The new economic world order

Simon Glazier:

Good afternoon, everybody. Thank you so much for joining us today. My name is Simon Glazier and I'll be hosting today's discussion. Before we do get started, just some usual housekeeping. We're planning to go about 40, 45 minutes today. And if you have a question, please, you can submit via your Zoom portal. If you're dialled in via the phone, unfortunately, you won't be able to ask a question today, but we'll do our best to incorporate the questions as we go.

Simon Glazier:

Otherwise, we might have some time at the end of the session or you can check in with one of the teams later on. Just a quick reminder, we do have, we will have CPD points for today's session, so that usually takes around seven to 10 working days. So bear in mind that, but it's something else we can try and do for you today. Today we're joined by Paras Anand, Fidelity International's Chief Investment Officer for the Asia PAC region. Now, Paras was responsible for this plan and any information edged throughout the region.

Simon Glazier:

Today we'll be discussing some of the high level themes that Paras and the team are thinking about and their potential implications for markets and investing. Now, Paras, in May we completed a white paper titled "The New Economic Order". In that white paper we covered themes, such as government intervention, the importance of fiscal stimulus, the continued strength of the Asian region, opportunities from dislocation and the continued trend towards sustainability. We also gave our views on the base bull and bear cases for recovery. With a 60% probability we put for a U-shape recovery, which included an expectation for GDP to decline by 1.7% during 2020, but recover in 2021 in both developed and emerging markets.

Simon Glazier:

And for those who missed it, the paper is available on the Fidelity website. So please check in and check that out. Paras to start the discussion today, given the disparities, we're seeing across the global economy, with some economies recovering at different speeds and times and others still in the depths of the crisis, does a general bull, bear and base case have much relevance when there's so many variables and unknowns?

Paras Anand:

Thank you, Simon, and welcome everybody to this discussion. What I will do in the presentation is really speak exactly to Simon's question, which is, how in the current environment with so many variables and so much uncertainty, do we think about drawing some clear investment conclusions and how do we start to contextualise this idea that maybe trying to make determinations about averages will carry less value in the future.

Paras Anand:

Let me just start by taking you to some of the work that Simon referenced in the white paper that we produced. And what you're looking at on this slide is the cumulative economic growth over 2020 and 2021. These are our base assumptions and a down-sized case, looking at a negative prognosis. Just to clarify that, exactly as Simon said, it incorporates both the near term drag from economic growth as a result of lockdown, but then also potentially the sort of the recovery in 2021.

Paras Anand:

On the right hand side of that chart are the various moving parts, which go into trying to make some of these the determinations. Now, of course, with all of these types of forecasting and all the points that Simon alluded to, I think this was just really an attempt to try to take a broad-based view at how we think the global economy and regions within the global economy will perform over the next couple of years.

Paras Anand:

The value in these observations is really about being approximately right, rather than precisely wrong. But the one conclusion that you can draw, quite simply, from this, is that it would appear from both our bottom-up research, as well as trying to incorporate all of those facts on the right hand side, that we're likely to see Asia and emerging markets in general, especially Asian-based emerging markets, demonstrating the strongest growth over the coming years.

Paras Anand:

And you could say, especially because a big part of that will relate to how the rest of this year will pan out, that thinking about the virus trajectory, lockdown length, et cetera are probably the two most important things for us to consider as we think about the near term.

Paras Anand:

In that context, let's just look at very simply how the virus has impacted different parts of the world, looking at it from regional basis. It starts to become very stark, but despite the fact that we had the origination of the pandemic in a province within mainland China. But when we look at Asia Pacific, both in terms of the numbers of cases around the world, but also in terms of the fatalities, we're seeing a much higher incidence and impact in the US and in Europe versus what we're seeing in Asia Pacific.

Paras Anand:

Clearly, when we think of impact of the pandemic, the success in containment measures, the ability for economies to emerge from lockdown, we're seeing that much more clearly in Asia versus elsewhere globally. So, we are likely to see both from that perspective and from an economic activity, from a demand, an output perspective, Asia leading the world from an economic point of view.

Paras Anand:

We can ask ourselves, very simply, why is that the case? Why, despite the fact that the pandemic started in mainland China, have we not seen a higher impact across the Asia Pacific region? I think there are a number of reasons for that. Firstly, we have the experience from SARS back in 2003, that's created, first of all, certain elements around people's comfort and recourse to wearing masks, social distancing, there's also been issues of the potential issue of the herd immunity to better immunity. Then, as a result of that, you have more policies in place to deal with issues, such as the one that we've had recently, things like temperature screening in airports and then the availability of tracking and tracing apps and the differential perspective around issues like data privacy, which have facilitated those, have also helped with containment measures.

