Staying ahead of the COVID curve

Simon Glazier:

Good afternoon, everyone. Thank you so much for joining us today. Welcome back to those of you who are joining us again. We've had a bit of a break from our online activity, but picking things up again. My name is Simon Glazier. It's my pleasure to introduce today's panel and participants. As we move towards the six-month mark living with COVID and the restrictions here in Australia, the experiences of different economies and countries are diverging to a great extent, so too are markets and their underlying economies.

Simon Glazier:

Today, we're bringing you insights from our COVID working group hosted by our Director of Equities, Viral Patel. We will discuss some of the latest pieces of information from the working group, and then bring it all together with Alex Duffy, who will take us through what it means from our portfolio construction perspective, particularly in emerging markets. Also joining in the conversation is Tom Ackermans, who's our London-based COVID Working Group Lead, along with being an analyst and a portfolio manager, and Huan Lang, our Hong Kong-based healthcare analyst. But before we get started, again, just a brief piece on housekeeping, we're planning on going for about 40, 45 minutes today.

Simon Glazier:

If you have a question, please submit it through your Zoom portal. We'll be taking Q&A and build that in as we go. We're keen to have an open, honest conversation with everybody. If we run out of time, we'll have some time at the end. Also a quick reminder that we will offer CPD points for today's session, however, it usually takes around 10 days for those to come through. So with that, my pleasure to introduce Viral and hand it over to the team.

Viral Patel:

Thank you, Simon. So welcome, everybody, to the Fidelity Live Session of the COVID Working Group. Hope you're all staying safe, and especially our clients and colleagues from Melbourne who have been facing some challenging times. Back in March, realising the importance of understanding and tracking COVID, the mortality rates, the infection rates, the hotspots, impacts on economies, opening economies, second, third waves, vaccinations etc. and the importance it would have on investments and our clients, we set up this COVID Working Group.

Viral Patel:

The group has three colleagues, two of them on this call, and the third having a much needed summer break in Europe. The two colleagues here are hovering around the screens, not at some nice beach unfortunately. Tom, a London-based senior investor and father of his second child. We got to also celebrate and acknowledge good news. So welcome, Sophia. The other colleague, Huan Lin Lang, very experienced healthcare analysts from our Hong Kong office. The call will give you some of the insights from this group of our global platform. We'll also share how these insights are then used by our fund managers to make money for you, our clients.

Viral Patel:

Our final guest, well-known to many of you, is Alex, who's a phenomenal emerging market PM. He just won the Money Management PM Fund Manager of the Year. He'll speak as a user to the working group. Then he can also talk to some of the impacts that COVID is having on emerging markets. Given the global hotspots currently, are in some of the emerging markets, It'll be very interesting to hear about that. These three speakers will share their experiences, insights, and each one will talk for about three or five minutes, and then we'll go into sort of a fireside chat mode. There's a couple of charts that you will see. Don't worry, you will get these charts after the call. So in case you don't see them in detail, you will have them to look through later. I've already got and incorporated a number of questions from the audience. But if you have anymore, please just send them through the Zoom app. Over to you Tom in London. Very good an early morning to you. You're on mute, Tom.

Tom Ackermans:

Morning and an afternoon, everyone. So as you can imagine, at the start of the COVID-19 outbreak, everyone within Fidelity was trying to find out what was going on. There were many emails flying around, many conversations being had and lots of people were trying to gather data all at the same time. So quite quickly became clear that we needed a much more organised and streamlined approach to make sure that all our investment professionals really received all the important insights and analysis. So at that point, a couple of us pulled together and together with senior management decided that the best way forward would be to form a working group that that we now have. Some of our main output includes a weekly summary of key research and review of all the case numbers and other observations. That all goes straight into our internal research system. Then there's a lot of debate and events that go on around that.

Tom Ackermans:

So I do think it's important to stress one point here. That's there are and there were many unknowns about COVID-19. So from the start, one of the key tenets of the working group was really to keep a very open mind about all the topics we discussed and approach, really approach the key questions from as many different angles as possible. I think you've all seen lots of people out there with very strong opinions on COVID-19. While many of them sound convincing at some point in time, actually we know by now that many of them were totally wrong as well. So we're just trying to get to the right answers, but by keeping a very, very open mind.

