking specifically at attractive opportunities in sectors such as information technology and health care, in order to take advantage of the current situation and upgrade his portfolio. In the IT sector, Dan is focusing on software-driven business models and videoconferencing, these companies’ tools being even more in demand during times such as these. In health care, Dan has continued to find opportunities, many of which are defensive, due to their ability to create new revenue streams regardless of the economic environment.
Overall, Dan is very excited to find some gems amid the current dislocation, and he believes that strong founder-led companies offer stewardship and a steady hand at the wheel, especially in times like these. Dan’s approach is bullish on the long term, because he expects to see a strong acceleration in economic activity when the current situation finally bottoms out.
Darren Lekkerkerker - March 23, 2020
Darren Lekkerkerker notes that there are some very attractive stocks with the potential for strong long-term returns that he is considering adding to his portfolio. These returns will depend on news concerning the virus, infections reaching a peak, social distancing, creating a vaccine and government stimulus. He observes that the defensive sectors, which are essential during COVID-19, are outperforming other sectors. These defensive sectors include consumer staples (e.g., supermarkets, food and beverages), health care, gold, and commercial services (e.g., waste collection services). Slowly, but conservatively, he is moving his portfolio into these sectors.
Fidelity’s asset management team is dedicating their time to talk with CEOs and CFOs. Darren’s focus is on companies’ business models and financial statements. He is looking for high-quality and long-term-oriented companies with sustainable business models that are seeking to adapt their operations to minimize risks during COVID-19.
Max Lemieux – March 20, 2020
Max Lemieux, portfolio manager of Fidelity True North Fund, believes the current market downturn may create a successful buying opportunity. Max notes that there is liquidity stress in certain asset classes, and this is magnified by the increased participation of passive ETFs. He reminds investors to be mindful of passive ETFs that hold illiquid securities, because they could face headwinds. Max notes that now is the time that active investors could capitalize on indiscriminate selling.
Max focuses on three elements of investing in this current market environment: valuation, earnings growth and interest rates. Valuation levels in Canada and the U.S. have lowered significantly, becoming more compelling, so Max remains focused on high-quality companies with good balance sheets, since he believes these attributes tend to navigate market volatility better. Earnings growth will likely be lower, but each position in Max’s investment process has been tested for a bear market scenario to ensure that downward pressures are factored into his decisions. Low interest rates and low supply levels tend to cramp up demand, which requires the support from healthy employment, and Max believes this may affect the speed of recovery in the market.
Fidelity True North Fund continues to take a barbell approach, with exposure to both defensive and cyclical areas of the market. As market conditions change, fund positioning may change in a gradual and orderly manner.
Hugo Lavallée - March 20, 2020
Portfolio manager Hugo Lavallée believes this is a great time to be an active investor. It is important to understand how companies weather market volatility; in his view, companies with great balance sheets, and who are good stewards of capital, will likely recover quickly. He views this as an opportunity to highlight the merits of active management during market volatility, and to focus on some of his favourite companies that have come on sale.
The companies currently in Hugo’s funds do not have a lot of balance sheet risk, and he is assessing each position to ensure it can withstand the stresses of a downturn, as well as working closely with the investment team to uncover all potential opportunities.
With global markets continuing to display a high degree of uncertainty, Hugo believes in placing less focus on the short term, because he believes investment success relies on a long-term approach. As a truly contrarian investor, his strategy is to be defensive when things look great and aggressive when things look dire. As Warren Buffett said, “Be fearful when others are greedy; be greedy when others are fearful.”
Jeff Moore - March 20, 2020
Jeff Moore says we are in the tail of extraordinarily high volatility. He emphasizes that the current economic climate should not be as concerning as the credit crisis in 2008, because he believes what we are currently experiencing is a short, intense period of uncertainty.
The Federal Reserve and Bank of Canada have acted much faster than they did in 2008, but with the overlay of social distancing, there has been a demand shock. Each affected sector will have its own outcome, but ultimately there is no differentiation in the market right now – which Jeff believes is good news for investors, because it means there could be opportunity. Jeff expresses confidence in the construction of his portfolio, noting that a lot of the areas that may need big bailouts aren’t places his team has been.
Jeff thinks that now we are seeing pockets of the world where the virus situation is improving (China, for example) and returning to normal, we might be able to start to identify how long this may go on in North America, and when the markets may start to make more sense. Until then, Jeff continues to see this as an exciting opportunity to turn over every rock and look at names which may have been too rich in the past, but are now a possibility.
David Tulk has a macro view, with defensiveness built into his portfolios. In David’s view, gold has a very important role to play in his portfolios: he observes that having an allocation to gold has helped more often than it has hurt. David also notes the benefits of the diversification that exists in his strategically designed portfolios. He is content with the overall allocations, which are set up to be resilient to a wide range of outcomes.
David believes it is important to keep a longer-term investment horizon in mind and to anticipate an eventual rebound in economic activity. He believes that trying to time the market is virtually impossible, and that, as we have seen in other episodes of event-related market volatility, having a long-term view could be the key to success.
Daniel Dupont says now is not the time to sell: he believes it is best to stay focused on the medium and long term. He is deploying significant amounts of cash and liquidity, some of it into securities that are more volatile but, in his opinion, significantly undervalued. This will create more volatility in the short term, but also the potential to benefit from performance over the medium and long term. Daniel notes that his approach is more bullish now than it was a few months ago, and he’s now bullish on some Canadian stocks that have been hit the hardest by market volatility.
Daniel has been defensive for a long time, but he thinks this is the right time to be more fully invested and aggressive, and to deploy cash. His two- to three-year market view is optimistic, and he has been deploying cash in the last few weeks in a rapid fashion, given his belief that right now Canada offers attractive and undervalued securities to invest in.
Geoff Stein and David Wolf
Geoff Stein and David Wolf believe the severity of this sell-off has primarily been caused more by panic than by any long-term structural impairment. However, the panic has elicited monetary responses, with recent interest rate cuts, and the managers also believe there will be a fiscal response designed to have a more near-term, targeted effect.
The portfolio managers are looking at macro themes that will unfold over one to three years and are not overly concerned by sporadic increases in volatility or risk aversion. They are looking at asset classes that have moved too far in either direction (overvalued and undervalued), with an eye to taking the other side once some clarity emerges, policymakers respond, and the panic subsides.
Don Newman continues to monitor the markets very closely. He notes that selective individual stock valuations look more attractive now. Don notes that passive index funds, by nature, have 100% downside capture. This means that during periods such as now, active managers can add significant value on the downside that could create great returns on the upside.
[i] Statista, Number of Facebook users worldwide 2008-2019. Published by J. Clement, Jan 30, 2020. https://www.statista.com/statistics/264810/number-of-monthly-active-facebook-users-worldwide/