2020: So long, farewell, auf Wiedersehen, goodnight

Lauren Jackson:

Well, good afternoon, everyone. And thank you for joining us for our final Fidelity live webinar of 2020. It's great to have so many of you with us today. I'm Lauren Jackson, one of the regional sales managers here at fidelity. And it's my pleasure to introduce our hosts and panel for today. As you all know, it's been an incredibly eventful year. We like many of you are looking forward to the Christmas break. With just over four weeks now to go to the end of the year, and the very slow reopening of the economy down here in Australia, are there finally some signs of hope that we can look forward to in 2021, that is quite different to the playbook of 2020.

Lauren Jackson:

Today, it's our pleasure to bring you some of those insights from our expert panel here at Fidelity hosted by our director of equities Viral Patel. Our experts here today, who I'm sure are going to be familiar to many of you, Paul Taylor, head of Australian equities, Amit Lodha portfolio manager for our global equity strategy and Alex Duffy, portfolio manager for our global emerging market strategy, will share their views on each of their strategies in what has been a year like no other.

Lauren Jackson:

Certainly, we'll be finding out a little bit about the opportunities that they see in their markets for 2021 and the way that they're positioning their portfolios. But before we get started today, just a little bit of housekeeping. We're obviously planning to go for about an hour this time. So if you do have a question, you can submit them via your zoom portal using the Q&A buttons at the bottom of your screen.

Lauren Jackson:

Unfortunately, if you have dialled in via your phone, though, you won't be able to ask questions today. Now, of course, thank you to all of you who have already submitted your questions to us during the registration process. Of course, we'll do our best through today's session to be able to address all of those for you. Also a reminder that you will get one CPD point for joining us today. The CPD's will be available around 10 business days after the session. Thank you again, ladies and gents for joining us and I'm now going to hand it over to Viral. Over to you.

Viral Patel:

Thank you, Lauren. Welcome all as borders open up and as the weather gets warmer heading into the holidays, we thought a wrap outlook session would be a good one to do with global emerging and Australian equity PMs that we have here. Alex and Amita are dialling in from London where it's likely early, damp, cold and still in lockdown. While I'm sure you wish you were here, thank you very much for waking up and dialling into this call.

Viral Patel:

The Q&A panel is just a q&a panel, I've got a whole bunch of questions already in advance that have come from clients. I will keep weaving in additional questions that you send online. So to kick it off, I want to first ask the individual PMs to just give a quick update on a recap on current environment and the outlook for the next year starting with Paul.

Paul Taylor:

Thanks, Viral, and good afternoon everyone. It's good to be with everyone. Things are looking a lot better in Australia and around the world. So yeah, what a year. Been an incredible year. Everything makes the world interesting. Makes markets interesting. It has been... While it's a very tough start and in a period where we really didn't know what was happening. We didn't have a lot of data on COVID-19, we didn't really understand it. We're finishing the year in a much better place where we've now got a lot of data, much better understanding certainly by no means perfect understanding, but much better understanding of also how to operate, live in that environment.

Paul Taylor:

Now with the prospects of a vaccine, hopefully sometime during 2021, as well. I think we're in a much better spot towards the end of the year. I guess as the year... The start of the year it was... when it's judgement you really got to use a lot of heuristics or rules of thumb. The one the market always goes to is that is the second derivative. I've talked a lot about previously. That second derivative, the rate of change bottomed in the end of March and almost to the day of the second derivative change, the market bottomed and we've been working our way up ever since.

Paul Taylor:

Governments have taken on really quite incredible steps. We find ourself with an amazing fiscal... I guess leading into it, we had already had a reasonable monetary stimulus. We now got very significant fiscal stimulus not only in Australia but right around the world and very significant tailwinds for the economy as well. I think we find ourselves in that position. Governments have talked about building a bridge over this steep ravine or hibernation is another way they've described it.

Paul Taylor:

We still are in that... Maybe we're thawing a little bit and maybe coming out of hibernation but we're still in that phase. I think generally, that's worked well. We are sort of ready to re go with life. We were just talking a little bit about it before we started. It was also... I think, there's so much pent up demand. People are ready. When we do feel a lot more comfortable I think people will be very quick to get back out and travel and go out to dinner or do whatever.

Paul Taylor:

I think we are in a much better place. Obviously had a very significant impact on people, people's lives, economies, markets. We're in a much better position towards the end of the year. I've actually had for people that have listened to my comments before, I've actually got a quite a positive outlook for 2021. I think companies are in good shape. I think companies have repaired their balance sheet to the most part.

Paul Taylor:

Obviously, some that are right at the coalface of COVID, still doing it quite tough but have actually got themselves in a good position to take advantage of any potential COVID recovery in 2021. I'm actually quite positive. I think the tail winds of fiscal and monetary stimulus are going to be very positive in 2021. I think the prospect of inflation or higher interest rates is there but it's probably a couple of years away which means that we're potentially entering a bit of a sweet spot for the equity market. I might just leave it there and pass over to the other guys.

Viral Patel:

Yeah. Thanks, Paul. We just move to Emerging with Alex please.

Alex Duffy:

Yeah, I think... Echo a couple of Paul's points. Coming into this year, we have seen a period where monetary stimulus has been somewhat of a tailwind. COVID really turbocharged, as everyone has well known, turbocharge a lot of trends that were already in place with respect to technological adoption in certain markets. That's obviously what's led equity markets. I think the real thing for emerging markets has been this polarisation of returns and where it's really been crowded into North Asia.

