A year of lockdowns, what's next for markets?

Andrew D.:

Good afternoon, everyone. My name is Andrew Dowling. And I'm part of Fidelity's wholesale sales team. We appreciate you taking the time to join us for today's conversation, a year of lockdowns, what's next for markets? Viral Patel, director equities, will lead us through a discussion on how the world looks a year on, including some unique market insights from our panel with a focus on the vaccine rollout, as well as some of the demographic trends. Now, today's discussion is scheduled for 60 minutes. You're welcome to submit your questions throughout the conversation via the Q&A module that's located at the bottom of your screen if you're using a desktop. Or the top or bottom of your screen if you're using a tablet or a mobile device. We'll also make CPD points available within the next 10 days. And on that note, over to you Viral. Thank you.

Viral Patel:

Great. Thanks, Andrew. Welcome, everyone, to another one of our panels featuring some of our investors from our various global offices. As Andrew mentioned, I am Sydney based director of equities. I manage a couple of teams across Asia and Australia. Currently, I am on leave in Port Stephens. I had to go out and buy the shirt today given I forgot to get my shirt and tie. Excuse me for that. Just to introduce the various people on the panel. We have Tom, who is the European based co-lead of the COVID Working Group. We have Anthony, who is Singapore based Asian markets PM, and he's required to wear a mask because in Singapore, even in office, you have to wear masks. James, as everybody would know on this call and mostly everybody would know, is our Sydney based PM of a small cap Future Leaders Fund. And he's also co-PM of our Global Future Leaders Fund which is launching quite successfully currently. And Aneta, who is a London based PM of Consumer Demographics Fund. And welcome, everybody. And thank you for waking up very early in the morning, London based PMs.

Viral Patel:

I'm going to do a quick introduction. And then I'm going to hand it over for about two to three minutes to each of our speakers. And then we're going to move straight into Q&A. Please ask on any Q&A via the Zoom portal. It's been a year. Right? We have the number of COVID deaths actually currently in the first quarter of '21 is higher than any prior quarters, which is still quite worrying. Right? Cases and deaths are increasing. Seven day moving average globally is increasing. The governments around the world has done a significant amount of fiscal monetary stimulus. Right? For advanced economies, more than $8.5 trillion of investment in fiscal stimulus has been done, which is a huge amount. Gross debt has gone up. Gearing of the various countries has gone up significantly. The total above and below the line fiscal stimulus is about $16 trillion, which is if you think about it in US, that's over 20 trillion Aussie dollars. That's all like $1 million per Australian citizen. There's are a lot of money being injected from government balance sheets into the world, into the markets and liquidity.

Viral Patel:

Monetary stimulus is very high. A lot of central bank rates of developed countries went below zero for some period of time over the last year. Consumer spending, as we'll talk about later, has held up. V online has gone really, really strong, which is one of the big winners of the whole COVID environment. Australia online has gone from 8% to 12%. Quite a bit increase over the last 12 months. Airline demand, very low. The airline demand based on revenue per kilometre is down 75% on a year ago. It's still very, very weak. Stock market is very high as everybody knows. Market is valued from trough to peak, over 80% in the US and 60% in Australia. And valuations of that, we'll speak to on the call, seem to be at five year averages. That's a quick snapshot just from my end of a few different indicators. But now we'll go on to the more bottom-up insight from the various panellists. I'm going to first start with Tom, who is going to talk about COVID. Thanks, Tom.

Tom A.:

Thanks, Viral. Good afternoon, everyone. Let me talk about kind of the rollout of vaccinations, the pace of vaccinations, and have a particular focus on Australia. If we look across the world, basically countries that have made the most progress on the rollout of the vaccines are Israel, the UAE, UK, Chile and the US. With, in all of these countries, basically at least 30% of the population having received a first vaccine dose. And in most of these countries, we are seeing the effects of the vaccine becoming visible, of the different vaccines. Obviously, there's differences in efficacy of the different vaccines. And we need to look at each cohort data to really understand what is happening with kind of underneath the headline data, but we are definitely seeing the effects becoming visible.

Tom A.:

In Australia, less than 3% of the population has received the first dose. There has been a lot of publicity about that in the press, of course. I'm sure you are all familiar with that. I'm going to try and focus on the picture going forward rather than regurgitating what you already all know. Just on the vaccine supply agreements that are in place in Australia, AstraZeneca was meant to be the most important vaccine with 53.8 million doses secured, 50 million of which were meant to be produced by CSL in Australia and locally. Now, as I said, there's been a lot of publicity, but basically the first 3.8 million doses of AstraZeneca have been a bit of a disaster. But as far as we can tell, and based on the information out there, CSL supply should now start to ramp up. Hopefully, they should soon be achieving their target of supplying 1 million plus doses a week.

