2021 Outlook: Where to from here?

Watch Anthony Doyle, Cross-Asset Investment Specialist as he wraps up the year that we saw - binge borrowing, sinking savings and rising risk. Anthony also looks at some of the key questions Australian investors will face in 2021:

- What are the implications for the COVID-19 vaccine?

- Have we entered into a new fiscal/monetary policy regime?

- Are ultra-low cash rates and bond yields here to stay?

- Should we worry about inflation or deflation?

- Where can investors turn to for returns

Lauren Jackson:

Well, good morning, ladies and gentlemen, and an absolute pleasure that so many of you could join us today for our end of year wrap up of 2020 with Anthony Doyle, cross-asset specialist here at Fidelity. My name is Lauren Jackson, associate director here at sales with Fidelity and it's my pleasure to host today's session with Anthony. Now, it's safe to say that the end of 2020 can't come quickly enough for many of us. Anthony today is really going to share some of his insights as to what has actually transpired through 2020 and what should we as investors be looking to for 2021?

Lauren Jackson:

Certainly, we're going to address some of the huge amount of questions that we've received from many and ones that certainly us as investors are likely to face moving into 2021, things like, how safe is the COVID vaccine and what are the implications of that going forward? But also, what is the significant amount of fiscal and monetary stimulus likely to do for us as investors moving forward? Today, we're actually going to make it a little bit more interactive. So I'm in my Christmas colours and we're going to have a little bit of fun. So, just a bit of housekeeping though before we do get started, for those of you that have joined via your tablets or laptops, you might see there is a Q&A portal at the bottom of your screen.

Lauren Jackson:

So if you do have any questions that you'd like to submit as we go through today's session, please type those in and we'll do our best to obviously address those. For those of you that are on your phone though, unfortunately, you won't have the opportunity to ask us questions today, but don't worry because Anthony and I will be more than happy to address any questions that you might have post this session today. Now, I guess a huge thank you for all of you for joining us today, and for those of you that have already submitted your questions through, let's have a little bit of fun. I'm going to hand over to Anthony Doyle now to get us started. Over to you, Anthony.

Anthony Doyle:

Thank you, Lauren. Thanks for a very kind introduction and thank you everyone for taking the time out of your busy day to join us for what should be a very informative and a very interesting session.

Anthony Doyle:

So, it's been an absolute hell of a year. You can see that I've got the latch on the door, the three kids are running around outside, and certainly someone that had never worked from home before, this year it started. We were sent home on March 16th, the day before St. Patrick's Day. I really wasn't too sure about what the world faced. Here we sit on the 3rd of December, we've subsequently seen the way that policymakers have reacted, the way that markets have reacted, and I think that certainly it's confused a lot of professional investors and investment strategists and certainly investors in equity markets.

Anthony Doyle:

If I had told you that we would be working from home, that significant proportion of the workforce would be stood down and would be on JobKeeper Payments, yet the equity market is around about... Looking at my screen right now, it's around about 1% lower than where it started at the start of the year. Australia will also have its first recession in 30 years. I'm sure a lot of investors may have said that the equity market would be far, far lower. But that's the uncertainty, that's the unprecedented environment that we find ourselves in. And markets are reacting in unusual and unprecedented ways as a result of many of the actions that we've seen from governments and from our own Reserve Bank of Australia for example.

Anthony Doyle:

So what I've put together today are I think three of the most important questions facing investors today, between the superannuation funds or wealthy individuals or professional investor managers. This will really be some of the answers to some of these questions. If there are some, will really be a key drivers of markets in 2021. So my first question is what impact will a COVID 19 vaccine have? So obviously, the vaccines that we've seen come out, there's been three, they have very high efficacy rates, very high efficiency rates, or effectiveness rates. We had been expecting, the market had been expecting... We're all armchair epidemiologists today, but we've been expecting between 60 to 70% effectiveness for any COVID vaccine.

Anthony Doyle:

And what we saw over the course of the last month have been a number of vaccine candidates come out with efficacy rates of over 90%. And that's really lit a rocket under the equity market in particular. November was one of the best months on record for the Australian equity market, up 10%, really phenomenal and really extraordinary in terms of the reaction that we've seen. Not only in the Australian equity market, but also around the globe. Now, obviously vaccines tend to take between 10 to 12 years to develop. The vaccines in case of COVID-19, of which there has never been a vaccine found for a coronavirus, we tend to have a few on the run at the moment that are effective, they have been obviously done within nine months. Truly extraordinary achievements from the scientific community.