Paras Anand:

I think there's two other things to refer to as well. When we look at Asia as a region relative to the rest of the world, there is a higher propensity or a higher respect for government institutions and for following government directives, than we can and have seen elsewhere in the world. And then that sort of a view of collective benefit versus individualism is also something that we see much more in the regions. So these are some of the things that I think we can look to explain why we, in some ways, face quite a surprising phenomenon in terms of the pandemic impact.

Paras Anand:

But, I want to now move on to a point that Simon raised, which was really about, with so much uncertainty, what are the other kind of things that we're seeing in the environment? And again, I wanted to come back to this point about averages mattering less, and this being an environment that is quite unlike things that we have seen previously.

Paras Anand:

So for example, when we typically see episodes of economic contraction, or exogenous shocks, or market volatility, we're normally very used to looking at companies, or industries, and looking at their relative resilience. So in other words, everyone has a negative impact, but some are impacted less than others. One of the things I think that quite distincts this period from previous episodes of economic contraction, is the extent to which, in this environment, certain companies, certain industries, and certain parts of the economy have boomed; so not just been resilient, but have actually boomed during this period. And we're obviously having this webinar on Zoom, but just to put it into some kind of context, the market capitalization, obviously, of today, exceeds the market capitalization of all of the airlines vector globally, right?

Paras Anand:

So we're not just talking about the airline sector in the US, but we're talking about the airline sector globally. And it gives you a sense that we are in an environment where the level of dispersion is increasing... and I want to keep coming back to this point, which I think is really, really important for investors to consider, which is that the averages matter less. So trying to determine if the margin and economic outlook is going to be a bit better or a bit worse, or the market's going to go up or going to go down, or they're in a risk-on risk-off environment. These things are going to mount to a little bit less, or in fact significantly less, to investors in the cycle, the [inaudible 00:10:52], that they may have been in in the previous cycle. And we'll unpack a few reasons as to why that is the case.

Paras Anand:

But beyond this issue of industries doing better or worse, I think the other phenomenon that we should be preparing ourselves for is an acceleration in the regionalization of the economy. So the move away from globalisation, which I think was already in evidence in the period leading up to the pandemic, is going to accelerate during this period. So if we take Asia as a practical example, 60% of trade in Asia is done intra-Asia. All of the work that we will see around nearshoring of supply chains, all of the political energy that we will see directed towards national interests rather than necessarily around global unity. In fact, one of the things that's been quite evident, almost evidenced by its absence during this period, has been the role that, for example, multilateral or supranational organisations have played during this pandemic, they have not had the equivalent share of voice that we've typically seen every time that we have a challenge in the market.

Paras Anand:

And I think this idea of regionalization is pretty well understood. I think people are more or comfortable with the idea that the political landscape is switching away from global interest in trade, more towards national interest. But I think one of the areas that I think can sometimes be underestimated is that the period that we are likely to see over the next one, two, three years, as we emerge from lockdown, is going to further, almost accelerate, this phenomenon of regionalization. Because when we start to see, for example, economies open up again, but most importantly we start to see travel links open up again, we are much more likely to see this concept of green lanes, or countries which are very close to each other, opening up the travel links first, before you start seeing much longer haul, or links more further afield.

Paras Anand:

So in a sense, the practical elements of how economies will emerge from lockdown will accelerate this notion of regionalization, of regional interdependence, and I think this is an important thing for investors to bear in mind. So when, for example, we're thinking about an asset class like global emerging markets, we may need to think very differently about the Asia based emerging markets and their link to, for example, Chinese growth, versus what we are more likely to see around the interdependence of the Latin American countries and their link to how the US economy will perform, and those kind of links much more going forward.

Paras Anand:

So less globalisation, more regionalization, higher dispersion in terms of corporate earnings outcomes. And coming back to this point around the political environment, there is another important phenomenon that will be happening, which I think, again, investors really need to have uppermost in their mind, which is that we are going to see, almost universally, economic strategy moving away from monetary policy, which was really the dominant economic strategy that we saw over the last 10 years, to more to fiscal policies, and more to governments intervening more directly into economies, in the very short term, to mitigate the impact of lockdown. But I think on a medium-term perspective as well, we're likely to see a higher degree of government spending, government intervention, and buy-rate intervention into the economy, versus the recourse to monetary policy, the recourse to central bank action, that we saw over the last 10 years.