Alex Duffy:

So the story of 2020 for emerging markets has been if you haven't been invested in North Asia, you've really struggled. To give you some clarity on that, Chinese equity markets up close to 20%, Latin American equity markets still down around 20%. A very wide variation of returns and really reflecting how the virus was dealt with in these different parts of the world. So policy response and ability to actually affect virus restraint and impose lockdowns in certain countries.

Alex Duffy:

Macro position at the starting point of the crisis. So places like Brazil, Sub Saharan Africa, and far less robust positions, then North Asia. But then also the composition of markets where you've got parts of North Asia which are far more technologically enabled and really drove the leadership of equity returns. And so, what that's led us to, I'm sure we'll get into some of these points as we go forward to next year is to really think around how that changes second derivative as Paul alluded to, impacts different countries, different economies, as we go towards a reopening and where the opportunity set presents itself.

Alex Duffy:

From my perspective, I think that we will need to be focusing very much on regions with large domestic economies that can drive internal demand. Okay, so I do think we've got elements of this increasing regionalization around supply chains which will be with us for a protracted period of time. That will require large domestic economies within a region to create demand and create activity for localised economies. So that's one aspect to look out for.

Alex Duffy:

But increasingly, I do feel that North Asia in particular sees strong fundamentals and in the trading data have been very very positive. Despite all of the headwinds, we've had revenue growth of 15 to 20% in many, many parts of North Asia. So you've got robust strong fundamentals and valuations reflecting that. I think increasingly the room for improvement, the margin for improvement comes in other parts of EM, maybe Southeast Asia, parts of India and elsewhere. That's where we're looking to buy good stock ideas where we can find them.

Alex Duffy:

I mean, all of that said, I do think we still got businesses across Asia in particular that can reinvest capital creatively and continue to compound healthy returns that will create value for the long term shareholder. But at the margin, the sort of valuation versus incremental change argument maybe rests elsewhere at this point of time. That's something that we're looking out for as we go into next year, and I think I'll hand over to Amit to give the global view.

Amit Lodha:

Thank you, everyone. Good afternoon. Pleasure to be here. I'll echo a lot of what Paul and Alex have already said. In March, my framework of looking at how we were going to go through this period would was classified into three, which was the widest phase, which is what we're still going through in some ways until we all get a vaccine. Then the recession which comes after that. The reason I thought there would be a recession after the wider space, which I still, in some ways worry about. I think governments have thrown everything at the crisis. But once we start getting some semblance of a recovery, and the vaccine starting to work, I think you will have to dial back some of these extraordinary measures that we've seen.

Amit Lodha:

Generally I've classified this period in my head, something as wartime. In wartime, the recession always comes after the war. I think that's a period which I think still in some ways lies ahead of us as a lot of these stimulus measures get moved out. I don't think that's the issue for 2021. But it's something that someone like me who thinks three to five years has to keep in mind because that is something that's going to come around from the bend.

Amit Lodha:

Then eventually, we should get a sustainable recovery in some way or form. I think two or three things in terms of how to navigate this environment. I echo Alex's comments, I think country selection becomes a lot more important. If you just take the vaccine, I don't think everyone's going to get the vaccine at the same point of time. Which means that if you look at just airline traffic, reopening of the economies, I think you'll see at different points of time, different economies opening up. I think emerging markets will take some time to get the vaccine. I think developed markets might get the vaccine a bit earlier.

Amit Lodha:

I think that's something to keep in mind. I think the US elections have been quite interesting. I'd say that we still have a 2 trillion, or maybe 1.5 to 2 trillion election ahead of us which is the Georgia primary senate race which is going to happen in January. The reason that's important is because the Senate is right now completely equally divided between the Republicans and the Democrats. If the democrats take that, that's about a 2 trillion stimulus, if they don't I think that's about a 500 billion stimulus. So that's a 1.5 trillion difference in stimulus.

Amit Lodha:

I think how you navigate 2021 will really be dependent on the stimulus that comes out of the US. If we don't get that 2 trillion stimulus coming out of the US, I think monetary policy will still have to carry a significant burden like it has through most of 2020. I think that will have some implications on how we think about portfolios. I'd say that in terms of when we put it all together, I'd say that if I think back to November of 2019, and I was in Australia actually around this time, if you told me that there would be a virus I would not see the office since February, I bet you would have not said that the Dow would be at 30,000.

Amit Lodha:

So we've really had a phenomenal year, given what we've all gone through in this year. So I think, to my mind, a lot of returns have been brought forward. We've captured a lot of the future returns. I don't know if we're allowed to talk stocks but just to give you one last example on a recovery stock. If I look at airlines in general, if we had been talking about two weeks earlier before the vaccine news came through, these stocks were almost 50% of or 70% off.

Amit Lodha:

They've had a very strong recovery. In some cases, a lot of the reopening stocks are now back to levels that they were in March. The reason I mention that, the reason I say that's interesting is because if you look at that on the market cap basis, that's probably right but if you look at them on an EV basis, which is just because of the amount of debt that they've taken, some of their EVs are now 50% higher than what they were in March.

Amit Lodha:

My point is that in this rally, we've seen a lot of indiscriminate buying, trying to catch up fear of missing out. If I could take a view more on a very short three month basis, six month basis, I'd say I'm a little bit more cautious as we are navigating this period. With that, Viral, I'll hand back to you.

