The analysts: Tech, banks and healthcare

Fidelity Live - Insights and outlook for Tech, Banks and Healthcare from our sector experts.

Our Director of Equities, Viral Patel, hosts a panel of three of Fidelity’s most experienced Australian analysts covering the technology, banks and healthcare sectors. 

In this teleconference, Viral and our tech analyst Maroun Younes explore the future for the technology sector post-Covid 19 and discuss what companies are likely to emerge as winners (or losers!)?  And having been through previous crises, what have we learnt? In banking, we discuss the impact to earnings, dividends and payout ratios, and how long we will have to weather this trend.  And finally, in healthcare, we cover the latest insights and trends from Fidelity’s global Covid working group, which has been established to connect our investment experts across asset classes and geographies to keep up with the latest information and trends in healthcare.

 

Simon Glazier:

Good afternoon everybody and thank you so much for joining us today. My name is Simon Glazier and I'll be hosting the discussion. Before we get started, just some housekeeping. We're planning to go for about 40, 45 minutes today, and if you have a question you can submit your question via your Zoom portal. If you've only dialled in today via the phone, unfortunately you won't be able to ask a question, and we'll do our best to accommodate and incorporate as many questions as we go. Otherwise, we'll should have time towards the end of the session to cover some of those off. Today we're doing a deeper dive into some of the sectors that have been topical, and received a lot of attention of late. We'll also provide some insights and analysis that goes on behind the scenes, in our efforts to deliver outcomes for our investors.

Simon Glazier:

A brief introduction to the team we have on the call today. We have Zara Lyons who is our resident healthcare expert, and a member of the Fidelity Global COVID Working Group. Zara will take us through some of the insights from that group, along with looking at some of the trends in the healthcare sector. Maroun Younes who is our tech analyst, will look at previous crisis, the lessons from them, and what we can expect coming out of this one, along with what it means for tech. And Rajesh Gannamani, will close out the session with some insights into the banking sector, and what we expect for earnings growth, payout ratios, dividends, et cetera.

Simon Glazier:

But before we do dive into it, I'd like to introduce Viral Patel, Fidelity's Director of Equities, who will introduce today's session, and paint a picture for us in terms of what it means to be an analyst at Fidelity, and put today's session in context. So welcome Viral.

Viral Patel:

Thanks Simon. On behalf of Fidelity and the Investment Management Team, thank you all for joining. I'm going to spend a few minutes talking about our global platform and scale benefits, which in these times are an even bigger competitive advantage and delivering value to all of you, our clients. Then some of my team will talk to the few relevant sectors as Simon mentioned, and time permitting we would love to answer some questions from the group.

Viral Patel:

So in slide one, which you have in front of you, who are we? Right. We manage over $500 billion of assets. That gives us massive scale and leverage. We have a global platform that is unparalleled. We have on the ground resources over 200 professionals in many countries, including on the ground teams in China and India, which provides huge insight into markets where local colour, local insights is critical and language skills helps too. My particular role, I focus on the APAC region, and I have about 30 plus analysts across three different teams that I'm working with.

Viral Patel:

But the three that are talking today are for my Sydney team. Rajesh who will talk about banks, came to Sydney from the India team. His skills were excellent, and are very much needed in Australia. So part of the global platform is also being able to move investors around to better benefit all of our clients globally. So just in summary on this slide, FIL has a really good global platform that is a massive competitive advantage to us even more so in times such as these, and I'll come back to give you a few bullet points on that.

Viral Patel:

Just moving on to slide two. So slide two is about what do we do? It's just a quick snapshot, right? What do the analyst, what do the investors do? We join the dots, we get information, and we analyse it. Both access to information and the ability to analyse information benefits massively from scale and leverage. The quality and speed of getting the information is critical with the large AUM, access to management, suppliers, customers, et cetera, is high.

Viral Patel:

With our internal teams globally, we have access to the latest and best insights of all over the world through over 15,000 management meetings every year. We've travelled, we attend conferences, we visit mine sites, and we kick the tyres as we talk about it. We have experienced insightful, hungry investors who generate insights from the data to generate value for our clients.