Anthony Doyle:

But one thing I just wanted to put together for you is in terms of, once a vaccine candidate gets to phase three, there's quite a high likelihood of approval. And even overnight in the UK, they have said that the vaccine, one of the vaccines, has been approved for distribution before the end of the year. So really fantastic and really has buoyed markets because there are now from expectations that we will be returning to some form of normality. Now, the reason that efficacy rates and effectiveness rates are so important on a vaccine is because a lot of people are still a bit wary as to whether they would actually take it or not. And the higher the efficacy rate, the higher the effectiveness rate, the less proportion of the population that is actually required to get it.

Anthony Doyle:

So for example, the flu, all of us have probably had a flu jab at one point and the other, and there's a lot of stories around, you'll talk to a colleague or a friend and they'll say, "Yeah, I got the flu jab, but I still got the flu that year. It was the worst flu ever. I don't want to take it again." Well, actually, the reason they got the flu is because the flu jab has an efficacy rate, an effectiveness rate of around 50%. So that puts it into some context when these COVID-19 vaccines are coming out with 90% effectiveness. But essentially what it means, even if there's a large proportion of the society... and this is a survey done on the left of a number of nations around the world, which suggest between 60 to 80% of people, populations were happy to get the vaccine.

Anthony Doyle:

Even if efficacy rates are high, well, a low proportion of people are required to get that vaccine in order for a society to return immunity. And you start to see the border restrictions fall, international travel resume, and the globe returns to some form of normality. So really, really positive developments on the vaccine. The effects are extremely bullish for risk markets. One thing that Fidelity did when COVID-19 started to hit internationally was put together a team of five analysts focused on COVID-19 full-time led by a medical doctor in London, and they are reporting back to us in terms of our research that these results are very, very encouraging indeed. One analyst described them as a home run.

Anthony Doyle:

So, quite a bullish scenario for risk markets which has been reflected in equity markets particularly over the course of November. Now, the next key question, and the reason that I have posed this question to you, should we worry about inflation or deflation? And I actually have a poll, so it will be interesting to see whether you're concerned about inflation or deflation. So if we could put that poll up, so are you more concerned about inflation or deflation? Now, this is an anchor to monetary policy around the world. If we face an environment of deflation, it means that the central bank will likely be doing further monetary policy easing, further unconventional monetary policy.

Anthony Doyle:

However, if we face an environment of inflation or rapid price increases, it's more than likely that we're likely to see interest rates move up. So if we could have the results of that survey, which should come through, well, it's really close. 54% concerned about inflation, 46% concerned about deflation. And I think that's right. It's pretty, pretty reflective of what is actually going on in the market at the moment. A lot of people are worried about how damaging the lockdown process has been to real economies and a lot of people are worried about money printing and ultra low interest rates and what that will result, whether an excess money supply will result in higher prices of goods and services and inflation.

Anthony Doyle:

Well, certainly, you can see the press and the media are all one way, so very much concerned about deflationary forces in the short term. And certainly central banks also very, very concerned. What tends to happen is if you enter into a recessionary environment, unemployment rates rise, spare capacity in an economy increases, and subsequently you don't get those inflationary pressures coming through in the real economy and obviously deflation becomes a lot more of a concern. And as I said, this is very, very important because central banks in one way or another target price stability and target inflation. Our own Reserve Bank of Australia targets between two and 3% inflation.

Anthony Doyle:

So again, it is a determinant factor of the reaction function of central banks, whether they're moving interest rates up or down and what that means for investment markets. Now, ultra-low cash rates for me and for the RBA, I believe they're here to stay. The RBA told us yesterday at its last meeting for the year that the cash rate, the RBA cash rate, isn't going to move in the next three years. So that is an environment where savers are going to be punished for putting their money in deposit accounts with a bank or in term deposits. Especially, if we see inflation higher than the cash rate today, which is only 0.1%, if inflation is higher, then you will actually be going backwards in what we call real terms, inflation adjusted terms.

Anthony Doyle:

To put it simply, if cash yields nothing and inflation is 5%, when you take your money out in a year's time, the value of that investment is down 5%. That is why what we're seeing in terms of asset markets is investors increasingly moving out of cash into asset classes and into investments which will generate a positive yield for them or a positive real yield. So one thing that Australian investors have to become aware of is that when interest rates get to these very low levels after a recessionary environment or a crash like the GFC or the COVID crash, they tend to remain at these very low levels for a considerable period of time. And there you can see the UK, the base rate there at around about 50 basis points for 12 years. In Europe, minus half a percent interest rates.