Viral Patel:

Thanks Amit. I'm just going to stick with you for the time being. Yes, 2020 was a big year for the virus news but it was also a big year for the US elections like you said. Could you comment a bit on possible outlook for trade wars, US China relations given Biden's at the helm? Split house would it make it better or worse for Us China relationships?

Amit Lodha:

Yeah, that's a good question. We spent a fair amount of time in Washington on zoom over the last couple of weeks post the elections. I'd say that the two things which in a divided... I don't think the nation has been as divided ever as it is now, if you look at the US. But there is consensus on maybe two or three things. I say there is consensus on... There's bipartisan consensus on China. So I'd be very surprised if they dial back everything that Trump has done and I'd love Alex's views on that.

Amit Lodha:

But that's the sense I got. The other area where I think there is bipartisan consensus is on big tech regulation. So in a period of the next four years, when I think we will have to navigate a divided Congress, a divided Senate, I'd say we have to focus on areas where there is consensus. I'd say, these are the two areas where I see a fair amount of concessions. A third area, which is germinating is I think you will see a fair amount of consensus on climate change.

Amit Lodha:

That is maybe more my hope but that's at least what I hear coming out of the meetings that we had. I'd say the things that I think the market is not thinking enough about is that I think the Democratic administration is going to dial back a lot of the loosening of regulations that President Trump had put into place. I think that's going to have some impact on the market. Luckily, I don't think there'll be any tax changes and I think that's a big positive for markets, simply because of the divided senate and the Republicans are not going to allow it.

Amit Lodha:

But in case that switch is over, I think that's something that we need to again, keep in mind. That we might get the stimulus, but we'd also get the taxes going higher. So there's lots of things that we need to balance out as we navigate this environment.

Viral Patel:

Thank you. Alex, just moving to the geopolitics side impact and other emerging economies of whatever happens with US China, et cetera.

Alex Duffy:

I concur with Amit. I think the genies out the bottle in terms of the trade dispute and the unrest or the recognition of Middle America in terms of loss of jobs. That narrative has gained a lot of traction and it's gained support on both sides. I actually don't think that politically, you see a change of stance around that. I would say, however, that I think post COVID the trends that were in place, in terms of trade disputes get furthered as a consequence of the post COVID world that we're going to go into.

Alex Duffy:

I'm based in the UK. You've got a desperate need. There's a massive difference between what's going on in financial markets and what's going on in the real world. People live in the economy who have got regular jobs and don't have the ability necessarily to sit at home and trade stocks like we do. This is a segment that is going to get the most attention post COVID. There will be a regionalization of trade and policy to rebuild economies and create jobs and create industries for local economies.

Alex Duffy:

That's not a UK specific thing, that's going to be a global developed market phase I think that we go through. There's also been... There's great reasons for why you see greater localization of production. So, back in January in February, the world was terrified of a supply shock. Now rapidly became a demand shock, not a supply shock but there's a recognition that globalised supply chains are inherently fragile to instances like global pandemics.

Alex Duffy:

In a world of low interest rates, it makes sense for corporates to get certainty of supply as opposed to optimization of supply chains. To get certainty of supply and some form of localization of those supply chains. I think that near shoring trend will continue. That has implications for emerging markets. It goes back to the point that I made earlier on. I think that over the next five 10 year period, this greater focus on regionalization of supply chains and regional demand becomes even more important, because global trade at the margin will somewhat soften.

Alex Duffy:

Right now that might come at the expense of returns on equity for the average global multinational because they have had near shore, but the certainty of supply is worth more than the loss of sort of incremental ROE. For emerging markets, it's very important to understand how supply chains can work in a regional context, why I think Asia and Southeast Asia in particular have healthy outlook on a five to 10 year view. But geopolitically, I don't think the US election really changes that dynamic dramatically.

Alex Duffy:

It takes some of the heat off, some of the headline risk probably dissipates as a consequence of this tweet mania that we've seen over the last four years. But actually on the ground, does it make any difference? I'm not sure. That's really how I'm viewing the outlook of emerging markets and geopolitics. I think that increasingly, we are likely to see this continual pushback against stronger China from the Washington Consensus. That isn't going to change whether it's Trump or somebody else in the White House. China's role in the world is growing and that naturally brings it into dispute in certain areas with status quo and the incumbents.

Alex Duffy:

I don't expect that to change over time irrespective of who's in the White House. That'd be my two cents on geopolitics. Which is not something that I'm an expert on but that's just my two cents in terms of how it relates to EM.

Viral Patel:

Thanks Alex. Your US two cents are better than all the two cents, we can take that. Just on stimulus impacts. Moving on to that, Paul, I'm going to ask you the first one, Australian cash rates are at record lows, right? What are the alternatives to zero cash rate? Are markets looking expensive? Where do retirees invest especially for income? You're on mute Paul.

Paul Taylor:

Good questions. I think that's the ultimate, what we're looking at the moment is interest rates are pretty much effectively zero in Australia and most of the places around the world. I guess the place... Part of the reason I think the equity markets have recovered so quickly is exactly I think what you're getting at, which is you still got a reasonable yield in the market although dividends have been one of the areas that have been impacted through COVID as well. That actually should recover pretty quickly as balance sheets are in good position.