Viral Patel:

In addition to company and industry analysis. We understand the sustainability credentials of the company, we get alternative insights from cross asset classes, insider buying, technical indicators, internal risk systems, all of that to help our investors basically make money for the clients. So in summary on this slide, we have the global platform but we really take advantage of our scale and leverage, to add value to you guys and to your clients.

Viral Patel:

Just moving on to page three. So just wanted to give you a quick snapshot on how we are doing currently in this current crisis, right? Now, during normal times our scale and leverage helps us. These advantages are far more valuable during crisis periods like we've been in, or probably are still currently in. So internally for example, by mid-March. So while the markets were still capitulating, we had already started up weekly Zoom meetings, across country meetings, global cross asset classes, multi-asset, fixed income, balance sheets, what's happening to liquidity, high yield, junk bonds, all of that kind of stuff. Sector meetings globally. The COVID Working Group, that Zara will sort of talk to a bit later. Various local meetings to continue the discussions and debates that generally happen when people are in office, but now happening while everybody's working from home.

Viral Patel:

Using our on the ground 200 plus analysts, we started a China survey too, a number of weeks ago. The chart that I've shown out here is just showing the first three weeks of data, and in there they very much show, not this chart, but the overall feedback of the survey has been that locally in China things are improving, going out, eating out restaurants. However, the on the ground Chinese team of us, are dealing with what they define as normal life and international travel. And, week to week we've seen that pushed out to more likely early next year. This morning I just got the latest China data from Monday, Tuesday, this week. And what the interesting thing coming out this week has been a strong uptake in both of our locations Shanghai and Dalian, showing an increased risk of a second wave amongst the 200 respondents.

Viral Patel:

Now, overnight, you've also seen in the last few days there've been articles that Wuhan has seen some new cases. Now of course that news could have been part of the reason why there's an increased view on the ground. The next two, three weeks, and the trajectory will sort of give us much more insights. But having the China team on the ground, phenomenally helpful for us.

Viral Patel:

We have a large number of external meetings. We have significantly ramped up our access to companies and management while working from home. For the six weeks from 16th of March, to the 30th of April, where you had global lockdowns literally nearly happening across all developed and in most emerging markets, globally, we had over 1,350 company meetings in that six week period, right? This is management who are now sitting in their houses, but talking selectively to key investors. Majority of these meetings are organised internally by a company and not through brokers, et cetera.

Viral Patel:

Globally, we have over 5,000 research notes that have gone around. Right? Locally in Australia, we've had over 160 meetings in six weeks. We've had 200 research notes. Now, these are the formal research notes. There's thousands of emails and calls going across our teams. But in terms of formal research notes, 200. 30 capital raisings with other internal ECMP and giving us a massive advantage too.

Viral Patel:

We have an internal Australia conference that we had scheduled six months ago to happen at the end of May. We have 25 confirmed one-on-one companies with majority of them being CEOs and CFOs. Now normally we have the Macquarie conference, and Macquarie has a fantastic conference that they do in early May, which is going on. And this year given the COVID situation, it's a very different setup. There's less than half the companies that are attending, and they're all group meetings, no one on ones. We have one on one meetings already. We've done a bunch of them, and at the end of this month like I said, we have another 25 coming up that our investors will have access to CEOs and CFOs. Also at the same point, we are still recruiting. We are not laying off or letting go. We're actually making sure our team is to full spread. So I'm currently in the process of recruiting an analyst role too.

Viral Patel:

So all of these things has resulted in a bunch of really good outcomes for us. The internal and external collaboration, despite work from home and uncertainties, our funds have had strong positive net of fees alpha in March, all of the local ones. We have top quartile performance, three months and five years, all of our local funds. The analyst team has had a very strong one month and one year alpha too. Clients, we have weekly updates like we're doing now. We have a whole bunch of global blogs, and podcasts, and whatever support is being needed. We are trying to help clients on that too.