Tom Ackermans:

So what do we do? There's about 12 of us in the working group, and we've divided our work into different focus areas. I've done a lot of work on the epidemiology, for example, whereas Judith, one of our other colleagues who is a fully trained doctor, she's obviously done a lot more in her expertise area on therapeutics and vaccines. I think as an example here, I think we have the slide showing some of the data we've collected for the evolution of case numbers in the US. It's just a small example. There's much more data that we look at. So where it really ranges from collecting and analysing that data on cases, hospitalizations, but also to reviewing scientific papers, virus research, treatment evaluation, but also, importantly, of course, the economic impact of the virus.

Tom Ackermans:

Now to put some figures to this, it's quite instructive actually to look at the amount of scientific papers that have been published for COVID-19. As of the end of July, there's been nearly 70,000 scientific articles published on COVID-19 and another 20,000 pre-prints. I'm definitely not going to pretend that we've read all of them. But we've certainly covered a lot of ground in the working group and have read and analysed all of the most relevant research. So I could go on for quite some time and discuss the fascinating learning journey that all of us have been on over the past half year. But in the interest of time, I'll hand over to what you Huan Lin now and then we can come back to some of the latest insights in the Q&A.

Huan Lang:

Thank you. Thank you for giving me this opportunity to share my experience with the COVID working group. So quick introduction, my name is Huan Lin Lang, and I cover China Healthcare, I'm based in Hong Kong. The first thing I like to highlight about working group is that everyone is sharing and everybody is contributing. So I am a health care analyst here in China. So as you can imagine, back in late January, when COVID first hit China, there's tonnes of information. I try to stay on top of it, like sharing the latest case number infection rates, mortality rates, possible treatment options. Though to be honest looking back, as Tom mentioned, we knew so little back then about COVID. It's not only myself, my colleagues in the global healthcare team, Yolanda, also sharing what they saw, from like WHO and scientific paper.

Huan Lang:

It's not only from the healthcare sector, actually we have analysts from all other sectors sharing as well, from the high frequency China data to the some early indications, to consumer behaviour changes, which is quite helpful in tracking the whole impact of the major shutdown in China back then, and then the recovery afterwards. Moving to March, when COVID became a pandemic and a global matter, we have more sharing globally. Then that's when we founded this COVID working group.

Huan Lang:

Then I think personally, I value the sharing from the colleagues covering emerging market very much because as you know, that data transparency is now agreed there. So it's very good to have a dedicated team to collect the informations. Then it's very helpful for me as well to gauge the potential outcomes of the pandemic. So overall, with the COVID Working Group, I think that we try to maximise the value of Fidelity as a global platform. I'm proud to be part of it. Another thing I'd like to mention is a very innovative way to leverage our workforce on the ground.

Huan Lang:

One great example that I'd like to show you here is a China survey we have initiated from April. Back then, the outbreak seemed under control in China. But how exactly are people on the ground feeling? How quickly can business activity recover after such a massive lockdown was a focus point? We try to address these questions by conducting a biweekly China survey to get firsthand on the ground colour. These are several questions carefully designed, mostly just yes or no questions. So very easy for the team on the ground to respond. We can see from the slide here, this is based on response we got from our specialists, the team in Dalian, where we had nearly 140 response per survey.

Huan Lang:

So the first and second charts show the percentage of people who are more likely to go out during the weekdays and weekends. The third chart shows the level of business activity. We can see that the sentiment is improving, but at a very slow pace. If I can draw your attention to the chart at the right, this is the answer for a question, when do you expect life to return to normal? The yellow bar here indicating next year extended through time, so it's clear that more and more people are expecting a much longer term impact of COVID, and it seems that we are not likely to get back to normal anytime soon.

Huan Lang:

So if we turn to the next slide, this is also from the China survey. It showed us how the sentiment can change rapidly due to a small local outbreak. The left hand chart is the daily new cases. We can see there's a pick up at the beginning of August. This was a small local outbreak in Dalian where our specialist team is located. At the peak, maybe just around 10 to 15 new cases confirmed every day. But even such a small scale outbreak, we can see from the two charts on the right hand side, the willingness to go out suddenly dropped from around 60% to single digits. It also recovered sharply after the local outbreak was well controlled. This shows how sentiment is highly correlated to the daily new cases.