Paul Taylor:

So equity markets probably are the standout. Once again, as you know, Viral, when we do the valuations on individual companies, we'll try to surround them by all different... We'll do a simple PE, but also an enterprise value EBITDA, dividend discount model, but also do a net present value on all the companies. One of the key ingredients in the net present value is the risk free rate.

Paul Taylor:

Right at the moment, the 10 year bonds are quite low as well and people would argue artificially low. But nobody's putting in 10 year bonds into NPV. If you did that, it would shoot valuations through the roof. People are trying to normalise them. Even then, with very low interest rates, even if you put in a few percent, equity markets still looking pretty attractive. On a relative basis, yields of three or 4% are still... It's very hard to beat and I guess in an Australian context, a lot of those are fully frank. That's an after text number.

Paul Taylor:

Once again, that's very hard to beat. As I mentioned on the stimulus, I just think the stimulus is going to continue for a prolonged period. It will change. Monetary stimulus, I think inflation and higher interest rates will eventually come but I personally think they're a couple years away. Fiscal stimulus I think will change. So at the start, it's very much helicopter money. It's just get money to people as quickly as possible to protect them, just to make sure that they're all okay.

Paul Taylor:

But I think that will change. As I highlighted, I think that's... As we move become more and more... As everything normalises, that helicopter money goes away, but in Australia's case anyway, I think it gets replaced by infrastructure investments. I think that's what the Australian Government is definitely gearing up for. Is a move away from helicopter money but a move towards very significant infrastructure investment over the next few years.

Paul Taylor:

So monetary stimulus will continue, fiscal stimulus will continue in a different form. People will see from a range of the companies where we've invested in in Australian context. A lot of them are linked to that nation building, infrastructure and construction industries as well. So as I said, relative to everything else, I think it's pretty hard to beat the equity market, because you got to put your money somewhere. The yields in that, and the... Like I said, I talked about a sweet spot of monetary and fiscal stimulus and a period of low inflation. That to me is a real sweet spot for equities.

Viral Patel:

Thanks, Paul. Amit I'm going to ask you a question. You mentioned earlier the $1.5 trillion election coming up in Georgia in January. So say the democrats win that and they have a $2 trillion dollar fiscal stimulus, how are the American government going to fund all of that? Do they reverse the tax cuts off Trump? And if they're going to bring in the healthcare system, how are they going to fund all that?

Amit Lodha:

I think that's a great question. I think people will be surprised number one by how the Republican side will suddenly have [inaudible 00:26:32] about the debt. The Tea Party movement, I don't know, if you followed that in the past, I think that will come back pretty quickly. I think it's not a done deal in any which way or form. I think there is even a section of the Democratic Party which is quite worried about the problems that we are creating for the future, given all the money printing and all the fiscal debt that is building up on balance sheets.

Amit Lodha:

The amount that we just created in this year, is almost five or seven years worth of debt that has been created. So I think that remains a challenge in terms of how we navigate that. I'd say that, from what I've heard and this is... It's difficult because you're asking me to speculate on politics and like Alex, that's not my area of expertise. I'd say that Biden seems to be more of a centrist. But there is a section of the Democratic party who wants more done on MMT, more done on money printing. He's got to balance out these dynamics.

Amit Lodha:

Actually, a divided Senate has worked well for him so far in terms of just how he's been stuffing his cabinet where he's not had to have Sanders or Elizabeth Warren in the cabinet. I think from... If you just look at the the way his cabinet is structured at this point of time, or the people who are supposed to be coming on, I'd say he's following a more of a centrist policy which to me pushed me a little bit more in the camp that they will not try and break things, they'll go steady as it goes, do what is required, understand that this recovery is nascent and try and move in that direction.

Amit Lodha:

They are not big fans of corporate America. That's pretty clear from Democratic versus Republican side. So I think taxes will definitely go up. I think taxes on higher income will definitely go up. Inequality, I think is a big issue, which has been one of the big issues for this election. If you look at why President Trump did better than a lot of us anticipated, it is because the Republicans managed to actually paint the Democrats as socialists in certain areas and that really work with the American population in certain areas.

Amit Lodha:

So I think it's very unclear but I think the point that we need to take away is that it is very unclear. There's a lot of uncertainty as we navigate this environment. I think there is nothing as a done deal that will get two trillion until we see what happens in Georgia, until we see the the composition of the Senate, until we go through the motions as the year progresses.

Viral Patel:

Great thanks. Alex, for you a question on emerging markets. Which are the markets do you think that will have higher levels of fiscal stimulus or the ability of [inaudible 00:29:14]. When you look at countries like India, they've not been able to do much as yet.

Alex Duffy:

This is the point. I concur that we've got unprecedented monetary and fiscal globally. Coming out GFC, we had a monetary stimulus, fiscal initially as well, but then more fiscal restraint. This time around, there's no question as to... No one questions to the fact that you need full taps open and go full bore on both fiscal and monetary from a developed market perspective. The truth in emerging markets is that there's a limited ability to do much fiscal.

Alex Duffy:

As you said, India, very limited ability to push fiscal taps. Brazil, Sub Saharan Africa, Indonesia, all of these markets have Very high debt to GDP levels for the most part. They already run sizeable fiscal deficit so that debt to GDP number continues to grow and gets to very, very challenging points, particularly when you don't have hard currency status that enables you to print unlimited amounts of money. So there has to be some form of fiscal restraint and the market dictates that. That does impose limitations on the ability to fund infrastructure build.