Anthony Doyle:

And as you can see, there was no sort of lift off in 2011. It very unusually, the European Central Bank, hiked interest rates before the European debt crisis. You can see our own RBA, Reserve Bank of Australia, very unusual scenario for a developed market central bank. We had much higher interest rates than the rest of the world, but we are now firmly at that lower interest rate party and we are drinking the quantitative easing punch with everyone else. As a result, what you're likely to see is yields continue to compress, continue to fall lower and lower as you can see there on the Australian government bond yield at the 10-year maturity for example.

Anthony Doyle:

So if you are looking at generating higher returns, cash is now a dead asset. You have to start thinking about taking more risk in order to generate the returns you once enjoyed from defensive assets like government bonds and cash for example. This will be the dominant force for the next decade. It's exactly what central banks want you to do. Today, they want to punish savers and they want to reward borrowers. They want higher asset prices all in order to generate higher growth, lower unemployment, and higher wages, and therefore higher inflation in the medium to long-term. Now, you're probably saying, "Well, we know it was very close. Who's worried about inflation? Who's worried about deflation?"

Anthony Doyle:

But what I want to highlight to you is the Consumer Price Index. It measures a basket of goods and services across the Australian economy. But to get a true understanding of what is really going on, you need to delve into that index and look at the underlying components. And what you will see, particularly since the GFC, is that those components that I classify as needs, like utilities, electricity, gas, water, rates, like school fees, house prices, we need to live in a house whether you're renting or whether you own that house, and other insurance, health, and medical costs, these components have materially outpaced the official CPI as indicated by that black line there.

Anthony Doyle:

They've also materially outpaced wages growth indicating that the average person in Australia in terms of their household balance sheet, in terms of what they have to spend money on, their standards of living are actually deteriorating because those components that are causing inflation to be low, that cause people to be worried about deflation... Discretionary items, how often do you buy a new computer? How often do you buy a new car? Now, games, toys, and hobbies, you can see they're down 20% since the GFC. I've highlighted them as a want. For some reason in my house, they seem to be a need. Particularly the grandparents come over every time with a new toy for the kids, something or a trampoline or something like that. So it might be a need in our house, but nonetheless down 20%.

Anthony Doyle:

And if I'm talking about computers down 70% or audio visual equipment down 70%, that's not to say that they're 70% cheaper. They're 70% better essentially. The statistician, the Australian Bureau of Statistics, will adjust these items for improvements in quality. Think about the iPhone 12 versus the Nokia. So again, many of these components are actually rising in value, but the motor car you get today, you've got power windows, it doesn't have the old wind windows, and that's reflected in the official statistics. So bear this in mind again, if you are trying to protect your standards of living from the eroding effects of these components rising in value much faster than official inflation, again you have to think about either saving more cash or investing in riskier asset classes.

Anthony Doyle:

So for me, and a powerful analysis, remember what the central bank targets is the overall level of goods and services in the economy. They are not measuring the cost of living which is by definition different for every household in Australia. So with this in mind, what is likely to perform well over the medium to long-term? If we remain in this environment of low interest rates, quantitative easing, the good news is everything should do well. I'm not here to give advice obviously, I'm not a financial advisor, but looking at past performance in terms of the last decade, in a world of low interest rates and quantitative easing, whether your own equities, whether you own bonds, whether your own international assets, everything appreciated from 2009 to 2020, except the Aussie dollar, which fell.

Anthony Doyle:

Obviously was approaching those levels of a $1.10 versus the US dollar at the peak of the commodity price boom. It's currently sitting around 74 cents, which is around the highest in three years. And commodity prices, we're a commodity exporting nation. If commodity prices are falling, then there's less demand for Aussie dollars to buy those commodities and subsequently Aussie dollar fell as well. Apart from that, everything rose, again reflecting much lower interest rates, not only in Australia, but across the globe. Now, the big dominant force will be investors looking for income, whether it's Australian investors, US investors, British investors, European investors.

Anthony Doyle:

And to indicate to you where the income now resides in investment markets, it tends to be in the riskier parts of the asset class spectrum, like high yield corporate bonds. So this is debt issued by companies that are riskier, that have a lot of leverage on their balance sheets, whether it's Asia or US for example. The Australian equity market I think we will be in demand, particularly from Australian investors looking for those dividends, looking for that income, benefiting from the fully frank nature of some of those dividends as well. Equivalently, I think importantly, Australians will have to look further afield for income and I think that brings into play emerging market and Asian equities as well.