Paras Anand:

And a couple of things will be a consequence of that. First of all, I think that for, in terms of the benefit to the real economy, it's more likely that we will see fiscal policy having a more direct positive impact on the real economy, and I think a long period of monetary expansion has really proven that the impact of that monetary expansion on real economic activity has been much more muted than I think many analyst or economist or central bankers would have expected. But again, there comes this additional point, which is that as fiscal policy is enacted, it is going to be enacted in a much more differential way. A central bank liquidity injection strategy, one form of monetary intervention, looks very similar to another form of monetary intervention.

Paras Anand:

But when it comes to fiscal policy, how you choose to use those tools in your economy is highly differentiated. Whether it's towards fixed asset investment or tax cuts or social transfers, the extent of fiscal policy will again be highly differentiated. So for example, more recently we've seen much less in the way of fiscal stimulus from China than we have from the packages announced in the US and Europe. So, I think that this again will compound this notion that there will be no simple rules of thumb that one can look to to understand how different economies, different industries are going to perform over the coming years.

Paras Anand:

And as we see this phenomenon of larger government, it will come with some conditionality attached to it. So, I think a couple of things that we've written about this in the paper and elsewhere, one of the things that I think investors should be prepared for is areas like regulation, corporate taxation, are likely to increase as a result over the medium term, of this higher level of government intervention. But again, and I think that this slide will illustrate the point well, is that that level of regulation will play out very differently as we look at different parts of, let's say, similar companies across the globe. So, in slide 9 what I've done, is basically looked at the tech mega caps in the US and the tech mega caps in China.

Paras Anand:

And I think it's very reasonable for us to expect that over the coming 10 years, with now the tech mega caps in the US being the incumbent monopolies, to be facing a higher degree of scrutiny from governments for the social responsibility of algorithms to be investigated. For example, the way in which regulation is applied to these platforms to be revised. So, in a way, when you thought of the rise of some of these platforms, what they've tended to do is to, in their own way, to sort of circumnavigate regulation. So, Facebook will say, "Well, we're not a media company. So, don't regulate us in the same way as you would a media company. We're a platform." Uber, "I'm not an employer. Don't treat me like an employer. It's just a platform," et cetera, et cetera, et cetera.

Paras Anand:

Whereas, this is fundamentally different to the way that these platforms have developed in China. For example, wherein China you've always had a party board or a government membership as part of the supervisory structure of these companies. So, as they have emerged, they have done so in the full gaze and with the full alignment to party policy. So for example, when there was an issue around a high degree of gaming. Tencent's is very involved in gaming. There was a concern from the government about the lengths of time people are playing games. Issues of addiction, issues of eyesight. They started to proactively manage the length of time that the players of different ages could actually be on the platform. So, that this kind of real-time societal responsibility has been in part been delivered by the fact of having government as part of the supervisory board.

Paras Anand:

So, to summarise the point, are we likely to see that same extent of incremental regulatory scrutiny on those platforms? I think, less so in China than we are likely to see in the US.

Paras Anand:

Moving on to another point which I think is very important for investors to consider in an environment where you have a high degree of dispersion, high degree of uncertainty, and in many ways, the path is a poor guide to the future, is that I think that there is a lot of risks, emerging risks in models. Now, the reason I think this was lacking is because I think that over the last 10 years in particular, and a lot of the publications on this page, and Risk-based and Factor Investing, Beyond Smart Beta. These are all books that were published in the last 10 years. And they really point to a rise in popularity of rules-based investing, using models within investment processes, all of that, which I think that there can be value in using models as inputs.

Paras Anand:

But one thing I think is really worth emphasising is that if you are in an environment where the past is an increasingly poor guide to the future, then I think that the value in models and the risk in models is very acute. And I do think, and one more thing that I wanted to emphasise this on this call is because I actually think this is, despite everything that we've seen, this is an area which I think has not reared its head yet. So, unlike in the period where we were running into the financial crisis, when we saw a huge dislocation in quantum strategies in 2007, 2008, we haven't seen it this time around.