Tom A.:

The second vaccine that is contracted is Pfizer-BioNTech. Initially, Australia secured 10 million doses of that. A further 10 million doses were added in February. And then an additional 20 million doses were secured in recent days. Currently, supply is still very low. I think there is only about 130,000 doses a week being delivered. But this is meant to ramp up over the course of Q2, and then reach much higher levels in July. We don't actually have details on kind of how that ramp up looks like. I haven't been able to find anything on that. But if we kind of combine the different parts of the agreements that have been published on, I would estimate that from July on, you're probably receiving at least 600,000 doses a week. And then from Q4 onwards, the supply of the additional 20 million doses that have just been secured should also start. Then there is the Novavax vaccine that kind of should also start to come in in Q3, but it's not clear whether that will be approved yet. I'll ignore that for a minute in kind of the next couple of comments I'm going to make.

Tom A.:

What we then need to do is, when we look at vaccine supply, we need to kind of split up the population in the relevant groups. Obviously, we've got about 25 million inhabitants. 5.4 million of which are 65 plus, 4.8 in the range of 50 to 64 years old, and then 10.2 million in the range of 20 to 49. And Australia has kind of made it clear that they do no longer intend to use the AstraZeneca vaccine for the under 50s. On that basis, realistically speaking and assuming we don't get further logistical issues, which we obviously can't exclude, you're basically looking at the full 50 plus age group having received the first dose of the vaccine at some point in late June or July. And then second dose is being completed by the end of September as kind of supply ramps up so quickly that it kind of gets easier to do that second round of doses.

Tom A.:

For the 20 to 49 year old group, given that that's all going to have to be Pfizer-BioNTech, we're probably looking at first doses being completed by September. And then second dose is towards the end of the year. There's still some time to go, but at least it takes place. That is also the route back to normality. I'm actually quite positive on, not only Australia, but also Europe. We are seeing the same things playing out, kind of supplies ramping up. The initial start has been difficult, but there's definitely a much better outlook going forward. I'll pause there. And I'm sure we'll come back to some questions later.

Viral Patel:

Great. Thank you, Tom. Just moving on. Next we'll have Aneta.

Aneta W.:

Hello. Good afternoon. Very early morning in London. Consumption, I managed to find one of them is global consumer, the other global demographics. Obviously, consumption is very much top of mind. And consumption is very important because 60 to 70% of global GDP is driven by consumption. And obviously, what happened last year with COVID created a massive crisis in terms of consumption opportunities. And what came out of COVID is changing consumption patterns. And we have seen many beneficiaries of COVID, but that's not going to stay. I don't know. Hopefully, consumption of food at home is not something that we are all going to be doing for the next decade. While some of the trends like e-commerce are likely to stay in place. And it was just a step up in the structural growth that we have been already seeing.

Aneta W.:

And the crisis, the recession, as some people will actually call a social recession, the lack of opportunities to see each other, the lack of opportunities to socialise. And obviously, coming out of this social recession, people will look for what they were not able to get, social interaction. The investment opportunities are in that space. And this is why I am looking for investment opportunities. Travel, leisure, restaurants, spirits, luxury goods, going out outfit, all these things, when I look at the leading indicators. And we do spend a lot of time. The whole consumer team, we are all analysing consumer behaviour almost on a live kind of day-to-day basis, discuss the outlook. And all the sectors are pointing towards quite a dynamic consumer coming back and spending. We are all hoping for some kind of Roaring Twenties in front of us. And we have seen signs of that. It is quite hopeful.

Aneta W.:

Thinking, maybe leaving consumption aside, there are some other bigger trends, demographic trends. And here, obviously, there has been lots of developments that have accelerated as well. We all have seen the impact of COVID on birth rates. Hopefully this is just temporary. But the global population is ageing. And that creates big massive investment opportunities. One of them is obviously healthcare. Healthcare is one of the sectors that today no one really wants to invest in, because there's so many other exciting sectors. But we stay firm, and we continue to see amazing opportunities, especially the medical devices business. I think people seem excited about consumption, but they don't seem excited about the return of all these procedures that has been postponed. And they need to return because, obviously, as people age, they have to get on and get some of the body parts fixed.

Aneta W.:

Another big opportunity that we have been investing behind, but also has accelerated through COVID, is automation. And here, obviously, robots do not get the virus. Automation has advanced at different speeds. But during the COVID crisis, I think many companies, many countries have chosen it as a strategic priority. That's another field where the investment opportunities have become even more attractive. And I will stop at that. Thank you.

Viral Patel:

Thanks, Aneta. Coming back to Australia, James.

