Q2 2026 Fund Commentary

Commentary and opinions are provided by Fidelity Investments Canada ULC.

Market commentary

The Canadian equity market returned 7.0% over the second quarter of 2026, while Canadian investment-grade bonds returned 2.0%. The market entered the quarter supported by rising energy prices, as geopolitical tensions in the Middle East and disruptions to shipping through the Strait of Hormuz boosted energy markets. Momentum softened later in the quarter as supply concerns eased and oil prices retreated, though volatility returned in June alongside higher bond yields.

The Canadian economy contracted by 0.1% (annualized) during the first quarter of 2026, following a 1.0% decline in the previous quarter, meeting the common definition of a technical recession. Real gross domestic product for April rebounded 0.5%, as stronger exports and improved housing set up a potential second-quarter recovery, though trade uncertainty continued to weigh on the pace of expansion.

Canadian inflation remained above the Bank of Canada’s (BoC) 2% target, with the Consumer Price Index rising to 3.2% in May from 2.8% in the prior month, driven primarily by higher gasoline prices. Employment rose by 88,000 and the unemployment rate declined to 6.6% in May. The BoC held its overnight interest rate at 2.25% in June 2026, signalling it would look through temporary energy-driven inflation while remaining prepared to act if broader price pressures persist. Eight of the 11 GICS sectors posted positive returns, led by financials and health care, while materials and communication services lagged.

Performance

STMicroelectronics NV contributed to the Fund’s performance, as the market increasingly viewed the company as an indirect beneficiary of the artificial intelligence (AI) infrastructure buildout, with improving expectations around data centre demand and semiconductor supply chains driving a re-rating of the company’s stock. TFI International Inc. contributed to performance, supported by its disciplined acquisition approach, improving operational execution and potential earnings recovery as trucking fundamentals normalize. The Toronto-Dominion Bank also contributed to performance.

An overweight allocation to, and investments in, the industrials sector contributed to performance, and an underweight allocation to the materials sector also contributed.

Bank of Montreal detracted from the Fund’s performance. Improving investor sentiment toward the Canadian banking sector, supported by resilient credit fundamentals, expectations for stronger loan growth and a more constructive interest-rate outlook, contributed to share price appreciation, causing the Fund’s underweight position in the bank to lag. A lack of exposure to a number of Canadian banks also detracted from performance.

An overweight allocation to, and investments in, the financials sector detracted from performance.

Portfolio activity

There were no significant changes made to the Fund’s portfolio during the period.

Outlook

In the sub-advisor’s view, investors are gradually shifting their attention away from geopolitical headlines and back toward company fundamentals, earnings quality and valuations. While uncertainty surrounding global trade, tensions in the Middle East and the evolution of the AI investment cycle continue to contribute to volatility, the sub-advisor believes the broader economic backdrop remains supportive. Markets may be entering a more selective phase in which business quality, balance sheet strength and earnings durability could play an increasingly important role in driving returns. The sub-advisor expects a period of relative stability rather than aggressive monetary easing or further tightening, and continues to favour companies with durable competitive advantages, pricing power and resilient cash flow generation.

AI remains one of the sub-advisor’s highest-conviction long-term themes, with growing focus on businesses that have established market positions, strong customer relationships and clear pathways to monetizing AI adoption. Within commodities, the sub-advisor remains constructive on Canadian energy infrastructure, transportation and royalty businesses, where the thesis is driven by increasing production volumes, expanding export capacity and North America’s focus on energy security. The Fund maintains exposure to precious metals as a diversifier and long-term hedge against fiscal imbalances, focused on high-quality producers and royalty companies. Canadian banks have demonstrated an ability to manage a challenging economic environment, supported by strong balance sheets, resilient credit quality and improving regulatory flexibility, and the sub-advisor believes the banks may benefit from future economic growth and infrastructure investment.