Paras Anand:

And I think a big part of that is because many of the quote-unquote "factors" that were performing well in the period leading into the pandemic and the market volatility have continued to do well through that period. So, in a sense, the revelation or the losses that one normally experiences at points in times of model failure are not being evident today. But again, I guess my word of caution here is that I think that that could be leading to a level of complacency that I think investors need to be alive too. So again, I do think that in an environment where there is going to be a high degree of divergency, averages matter less, there's less to generalise, there are fewer rules of thumb, that I think one should treat models and model-based views with a much greater degree of caution.

Paras Anand:

I just want to close by talking a little bit more about Asia. And about Asia really in the context, not just in terms of the economic outlook because I think we've covered that. But I think that really, I want to talk about Asia in the context of technology innovation. Because I think that one of the areas which I think is going to further drive the acceleration expansion of Asia as a region and as a collective economy if you like is really this idea that when we start to move into the fourth industrial revolution, that Asia will be a leader rather than a laggard. We know that the U.S. won the race to the smartphone and dominated in terms of things like software, packaged software, et cetera. But I think as we look forward, and we think about what I would call the broad-based universal application of cutting-edge technology to improve productivity at a larger scale level, I think Asia has a very good chance of being not the laggard in that context, but the leader.

Paras Anand:

We actually did a podcast on this recently, which I would encourage you to check out if this is an area which interests you, but let me briefly run through what I think are the base elements that that will create this change.

Paras Anand:

I think, look, the first point is that Asian economies and Asia as a region has digitised ... Many of the economies in Asia digitised faster than established economies in the West or in Europe or in the U.S. A big part of that is because you had, basically, your starting point was a much more immature economic infrastructure. So things like banking, financial services, there weren't significant incumbents that were there already. This has obviously left the space for things like super apps, [inaudible 00:25:46], WeChat, to come in and help larger parts of the economy move to a digital environment, move online sooner rather than later.

Paras Anand:

The second is that you have a very different philosophical attitude towards issues of data privacy in the region. People are much more happy to trade the idea of data privacy for security, for convenience, for service. And so that means that the people's view of data privacy is totally different to what we see elsewhere in the world.

Paras Anand:

The last point, which may seem a surprising point, but I'll be happy to develop it a little bit more, is that in Asia, what we generally have, as we look across the region, whether it's in China, North Asia, Southeast Asia, we generally have, including Australia, we generally have a newer, well-invested physical infrastructure there. And again, the possibility and probability that you are closer to moving to smart cities relies on the basis of actually the physical infrastructure being able to match the technological development.

Paras Anand:

And then, of course, issues like 5G bandwidth improvement, the benefits of those will accrue to obviously both the players within 5G, but also the ability for there being more products and services that you can access digitally. So connectivity and modern, state-of-the art-telecoms infrastructure becomes a significant enabler of this ability to lead in the next industrial revolution.

Paras Anand:

What we might find is, if possible, the kind of autonomous driving becomes a key signal of that, is that even though some of the early developments of autonomous driving happened in the U.S., I think this combination of physical infrastructure, the adaptation of technology, also the kind of societal attitudes towards environment, et cetera, you may find that in Asia, the adoption of autonomous driving or the ability to institute autonomous driving is actually much faster in Asia than it is in other parts of the world.

Paras Anand:

All of this really touches on the importance of artificial intelligence. Everything that we've been talking about: connectivity, data, et cetera, it's really going to be about the ability to use artificial intelligence, internet of things. And to this extent, one of the things I think is, again, really worth considering is artificial intelligence is very different to packaged software, because most of the algorithms that you need to be able to institute AI or machine learning are quite universally available, but things that are harder to get are the access for the data, for the richer your data environment, the more effective you can use AI within the economy.

Paras Anand:

But then also, what we're seeing across Asia is the supply of engineers, highly educated engineers, but engineers that are much cheaper than the equivalent in other parts of the world, is again ... So from a work force and skills perspective, that is going to be another area where Asia has an advantage.

Paras Anand:

And always thinking as an investor, one of the things that again is important for people to consider is that we often talk about this idea that companies in, let's say, Chinese tech companies being very significant in the context of China's domestic economy or what we're seeing around the region. But I think what we're seeing, for example, in something like TikTok during this period is it's probably one of the first truly global Chinese brands. In fact, I'm sure that lots of TikTok users have no idea that it's a Chinese-owned application. But I think this is, again, one of the things that as we think about investment return opportunities and the Asian leadership, that the intra-Asian story in itself can be a big part of that from a talent and leadership point of view, but actually then thinking about how that can make a bigger impact on the global stage as it were, I think is something that is certainly not in investors' forecasts or asset prices today.