James Abela:

Hello. Thank you. Just following on from Tom and Aneta's comments. Really Australia COVID winners was the big theme that came through the whole COVID period. There is a whole lot of sectors, which are mentioned. A lot of these have come off since COVID is mentally, I guess, and socially become less of a focus of the Australian population. I'll just touch on all the COVID winners did quite well. Technology productivity was a big one, personal, corporate or government. Any productivity tools which are software based or technology based, they were big winners. And as Aneta mentioned, these were existent pre-COVID. But a lot of the COVID environment just accelerated the need for productivity, the need for efficiency and the use of technology as a replacement. Next one was really home improvement. Everyone being at home, Lounge, manufacturers such as Nick Scali, well, other things that were really home improvement based really, really took off during COVID.

James Abela:

The next one is really e-commerce or online retail. Again, as Aneta mentioned, that was there before, but this really had a big step change in penetration rates of online retailing. Companies like Kogan and Redbubble and Temple & Webster were big beneficiaries of the e-commerce trend, which really accelerated. The next one is Buy Now, Pay Later and really kind of other new credit phenomenons were really starting to develop very quickly. And also the government, for myself living through the global financial crisis in 2009, which was a lot more financially driven. The banks were really encouraged by the government and the RBA to really facilitate credit and allow for credit with collateralized agreements, et cetera. In a very different environment, a pandemic, but in a similar vein, credit has really been allowed to facilitate growth and facilitate spending. And I think that was a really great time for these Buy Now, Pay Later stocks to really step up and have a big step up in penetration, and also attraction. Stocks like Afterpay, Zip, Sezzle, Laybuy and Humm are very, very big, and still remind to be.

James Abela:

Data centres also working from home had a big penetration benefit, given data flows. Financial services or FinTech was also significant. Netwealth and Hub really, again, the movement towards software. And also gold as a store of value. That's really come off, I guess, in the last quarter. But still gold is a big beneficiary of COVID, I guess, sphere. And that was a store of value that did well. But as I mentioned, many of these have come off. The market is in a very different place now. Values had a big rally. Momentum had a big rally. Quality has come off. And a lot of these COVID winners have also come off, most of them are off 30% from their peaks. I'll leave it there and hand it back to Viral. We'll come on to these issues again.

Viral Patel:

Thanks, James. Just before we move to Anthony, I just wanted to put in a reminder, any questions for anybody on the panel on anything, it doesn't have to be COVID related, anything to do with markets, please send the questions via Zoom. Thank you. And moving to now Anthony on the Asian perspective.

Anthony Srom:

Thanks, Viral. Just double checking that everyone can hear me, because of the mask. We'll see how we go. But perfect. Just kind of following on maybe the back end of what James was saying about COVID winners rolling off now. From what I see out here in Asia, COVID, not that much news flow, not that much of an issue in markets. Travel in China is rebounded to being above 2019 levels. Things are back to pretty much normal there. I think the market's preoccupation is with the strength of the economic rebound now, what sectors, more companies you may want to rotate into. But also, I think, if I take a longer term picture, what's maybe going to be come front of mind or starting to get some attention up here is very much the liquidity situation in China. Also, debate about inflation versus maybe no inflation. I think the positivity towards the big rebound in inflation in the first quarter is moderating somewhat, is what I sense up here.

Anthony Srom:

And then also, I think, a big picture question is, given all this stimulus that Viral mentioned and has been touched on so far, where does all that liquidity go? Debt levels are high, as we pointed out. Some markets may start looking at financial repression. And therefore, where do those dollars flee to? And to me, emerging markets kind of make sense. Maybe a bit of a spoiler, I think a lot of my colleagues have spoken about COVID, that doesn't seem to be that much of an issue or a driver up in Asia anyway. And there's some kind of leading points or comments that are exercising my mind in what I see up here at the moment.

Viral Patel:

Great. Thank you, Anthony. We just start off with a few questions that we have gotten. First one is more around rising bond yields. We talked about monetary stimulus, et cetera. We are starting to see bond yields troughing out and rising, possibility of inflation, we've had a bit of a cycle change from growth to value, et cetera. How concerned are you about rising bond yields inflation and the impact on long duration assets? Let's start with James first.

James Abela:

It is obviously very topical. And I think you just need to remember why bond yield is going up. And bond yields are going up because confidence is rising, inflation is rising, expectations are rising. And I think that's just what needs to be kept in mind. For me, the interesting thing is the longer you think that confidence is going to hold, economic recovery is going to hold, then you're actually going to be moving longer and longer down the duration curve. Therefore, quality will work. Whereas now, it was very much momentum and now it's going through the end of the value rally is what is generally felt at the moment, because a lot of those value names have run their course. The easy money is being made in value, but the quality has really come off. And that's what's really happened.

James Abela:

The longer the inflation stays higher, expectations and confidence remains high, the market will, potentially over the next six months, will start to move back to quality as you start to move to duration. And you stop craving, I guess, growth, certainty and short term right now, which is where you go for more so momentum or value. That's how I think that comes into the stock selection process.