Viral Patel:

Finally, just some interesting stats on Zoom, right? In the six weeks, again, Mid-March to end of April, 17 and a half million minutes of Zoom. I mean that's just tiring to think about. Right? There's nearly 300,000 hours of Zooming. We've had 90,000 meetings and webinars like this, right? All of that has been there to basically make sure we are adding value to our clients. That is our ultimate focus and that's what we keep doing. That result, we can see that in things like Morningstar Fund Manager of the Year, and Fidelity's a Future Leader Fund, winning the hat trick three years in a row.

Viral Patel:

So just to summarise, we have a fantastic platform. We take advantage of the platform, and we're clearly continuing to deliver value for you, and all of your and our clients together, and even more during these really, really volatile times. I may just pause to see if there are any questions from Simon at this point. Okay.

Simon Glazier:

None at the moment Viral, so let's push on.

Viral Patel:

Yeah. So, I'm just going to handle it to Zara now. Zara has been with us for three years, and brings deep improvement in health care analysts. Over the last two years that I've been here, the most frequent words I've heard from Zara have been buy CSL and she has been correct. So let's go to the healthcare section. Thanks Zara.

Zara Lyons:

Thanks Viral. In response to the crisis, Fidelity established a COVID-19 Working Group, led by medical doctor Judith Finegold, which includes colleagues from all regions and asset classes. This group essentially serves as a centre of excellence, directing, producing, and publishing research regarding the Coronavirus. The intent of the group is not to inhibit the excellent entrepreneurial efforts of our investment professionals around the world in analysing the virus, but rather to help coordinate that work and reduce the duplication of efforts. The group's principle areas of focus include, epidemiological spread of the disease by region, diagnostics, therapeutics, and macro-economic analysis relating to the impact of lockdowns, and subsequent economic recovery scenario.

Zara Lyons:

So why is this outbreak been so severe? Well COVID-19 is the worst kind of virus. There has been no previous human exposure, so there is no immunity in the population. There were no diagnostics for the virus available early on, and no known therapeutics. The infectious for reproduction rights known as the R0, is estimated at between two and four, and then the virus has mild enough symptoms to allow case spread while viral shedding before an individual develops symptoms.

Zara Lyons:

So turning to the left hand chart, this shows the number of confirmed COVID cases per 100,000 populations for the top 10 countries, with the highest absolute number of deaths. So this illustrates how rapidly the pandemic has expanded over the last five months around the world. While the right hand chart, the next slide, shows the five day moving average of the new COVID cases, and looking at the rate of change, all of these top 10 countries other than Italy, have increased numbers of new cases this week.

Zara Lyons:

Please turn to the next slide. Thank you. One key measure of the burden of COVID-19 is mortality. In countries throughout the world have reported very different case fatality ratios. That is the number of deaths divided by the number of confirmed cases, as well as deaths per 100,000 population. So the left hand chart here highlights the top 10 countries by mortality per 100,000 population. Some countries here might surprise you. The list is dominated by Western European nations of Belgium, Italy, UK and so on, followed by the U.S., Iran and Brazil. But note on this measure, China, where the first cases originated, rank's number 93 worldwide, ahead of Australia which ranks number 86 worldwide.

Zara Lyons:

The right hand chart highlights the distribution of the fatality across 146 nations. And those same top 10 nations have bolded here, but I've also highlighted Australia, which is low in the middle, and the higher EU nations. China and India, which... sorry, Australia, China and India, which have below 0.4 per a 100,000 lives. So on these spaces, I think Australia has done a reasonable job in terms of controlling the outbreak, with the number of COVID infections and deaths at fairly low levels.

Zara Lyons:

So the differences in mortality numbers can be caused by a number of factors including, the differences in the number of people tested. So with more testing you see more people with milder cases being identified earlier, which lowers the case fatality ratio. Does demographics take the path in terms of mortality tends to be higher in nations with older populations, and certainly characteristics of the healthcare system. So mortality has been higher in nations where hospital systems have become overwhelmed, and have fewer resources to spread around. And there are other factors which are unknown.

