All this may change, says George Efstathopoulos, portfolio manager and co-head of multi-asset research at Fidelity International. “We’re moving into a new phase,” says Efstathopoulos at the fund house’s conference on June 11, pointing to data points such as global fiscal spending. “We are seeing governments spend as they have never spent before.”
Other factors include higher, stickier inflation and geopolitical fragmentation — whether it’s actual conflict or trade tensions — along with more recent concerns about energy security.
George Efstathopoulos, portfolio manager and co-head of multi-asset research at Fidelity International. Photo: Fidelity International
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“If you look at inflation targets, central banks around the world versus where inflation is overshooting in pretty much most places. Look at geopolitical fragmentation, whether it is real conflict or trade conflict. We are seeing a lot more. That is becoming the norm in the past few years,” he adds.
Amid these developments, ranging from large-scale stimulus to the search for energy resilience, there are investment opportunities. “Another thing that we are looking for is domestic revenue generation in the world of fragmentation,” says Efstathopoulos.
Some 15 years ago, Efstathopoulos noted that Western bourses mostly dominated the markets. However, today, in a world that is reversing on globalisation, other than the US, “all other big stock markets are actually in Asia”, he adds.
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That said, Efstathopoulos says this doesn’t mean the US will stop providing exceptional returns. “The US is a market that generates very strong earnings, very strong return on equity and a lot of innovation,” he says.
Gold, copper, uranium still investable assets
With this, Efstathopoulos believes investors should position themselves around these three themes: real assets that benefit from favourable supply/demand dynamics; financial stocks, particularly in the US, Japan and Greece; and companies that are heavy on domestic revenues.
Real assets such as gold, copper, uranium and clean energy will benefit from simple economics. That is, the rising demand for electrification, AI infrastructure, defence spending, industrial reshoring, renewable energy and the green energy transition is not keeping pace with the constrained supply, which has been affected by the conflict taking place around the Strait of Hormuz, years of underinvestment and lack of development in new mines.
“For the past many years, the world has not been focused on investment[s] in hard-resource markets,” says Efstathopoulos. He adds that the world’s focus on global defence spending, the AI grid and spending in that space, including electrification and electric vehicles (EVs), requires commodity spending.
Gold, for instance, which has had a rough few months after an exceptionally strong two-year run, still has an investment case.
The precious metal, which peaked at US$5,327.65 ($6,894.19) per ounce on Jan 29, had since corrected to just above US$4,000 by the end of June. According to Efstathopoulos, this is because countries that have previously hoarded gold are now selling down their holdings in the precious metal to defend their currencies. However, the sell-off will abate at some point, and that will be a “good time” to stock up on gold.
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“The structural themes are still very much there,” says Efstathopoulos, noting that three key factors — such as higher and steeper inflation, concerns around central bank independence and fiscal spending around the world — are still there.
“These three things are still very much at play and these will be supporting factors for gold,” he says.
Copper is another metal that will benefit from the current demand-supply dynamics. The metal has many tailwinds, including its use in EVs, AI infrastructure, the AI grid, defence spending and electrification. Similarly, uranium will benefit from the rising demand for nuclear energy, part of a broader thirst for power.
Clean energy, which never really took off when it was first promoted a few years ago, is now back in focus as countries realise the importance of energy resilience. China, for one, was thought to be in for a tough spell given how it receives 90% of Iran’s oil exports. Yet, because of the massive buildup in its own clean energy capacity, described by Efstathopoulos as the largest of major economies, the country ended up being one of the most resilient countries since the conflict in the Middle East began. Since the war, China has had one of the best-performing bond and currency markets globally, inspiring other countries to try and follow suit.
Making a case for financials, particularly Greek banks
The financial sector, which has been one of the worst-performing sectors since the Global Financial Crisis, is now making a comeback, particularly for financial stocks in the US, Japan and Greece.
Over the past 10 years, corporates and households have been deleveraging, which did not bode well for banks and financials, notes Efstathopoulos, although the tide is now turning. “We think the stars are aligning… What are these stars? Some are structural, some are cyclical in nature,” he says.
On the structural side, banks and financials will stand to benefit from higher cash rates thanks to inflation, which is increasing and will remain higher for longer, a good thing for bank margins.
Deregulation is the second structural tailwind. In the US, new Federal Reserve chair Kevin Warsh has advocated for bank deregulation. Europe, which saw heavy regulation since the European financial crisis in 2010, is now pulling back. Buybacks and dividends from European banks have risen as a result.
The cyclical picture is improving as well, with steepening yield curves — positive for net interest margins (NIMs) — and the lending cycle on an upward trajectory, albeit at different speeds across markets. “We have already seen corporates starting to lever at some point. We might even start seeing households re-lever again,” says Efstathopoulos.
Japanese banks — with Japan having one of the world’s steepest yield curves — are one of Efstathopoulos’ picks.
The portfolio manager also makes the case for Greek banks, an out-of-consensus call.
The Greek stock market is roughly 67% banks and it has returned around 120% over the past three years, outperforming even US equities, which returned about 80% over the same period and European equities, which returned around 50%.
The unusual part is that valuations have actually come down over that stretch, because earnings have grown faster than the share price. “The earnings story is so strong,” he says, adding that there’s still potential for multiples to catch up.