James Abela:

And globally, prices have been very strong. And other areas such as housing and things like that as well. That's a real phenomenon. And record confidence, that's what a lot of people mention in the news today. We've got record consumer confidence as high as we were in 2013. Record corporate confidence and business confidence as well. There is this concern that yes, bond yields are rising and inflation is rising, but there's a building concern of euphoria right across the board, because whether you want to think about styles or you think about sectors, the price of risk is going up. But a lot of people are concerned that the valuations have not really reflected that. And a lot of stocks have really, really run. And it's not even mentioning the other things that are happening in the world in terms of cryptocurrency and Bitcoin. There is a lot of other things that are going on that just signal that risks and euphoria is at, we're trending upward. I think bond yields and inflation is perhaps the limiting factor that is coming, but it is likely still rising, in my mind.

Viral Patel:

Great. Thanks, James. Yes, Aneta first, and then I'll go to Anthony.

Aneta W.:

Thank you. If I could just pick up... We have, or at least before the latest stimulus in the US, there was 1.4 trillion savings available. It's a massive amount of money. And a strange set, the confidence is very high. The willingness to spend this money is also quite high once the opportunities are there. Obviously, as investors, we all kind of look at charts and think about what happened the last time. But I think it's more important to step back and think, okay, there is a huge amount of money, what is this money going to be spent on? Because obviously, as an investor, you benefit from that much more than from finding a value stock. And I think consumers have become very discerning. And that's the job I am trying to do every day, trying the components that sell product services that consumers are looking for, and companies that have pricing power. I think inflation is here for the time being, maybe for quite a bit longer. But many of the companies, and some of them growth companies will benefit in a big way.

Viral Patel:

Thanks, Aneta. Anthony. You are in mute.

Anthony Srom:

Thanks, Viral. In terms of rising bond yields and my concern, at the highest level, I don't think the world can tolerate rising bond yields, just given the sheer amount of leverage that's going on. In essence, it's kind of a circular reference. At some point, they will go too high and starts to crimp growth. Kind of my thinking there is, well, you may get some upward moving in yields, you may get some rising inflationary expectations, it could cause a little bit of a heart attack for markets, but at the end of the day, it's not tolerable and nor is it sustainable.

Anthony Srom:

My sense is, I mean, if you look what's happening in Europe, the ECB is kind of doing it without saying it, but kind of yield curve control. The US may or may not do it. At some point in time, we'll see. But I suppose the point I'm trying to make is we're kind of focusing on rising bond yields now, but they're not sustainable if they get pegged at low levels. Real rates are likely to stay low, if not potentially fall. And therefore, that kind of changes the equation from what the market has currently been buying. That's the only thing I would kind of say about that in terms of my perspective.

Viral Patel:

That's very helpful. Thank you. Just James, a quick question for you. You mentioned the Zoom stand out as winners. Have they had their day as leaders going forward? Do you expect them to crack in line with the market or could they underperform?

James Abela:

Look, now it has become very, very stock specific. That is what I think you need to remember overall. Everything is run with very high correlations. If it's a COVID winner, it's running. If it's value in the last six months, it's run really hard. And I think you need to be very, very stock specific. In odd contrast, companies that have been very specific beneficiaries such as e-commerce, for example, Kogan, it's very, very stock specific, that that was a beneficiary of people being at home. If you take away people being at home and you put them in their offices, you put them out in their normal environment, are they going to be ordering the same volume? And therefore, does the company get the same margins, and therefore the same profits, and the same ROEs, and therefore deserve the same valuation that it did during the COVID environment? And I think that's what you need to think about right across the board with all of these COVID winners.

James Abela:

For me, it's very stock specific. And it comes down to, the key word for me is sustainability. What is the sustainable return? What are the sustainable margins? And therefore, what are the sustainable growth profile of the business? And as I mentioned, healthcare, a lot of these healthcare names have come down in a huge way, 30 or 40% relative to the market, and got to very attractive valuations. A lot of the COVID winners got up to very, very high multiples on earnings that were 30, 40, 50% higher than they were pre-COVID.

James Abela:

There is a lot of adjustment that will take place over the next 12 months. And I think you just need to be very stock specific. Stocks are being given very generous earnings, upgrades, very generous valuations, very low interest rates, a very risk loving market, and a market looking for leverage, a market looking for exposures. And as that is changing with Australian society, but also the bond yield backdrop, I think that is what you need to really think about for the next 12 months, two years, because companies are based on multi year earnings outlooks, multi year return on capital. Investing is not one or two year phenomenon, it's a multi year phenomenon. For me, it's the sustainability that is really going to be questioned, especially in the next six to 12 months.

Viral Patel:

Great. Thanks, James. Tom, I have a couple of questions for you. The first one is, what is your view of the mutations on efficacy of vaccines? And the second question I'll ask you at the same time is, China seems to have life gone back to normal as Anthony mentioned. Right? If that's the case, what is it that China is doing well that is causal? Is it like Australia, just lockdowns and hard border closures, or is the vaccine one that's working well for them?