Zara Lyons:

Perhaps we'll turn to the next slide please. Governments around the world have been working hard to flatten the curve of the Coronavirus pandemic, to reduce the number of new COVID-19 cases from one day to the next, and to help the healthcare systems from becoming overwhelmed. Meanwhile, healthcare researchers around the world have focused on developing therapeutics that is completely new viral outbreaks. And a summary of the broad categories of the therapeutics are listed here, which ranges from antivirals, anti inflammatories, antibodies, and vaccines. So far more than 130 clinical trials of potential therapeutics are underway in the U.S. with FDA oversight.

Zara Lyons:

So while we don't have a cure for COVID, with time we will have better knowledge of potential treatments to help infected patients, and with any luck a vaccine to reduce the spread of disease within the general population. There is still potential for subsequent waves of private infections. However, the increased range of diagnostics may change the severity in time courses greatly. To date, the USFDA has authorised 93 tests under Emergency Use Authorizations, which includes 12 antibody tests and one antigen test. The caveat here is that COVID-19 won't or doesn't mutate significantly as all RNA viruses do mutate regularly in small amounts.

Zara Lyons:

Please turn to the next slide. Okay. So, the initial impact of the crisis from the healthcare stocks is interesting. The market determined a clear set of winners and losers. In terms of earnings derived by COVID demand, liquidity and balance sheet strength. The winners included companies manufacturing in demand items, including personal protection equipment, ventilators, masks and accessories, medications, potential therapeutics, and diagnostic tests. Beneficiaries include companies you would know such as CSL, ResMed, and Fisher & Paykel Healthcare. This is where those companies leverage to deferral of tests and procedures during lockdowns. However, we remain confident demand for these services will rebound in the fullness of time.

Zara Lyons:

Longer term, the healthcare sector is supported by favourable structural drivers, however future demand will be shaped by the impact of the COVID crisis on the economy. Which again in part depends on the intensity of subsequent waves of COVID infection, and the associated lockdowns. And as you know, different countries have deployed various strategies with respect to managing COVID, ranging from elimination, controlled adaptation, and herd immunity.

Zara Lyons:

The chart from the right hand side here from the group of eight roadmap to recovery task force asked, argues that virus elimination is better than suppression, both for the health and of our population and the economy. In a report from an interdisciplinary group of 100 researchers from Australia's leading universities. The task force argued it would have been three to six times more expensive to pursue herd immunity, of an economic cost of 20% of GDP, versus the elimination strategy at 3% of GDP.

Zara Lyons:

So in conclusion, Australia is in relatively good shape, and less popular States have achieved close to elimination of local transmission of the virus while larger States such as New South Wales, are edging closer and closer to this outcome and I remain optimistic with continued testing, contact tracing, and confidence in the outcomes of both of these, that Australia can put itself on the road to recovery, although this may involve highly controlled borders.

Zara Lyons:

So thank you for your time. And you can ask questions.

Viral Patel:

Sounds good. All right. Yeah. Let me ask you a couple of questions Zara. The first one is, are you tracking the increase in the death rate about the average, and do we believe that death rates due to COVID-19 reported are under, or over reported?

Zara Lyons:

The death... Sorry, the death rate. Is it under reported?

Viral Patel:

Yeah. Do we think they're over or under reported?

Zara Lyons:

Well, it's certainly reported, and it is being captured in statistics. However, there is a timing issue, and in some nations it might not be reported as quickly as in others. For instance in the UK, aged care, home deaths, weren't being captured in the official statistics. So there are circumstances like that do come into play.

Viral Patel:

Okay. Thank you. And the second question I had is given my comment earlier on "buy CSL", how has CSL positioned to leverage on the cures for COVID.