Anthony Doyle:

In terms of our expectations of how various asset classes might perform in the next five to 10 years, I have their five-year annualised returns and 10-year annualised returns. So, central banks want you to move out the risk curve, which they describe as the portfolio rebalancing effect, rebalancing your portfolio from cash and defensive assets into riskier assets in order to search for those returns. Now, these returns will come at a cost of higher volatility, so you may experience greater drawdowns, but the upside may be greater as well. And in terms of emerging market equities, we're expecting around about an 8% return per annum over the course of the next decade, which is quite significant relative to developed market equities of around 6.8% equivalently for Australian equities as well.

Anthony Doyle:

So I envisage that emerging market equities, Australian investors, this will become a structural allocation or a permanent allocation within most Australian investors portfolios over the course of the next decade. If we come back in 2030, I think increasingly Australians will be moving out this risk curve, looking for those higher returns, but obviously one has to accept the higher potential volatility that goes along with that. So in terms of the key long-term trends, one thing to bear in mind, and I updated this chart on Tuesday, is that you get quite significant dispersion below the index looking at various sectors. The big winner this year, information technology, big winner this year, gold miners as the gold price appreciated to $2,000 an ounce, consumer discretionary, consumer staples.

Anthony Doyle:

But you can see there that the sectors that outperform depending on where you are in the business cycle will change from time to time. And this really speaks to an environment where active investment management can thrive by identifying those companies within these sectors which are likely to be the winners going forward. So I think that a key trend is that active investment management rather than a passive allocation will be key to generating outperformance over the course of the next decade. Of course, I've spoken about emerging markets for those of you that have seen me present before. I think this is a very, very strong case on a structural, long-term perspective to have an allocation to emerging markets. At what is Australian investors are underweight this region, emerging markets will drive growth.

Anthony Doyle:

They are more resilient to an environment than what 1997 encapsulated for example, the Asian Financial Crisis, far more resilient to that now because they've built up their foreign reserves. They are technology innovators, in many ways they are ahead of the developed markets on technology adoption. And that's particularly the case over this year for example. The demographics are in their favour, they're experiencing rising wealth. Unlike the developed world, they have much lower levels of debt, growing consumer markets, and they happen to be cheaper as well, particularly relative to the S&P, US S&P 500, the US equity market for example. So this is a dominant, long-term structural theme. There'll be volatility around it, but I think that this is one part of the investment landscape that Australian investors can potentially exploit over the medium to long-term.

Anthony Doyle:

So I have a poll here, if we put it up for you. So given these long-term trends for Asia and emerging markets, how likely are you to invest in the region? I'm going to say over the course of the next 12 months. Are you likely, unlikely, or no change? Give you a few seconds there to determine your answer. I think you know my view obviously. Will be interesting to see what people say. Likely, okay. A very strong response in terms of some of those themes that I've spoken about. Likely, 72%, unlikely, 8%, and no change, 20%. So, well, if you are likely to invest, well, we happen to have an emerging markets fund or an Asia fund you might be interested in. So speak to your Fidelity sales representative. Equivalently, you can go on our website. I'll give you the website later on.

Anthony Doyle:

If you're looking at exposure in the region, Fidelity have a global emerging markets fund. We also have an Asia fund that have both performed particularly well. A lot more information on those strategies on our website. So very briefly what we do at Fidelity International, before we open it up to Q&A, we are a large investment manager, we are globally based. I have 400 colleagues around the world doing investment research. I spend a lot of my time on calls to London, Shanghai, Hong Kong, Toronto for example, and 90% of the research we do is produced in-house. We are meeting these companies, truly understanding the businesses, and becoming comfortable before we make an investment call or allocating your capital to some of these companies. Fortunately, it's been reflected and we won Fund Manager of the Year this year.

Anthony Doyle:

Here's some of the strategies that I think are really interesting right now that we have on offer to investors. I mentioned Asia, I mentioned emerging markets. I think sustainable will be a key tenet of Australian investors portfolios as well and we happen to have a sustainable water and waste fund. For those people that are perhaps more uncomfortable taking risk but are forced to do it, we have a low volatility equity fund as well that invests on a global scale. Here is the website for any more information, fidelity.com.au, learning hub. There's a lot of my research up there; how I think the world is going to develop, some of the strategies that you can put in place for investing through volatile periods. Please have a look, a wealth of information.