Tom A.:

A lot to cover in those two questions, but I'll try and be quick. Look, the question on vaccine efficacy is a difficult one, especially with kind of mutations and different strains out there. What we know is that the vaccines, in particular Pfizer-BioNTech and Moderna, have very high efficacy against kind of the basic strain, if I can call it like that, and very good efficacy against the UK strain. But then we don't really have enough data yet to judge the efficacy against the South African strain.

Tom A.:

Now, the first data is actually starting to come out in this. I think there was a paper published in Israel two days ago that kind of looks at cases amongst the vaccinated population. And what we see there is basically that it's much more likely that someone who has already been vaccinated has a case with the South African strain rather than with the UK or kind of the basic strain. That kind of tells you that even the Pfizer-BioNTech vaccine is less effective against the South African strain. And we're seeing that in some of the other test data that has been out there and some of kind of the lab based data. But we don't know yet just kind of how that impacts things like hospitalisation, because that's really what we care about. Right? As long as we can keep the hospitals empty and keep that at a very low level, then life can go back to normal.

Tom A.:

The biggest risk I see is, of course, that we get further mutations of the virus. We saw a further mutation of the South African strain that completely escapes the current vaccines out there. What we really have on our hands is the race between the vaccine manufacturers and the virus. At the moment, given how many COVID cases are still out there in the world, we are basically providing the virus lots of lottery tickets each and every day to mutate successfully. Right? Overall, it has to be a combination of factors. Kind of reducing cases, developing boosters, and everyone kind of remaining careful and cautious in the way they go about their lives.

Tom A.:

On the question what has China done right? I think it's a combination of things. First of all, I don't think it's vaccine efficacy. In fact, if we look at the data on vaccine efficacy for most of the Chinese vaccines, it's actually not that good. It's perhaps around 50%, or in some cases even lower. And we're partly seeing that back in how cases develop in Chile, for example, which are using one of the Chinese vaccines. I think it's really a case of kind of aggressive lockdowns, aggressive tracing and really kind of not giving people the option to still mix. And you see big contrast there, even within Europe, for example, where different countries choose different routes to deal with the virus and are getting very different outcomes. I'll stop there. But there's plenty more we can discuss, of course.

Anthony Srom:

Sorry, Viral. It's Anthony. Just maybe on Tom's comment what's China doing different in maybe an Asian perspective? I mean, I've come from Australia. And one of the things that I noticed when I moved to Asia was if the government says you do something, everyone bloody does it. And in Singapore, the contact tracing thing, it's very strict, very accurate. And the case count here is exceptionally low. But interestingly, I think two, three days ago, we had our first case of a fully vaccinated individual contracting COVID. We got to work through that one. But just rounding up, I suppose from a cultural perspective, it's stark contrast to what you'd expect in, say, Australia or elsewhere, how people deal with it up here.

Viral Patel:

Thanks, Anthony. Tom, just actually going back to you, a question from me. I know from the team in India, we've had some cases where some people have been vaccinated and then have gotten infected. Just mention a couple of minutes on the possibility of that.

Tom A.:

I mean, look, that is kind of the natural outcome of how vaccines work. Right? I mean, the ideal case would, of course, be that we have 100% effective vaccines, and we eradicate this thing once and for all. And that's it. And the reality is the vaccine doesn't always fully work. The point is we need to kind of close off routes for the virus to keep spreading. Right? I don't want to go into a big discussion about herd immunity. But basically, you need to get to a situation where if one person contracts the virus, they cannot spread it to more than one person, and preferably much less than that, statistically speaking. Right?

Tom A.:

Different countries using different vaccines will see different results. Right? If you are vaccinating mostly with a vaccine that's 90-95% effective, then that has different implications than if you're using a vaccine that's 60-65% effective. And again, even there, we need to differentiate between kind of case loads and hospital admissions, ICU admissions and deaths. Right? The goal is to get life back to normal, the goal isn't necessarily to completely get rid of COVID forever. That's one perspective.

Tom A.:

The other perspective is, again, coming back to mutations. Right? You need to be very careful in terms of when you look at the data. Okay. These cases of kind of people that had been vaccinated, kind of what strain is this? Why is this happening? And all of that's happening in real time. It's kind of we just continuously, in the working group, keep on tracking all the data that's out there, all the papers that are coming out there. Right? There's Israel paper from two days ago, very interesting. We try and keep on top of that. But at the moment, there is no clear picture yet as to kind of how the rotation game will play out over the next month, but we are watching it closely.

Viral Patel:

Excellent. Thank you very much. Aneta, a question for you. Just globally, and maybe a bit in Australia if you can, given the demographic changes, consumer changes, what are the sectors, industries that you think are likely to be the structural winners? I know you talked a bit in the start, but if you can just highlight a bit more there.