Huan Lang:

In addition to leveraging our internal resources, as a colleague working group, we hosted several COVID events to leverage all the insights from external experts as well, like vaccine experts, testing experts and then key opinion leaders, physicians in the related disease areas. The idea here is to leverage our industry contact resources. Listen from different experts across the globe. So we can enable our global investment team to get views from different angles and put together a more comprehensive picture. Last but not least, I would like to mention that we also collaborated with Erodes and FMR upon Antonio Bolton's suggestion. Of course, we made sure that we're strictly complying with all the guidance from compliance. This is a good way to show that we can also leverage on the big Fidelity platform. With this, I would like to hand over to our portfolio manager Alex to share his view on the working group.

Alex Duffy:

Yes, thanks. I mean, I think one of the things as a diversified global emerging market portfolio manager, one of the greatest things about the COVID Working Group from my perspective is that it really leverages the best of the Fidelity research platform. Individuals largely self selected actually based on their own expertise, but they're also their own levels of interest across our regional offices coming together to produce unbiased research for portfolio managers for our client portfolios that we can then take to make investment decisions at the individual fund level.

Alex Duffy:

Now, as someone who spent my entire career analysing global emerging markets and really focusing on companies within those regions, the first thing I'll openly admit is that I'm not an expert on viruses, at least for Coronavirus. So from a user perspective, at the outset of this going back to January and February, there was really leveraging the working group to understand what we were dealing with. What actually is this virus? How does it work? What are the potential scenarios as we look to infection rates and think further forward to potential treatments?

Alex Duffy:

So there was very much a data download, and a learning curve that all fund managers myself, specifically went through in terms of trying to understand how the virus itself worked. Then as the level of data and information ramped up not just within Fidelity, but globally as well, there is a great need to have that data interpreted and put into a format that as I said is unbiased, so that we can interpret it and put it towards practical use. As we're all well aware, there's a huge amount of information on COVID, and working out the noise from the fact is really something that the working group does extremely effectively.

Alex Duffy:

Whereas if you look at how my time would have been spent six months ago trying to follow what was going on on a day to day basis. Now, I really just engage with the working group and take my information from that group, knowing that it has been sanitised and health checked in terms of its integrity. The point that Huan Lin made about leverage to other industry contacts is also critical. Now, that isn't something that I would have had direct access to in a small team within an emerging markets capability necessarily, but leveraging the facility network, getting access to discussions around vaccines, policy implications, and then also taking that to understand what it may mean for future policy decisions has been a critical element of my engagement with the working group.

Alex Duffy:

I think that where I then take that information is to distil it into how COVID impacts emerging markets, both directly at a single country level. The impacts are different across global emerging markets because of the position that individual countries sit within. We can get into some of that within the Q&A. Then more indirectly, from an economic and a trade perspective because as certain developed markets of certain parts of the world impact policy, take certain different approaches to dealing with a virus that has material implications for trade globally and certain countries within emerging markets that are more reliant on global trade as opposed to regional trade.

Alex Duffy:

So there's a rounded approach to how we take this data, it's really about ensuring that we've got robust integrity of data and unbiased opinion. Tom said, open mindedness as to how we've looked at the treatments, and then distilling that into how it affects global emerging markets specifically and how we should therefore be positioning portfolios, both at a country level but then also from a business model perspective as well given some of the material changes to consumer behaviour and the impact of business models that we've seen as a consequence of this pandemic. I think I'll stop there for a moment, Viral. I'm happy to hand back to you to Q&A. We can get into any of those elements around the virus specifically, which I think would be most useful to our clients, but also emerging markets and how it pertains to the outlook for the asset class.

Viral Patel:

Fantastic. Thanks, Alex. So the first question that's come on the line is, Tom, so you mentioned we have about 70,000 articles globally, right? What are the public access resources that we feel would be the top two or three, both Tom and Huan Lin, in your areas that you've seen, that clients could look towards to get a good information that we think is as Alex is very appropriately said sanitised in these COVID days? Tom?