Zara Lyons:

Well, okay. CSL is a key exposure for Fidelity, and it has a few shots on goal in terms of therapeutics, which fit in well in terms of what it can do to add to science, product development, and manufacturing capabilities. So in the vaccine space, CSL is collaborating with the University of Queensland, and in the treatment space, CSL is part of a broad Plasma Alliance with Takeda, and others and they are developing a hyperimmunoglobuline treatment to seriously ill patients. They're using plasma from recovered COVID-19 patients. We also have an Australian special version of this trial, being speed in Victoria. CSL have also looking at polyclonal antibodies in collaboration with SAB Biotherapeutics, and working on re-purposing some of its early stage monoclonal antibody projects, which could assist with the cytokine storm experienced by COVID patients, experiencing acute respiratory distress syndrome.

Viral Patel:

Cool. Zara, and one more question. So what do you think of a second chance, or a wave, or a chance of the second wave, both here in Australia and in the U.S. as travel restrictions and all are coming off in these two big geographies?

Zara Lyons:

Yeah. Subsequent waves are likely to happen. The infection, the issue or the viability of the strategies depends on how well countries keep up their testing of suspected COVID cases as well as the general population, whether they catch a sniffle, or a cold, and as well as contact tracing of cases when they emerge. So, I'm really reasonably confident about Australia, and being an Island nation, it's much easier to control our borders. You know, in Europe, continental Europe, and the U.S. it's a lot more difficult. And also they have the governance there of taking slightly different approaches. So, subsequent waves of infection are going to happen. It's the case of how actively you can shut them down, how rapidly you can control them, which is really going to determine how successful countries are in terms of getting back on their feet.

Viral Patel:

Great. Thanks Zara. Can move on to Maroun.

Maroun Younes:

Thanks for that Viral. So in this slide I'll go through some lessons learned from past crises. I want to look at here is three recent experiences the GFC, the Tech Bubble, and the Southeast Asian Financial Crisis. It's a busy slide, but basically the charts on the left hand side look at the sector behaviour both in Australia up the top, and U.S. down the bottom during the GFC. The chart on the right looks at the U.S. market during the technology bubble, while the chart on bottom right looks at the behaviour sectors globally during the Southeast Asian Financial Crisis.

Maroun Younes:

Now, whilst no two crisis episodes of this are exactly the same, this study of history reveals some interesting repeating patterns. So firstly healthcare, consumer staples, and communication services tend to outperform during the actual crisis periods themselves. Spending in these sectors tends to be quite resilient, it's less sensitive to economic factors, and so the stock price behaviour is also relatively defensive. Importantly however, we see repeat patterns of sector behaviour coming out of a crisis. Now this is important for us as we start to look out beyond the current crisis period, and start to think about positioning the portfolios for the eventual recovery.

Maroun Younes:

So history has shown us technology, industrials, financials, real estate, and consumer discretionary are the sectors that generally lead us out in the recovery phase. Now these sectors, they're more sensitive to economic forces, they respond to lower interest rates, they respond to improved employment conditions, as well as increases in both consumer and business confidence.

Maroun Younes:

On the flip side sectors such as healthcare, and consumer staples tend to lag the broader market during the immediate recovery phase. So this observation immediately gives us very fertile hunting grounds to source opportunities, and allows us to better focus our efforts as we think about positioning the portfolios going forward.

Maroun Younes:

Now, on the following slide, I'll dive into the technology sector itself, and look at what intra-sector areas may come out as winners from this pandemic. Now, one of the responses to curb the spread of COVID has been the prevalence of working from home. And it's fair to say that whilst we, at some point we'll see a gradual return to the office place in some form or another, working from home has seen a structural step change going forward. Many businesses, including our own, as you've seen from Viral's slides, have had to adapt to working from home, and management teams all around the world have seen firsthand that remote working is indeed effective.

Maroun Younes:

The chart on the left is a basket of stocks that I've put together, which are a stay at home proxy, Amazon, Microsoft, Equinix, Digital Realty. These are U.S. cloud and data centre operators. Whilst here in Australia, NextDC and Megaport are Australian versions of stocks exposed to the cloud. So the chart itself it shows the relative performance of these names, versus their respective benchmarks. The U.S. names are relative to the S&P 500, and Australian names are relative to the ASX 200 index.