Paras Anand:

Let me conclude. I think that the objective of this discussion was to really talk about some large but hopefully important things for investors, to really guide through not just the next six or 12 months, but thinking about the market cycle to come. And in that context, I guess my key conclusions are that what we've seen over the last 10 years, whether it's being done implicitly or explicitly, is a higher tendency for people to make generalised assumptions. We see this level of monetary intervention, this will happen in markets, but I would expect markets to behave this way or certain sectors to behave this way in a risk on, risk off environment.

Paras Anand:

This is what I expect to happen from an economic outlook perspective. And I guess part of the view here is that we may be entering a phase which we can call the end of generalisation. That the idea that the averages matter less. Now, as a result of that, those results of high dispersion and lower, if you like, innate predictability, I think that all models, for example, should be treated and forecasts should be treated, with significant care or in some cases ignored entirely.

Paras Anand:

Now, one of the consequences of that is that you potentially have a return of what we're calling here, the information age. And this may sound like an old concept because it was thought to be the case that, well the information age must be exhausted because information is ubiquitously available, everybody has it. But I think that a long period where people have looked for shortcuts or rules of thumb or looked at actually, the behavioural securities, rather than remembering that they own, that most cases, securities are a share of an underlying business or are used to part-fund an underlying business. That dislocation between Wall Street and Main Street is something that I see recoupling over the cycle to come.

Paras Anand:

We talked extensively here about Asian leadership. And in the context of the white paper that we wrote, we also talked about the key importance of sustainability. And what we mean by sustainability is the companies that are likely to thrive over the medium term will need, almost by definition, to have a greater attenuation to a broader set of stakeholders, rather than simply just minority shareholders.

Paras Anand:

I think we are experiencing a quantum leap in digitization, the webinar, the format that we're having now is a good proof statement of it. There are lots of incremental changes that I think have been significantly accelerated as a result of the period that we've been in. I do think that part of the investors' toolkit for the cycle to come is maybe a simple reminder, but it is a very key one, which is the importance of valuation. The importance of reconciling the fundamental intrinsic value of an asset that you own with the market price. And the reason that I'm emphasising this point so strongly is because, in many ways, this was a false friend in the cycle that we've just experienced in the sense that expensive stocks became more expensive or expensive assets became more expensive and cheap things became cheaper. So, valuation became a very poor predictor of future returns.

Paras Anand:

And the last point, which is something that I'm planning to discuss more in an article I'm writing at the moment, is this idea that there has been in some ways almost cognitive bubble, for want of a better expression, in this idea of investing for income. And whilst I think that there's always going to be an importance in thinking about income, and income as part of the returns to saver and as part of investment strategies, I think that that has moved to such an extent that actually there is almost an undervaluation or under attenuation to the scope for capital gain.

Paras Anand:

And I think as we start to play this out globally, this also gets compounded by some of the issues around what we see as the dividends risks to income strategies. So, I think that potentially, investors in a way pricing capital gain or remembering the importance of capital gains versus just income. I think is an important shift to think about in the cycle to come.

Paras Anand:

So, I'm happy to end it there, Simon. And yeah, very happy to take yours or any questions that we've had from the call.

Simon Glazier:

Yeah. Thanks, Paras. We do have a few questions and I suppose an observation is, the new rule of thumb is don't use the old rules of thumb, right? But I cannot help but think about the impact on inflation, bond yields. Will we see a divergence between inflation and interest rates globally, regionally, even here in Australia? What are your thoughts on that?

Paras Anand:

Yes. But I think the inflation debate is a really interesting one. And it's hard for me to look at the varies of the things that we've been talking about. So, whether it's regionalization, the move away from globalisation, the need for government to invest in the ... One way, Simon, you can think about how government could start looking at the post-COVID investment priorities is very similar to how the financial sector thought about dealing with the aftermath of the financial crisis.

Paras Anand:

So, the basic conclusion in the aftermath of the financial crisis was that the banks were under-capitalised relative to their ability to take a systemic threat. One of the things that has become really apparent and again not universal, is that many social care systems, health care systems, economies, basically had too little ability to withstand the stress of a lot of people getting sick at the same time. So, you can again see that much of the government investment will be in investing in those kind of buffers. All of these things I think are going to be inflationary. As well as some of the psychological consequence of people now recognising that sometimes there are goods and services that are not universally available because we've been used to things being always coming out.