Aneta W.:

It's a question of where did the behaviour or the consumer behaviour change for good? And as in many segments of the economy, I think the changes were already happening before, and then the COVID crisis has just accelerated them. One of the strong trends that I already have been investing behind was sportswear, the casualization of the way people dress. That has massively accelerated. And obviously, now question is will people go back? But I think we can ask ourselves the likelihood of wearing suits or wearing, for women, kind of high heels to go to the office. I think that really seems like things from the previous era. And I see a lot of patterns like that.

Aneta W.:

Another thing is the whole trend of wellness and taking care of yourself and paying more attention to health. The sales of vitamins have been going up in a big way. Again, it's because people are thinking much more about their own bodies. And how sales of skincare, is that something that is going to be there? I think once people get used to using it and believe in the benefits of using skincare, even post COVID going back out, that will become a habit that will stay. It's very interesting because there are so many different patterns and trends that have firmly established themselves. And obviously, a handful of companies that really play well into these trends end up creates quite interesting investment opportunities.

Viral Patel:

Well, Aneta, thank you. James, just coming back to you. Are countries like Australia, and we've already put hard border restriction, lockdowns, all that kind of stuff, are we restricting ourselves from being able to take advantage of the rebound in global tourism travel, whatever else it is, by basically effectively creating a moat around us due to COVID?

James Abela:

Well, look, certainly I think that's a yes. International travel corner us. And a number of travel people were on the news today in the last few days just saying 2022, '23 is the likely normalisation for international travel. What that has created on the other side of the coin is a very significant boom in domestic big site locations, domestic interstate, or not even interstate travel, but regional travel in your area. If you're Sydney based, you've got the North and the South Coast that you would travel to. If you are in Queensland, the same, you're going up to North Queensland for your getaways. It's created a lot of interstate travel activity from the domestic market. And interstate travel, people are still very nervous because they don't want to be getting on a plane and then bring their family and say, okay, I've got to be in quarantine for two weeks. And you had that situation in the recent lockdowns. When it was announced overnight, people were landing in another state and then getting on the next plane to go home, because they don't want to be stuck in a hotel for 14 days.

James Abela:

This anxiety is creating pretty much very strong interstate travel. It's creating, obviously, anxiety of international travel given it's not available, but also there's a lot of nervousness and conditions around it. I think the answer is yes. And that means the international travel normalisation is in at least one to two years away. And that, I think, they are the multiple outcomes of that question.

Viral Patel:

Thanks, James. Following on from that question, and I'll ask this to more of the panellists. Right? Globally, different markets are doing it in different way. Some are opening up, some are keeping hard lockdowns. What is our view on return expectations in one, two, three years out? And your views on positioning in equities versus other asset classes? James, do you want to go first? With the smile on your face, I have to start with you.

James Abela:

I wasn't trying to speaking there. All right. Look, equity is, for me, still attractive. And valuations, the earnings are still in recovery mode. The world is still in recovery mode. For me, there's still upgrades to come through. ROEs are still moderately low, they're still not bottom cycle, but they're mid cycle. But valuations are still very reasonable. Two times price to book in the Australian market is a very reasonable valuation. PAE of 20 times for 12 or 13% growth in Australian mid and small caps is very, very reasonable. Even the dividend yield is 2% is very, very reasonable. In terms of Australian mid and small caps, which are more leveraged to recovery, more exposed to commodities, and also have a decent quality and value skew, they are a benefit and doing quite well in terms of growth. And valuations do look quite attractive. And the Australian small caps, they do look quite good. And I think relative to other things in the marketplace such as bonds, the Aussie small cap equity market does look very attractive.

Viral Patel:

James, just on that, what about things like infrastructure?

James Abela:

Well, look, I mentioned if you're highly leveraged and you need a lot of debt, I think they're things that I think are a little bit more concerning. For example, one that I look at is Auckland Airport. That used to trade at 8 or $9, it went down to three or four, and now it's back at seven. A lot of the recovery in terms of infrastructure is priced in. And I think that's the concern, I think, that the market has with it.

James Abela:

And a lot of these infrastructure assets, if you look at Toll Roads and others, they have a lot of leverage attached to them. When you've got a lot of leverage and you've got rates going up and long bond yield rising, these were seen as, I guess going into pre-COVID, as very high quality defensives. During COVID, they are very leveraged defensives. And as we're coming out of COVID, relatively, they're seen as expensive defensives with leverage, which is the concern, generally, for infrastructure as an asset class today. Whereas you can get leverage at a lower multiple in commodities, you can get often higher yields at lower valuations in real estate. And I think there are actually a lot more options with the current environment compared to pre-COVID.

Viral Patel:

Thanks, James. Anthony, would you like to add on that?