Maroun Younes:

So you can see in all these cases, there's a very pronounced period of out-performance which commences around late February, early March, which is really when the impacts of COVID on the broader economy begin to take hold. Now whilst the cloud itself is not a new phenomenon, and we have been seeing gradual increases in its adoption over time, the COVID experience has definitely accelerated the migration to the cloud. And it's brought forward what would have taken place over a number of years to the here and now, as businesses think through the robustness of their redundancy protocols, in order to tackle future disruption threats.

Maroun Younes:

Here in Australia, some of our Australian equity funds have had exposure to NextDC, and Megaport prior to COVID, and so we'd been one step ahead to the benefit of our investors. And to tie it all in with the strength of our corporate access capability, which is something that Viral touched on earlier. Our global tech team immediately mobilised when COVID took hold, and began working on hosting a Fidelity only global virtual tech forum, with the aim of spending a few days diving deeper into the entire cloud value chain. As you can see on the flow chart on the right, we've assembled together an impressive list of corporate attendees, most of which will be with C-suite management.

Maroun Younes:

So Microsoft, Amazon, Google, and Equinix are obviously cloud operators amongst other things. In addition, in the software space, we have SAP, Oracle, Workday, Salesforce, and Adobe. Cyber security is a very essential element for corporates when they think about their networks. And so here we'll be meeting with the likes of Palo Alto Networks, and Check Point Software.

Maroun Younes:

Many corporates also require IT service firms to assist, not only with the migration to the cloud, but also the ongoing hosting to the cloud. And here we'll be speaking with the likes of Accenture, and ServiceNow. And finally, semiconductor chips power all the computing storage that takes place in the cloud. And here we're meeting with the likes of Infinian, STM, ASML, and ARM. This ability to put together a who's who list of cloud names on such short notice, including some of the largest companies in the world, is a differentiating strength of Fidelity, and it's something that most other asset managers simply wouldn't be able to do. So with that, I'll pause for questions.

Viral Patel:

Yes. Thanks Maroun. So, one question for you. Data centre cloud migration, has that story already run its course?

Maroun Younes:

No. I don't think it has definitely run its course. I mean this is a long-term 10 plus year structural change that is going on. We've seen the first wave of early adopters move across. We started to see more and more coming across, but this is going to permeate all the way down over time, even down to smaller medium sized enterprises. And so the migration that we're seeing I think will continue on for the best part of the next decade.

Viral Patel:

Cool. Thanks Maroun. And just for the audience, other questions that have come through on healthcare, we'll address that time permitting at the end. Thanks Maroun. Over to Rajesh.

Rajesh Gannamani:

Thank you Viral. A very good afternoon everyone. I wanted to touch upon here two different topics, but kind of interrelated given the traditionally higher weighting for the Australian banks towards dividends. My first slide, slide 10 talks about dividends in a global context, and how Australia and other markets behave during the global financial crisis. The Australian market has traditionally been a high dividend yielding one. Thanks to the average payouts, and franking credit benefits, and in general a more judicious capital management by the ASX listed corporates.

Rajesh Gannamani:

The first chart on the top left is a comparison of payout ratios across different markets. Over here, I wanted to bring in the perspective of how capital conservation happened during the global financial crisis. While Australia chose the path of significant and early recapitalization while maintaining the higher payouts, most other markets have seen relatively sharp cuts in the payout ratios, and arguably as they can't preserve capital in the downturn.

Rajesh Gannamani:

The chart on the top right showcases the extent of dividend and earnings reduction the broader market has seen during the global financial crisis. Evidently, the extent of earnings reduction looking at 2008 and 2009 together, was greater than the extent of dividend per share reduction during this period. Fast forward that to the current ongoing crisis.

Rajesh Gannamani:

The chart on bottom left compares the dividend yield of the last 12 months, to the prospect of dividend yield of next 12 months. It's evident that the fall in yields is greater for Australia, compared to the other geographies. And this is visible in the extent of dividends expected to fall during the next 12 months. Even while we debate whether the full impact of the crisis is fully reflected in these estimates.