Paras Anand:

And then more importantly than that, when I look at asset markets and asset prices, they're all in on a state of the world where inflation and rates remain subdued. So, I think it very wise for investors to position that actually there is a likelihood that we are going to see higher inflation over the medium term and that this zero or negative rates environment, I think will start to be challenged as an economic strategy. And not least of which is ... there's a kind of a circular element here, which I'm sure people appreciate but I think it's worth emphasising, is that the part of the challenge with keeping policy rates very low is it squeezes the profitability of banks. And squeezing the profitability of banks means that you don't get the transmission mechanism of monetary injections into the real economy because the velocity of the multiplier effects doesn't work.

Paras Anand:

And I think it's interesting looking at, for example, some of the statements from the PVOC who said, "We will definitely not be following the economic strategy of lowering rates because we want to, first of all, ensure that savers have a return on their deposits. But second, that we believe that having a healthy banking system is very integral to the healthy functioning of an economy.

Simon Glazier:

And you mentioned, and we've talked about the end of globalisation, regionalization, et cetera. From your perspective, how does Australia fare in that scenario?

Paras Anand:

So, I think Australia fairs well from a location perspective. I think that we are going to see ... Well, a number of things. First of all, I think that Australia will stand to do well because we are going to see a bigger pickup in fiscal spending globally. I think that will be positive for commodity prices. I think it will be positive for growth in general. I think proximity for Australia with respect to Asia, more broadly, I think is a positive.

Paras Anand:

And then I think the other point for Australia has been the preparedness of companies to recapitalize early, I think has been a benefit, we'll see a benefit in terms of the corporate sector. So, I think we can be pretty encouraged in terms of the economic outlook for Australia.

Paras Anand:

And then I think what will be important to see is how is the role that Australia plays within the broader region of Asia and how it benefits from that regional development.

Simon Glazier:

And we've spoken a lot about, obviously the strength in Asia, and we reflected on the fact that their infrastructure is a lot newer, therefore can support driverless cars et cetera, et cetera. But looking at it from the other angle in developed markets with older infrastructure, isn't that also ... probably a two-part question, isn't that also an investment opportunity to upgrade that infrastructure? And with developed markets, what are there supply chains look like if they're not partnering with the regions that typically supply the products that they demand?

Paras Anand:

Yeah. So, there's a couple of points I'd make there, Simon. So, I think, yes, you're absolutely right that that will be, within certain economies where there is the imperative for infrastructure investment, that will lead to opportunities for certain businesses and certain industries in those economies. And interestingly from almost a leadership point of view, that certainly is not what is being priced into markets today. We've had a slightly better performance from cyclicals over the last 10 trading days or so.

Paras Anand:

But in general, most of those kinds of stocks or those kinds of industries that of course stand to be beneficiaries, have not done it. Look, it also gets ... putting infrastructure programmes in place is complex. You have the additional challenge of environmental considerations. But it's been a full 20 years, I think, or probably 15, 20 years since you had a large, a major roads programme in the US. If you go to the US today, the infrastructure is kind of literally creaking. So, I do think that that does create an opportunity for the different sectors. Sorry, I forgot the second part of your question. Sorry. What was that?

Simon Glazier:

In terms of, particularly developed markets, probably thinking more about the US here, but China's been a huge supplier to the consumer across the world. How do developed markets potentially find new supply chains if we're going to more of this regionalization environment?

Paras Anand:

Yeah. So, I think that you're going to see, and it's a really good question, Simon, because I think sometimes when we talk about near shoring of supply chains or evolution of supply chain structures, people think of it as a kind of a pendulum that's going to swing from one side to the other. But it won't. It's basically, you're going to end up with a combination of some longer form supply chains with some near term supply chain with a high degree of provenance so that you can manage supply chain disruptions better.

Paras Anand:

So, in a sense, again, it comes back to the earlier question you asked about cost and inflation. If you're adding incremental cost to your supply chain, you're not trying to optimise the supply chain as you once were because you've now recognised what a failure can look like, what a supply chain risk can look like. And it's also very important that you can't unpick 30 years of globalisation immediately, right? Those global trade and supply links are well-established.