Anthony Srom:

Yeah. Look, I think in terms of equity market outlook, to me, it's a lot of risk with kind of modest return. And then you got to start thinking do you want a nominal return or you want a real return? And what do you want your return in? And China is in a bear market. I mean, the market is down 15% in the last two months. Again, kind of China, to a certain degree I'll listen to it as a leading indicator for what else might be happening.

Anthony Srom:

But again, going back to what I was saying earlier in some of our earlier comments being rising bond yields, in my view, not being potentially sustainable or the yield curve control. Again, I just kind of think of gold. I mean, we haven't discussed that in this call. But, again, I think if you extrapolate a few years, gold will be a relatively good place to be. You're not losing your shirt by owning gold over the last few years. And if you pick your equities correctly, you can actually outperform. To me, it's one that's kind of been, I wouldn't say consigned to the dustbin just yet, but there is a lot of commentary on Bitcoin kind of taking the limelight. But in terms of what looks interesting in an equity market context, I think gold still looks good on a multi view.

Viral Patel:

Great. Thank you, Anthony. Aneta, is there anything you would like to add there?

Aneta W.:

Well, for me, it's obviously we are in a positive economic cycle, but also at a time where the financial repression is clearly a strategy for a lot of governments and central banks. And that means that, as investors, we need to protect our purchasing power, we need to look for companies with pricing power and good execution, good product, desirable products, and pricing power. This is what I think will protect you from this liquidity that is all over the place. And I think only equity give you that. And that's why I think equity is still the place to be.

Viral Patel:

And while I'm with you, Aneta, one more question that came through. You've talked about having pricing power. That's very true. Whatever will have more pricing power will probably do better going forward. Your views on commercial property?

Aneta W.:

Very interesting. Technology has allowed much more flexible working long time ago. It's just that we were not willing to do it. As humans, we are social animals and we like to be in herds. The big question now is what's going to happen when we can go back to the office? And a lot of companies, Fidelity included, has been coming up with a new policy, allowing working from home for a day or two a week, depending on what is your job. And I think we all will try and want to use that, especially summertime when you can be maybe in a nicer place than Central London. I think the technology enabled flexibility will reduce the need for commercial office space. The same with retail. E-commerce has taken a share. And that's there to stay. And it will continue to grow because it's just convenience and much larger choice which will never be able to be offered in a place, in a shop.

Aneta W.:

I think the commercial real estate is in a difficult spot. But I think there will be new users that come up. And obviously, in a lot of cities, we are now seeing house price boom. A lot of that can be maybe turned into apartments, especially for younger people. We all talk about the need to help the younger to get on the property ladder. Why not turn some of the big office buildings into blocks of flats? Maybe a write-off will need to happen along the lines. But I think a lot of that will be happening.

Viral Patel:

And James, just on Australia on commercial property.

James Abela:

Very similar to what Aneta said. Probably shopping centres and commercial office spaces are the ones where people were very worried during COVID. Amazingly or surprisingly, I guess a lot of that has bounced back. But it's still a little bit lower than what it was pre-COVID. The bigger thing I think is the spreads between A, B, C, D grade. Those spreads were getting very, very close during pre-COVID time. Things were 3 or 4% cap rates or yields were universal across A, B, C, D category. Spreads were getting very thin. And recent transactions have regional shopping centres out at about 8% whereas office is still around that 3 or 4% cap rate or yield rate. That's the big thing in which you mentioned valuation corrections. Shopping centres in regional areas are where probably there's most risk of yield expansion or valuation compression. And then CBD office may be better. But then B and C and D grade office are the ones where you're probably going to get a little bit of risk. I agree with Aneta's statement, it's pretty much Australian relevant as well.

Viral Patel:

Thank you. Tom, anything you want to add on the prior question? And then if not, I have another question for you.

Tom A.:

Let's go for the other question.

Viral Patel:

Sounds good. Just on the international travel. Right? From where the COVID Working Group looking at different countries and seeing what's happening. Well, what's the views on some path to normalisation that we're seeing for travel?

Tom A.:

Sure. I still think that we're going to see the first signs of normalisation from the second half of this year onwards, but predominantly then between countries that are far progressed with the vaccine rollout. I think countries are still going to be quite protective of their borders in a way. But kind of in some of the stocks I cover as part of my other role is the likes of Visa and MasterCard. They see a lot of kind of data on what's going on with travel and where people are using their cards and all of that. And what they've seen so far, whenever a border has been opened up, there's been an enormous resurgence of travel, because people are just desperate to move again. You can make references to 911 and how long it took for travel to recover at that time. But I think we're dealing with a slightly different situation here where people actually would want to travel again. And as long as they can feel comfortable that cases are low and that they've been vaccinated, I think they will go back to travel very quickly.

Tom A.:

I think in second half of the year, we'll start to see more of it. That's later than I had hoped for. Maybe three to six months ago, I thought we'd be seeing the first signs now. Clearly, things have been taking longer. But I think there will be pent up demand as soon as borders reopen. But I'm basically assuming a full normalisation by 2023, but there are pretty high levels already next year.