Alex Duffy:

You've had helicopter money in a lot of these markets to support people who've been unable to work. But that's already been wound back. I don't think there is a huge opportunity. Again, to go back to the point around regionalization and country selection, it does mean that the ability to affect change domestically for some of these smaller markets is more of a challenge. I guess, the obvious place where you can see fiscal and monetary together largely as a consequence of the closed capital nature of the economy is in China.

Alex Duffy:

I think the truth there is actually the way that fiscal stimulus in China has worked historically has been through property stimulus. That's caused a lot of problems over the last five, six years. The current administration in China, and under Xi's leadership very publicly stood up and said houses are for living in not for speculation, not for investment. There's a huge reticence to actually push that button, particularly aggressively.

Alex Duffy:

So I don't think that that as a consequence of that you see significant material fiscal throughout emerging markets. It's much more about continuation of monetary. It's much more about from a market perspective, the relative growth opportunity that exists. I think increasingly, I'd be interested to hear others views on this, increasingly, the monetary and fiscal approach in developed markets weakens those currencies over the long term versus emerging markets.

Alex Duffy:

You've seen it, this is where this inflationary aspect gets interesting. I think that most developed markets are likely to try and squash the yield curve for as long as they possibly can to inflate their way out of trouble because debt levels have risen substantially. That should in a sort of classical theistic approach lead to softening of demand for US dollar, yen, Euro, Sterling whichever currency you want to look at. It finds its way into other assets. Part of which will be gold, I think Bitcoin at the margin, other forms of gaining relative trust versus developed market currencies.

Alex Duffy:

So there's a bit there. Inevitably, there's a bid for equities and a bid for emerging market equities where carry is still relatively high. You get that relative growth uplift at the same time. So I think the fiscal... I elaborated here, but I think fiscal ability is limited but I don't think it holds back markets because of the relative trade offs and where capital is going to wash around the world and find an interest in home.

Viral Patel:

Just to ask further question on that Alex that has just come on the net. What is China's net debt to GDP ratio, and that's specifically in line with the trillions that they own in US bonds and what could be the impact there?

Alex Duffy:

The Chinese debt to GDP position when you aggregate private, public, corporate level is north of 250, or around 200% debt to GDP. It's a very high level. Now, as you say, there is a US reserve position, but that reserve cannot be looked at in the context of being sold to pay off debt in the economy. So you can't net one versus the other. In fact, the reserve position of around 3 trillion is relatively small in the context of the actual monetary stock, the M2 stock in China.

Alex Duffy:

And so I think that actually that reserve position could be larger given the risks to the currency if indeed you did see an outflow. But that... I think the point around the Chinese debt position is that it's all internally funded. You've got a very large domestic savings pool that supports that debt position. So it's not as if you get a run, the country's go bust when they run out of cash. Not when they make losses necessarily. So if you've got the ability to fund that internally, it doesn't create such huge issues. We've seen that with Japan for many, many years.

Alex Duffy:

It does impose issues in terms of your ability to stimulate growth at some point. I think you'd view it more from that context rather than getting too concerned about the overall debt levels.

Viral Patel:

Thanks. Just one follow on, moving from China to emerging market, what percentage of emerging market debt is US dollar?

Alex Duffy:

Again, it very much depends on the market that you look at. For the most part there is a lot of US dollar debt in emerging markets. It does tend to be backed by US dollar assets to a certain extent. You'd have... Or you've got certain segments of the market like the property market that have gone out and issued US dollar debt to fund an asset which is hard currency. If you look at parts of Brazil, yes, the debt to GDP number is high, is 85% of GDP but it is RI based.

Alex Duffy:

So it isn't the same sort of debt spiral that you would see elsewhere. I guess the pockets of weakness are markets like Turkey, Argentina, Venezuela. The areas that actually we don't invest in, but that's where the dollar debt issue resides. Is not so much in the bigger economies that we're invested in from an equity perspective.

Viral Patel:

Great. Thanks, Alex. Paul, coming back to sunny Australia, and as you always remind me, even sunny Brisbane. What is the 12 months outlook for Australia? What do you think are the best sectors in this current environment?

Paul Taylor:

I guess as we gone through this year, I might make a few extra comments. I guess the thing in Australia is... Australia is a little bit different to the rest of the world in that our market is still well behind where... Previous peak sort of thing. That's because we've got a big financial sector rather than... Obviously, the tech sector has been the big mover in the US. That's primarily I guess why it's ahead of... It's already ahead of its previous peak.

Paul Taylor:

Australia is still well below its previous peak. Our big sector is financials, which had a tougher time, although now you're starting to see in a coded recovery some big moves in those financials. That's likely to play a little bit of catch up through 2021 as well. We've probably added or I've added in the portfolio really three areas. I guess, into this sort of COVID decline or more difficult areas. One was... Probably, in Australia has a much smaller tech sector but tech stocks that got hit very hard through COVID. That's things like I guess, wise tech and Tyro which we think are really great long term fundamentals stories.

Paul Taylor:

As Alex highlighted, a lot of the trends... The funny thing about the COVID period is that it really amplified and accelerated trends that were happening pre COVID. So whether that's E-commerce or digital delivery of food and beverage or small area active web, formal wear, work from home technology, or even cashless society. Tyro is a big beneficiary to the cashless society. They've got amplified and accelerated through COVID. A lot of those trends are very long term structural trends.