Paras Anand:

But I think what will happen is they will then supplement them with more shorter-range supply chains. And that will be, again, all of these things that we've talked about, infrastructure development, near shoring manufacturing, near shoring supply chains. All of that is politically very attractive because it's all about playing to national interest in investing in domestic economies.

Simon Glazier:

I'm just conscious of time. That's 45 minutes and we'd usually finish here. So, we do have a few more questions, which, happy to hang around for another 15 minutes. If you're unable to stay with us, thank you for joining us today. We really appreciate your time and support. And please, if you have any follow up questions, please reach out to the team.

Simon Glazier:

Next week if you're keen to join us, we've got Paul Taylor back again to discuss his latest views on the domestic market and how it's shaping up. So, keep a lookout for that. But if you're happy to join us, if you're happy to stay on, we've got some more questions to cover. So, if you're going to say goodbye, bye for now.

Simon Glazier:

But, Paras, Paris probably to take it to the next point, we haven't spoken about Hong Kong at all. So, I'm keen to get your views on whether or not there's going to be enough capital market support or the ongoing success of Hong Kong as a financial centre in Asia. And what potentially does that mean for companies maybe relocating, particularly US companies relocating out of China? Is it still a viable option for them?

Paras Anand:

Yes. Absolutely, Simon. I guess, in a way, the rising geopolitical tensions and the way that the rhetoric between US and China has evolved, in some ways Hong Kong stands to be a beneficiary of that. Because you are seeing, for example, more of these Chinese companies listed in the US relocating their listings to Hong Kong. And I think that, again, one of the things that investors should be conscious of is how substantial these companies are in terms of the trading volumes. And so I think that that becomes significant, number one.

Paras Anand:

Number two it's very clear that China is on a journey to develop its own capital markets. But to stop short of removal of capital controls in its entirety. So then, Hong Kong becomes very strategically important in that context. So, I do see that whilst there are clearly things like the Bay Area Initiative, which will develop the financial centres of Shanghai and Shenzhen, that Hong Kong perhaps becomes a more important financial centre in the future. And I think the last point I would make on this is that if it takes ... when we think about these kinds of deep liquid, well invested, well trusted financial centres like Hong Kong or London or New York, these are much harder things to kind of replicate than ... so even though there may be the opportunity for other sort of financial centres to emerge over time in the region, I do think that what we're seeing in terms of the regionalization piece is going to play very much to Hong Kong strengths.

Simon Glazier:

And probably the other significant economy we haven't talked about is India. And I'm interested to talk about global consumption and have we reached peak consumption and the impacts of that, but do we think India's rise has been hampered by the current crisis and what does the path look like for them post-COVID?

Paras Anand:

Well, it's interesting. I mean, obviously India has emerged from lockdown and has emerged from lockdown in ... partly in the context of trying to ... and looks like it has handled the pandemic in terms of the data that we have in terms of number of infection numbers, or mortalities surprisingly well, especially given that everything that we would have expected around the income inequality, population density, challenge of testing, all of those sorts of things. And I think it's a fair challenge where but people say, "Do we have the best sort of quality of data," but I think what was also becoming apparent was you're talking about an economy where the lockdown was having as much impact on individuals wellbeing and the overall society as was the pandemic itself and hence the decisions to kind of emerge from lockdown.

Paras Anand:

So we're really excited about the medium long-term growth prospects for India as an economy from a number of perspectives. I think the first is that India is quite unique in the context of Asia, maybe not unique ... maybe unique because of its size, but also unique in the sense that it has on the one hand quite a well established traditional part of the economy, traditional banking sector, traditional retailing, et cetera, and then a very rapidly emerging, an interesting sort of economic ... sort of like a digital economy as well. And so one of the things that's very fascinating about India is that you've had a huge amount of investment in digital infrastructure, but the level of the investment in physical infrastructure is the thing that's lacking.

Paras Anand:

So we see one of the routes to productivity growth, corporate earnings growth, et cetera, is going to be around making sure that we have that kind of investment in physical infrastructure, but the level of innovation that we're seeing in India from whether it's the Fintech space or even kind of well-established digital businesses I think is kind of very exciting and again potentially could play a big role in accelerating the transformation of India. Even as we also ... maybe the last point I'll make on India, Simon, is that we're very used to seeing India as a more expensive market in the context of Asia. So, there's been a higher degree of belief that Indian businesses are all sort of well-managed, good corporate governance, good level of profitability, people trust ... the valuations have always been quite steep.