Viral Patel:

Thank you. Anthony, are we under estimating sovereign risk in China? And has Indian market still gone upside after the recent rebound?

Anthony Srom:

In terms of sovereign risk to China, pretty much looking at it through an economic lens. And I'd say the market is... I mean, if I think about China, I'm actually stunned that they're still persisting with a liquidity tightening monetary stance. I mean, the problem that you got in China is that this is one of the more highly levered economies in the world. And if you that levered, you should grow faster, not slower, to outpace the growth in debt. But they've been talking about deleveraging for years, they've delivered nothing. And now they're tightening policy, which I think is kind of a bit of a dangerous proposition. Again, I think that's partly symptomatic of what's happened to the equity markets. Now that they've come off, maybe growth is less abundant. You got to pay a premium for some of the growth names that are in there. And you're starting to see some bifurcation in the market, a bit like you are in India.

Anthony Srom:

And I think where I'm coming from is a valve to kind of solve part of this is devaluing the renminbi. I mean, it's been incredibly strong. The dollar Desi surprised on the upside. Everyone thought it was going down. The renminbi has kind of tracked it. I mean, in terms of China risks, I think the number one in my mind would be growth is too slow and you've got downward pressure on the renminbi. That's kind of my thinking on China.

Anthony Srom:

In terms of India, you know that markets rebounded incredibly strongly. I mentioned earlier that kind of COVID is a bit of a non-issue in the Asian markets. India would be an aside to that, given the rebounding caseloads that you've seen there in infections. But, again, when I look at that market, headline level, I think the market is expensive. And within that, to be frank, the fund that I manage, Fidelity Asia Fund, we've only got one company in India in the portfolio. I just don't see a lot of ideas or value right there right now. We'll leave it for another day. But again, you're seeing what's happened recently with India. It's come off the boil. People are getting a little bit concerned about COVID, but it doesn't seem anything cataclysmic just yet. I'd say it is expensive, and then we'll wait and see for another day.

Viral Patel:

We touched a bit earlier on valuation. I just wanted to wrap up a bit with, not just levels, how do you think about valuations and what do you think right now? Maybe, again, I'll start with you, James.

James Abela:

Thanks, Viral. Look, I look through what I call my QMTB lens or quality, momentum, transition and value. And I think there are opportunities and concerns in every single quadrant at the moment. And as we go through, we have gone from fear to hope to now heading towards euphoria potentially in a whole lot of areas. You've got to be very discerning on valuations. What it's led, for me, to quality is really in healthcare sector. That one is probably the most opportunistic area where valuations have come off the market's run. And healthcare in Australia is hardly going anywhere. But they're delivering 20% ROEs, 15% growth, really high quality companies at really good prices. Quality is the opportunity in healthcare. And quality concern is really software. They were very expensive COVID, disappointed during COVID. And they've come off. But even the medium term outlook for a lot of the software names is a little bit weaker post COVID. A lot of those, for me, are actually risks in quality.

James Abela:

And then in momentum opportunity-wise, copper, electric vehicles and net zero, all these thematic pieces around commodities are really interesting in momentum right now. And that's when they have quite a decent amount of exposure. Whereas the concern, as I mentioned a lot bit COVID winners, e-commerce, BNPL, loss making, leverage names, expensive defensives, all those are a bit more concerning in terms of momentum names. Transition, I'd say construction and building is definitely the opportunity set as mentioned on the call. Housing is very strong. Construction is very strong. That's definitely a turnaround kind of environment. Whereas concern is more your bricks and mortar retail that have had huge runs in share prices, very high expectations already. And I feel like that's a lot of concern, more in terms of valuation concern.

James Abela:

Then in terms of value, opportunity-wise is media as the market recovers and corporate start to spend. Media is having upgrades. There's some structural winners who are more exposed to in that environment. But definitely media in terms of values is still a good opportunity. Whereas the ones I mentioned before, property, shopping centres or office are probably a bit of a concern in terms of value where there's potentially a bit of risk. That's how I'd summarise the kind of valuation opportunity set right now.

Viral Patel:

Great. Thanks, James. And given the Australian client base is probably most interested in the Australian valuations. And Anthony has already covered a bit on valuations in Asia. I may actually, at this point, wrap up this session here. And I'll pass it over to Anthony to wrap up for us. Sorry, Andrew.

Andrew D.:

Thank you, Viral. And thank you, James, Anthony, Aneta and Tom. Certainly some very valuable insights and observations terms in this current market environment, and also some insights around what's next for markets there as well. I very much appreciate everyone's time. To our webinar attendees, thanks once again for joining us today. If you do have any follow up questions, please do contact your Fidelity account manager. And as mentioned, we'll also have CPD points at you in the next 10 days. Enjoy your evening. And we look forward to seeing you again soon. Thank you.