The Greek economy, he says, is performing “very, very strongly” with ratings agencies issuing upgrades. In March this year, MSCI announced that Greek stocks will be added to the developed markets index in May 2027. The country was the first — and so far, only — developed market to be downgraded to emerging market status, a move that took place in 2013.
“If anything, I would argue that the market right now is so strong that if Greece had its own central bank, the central bank should be hiking, because Greece is actually performing very strongly,” says Efstathopoulos, adding that Greece is one of the few countries where debt-to-GDP has fallen in the past few years.
Looking inwards
Efstathopoulos’ third and final theme is domestic revenue generation, or companies whose earnings are driven by what happens within their own borders rather than by global trade flows.
“In a world where we’ve seen a bit of a reversal of the past 20 years, from globalisation to more localisation, we think a focus on countries where domestic revenue generation makes sense,” says Efstathopoulos.
To him, three markets stand out: Germany, China and Japan.
Germany is spending like it hasn’t since World War Two, including in defence; it has the largest fiscal impulse of any country right now, Efstathopoulos notes. He adds that the country has room to do more, given that its debt-to-GDP ratio remains meaningfully lower than that of most peers. “If they get the politics right, they can do more,” he says.
Efstathopoulos also likes Chinese mid-caps for their domestic revenue exposure, but concedes the consumer recovery is more aspiration than reality for now. The housing market will need to stabilise, and while policymakers have signalled for years that they want to shift emphasis towards households and consumers, strong exports have dulled the urgency. “For China to meaningfully come out of its disinflationary forces, a focus on domestic consumption is very, very important,” he says.
The policy direction, he adds, is clear enough: a push towards wealth management, pensions and equities as vehicles for long-term savings — property used to fill that role. “The pivot is that it now focuses more towards equities,” he says.
Japan, meanwhile, is experiencing something it hasn’t seen in decades: wage inflation. Nominal wage growth has printed above 3% for three consecutive months, the first time in 34 years. Real wages, negative just a year ago, are now growing at 1.9%, above market expectations. “This is sustainable inflation. This is good inflation,” says Efstathopoulos.
The play here is Japanese mid-caps, whose earnings don’t depend on the yen. Large-cap exporters benefit from a weaker currency but also bear currency risk. Mid-caps don’t have that problem. They are also starting to catch up on the corporate reform story that has driven Japanese large-caps for the past five or six years, as pressure for better capital allocation trickles down from the top of the market.
Rethinking the 60/40 portfolio
Within a traditional 60/40 portfolio, in which 60% is allocated to equities, Efstathopoulos recommends allocating some of the 40% to credit, where fundamentals are “solid”. Otherwise, about 10% to 15% will comprise real assets. Of that, gold or commodities would currently comprise around 2.5% of the portfolio, or 5% to 8% in a high-conviction scenario.
The shift reflects something more fundamental than a view on rates. The negative bond-equity correlation that made 60/40 work was a feature of a disinflationary world. “Those days are behind us,” Efstathopoulos says in a separate interview on June 12. Real assets, with their distinct return drivers, now take on the diversification role that bonds once played.
Years of near-zero rates pushed companies towards debt financing, which squeezed public market free floats and gave private credit its moment. With cash rates now at 4%–5%, that’s reversing. Equity issuance is returning and private credit is facing headwinds. “I don’t think most investors appreciate the fact that we were in a world of zero interest rates, and that led to certain dynamics,” says Efstathopoulos. “As we come out of it, those dynamics will probably slowly go away.”
At this point, the global scenario is still “benign”. Fidelity’s proprietary leading indicator, which leverages soft and hard data, commodities, and business surveys, is currently in its strongest quadrant and has been for longer than at any point in the past 20 years.
The conflict in the Middle East has not affected it as much because China, a major oil importer, has dialled down its imports, while the US has been drawing down its reserves. At some point, China will have to import more, while the US’s reserves may reach a level where things become “tricky”. Given this, if there is no visibility into the flow of oil due to the blockage of the Strait of Hormuz, by September, there may be demand destruction, which is “not a good thing”.
On the recent spate of giga listings in the US, Efstathopoulos notes that the IPO pipeline looks large in absolute terms. Still, it is not particularly elevated as a percentage of overall market cap or GDP, as US equities have run “massively” over the past few years.
“I would even argue that issuance now is large, but compared… The anomaly has been the past five, seven [or] eight years, where issuance has been relatively very light,” he says. “You go back, you know, [to the] early 2000s, dotcom and before, this level of issuance was the norm.”
When asked how the team identifies investment themes, Efstathopoulos shares that the team looks across fundamentals, validations and technicals.
“We want to make sure that across each one of these verticals there’s something, there’s a catalyst of some sort,” he says.
However, if the thesis is not playing out, the worst response is to start looking for data to support it, which is the “wrong thing to do”.
Equally, if a high-conviction trade gets derailed by something unforeseeable such as a geopolitical shock or a policy surprise, that’s not a process failure. The point is to have a portfolio diversified enough that no single event does serious damage, and to have already mapped out your response before it happens.
“The important thing is to make sure that you’ve got your preset course, if X, Y, Z happens and what those assumptions are,” he says. “Because then you’re a lot more disciplined… Nothing is a surprise.”