Tom Ackermans:

I'm not sure if there's a there's a properly sanitised website out there where you can just go on get all the perfect info. But actually one of the pages that I found very useful is there's a Reddit page with the COVID-19 hashtag where people post a lot of the latest research. There's actually a bit of an active discussion going on on the findings in that research and some critical evaluation. So that's good. Then there's a couple of of the standard journals out there that make a lot of the research available like the the Lancet here, a couple of other things, but we can always share us share some further things with clients if they're interested.

Huan Lang:

Well. I'd just like to add a little bit. For the case numbers, of course, there are different resources and then WHO resources and then for China specifically, there's an HTC, like the Chinese CDC, they will publish the data every day. Then in terms of the scientific paper, as Tom mentioned, there are some very reputable journals. Then we do follow that very closely. Also for the vaccine and therapeutic areas, clinical trial data, there's FDA published a website for the clinical trial data. We can see all the details there.

Viral Patel:

Thank you, Huan Lin. Again, for both of you. Another question is what are the similarities, differences at a higher level to the back to the 1918 pandemic that we saw?

Huan Lang:

Tom?

Tom Ackermans:

Maybe I'll start with that one. So far, COVID-19 deaths are still under one million people, thankfully, if we can say that. The Spanish Flu depending on which estimates you believe, had somewhere between 17 and 50 million deaths, and some claim even 100 million. Now based on everything we know today, I don't think we're going to get anywhere near that with COVID-19. I do think that things we can learn from all the past then that makes researching looked at the evolution of several other pandemics. But I don't really think we're going to find all the answers we need by looking at the 1918 Spanish flu. We should also not forget the way the world operated and the way information went around at that time was just very different. So there's a limit to how much we can we can learn from it. So I'll probably stop there just in the interest of time, and we can look at some other teams as well.

Viral Patel:

Anything, Huan?

Huan Lang:

Yeah, so if I could add a little bit. So similarity, I think both are global pandemic. But as Tom mentioned, the case number is still quite different. Then there are indeed a lot of differences. Back then, we probably couldn't identify the virus and then know the gene sequence in such a short period of time. Then for the vaccine development, for all these testing methods, they are all different. Contact tracing, there's a lot of technology involved in that, so that's also different as well. So I guess we can learn something from the 1918 flu. Yeah, a lot of things have changed.

Viral Patel:

Just while we're with you, Huan Ling, Wuhan specifically, what's the situation there currently, are there any new cases in Wuhan or not?

Huan Lang:

There's no new cases for I think a few months it's already. Then back in April, I think, so Wuhan basically, they've done a full screening of ... So they basically tested all population in Wuhan City, which is around 10 million people. Then there's no infection detected. So basically, everything is clear. I think just recently, well, not recently, but not a couple months ago that the travel ban also were lifted. So everything is back to normal. I have friends living in Wuhan and I talk with them regularly to check on the situation. But everything seems to be back to normal.

Viral Patel:

Just for you, Alex, a question and the others can answer too. How much do you trust data coming out of Brazil, Russia, Korea, China, all these countries on corona?

Alex Duffy:

Yeah, yeah. I mean, whether the actual data is 100% accurate to the sort of last case number is not that relevant. I think the direction of travel is what ... Like with all data, the direction of travel and the trend is what is most relevant. Now, clearly different countries have different institutional frameworks, different political structures, and the integrity of data, as a consequence of that, varies greatly.

Alex Duffy:

I don't think that the data collection in Africa is as robust as it is in China or South Korea or elsewhere, right? But that's just the consequences of infrastructure. Similarly in Brazil, I think it's pretty clear that the approach, and this is where I say the Coronavirus impacts different countries in different ways. But the policy response in Brazil has been markedly different to what we've seen anywhere else in the world, with one or two exceptions.

Alex Duffy:

As a consequence of that, the rates of testing have been materially lower. So we would obviously expect the stated case numbers to materially underrepresented the actual rate of infection. But I think it's more the direction of travel and the trends that we witness that is the important element to get a handle on. I mean, if I can I think Brazil is an interesting case in point because I do think it's one of those countries that relies very much on global trade, as the consequences of its position as a commodity exporter and so on.