Anthony Doyle:

I also want to thank you all very much for all the support you've given us over the course of this year. It's truly been astonishing and these are relationships that we want to obviously foster and empower in the years to come in order to assist you in meeting your investment and your savings goals. So I know that my compliance team, they always watch all my presentations, here is the all important disclaimer. So that's for you, Katherine and grace. I know you are watching. Now I'm going to pass it over to Lauren for some Q&A. I look forward to it. Thank you very much.

Lauren Jackson:

Well, thank you, Anthony. As always, valuable insights that you've shared with all of us this morning. To get started with the Q&A, we have had quite a few questions come through, but one that's been quite prominent is your jacket. So please tell us, where did you get it?

Anthony Doyle:

Yeah. So this is a company called Bespoke. If you go online, there's probably six or seven to choose from. I've got the full suit. So there's a tie as well and trousers. I hosted the Christmas party last year and I thought I had to do a good job there. So they also have female suits, business suits as well, if you're interested.

Lauren Jackson:

Excellent. Thanks, Anthony. All right. So moving through to some of the questions, particularly as it relates to cash. So you alluded to the fact that cash is now a dead asset, so as an investor today, if I want to maintain some liquidity in my portfolio, how can I think about allocating my capital right now?

Anthony Doyle:

Yeah. Lauren, I mean, it's a fundamental question that not only Australian households face but superannuation funds as well, so the big institutional investors. One thing to bear in mind is when you are building an investment portfolio is to be diversified. Don't be all in Aussie equities, don't be all in emerging market equities, don't be all in cash. Australians typically are quite conservative and tend to have quite high cash levels. The reason for that is because our interest rates have been high, so it makes sense. But unfortunately, we are now with the rest of the world. I was in the UK for 10 years and I saw what happened over there between '09 and '18 for example.

Anthony Doyle:

So what you need to do is have a level of liquidity in cash or short-dated government bonds which are risk-free essentially to ensure that if there's volatility going on in the other parts of your portfolio, you don't become a forced seller and you don't face a margin call for example. So that's very, very important. They have enough liquidity on hand, that if there is any sort of uncertainty... No one saw a pandemic this year for example. The Aussie equity market was down 30%. You don't want to be selling. As we know right now, the Aussie equity market is back to where it was. So you do not want to sell 30% down in March. Have enough liquidity on hand to enable the growth parts of your portfolio to do a job for you and generate those higher returns.

Lauren Jackson:

Valid points, absolutely. Couple of questions that have just come through as it relates to ETFs. Do we have any funds listed on the ASX to trade?

Anthony Doyle:

Yeah. So the first fund that we launched... And you're the expert on this, Lauren, actually. I don't know why you're asking me. But the first fund was December, 2018, and that is an active ETF. When we say active ETF, it means it is actively managed. But you can go onto the ASX via your broker, whoever you use, you put in the ticket FEMX, and that is a fund that is actively managed by our portfolio manager, Alex Duffy, with all that resource that goes into choosing the stocks within the particular fund, and that is replicating the unit trust, the unlisted unit trust and the performance I showed earlier on. So that ticker is FEMX. It is called the Fidelity Global Emerging Markets Fund. More information, call Lauren, she's the guru on active ETF.

Lauren Jackson:

Thanks, Anthony. That's wonderful. Now, ladies and gents, I am actually quite conscious of your time this afternoon. And I did have a couple of questions, which we'll happily try and address for those of you in due course, but first and foremost, I'd like to thank you, Anthony, for sharing your valuable insights with us this morning, really some great things for us to think about as investors as we navigate into 2021. But ladies and gentlemen, thank you so much for joining us for this session today. We hope that you have taken away some key points as to how to think about your investment portfolios moving into next year.

Lauren Jackson:

Certainly, if you have any questions from today's session, reach out to your financial advisor or certainly don't hesitate to give us a call here at Fidelity and we'll do our best to address any questions that you might have. But once again, we wish you a very safe and Merry Christmas and we definitely look forward to seeing you all in 2021. Thanks, Anthony, and thanks, everyone.

Anthony Doyle:

Thank you all. Be safe, be kind, and have a great break.

 

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Anthony Doyle has over 17 years’ experience in global financial markets, working for some of the largest investment management firms in Australia, Europe, and the United Kingdom. In his current role, Anthony helps to explain Fidelity’s broad investment capabilities, strategy, market views and performance to clients.