Rajesh Gannamani:

One of the interesting perspectives from the chart on the bottom right, is that the extent of recapitalization during the global financial crisis meant that, the broader markets earnings per share, hasn't rebounded to the levels seen during 07, while dividend per share has still clearly gone higher. I believe this time around while broader earnings per share will probably rebound to the recent highs, dividends are unlikely to rebound to the recent high levels, and this can have an implication on individual constituents, and the broader exposure towards income oriented portfolios.

Rajesh Gannamani:

Moving on to the next slide, slide 11. Where I discussed the Australian banks, with respect to their increasing capital intensity, and expected future dividend profile. The big four banks constitute 20% of the index, and they made up close to 40% of the total dividends paid by the ASX 200 listed names last year. But the focus of this reporting season and the market in general, has been around the scenario analysis for COVID-19, and the impact of provisioning on the P&L.

Rajesh Gannamani:

The most important piece of new information from the majors has been the capital sensitivity to a higher risk weight density. So what is risk weight density and why is it important? Banks currently use internal risk rate models against which they have to keep aside capital, also called the Common Equity Tier 1 Ratio. As credit exposures get downgraded in a typical downturn, banks face a capital impact depending on the change in default probabilities, and the then estimated loss given default of a particular exposure.

Rajesh Gannamani:

Under different scenarios as the three bank managements have outlined, even while there is still an ongoing debate if the downside case is indeed a truly stressed scenario, we are looking at anywhere between 80 to 180 bips of fall in common equity tier 1 ratios. And stand below the unquestionably strong benchmark set by APRA, that is 10.5%. Which means that a lot of future earnings would actually go towards capital strengthening in order to prepare for the next crisis, rather than paid out as dividends. Accordingly, I expect dividend payout ratios to come down from the current 80% plus levels, down to around 65% by 2022. Also coupled with the fact that ROEs for the majors have come down from around 20% levels in 2007, to 11% currently. The sharp recovery seen in earnings and the commensurate dividends during the 2009/10 period, is unlikely to reoccur. And I expect total dividends to be at least 30% below the last year levels even by 2022.

Rajesh Gannamani:

Moving to the last slide, slide 12. On valuations for the major banks. While from historic perspective, valuations look supportive for the majors, given the structural headwinds from a weaker credit growth, lower margins, sticky cost structures, rising loan losses, and now with the higher risk rate density, it is likely to weigh on future earnings, returns, and dividends. Accordingly, we should look at valuations from a global and a relative context, and suggestion in the chart on the right, which indicates that the risk is still skewed to the downside over a medium term. Accordingly, all our funds remain underweight the major banks, even at current levels. Thank you.

Viral Patel:

Thanks Rajesh. A couple of questions for you. Are we currently staying away from financial sector completely at this point?

Rajesh Gannamani:

As I mentioned at the end of the presentation, so we remain underweight the major banks, but within that I have a preference and my preference is for CBA, particularly given its scale strong consumer franchise, both on the asset and the liability side, and is actually entering the crisis with a strong capital position. I believe, and I continue to see CBA generate returns in excess of cost of capital, which should help command the current multiple that it trades on. While I can't quite say that for the other three majors. So yes. Short answer, not completely, but within that I prefer CBA among the rest.

Viral Patel:

Cool. Thanks Rajesh. Now, I'm just going to open it up to all three of you. So Zara coming to you there's a question. Apart from CSL, what other health care stocks would you like for the next decades?

Zara Lyons:

Hi, sorry, can you hear me?

Viral Patel:

Yes. Clearly.

Zara Lyons:

Oh apart from CSL, other stocks that I'm keen on for the next decade include ResMed, and Fisher and Paykel Healthcare. Both serve under penetrated markets. Particularly ResMed in terms of their OSA business, and they are well ahead of the curve in terms of digital, or digitization of the healthcare, as well as providing health care in the home. And those two trends, I suppose an acceleration of digital strategies, as well as increasing health care services provided in a home environment, I think will be themes that will emerge out of the COVID crisis and be key drivers of those businesses for the next decade.

Viral Patel:

Okay.