Paul Taylor:

So when we saw opportunities in companies that got hit very hard in the COVID, that we could then play a long term structural growth story that we thought that was a... They were excellent investments. One tech sector, the second one we were adding to was resources. So on a sort of China first in first out basis, and we've had some incredible... The iron ore it's just amazing how iron ore has held up through this entire period, which is a little bit maybe opposite energy or opposite oil in that we've had continued strong demand from China, but sort of a supply to disruption because of some of the things Alex was talking about with Latin America and Brazil's Australia's biggest competitor in that space.

Paul Taylor:

And they just have unbelievably strong balance sheets. Excellent fundamentals in all of those industries. Iron ore you can still question for the next year but now we're starting to get lithium markets and electric vehicle and battery minerals coming back to life again as well. We've been adding...

Viral Patel:

Paul you've gone mute. Paul, we can't hear you Paul.

Paul Taylor:

And then the final area was really what is the COVID recovery type plays. So they were the ones that really got hit hard by COVID, which are obviously things like the travel agents, airlines, airports, casinos, gaming, entertainment, hospitality. We've been adding into those sectors but probably a little bit more cautiously and very focused on the strength of the balance sheet and those businesses and often adding into those companies.

Paul Taylor:

One of the good things in Australia is we have an accelerated rights placement and rights issue market. Those sort of companies have been able to do those accelerated raisings, get their balance sheets in a good position. So that even if we don't get a strong recovery next year, they're still in a great spot for the next couple of years. We use those capital raising opportunities to invest into those companies that are right at the coalface of COVID recovery. That's been working, and will probably continue to do that as well. So I just think they're three areas that we would continue to add to I guess at current prices.

Viral Patel:

Thank you Paul. Amit following from Paul's comment on tech and how much US tech especially is run, do you think Tech has a lot more to run? Do you think Facebook could be broken up the US regulators?

Amit Lodha:

Yeah, I think technology is a good question. Technology is such a big part of the markets now. If you look at the US market, the five stocks have been a significant driver just up to recently in terms of performance. I'd say to answer your question in reverse, the time that we spent in Washington gave me a sense that... I think the surprise for me, was two years back when we did the same trip. Washington congressman did not have the understanding of tech business models that they have now.

Amit Lodha:

So they spent the last two years understanding how Facebook makes money, what the business model is, how Google makes money, how Amazon makes money. I think there is a real ask to try and understand these businesses and try and regulate them a bit better. In some ways, you need to write the regulation before they can be regulated. So similar to what the regulation was written for AT&T or Standard Oil in the past, regulation had to be written to regulate these companies. I think we are in that mode.

Amit Lodha:

I think it's about at least two to three years away while we write that regulation. But I think it's clear that's the direction of travel. If I'd rank order my worries it would be Facebook at top, then Google, then Amazon, and then probably Apple and the rest. That's kind of the order of worry in Washington in terms of what I heard. One of the senators said that in the long term, Washington always wins. I didn't see anything that I would dispute that.

Amit Lodha:

In terms of technology in general, I think Satya Nadella mentioned that we've seen two years of digital change in two months. I think that will continue. I think a lot of companies have realised that technology is so important for just managing their businesses better, for building the moats around them. For driving innovation. I think technology not only in terms of tech, but technology as far as alluding to in terms of grocery deliveries and how you manage that or how you manage your iron ore, mining better through automation.

Amit Lodha:

I think technology is going to see it through a number of sectors. I think financials in terms of the impact of central bank digital currencies is going to be very important. I'd be remiss not to advertise that I put a note out on the perspectives that Paul, Alex and I write in September talking about this exact change and how I think that'll be a big impact area. I think technology as a space will continue to grow because I think companies need to do a lot more to continue to augment their technology to make themselves future ready.

Amit Lodha:

I think we've seen a lot of interesting companies in emerging Asia and China, for example, which are doing some really great things and I've always actually maintained the view that the innovation now is actually moving from east to west versus from west to east. I'm really interested in a lot of what is going on in technology and innovation in markets like India, in markets like China in Southeast Asia.

Amit Lodha:

I think there's a there's a lot of good stuff going on, which is different from the top five names over there. Just one broader point to make, which is that I think one of the great things about this period, this few things so you've got to really hang on to the silver lining. But the silver lining here for me is that there are so many companies, there are so many countries which have exhibited a much higher degree of resilience than I would have anticipated. The emerging markets are not the emerging markets of 99, the Thai crisis, and all of that.

Amit Lodha:

They've come through really well. China has not had to stimulate as much as the rest of the world. I think there are certain emerging markets which have actually managed COVID so much better than what we see in the US or even in the UK. I think that, to my mind, gives us a sense of how the future might look because I think government intervention is very important. If you've got competent leadership, I think you'll be able to navigate this period better. I'd be actually very genuinely positively surprised by some of that coming through this crisis.

Amit Lodha:

I think that, again is an area where, if you look at, say, Korea, if you look at Taiwan, just in terms of how they've navigated this crisis with what I would call very technocratic technology focused leadership. I think has given me some hope. I think technology in the US will continue to do well. There's a lot of disruption going on. I think there are ideas beyond the top five FANG names. There's so much interesting stuff going on in emerging markets. In other markets, there's a lot of interesting stuff going on in climate technologies, in central bank digital currencies. I think to me, that is of really significant interest.