Alex Duffy:

The approach that they have taken from a policy perspective does make life a little bit more difficult for Brazil as a country at an economic, from an economic point of view than some of the other countries that we look at within emerging markets. But in terms of data integrity, clearly it varies by region. I think trends and direction of travel, potential treatments are the areas that we focus on in terms of scenario building.

Viral Patel:

Just to add to that some of the flow and benefits of Brazil having the challenges on export is Australia benefiting given IMR prices and IMR exports from here.

Alex Duffy:

Yeah. I think that clearly what what we've seen with particular lockdowns and inability to infect production is that usually you've got rising commodity prices as the consequences of supply shock that's going on. This is a completely different topic, but I think the inflationary implications of the policy response we've seen globally are important long term investment considerations that will get reflected in raw material prices and clearly Australia is relatively well-positioned in that regard.

Viral Patel:

Yeah. Tom, any comments from you on the data coming out of some of these countries?

Tom Ackermans:

Yeah. I think in general, case numbers are very dependent on what actions you take to record those case numbers, right? I think very interesting. What we'll see happening over the next weeks and months in terms of second waves of infections being reported. To give you an example, Spain peeked at just over 160 cases reported per million inhabitants. In the first wave, they had these reported cases. They're now seeing a reasonably big second wave and are reporting 130 cases per million people per day. So you could say, "Wow, this second wave, that's almost as bad as the first wave they had."

Tom Ackermans:

But actually based on what we know about the virus today, and based but based on death rates and everything, we think case numbers in Spain in the first wave were probably underreported by a factor of 15. Right? So if we base our analysis on the number of hospitalizations, the number of deaths, that's still far lower in Spain today than it was in the first wave. So we think what's really going on is yes, there is a second wave. Yes, there are new outbreaks. But the severity of it is far less so far.

Tom Ackermans:

It's just that the reported data shows you a potentially different picture if you don't think about what's behind that data. So that's that's why it's so important to really critically think about what am I actually looking at here and what can I conclude from it? The same thing applies across the globe, across the countries, whether emerging or very well established, the US, the UK. There's many questions about the data.

Viral Patel:

GooD. Thank you. Just now moving on to vaccinations, and I'm not talking about the kind that our head of state has talked about injecting fluid, cleaning fluids in your vein. I'm talking about true vaccinations. What is our view on the meaningful trials that are going on right now that we can see on vaccinations? Maybe Huan Lin and Tom.

Huan Lang:

Yeah. Well, if I can go. Sorry. Okay.

Tom Ackermans:

It's okay, Huan.

Huan Lang:

For the vaccine, because we recently had calls with industry experts both in US and in China as well about the vaccine. So basically the most advanced ones globally are the MRA vaccine and then those are in a large scale phase. We're talking about about 30,000 patients. Sorry, 30,000 enrollments. So that's a very large scale phase three. Then the result is expected in October. Then we can see some very early data for the efficacy. Then for the safety, we definitely need a longer term follow up, at least for another six months. Yeah, so I guess that's the most advanced ones.

Huan Lang:

But then the good news is we have a lot of vaccines under development, all different technology platforms are advancing as well. So hopefully, we can have some successful vaccines and the broader, I think the industry experts' view is the end of this year or early next year.

Viral Patel:

Tom.

Tom Ackermans:

Yeah, no, I think that's ... Totally agree with that. But I think the one thing that's going to be interesting is how the whole political angle plays into the vaccine trajectory. Right? There's hurdles that need to be met for a vaccine to be approved. Those hurdles, it will take a lot of stamina from the doctors involved and the people involved to say, "Okay, we need to properly pass these hurdles."

Tom Ackermans:

There might be some emergency use quite early on. I do you think we'll see news flow around certain vaccines being used this year already. But I think it will really, at the earliest, I think, real mass vaccination will probably be possible maybe from the middle of next year onwards. But we should also take into account that with only really six of these vaccines in phase three trials right now, there's a good chance that some of them will fail those phase three trials. We're hopeful that some of them will make it, but we should be prepared for some disappointment along the way as well.