Zara Lyons:

Does that answer the question?

Viral Patel:

Yes, thank you. And Maroun, what do you think of Rhipe in addition to NextDC, and Megaport, is Rhipe an Aussie company that would benefit?

Maroun Younes:

Yeah, definitely. Look, Rhipe is a reseller of Microsoft applications, and Microsoft cloud. So there is an exposure there. Obviously it is largely dependent on Microsoft and so depending on how Microsoft goes in terms of cloud market share versus say Amazon versus private clouds, that will give you some sort of exposure to increasing cloud adoption

Viral Patel:

And on the tech sector Maroun, can the sector continue to lead the global market higher, when it's already such a large part of the index?

Maroun Younes:

I definitely think so. The market leadership tech sector has shown over the past decade, and continues to show right now is largely predicated on its earnings profile. The multiples whilst they're relatively rich, versus history aren’t exorbitant, and so with all the secular trends in place the multiples aren't particularly exorbitant. There's no reason why they can't continue to march higher.

Viral Patel:

Sounds good. Thank you. Rajesh, is it a realistic risk that RWA inflation exceeds bank expectations?

Rajesh Gannamani:

So the RWA range that the banks have outlined is depending on the scenario analysis that they've portrayed for a more realistic scenario, and a downside scenario. Now, if we look from history, we've seen time and again, that the risks actually come lifted, in the sense that they actually show up in places that you least expect. So if that has to repeat, I presume that there is a higher probability that we can actually see the risk weight density actually increase higher than what they've outlined. But some of the downside scenarios that the banks have outlined seems very conservative at this stage, and should encompass some of those that would probably come through.

Viral Patel:

Cool. Thanks Rajesh. And the last question is, do we think markets could correct to test the lows of 23rd March? My quick views on that is, when you look at technical analysis, historically over the last 80, 90 years. Technical analysis would show that in a bear market, during a non-recessionary environment, unlikely to test, but in a bear market, in a recessionary environment which we are likely to go, are in, higher likelihood of more of a W-shape recovery, where prior lows can be tested. However, there's a lot of uncertainty with what happens with second wave treatments, vaccines, economies opening up. So at this point it's really hard to say, but it's not out of the realms of reality in terms of what could happen in terms of market lows. With that, I'll hand it back to Simon.

Simon Glazier:

Thanks Viral. Thank you team for your time today. Just conscious of time. We've had some really good questions come through. Hopefully we've covered off a lot there, but if we've missed your question or if you've got another question burning, didn't get a chance to ask, please reach out to the team. We'd also love to hear from you in terms of what other topics, and what other conversations you'd like us to have over this period. But with that we might call the session to an end. So, I thank you very much for joining us today. We appreciate your time and support. And again, if you do have any follow-up questions or queries, please contact one of the team. But as for now, thanks for joining us, and we'll talk soon. Thank you.

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Viral Patel joined Fidelity in 2018 and is our Director of Research, based in Sydney. Viral has responsibility for Fidelity’s team of eleven Australian equity analysts, fourteen Singapore equity analysts and nine Indian equity analysts. Viral is also Asia regional lead for Fidelity’s global Metal and Mining sector research team and for all MBA hiring.

Viral has over 19 years of investment experience and joined Fidelity from T. Rowe Price where he was Head of Australian Research. Viral has also held roles at Bernstein, Boral and McKinsey & Company. Viral holds an MBA from Columbia Business School.

Maroun Younes is a Portfolio Manager and analyst at Fidelity based in Sydney and has 14 years’ experience in investment management.

Maroun joined Fidelity as an investment analyst in 2012 and was appointed Co-Portfolio Manager for the Fidelity Global Future Leaders Fund in 2020.

Over the last decade, in his analyst capacity Maroun has had extensive experience covering the telecommunications, media, technology, building & construction materials, packaging, transport, infrastructure, chemical and steel sectors. He previously spent 6 years as an Investment Consultant for global advisory firm, Towers Watson.

Maroun holds a BBA & Bec from Macquarie University, Australia and is a CFA Charterholder.