Paras Anand:

And I think what's been interesting about looking at the performance of the markets during this particular period, I think because of the short-term concerns around the pandemic as you say, we're starting to see quite a lot of value emerge in the Indian market. So yeah, that would be ... I mean, I think all that being said we're still ... we still are ... it is also the economy where we are just that little bit more sensitive to risks around how the second wave, but just in terms of thinking about longer term valuation of the market and certainly some of the sectors within the market, we see them as being very attractive at the moment.

Simon Glazier:

And probably just moving on and taking a higher view, I'd love to get your views on ... We think about end of globalisation, regionalization, interest rates, inflation, what does that mean to asset class correlations and then asset allocations over the next kind of medium to longer term?

Paras Anand:

Yeah. So look, it's a really good question, Simon. I think that as challenging as it might sound, I think that expecting some of the historic relationships between different asset classes to hold in the future, I think is a bigger risk, and we've seen ... and this is actually something that we have seen during this period of market volatility. We saw much, much higher correlation between performance kind of bond markets and equity markets than we might've been historically seen. And so I think that maybe some of those, again, rules of thumb about asset class correlations, I think need to be looked at with a forward-looking view, not a backward-looking view. So again, I would encourage investors not to kind of rely so much on the past being a guide to the future.

Paras Anand:

What can be really helpful in this context, again, I think as I've said on my previous slide is valuation, so looking within bond markets, within equity markets, within different asset classes, within different themes, as to where you genuinely are thinking that you're getting paid to take the risk. So if what you feel like you're ... because, and I think this is so important because there's so many assets have performed over the last 10 years really driven by what you could typically call secondary reinforcement.

Paras Anand:

So it's ... as long as there's some kind of a marginal buyer that's willing to pay a higher price, I think that I'm kind of interested in owning that security. And so I do think that really trying to take a step back and reconcile the valuation of the asset versus the market price, recognise that whatever we think about the shape of ... we're very, for example, again I don't want to turn this into a kind of a stylistic conversation, but we're very comfortable with the idea now talking about a value trap, right?

Paras Anand:

Because we've seen an enormous number of value traps over the last 10 years and sort of value has become almost ... or cheap has become another word for failing, right. But we should remember there are also growth traps out there. There are also securities for who an extremely positive state of the future is already baked into the asset price today, or this idea that there will always be a marginal buyer. And I think that ... and therefore, I think it comes back to a theme which we haven't talked about explicitly, but I think is really important for investors to consider, which is on the whole area of active management, because I think you're going to be in an environment where the benefits of omission, so the benefits of what you don't know are going to be as meaningful as the benefits of what you earn.

Simon Glazier:

And again, just conscious of time, but we might finish with one last question, which is probably asked time and time again, but is it different this time?

Paras Anand:

So, I think it is. And look, Simon, the truth is that all market cycles generally have quite a big degree of difference from one to the other. And I think that investors always need to think about which elements of their toolkit, which things could be valuable to them in this cycle coming.

Paras Anand:

And sometimes one of the things that can help in that very broad statement is maybe some of the things that were less helpful to them in the last cycle. Right. So, when you were in the mid to late 90s, that was another period where trying to be too draconian on valuation was in some ways a false friend. At that point, valuation was a poor predictor of future returns.

Paras Anand:

Very, very important as we went into the industrial production upturn in the early 2000s. But even then I think that there were certain sectors, maybe as a result of deregulation like utilities. Which were again, the tools of the past became a poor way to navigate that environment.

Paras Anand:

So I think it's always useful for investors to try to think about... Sorry, last point I'll make on this, but I do think it's really important is that the key thing for investors to remember is that the market is a pari-mutual system. Right.

Paras Anand:

So if the offer is shortening in one part of the market, then lengthening in another part of the market. So almost by definition, the sources of future returns are very likely to be different than the sources of past returns.

Paras Anand:

And that's where I think that kind of mental flexibility, I think and flexibility of approach and maybe having, especially with an environment of such low predictability, trying to take some kind of longer term positioning feels like a wise thing to do at this point.

Simon Glazier:

Thank you, Paras. And again, we're just coming on to an hour, one o'clock Aussie time. So thanks for joining us today, Paras, really insightful. Great conversation. Thank you for everyone that joined us and great questions coming through. Please join us again. But with that, it's bye for now.