Viral Patel:

Alex, it's coming to you. There's a question. So what in your mind is being priced into markets right now on vaccinations? If one of these were to succeed, what would markets do immediately?

Alex Duffy:

I mean, I think clearly, markets ... Well, three elements to this on vaccines specifically, any positive news on vaccines is going to be positive for markets because there's been two big impacts in markets that have gone on this year that I would state. One is that the policy response from a monetary perspective and a fiscal perspective is unprecedented. We thought what we've seen previously was unprecedented. But this is, we can put it that way, truly unprecedented. The cost of capital has declined materially, and that declining discount rates is rerated cash flows, right?

Alex Duffy:

So you've had multiple expansion as a consequence of that at a market level and that's been one of the elements has driven markets higher. You've also had businesses that have adapted to this crisis and that have flourished as a consequence of this, as the changes in infrastructures, changes in the business models create new opportunities for certain types of company. That has been really leading some of the market gains that you see it's concentrated in certain parts of the market, be it technology, be it healthcare and so on. There are other areas that have lagged. I mean, I clearly think that vaccines will be positive at the development. They'll give an element of certainty to market participants and create more confidence.

Alex Duffy:

I'm probably more in the camp though, the markets have moved on. Right? I actually think you look at market behaviour, you look at four looking data points, the numbers that companies are reporting, the conversations that are being had, it's much more around the mortality rates impact in different levels or different segments of societies. A personal opinion really, but mortality rates impacting different segments of society in different ways.

Alex Duffy:

Actually economies being over the worst of the lockdowns, I think that that is what markets have really priced is that we had very harsh lockdowns initially, we have huge uncertainty as to what as to what that was going to mean from an economic perspective. It drove us to analyse declines in March that were very aggressive in terms of market behaviour. The market has quickly reacted and said, "Well, we've probably seen the worst from an economic perspective, maybe not from a healthcare perspective, but from an economic perspective," because of the way the policy will adapt.

Alex Duffy:

Speaking personally here in the UK, I think it's very unlikely that we go back to the national lockdowns that we saw back in March. That's what I really think markets have priced along with cost of capital declines. Vaccines would be critically important for certain parts of certain industries, like clearly travel, right, is a major one. If you get effective vaccination, border controls can be mitigated over time, elements of society, which are going to remain under lockdown can get opened up, and they may be more effectively, that would be the areas that I would focus on. But I don't know that it's necessarily as material for markets directly.

Viral Patel:

Cool.

Alex Duffy:

We need to know the efficacy of these vaccines, as Tom said, we don't know, right? It's too early. Also what's uptake going to be? I mean, how many people are actually going to have the vaccine when it becomes available? Will it be mandatory? Can you make it mandatory from the perspective? I don't know. There's all these different social questions that get raised.

Viral Patel:

Yeah. I mean, we've come back to markets with a few more areas of interest there. But on lock downs as you mentioned, right? What do you guys think has been an effective lockdown strategy? Has Sweden been good? Should other countries follow that model? Any thoughts on that?

Tom Ackermans:

I would say that's a very difficult question to answer in a way, right? Because not only does it depend on the data you look at and the way you adjust that data, right? So I could argue Swedish GDP was down 8.6% in Q2. Denmark, which had a much more full lockdown was down 7.4%, the EU was down 12%. Right? So we will have to adjust for the makeup of the economy and look at all the individual contributors to say, "Okay, is this better or worse?" What we can say in Sweden is that kind of domestically exposed businesses were less hard hit than in other countries that had full lockdowns, that's totally fair.

Tom Ackermans:

But Sweden is obviously very dependent on their export market as well. The trade off for that softer lockdown still looks to be much higher death rates than we've seen in other countries. But even that, we cannot judge right now because what happens if Denmark and Norway have a much heavier second wave than Sweden has, we're still learning about how this virus evolves. We're still learning how many people actually get it. There's the big topic about herd immunity and 75% of the people should get it. You can calculate different numbers. But ultimately, that's just a formula. That's not the real world. Right? So we need to find out how things work and so hard to tell what the best approach is.