Viral Patel:

Amit just on that, like we talked earlier, if there are reversions in corporate tax, and if taxes go higher on various parts of the US, market reaction, which sector do you think we can hit harder?

Amit Lodha:

I think the domestic sector's generally which were the significant gainers of the tax changes which will generally get hurt in some way or form, especially in the US. But I think the markets will discount that very quickly once it comes through. It's not something that I spent too much time thinking about. Really what companies are driven by is the long term earnings and the long term cash flows. Yes, the government could take a slightly higher share, but the market will discount back quickly. We'll move on from there. I don't think that'll change the relative differentiation of that.

Amit Lodha:

I think what's been really interesting in this period, is that we've gone from going for experiences to buying stuff. If you look at what's really done well through this crisis, it's housing. It's autos, what I call... We gave up on TripAdvisor and booking and we all went on to Amazon. We gave up on experiences, and we've all been going to buy stuff. I think that's an interesting dynamic. That's an interesting change. I think the Chinese have this example out of 2003 SARS crisis, where there was a massive revenge buying once everyone came out. Everyone was so happy to be alive.

Amit Lodha:

We had this phenomenal growth in luxury spending, phenomenal growth in experiences. Phenomenal growth in travelling. My hope is that we see some period of that over the next year or two as we get the vaccines coming through. I think that'd be really positive for a lot of companies.

Viral Patel:

Thank you, Alex, just coming to you. The whole growth versus value thing, as you're seeing your stocks in emerging markets what are you thinking about growth versus value style?

Alex Duffy:

What do I think about this? I mean, I think that the argument to buy in the cheapest subset of stocks in a market, which is basically what my understanding of value is, the definition of value as a style is. The pushback I have to that is that it really resides on the belief that those... That segment of the market will generate economic returns. When you look at emerging markets, because of the corporate governance structures of a large part of those companies that constitute the value element, the value style buckets, they're not actually incentivized as businesses to be positive economic return companies. Positive EVA Businesses.

Alex Duffy:

Whilst I think that in markets where value has significantly underperformed, and they are businesses that genuinely try to make positive returns on equity and with the benefit of inflation retial end will be able to do so. I think you've got an argument to own stocks in those areas. This is this argument about really how inflation manifests itself in terms of certain businesses. I think for large parts of emerging markets that value versus growth debate is a little bit more nuanced because of some of the challenges of these value trap stocks, which are value traps as a consequence of how they allocate their capital.

Alex Duffy:

That's a critically important point. Now, on the flip side, there are elements of the growth buckets where valuations are clearly extreme. Okay, so I think that the key challenge that I face is this polarisation of equity returns and this polarisation of valuations. What we really seek to achieve with the emerging market strategy is to somewhat steer the middle ground where we buy businesses that are well managed to allocate capital well, that create positive economic value out over time.

Alex Duffy:

Because of the nature of the markets in which they invest, those good businesses create a reinvestment opportunity for their excess cash flows which creates the earnings growth and intrinsic value creation over the long term. We do that whilst ensuring that we're buying them with an appropriate margin of safety from a free cash flow based valuation approach. I think for how we invest nothing necessarily particularly changes here.

Alex Duffy:

I think for the market however, you do have and we've talked about it, we've been through this period of polarisation of returns, a huge crowding of capital into the hot sectors, technology being one of them. I know from bitter experience, been a resources analyst with Ahmed actually back in 2007, that when you have a huge amount of capital crowded into one area of the market, and it tries to get out of a large section of the market and into a small section of the market, it creates draw down in the growth areas and it builds up equities in the other areas, because the weight of money movement can be so extreme.

Alex Duffy:

I think that's the key area that we're going to have to watch for, is that as economies reopen, as some of the... The market and I agree with Paul, I don't know that you get inflation straightaway but I think the market starts to price it much more quickly than that. As those dynamics take hold, you are going to see these shifts in allocations of capital and ETFs obviously exacerbate that because they buy these baskets.

Alex Duffy:

I think that that leads to somewhat of a normalisation of returns. I'll be much more nervous about being in those Uber... Growth at any price type stocks that are out there in the market. But I still think the middle ground is probably the better way to navigate that. We've seen it before. These value rallies, particularly in emerging markets where you see stocks that are cross cycle return destructive businesses. They're short lived and it's very painful to chase them. Our approach is firmly to own businesses, good companies for the long term that can replicate their business models and grow intrinsic value over a three five year investment time horizon and beyond. That's what we're really seeking to achieve.

Viral Patel:

Great, thanks. The last question I'm going to ask you, about a minute each from each of you. For long term investors, what do you believe are the three most investing themes of the next five years? Just start with you, Alex, just continue.

Alex Duffy:

I think... To me, we keep things fairly simple. We invest, we allocate our capital to good people, good managers who reinvest well, that monetize the opportunities that they're presented with. Within emerging markets, those key principles remain the same, that you do have large under penetrated markets that with rising levels of penetration from a bankerization perspective, from a consumerism perspective and so on that creates reinvestment opportunities for good companies.

Alex Duffy:

I think that increasingly emerging markets have changed over the last 15 to 20 years. They're much more domestic internal facing marketplaces than global trade driven, than commodity price global trade driven. I think the real opportunities exist in the adoption of technology unlocking a number of these opportunities, whether it's domestically in China, whether it's domestically in India, domestically in Southeast Asia, and also parts of Latin America. I'd be very focused on identifying the domestic long term winners that monetize that under penetration opportunity. In a nutshell, that's really where the opportunity exists for me.