Tom Ackermans:

Overall, I totally agree with Alex that it's very, very unlikely that we'll go back into full lockdowns in most countries, the economic cost is too great. Every politician out there will try and manage things with track and trace and local lockdowns. We should also not forget that there's a lot more hospital capacity available now. Treatments have improved. So that everyone's healthcare system just has much more capacity to deal with further waves of infection here. I think that's the key point.

Viral Patel:

Huan Lin, just from the China example, we've seen recently some breakouts in subsidy. But they seem to have been controlled very effectively compared to other countries. Is there a learning from there, what and why?

Huan Lang:

Well, I think in China right now is more ... First of all, in China, they controlled the border very strictly like for people coming from aboard then requires 14 days for the quarantine, but it's not quarantine at home. It's more like quarantine at a designated hotel. So it's very strictly controlled for imported cases. Then still, there are some local outbreaks. Then for local outbreaks, what China did is to just block for the rest of the areas fully impacted.

Huan Lang:

For example, we had a local outbreak in Dalian. Then Dalian City, there is a lower level. They screen as many people as possible by contact tracing, close contact of confirmed cases, things like that. Then by these methods, they try to control the outbreak at a small scale. So we see even though there are some small, local outbreaks, but then it's well controlled in just a short period of time. In the meantime, the rest of the country remain unimpacted. Right now, internally in China, you can travel freely, and it's all okay. But just aboard, travel aboard and then travel from aboard into China is strictly controlled right now.

Viral Patel:

Good. Thank you. Alex, question for you. How long do you think is going to be the lag between lockdowns and impact on companies and their results? Also along the same question, what could be the structural impacts of this virus situation, right? For example, you hear things like 30% of job losses in the US could become permanent. Right? What's your view? Is there just general?

Alex Duffy:

Yeah, I mean, I think that given ... Okay, so the lockdowns, impacted market and this is a very important distinction between the bear market and we saw in the first quarter of this year and what's happening prior bear markets. It was predominantly a services sector impact, right? You lock down economies, shops have to close, retail stores have to close, very different to prior recessions particularly in emerging markets, which have typically been industrial commodity price, global demand lead on the fixed asset investment side.

Alex Duffy:

I think that that gives you a more immediate transfer, right, in terms of the impact that it has on trading densities. You think of footfall in retail stores as a case in point. Well, our expectations of earnings for a retailer may well be one thing. In a normal scenario, when that retailer closes 100% of their stores, there is an immediate impact on cash generation. I think there's a very rapid transfer in terms of the impact of lockdowns into companies forecasts.

Alex Duffy:

Actually what we've seen in terms of reported data through Q1, but also now obviously at the end of Q2 is soundbites in terms of month on month trends coming through May and June improving as those lock downs unwind. Right? So just today actually, Shinzo international is a textile manufacturer that we hold in the portfolio. It's a big supplier to Nike and Adidas, selling domestically to China but also globally, and they are reporting improvements in activity in terms of demand for for apparel sportswear, apparel, etc, as as these unlocks come off. So I think there's a relatively immediate transfer from that perspective. I'm sorry, Viral. The second part of the question was?

Viral Patel:

Structural changes from the COVID, like job losses etc.

Alex Duffy:

Absolutely, I mean, you've seen I think the shift, particularly and you've mentioned it in the case of the US, but I think emerging markets is very relevant as well. The acceleration of trends that were ongoing prior to COVID has been dramatic. So you look at work from home, you look at online. Okay, so case in point, Brazil, online retail is 6% of total retail pre COVID. It will exit this situation into the teens. Okay, so you've had a near doubling of the rate of retail penetration. Now, they came from a low level initially, but the investments that have been made by companies and what that's meant in terms of industry shifts has been very dramatic. I think that this will be one of the political issues that we have to grapple with and socialists that we have to grapple with going forward is there are going to be structural material job losses as a consequence of even in a return to normalisation activity will be lower in physical infrastructure-led business models, right?

Alex Duffy:

So I went into London, like I said, I went into London about six weeks ago. I hadn't been since the 15th of March. Every single store and coffee shop is practically closed and those that are open have one employee, a third of them, of the usual level of stock available in sort of food outlets. I think that it's highly questionable as to whether any of us are going to go back to full time working in some of these big cities that we've lived in. Maybe we will, but it will take a long time. As a consequence of that, I think that you see material shifts in the makeup of employment.

Alex Duffy:

Then that is something particularly in developed markets actually, maybe more than in emerging markets, that policymakers will have to deal with in terms of the changing nature of the economy. Now, we focus on the negative implications in terms of job losses, it will create opportunities elsewhere. It gives more flexibility. It will make economies more flexible. It will create investment more broadly across economies as opposed to being particularly in the UK, very regionally focused, if I can put attention to that for one second. But I think there are benefits to that in terms of greater inclusion in the economy. But yeah, there will be material implications, this is my personal observation and views. Yeah.

Viral Patel:

So then just on that, right? So there's a good chance that overall unemployment, it's already higher for sure now, but it could actually be higher when retail and some of these other tourism sectors that are large employers, we see ending up high unemployment. Right now stimulus all over the world is putting money in everybody's pockets, markets. Now, people are spending more, shopping more, etc. At some point, the stimulus has to end.The government debt is going through the roof. When all that happens and markets in many places are higher than they were before COVID, one of the questions is the US market is like a game of Jenga. That last piece is going to come, it's going to all crumbling down. What's your views there? Should we be in cash?

Alex Duffy:

I think you have to distinguish slightly between the composition of equity markets and government accounts, right? There's a big difference between the Amazons and the Facebook's and the Microsoft's, and Apples of the world in terms of the strengths of their business models and what it represents with respect to the US economy.

Alex Duffy:

As an emerging market investor who's lived through all manner of classical EM crises, government debt levels build up, you borrow from offshore to pay the interest rates, your currency devalues, you get into that death spiral, I've looked at the data for developed markets over nearly 20 years. I'm always amazed at how much they can keep pushing these debt to GDP levels and keep interest rates low and not have runs on their currencies. I think the truth actually is that from a currency perspective, when you look at dollar, yen, Euro, Sterling, Aussie dollar these big kind of triple A rated currencies, there's somewhat of an ugly duckling contest where everyone's trying to devalue at the same time. So where do you go?

Alex Duffy:

But actually, what we haven't seen is the inflationary pressure that forces interest rates up, right? That we haven't seen. So in emerging markets, the currency starts devaluing interest, inflation picks up and policymakers have to take up interest rates, which crushes the domestic economy. That hasn't yet happened in developed markets. So the key element go right back to something we talked about earlier on, is the policy response, and then as we unlock economies, what does it lead to in terms of inflationary pressures further down the road?

Alex Duffy:

You referenced commodity prices and iron ore earlier on. Do we get inflationary pressures building up? Does that lead to a change in monetary policy? I think that that question is something that is going to have to be grappled with over a two, three, five-year time horizon. What we may well find is that real asset prices do start to move higher. It's no coincidence to me that the gold price is at $2,000. Bitcoins are back at $11,500. I think real asset prices rise globally would be my personal view.

Alex Duffy:

As an investor with an emerging market portfolio, we are positioned with one eye to that. We do have exposure in those material sectors. We do have broad exposure across geographies, Asia, EMEA, Latin America, we own businesses that are well-positioned to benefit from changing structural trends in the marketplace that we're facing in a post-COVID world.

Viral Patel:

Cool. Alex, thank you very much. I think we are going to end on that. Simon, right back to you.

Simon Glazier:

Yeah, thanks, Viral. Thanks, guys. Geez, I tell you what, that went so quick, I didn't realise we were at the 45. It felt like we still have 15 minutes to go. So just want to say thanks for joining us today, both obviously, the panel and everyone dialling in through the web.

Simon Glazier:

I hope you got something out of that, I really learned a lot. To be honest, there's still a lot of questions outstanding. So that tells me we probably look to have another session like this within a month or whenever we can sort of pull this together again. But we will continue to run our online sessions. Topics may change, but really, thank you so much for the interaction today. I know there are, as I said, some questions outstanding. So if we have you outstanding today, please reach out to the Fidelity team. We're there to help. Hopefully, if you've got any other feedback as well, pop it in the feedback when the follow up email comes through, because we want to hear your thoughts and ideas. But just conscious of your time. Again, thank you for joining us today. With that, it's bye for now.