Viral Patel:

Cool, thank you. Amit.

Amit Lodha:

I go for three areas then I give you a bonus. For me, I think one area that we haven't talked enough about is health care. To me, I think this period has shown that health is really our true wealth. I'd expect a lot more investment in health care. In fact, I think that if the 2010s were the age of technology, I'd hope that the 2020 is the age of science. So healthcare and anything to do with healthcare, science, technology is of huge interest to me. That's an area where the portfolio has quite a lot of focus.

Amit Lodha:

I'd say that the second area that I'm thinking about is where technology and a big issue intersect to find some solutions. So climate is a big area for me. I have a fair amount of focus on renewable energy in the portfolio, through battery technologies or through solar or some of the other areas, I think that's going to be a growing area over the next few years. That I think has something which is really important that we all really tend to focus on and forget at times that climate change is never linear, it happens in huge step functions.

Amit Lodha:

We need to keep that in mind. I think the third area I would say, is the impact of central bank digital currencies. I think that is something that we'll be talking a lot more about in the next two years, three years, five years. I look at what's going on in China and I think the rest of the world will have to catch up in terms of their thinking around all of that. Those are three areas which are pretty clear to me that we need to have something in the portfolio for those.

Amit Lodha:

The fourth area which I give it as a bonus, almost in homage to Paul and my moustache which he did not like at all and I don't blame him for that. I'd say that one of the issues that I hear a lot of CEOs talking about is mental health. I think mental health is something that is interesting from a challenge perspective, but it's also something that we need to spend some time thinking about from a stock market perspective.

Amit Lodha:

I think this period has changed all of us in ways that we don't really understand at this point of time. We will understand when we come out. Will I travel less? Will I do my job differently? Will I focus on different things? Will different things become more important to me? Will I become more conservative with my political Outlook or more libertarian? I think this has been a unique period that all of us have lived through.

Amit Lodha:

Mental health is a big challenge but also I think how this period changes us as consumers, changes us as investors is something that I don't think I have a clear lens on. If you had to give me one question which I'd like to know the answer to, that would be the question that I'd like to know the answer to is how does consumption change for all of us as we come out of this period?

Viral Patel:

Thank you Amit. Paul I think you've answered a lot of that but there's one question, the first question that came today was Paul what is the beautiful landscape and the painting behind you? That was the first one that came online.

Paul Taylor:

Okay, just to answer that, that's the hinterland to the Gold Coast. It is Bill Robinson, who's a wonderful painter. But if I can talk about the five years as well, I actually think we'll look back... I mean, first of all, I think we'll look back... In five years time, we'll look back at this period and think, geez, I wish I had invested more. I think it's going... We'll look at it and think... There's a lot of changes, there's a lot of disruption but I think we'll look back and see it's a really exciting time to invest.

Paul Taylor:

I think the other thing, and we're all... Alex, Amit, myself we've all grown up in that Fidelity world where it's about individual stock selection. We are stock pickers. The other thing I'm really excited about is COVID has created real discernment. It has actually... Good companies have done well, and some companies haven't done so well and there's actually been a massive difference. Actually picking the right stocks has made a huge difference in this environment and I think that's going to be even more important as we move forward and as we recover from COVID-19. So I think that's going to be critical over the next five years and that individual stock selection is going to be great.

Paul Taylor:

I would also... As Alex said fundamentally, we're all looking for the same thing. I want a business that's got a high return on invested capital, but critically, can reinvest at a high rate. Because that's how you create value. You want that all at the cheapest possible price. Linking that to what Ahmed said, he talked about healthcare which I would completely agree with as well. I think there's a really interesting space.

Paul Taylor:

Healthcare is an interesting space in Australia because we've had some healthcare businesses that have been highly impacted by COVID-19. So you look at the private hospital sector. They basically had no profits through this period because the government has basically stopped elective surgeries and got them on board... There on board the team that's helping us fight COVID-19. So their profits have been significantly impacted but they have a wonderful structural long term prospect.

Paul Taylor:

They're one of the ones... On private health, Ramsey was one of the ones that raised capital that got its balance sheet in a fantastic position. That was a great opportunity to buy into that capital raise. They've got both a cyclical upswing from a COVID-19 recovery play and long term structural growth. I think that's a really... I don't know, is the intersection of a whole range of strong trends. But as I said, I think in five years, we'll look back at today and think what a great opportunity to invest.

Viral Patel:

Thank you, Paul. And from all of us at investments here, have a safe non lockdown holiday. See you in the new year with all that it brings. Whatever it brings, we'll navigate it together. Over to you, Lauren.

Lauren Jackson:

Well, thank you for Viral, Paul, Amit, Alex. An absolute pleasure and some brilliant insights that you've shared with us today. Thank you. I guess on behalf of the Fidelity team, I'd like to also thank all of our attendees for joining us for today's session. Clearly still a lot of things that we need to be thinking about as we move into 2021. We very much appreciate your ongoing support of our business here and certainly if there's any questions from today, don't hesitate to reach out to your Fidelity person or definitely jump on the website at www.fidelity.com.au. We do wish you all a very safe and happy Christmas and we all look forward to seeing you in 2021 so thank you again for joining us and goodbye.