Post-pandemic Australia - are we there yet?   

Simon Glazier:

Good afternoon, everybody. Apologies for that delay. We were just having some technical difficulties trying to kick-start today. But good afternoon, everybody. Welcome. Thank you so much for joining us. My name is Simon Glazier and I'll be hosting the discussion today. Before we get started, as per usual, just some housekeeping for those who haven't joined us before. We're planning on going for about 40-45 minutes today. If you have a question, please submit your question via the Zoom Portal. If you've 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. Otherwise, we should have some time at the end of the session to cover off if you've got any left over. And again, reminder that CPD points will be available post today's session, as long as you stay with us throughout.

Simon Glazier:

Today we have Paul Taylor, portfolio manager of the Fidelity Australian Equities Fund. He's probably not a stranger to many and hopefully not a stranger to you on this call today. Previously, Paul has spoken about the second derivative, the different phases of progressing through the crisis, leadership, i.e., the companies that will lead us out, and a number of key other observations. If you didn't get a chance to join us in those previous sessions, they are available on our website, so please check them out. And today we'll continue that discussion along with any portfolio implications as we go.

Simon Glazier:

So, where are we now? And as we attempt to come out the other side of lockdowns and hopefully avoid a second wave, our market hitting 6,000 yesterday, markets in the US on a tear also, there does seem to be a pretty significant mismatch between markets and underlying economies. And with that, Paul, welcome, and thanks for joining us today. We might start there, but a bit of a broad question to kick us off is how have we gotten to this point and what do you make of this mismatch?

Paul Taylor:

Yeah. Thanks, Simon, and good afternoon, everyone. Hope everyone is going well. Yeah, we do, we find ourselves in an interesting spot and maybe just to give a bit of a recap of what's happened so far. So obviously, right at the start, if we go back to the start of the year as sort of COVID-19 has struck us, we really didn't know a lot about what the implications were. I guess we've learnt a lot over the last several months and we're obviously in a much better spot today than we were previously.

Paul Taylor:

I think, as we've talked about in previous webinars and series, as we gain more and more information there's a general rules of thumb in these crisis situation, and as you touched on there, the key one, really, is the changes in the second derivative. Now, that's the sort of best market rule of thumb when you don't have a lot of information. Like I said, we've been gaining a lot more information, gaining a lot more knowledge as we've moved forward about the disease, about the treatment, about the best way to handle it.

Paul Taylor:

And it was quite amazing, really. It was almost exactly to the day of the second derivative change, markets started to turn up. And just once again to recap, the second derivative is the rate of change, so it's sort of acceleration or deceleration. And so, it was the rate of change of new cases. So when we saw that, we were still seeing new cases but the number of new cases started to decelerate, which is the critical factor. That was right at the end of March and start of April, we started to see that. Markets turned at that point. I think why that is a bit of a sort of rule of thumb is that the second derivative is often seen as the maximum point of destruction and pain. That was, once again, is we look back to that period, it was very much the case. So, it's a lot of uncertainty. We're very unsure where we're going. Governments are taking the most aggressive action at that point, so we're seeing, actually, things close down and quite aggressive action from government.

Paul Taylor:

So it was really, same in the situation that the change in the second derivative perfectly coincided with, really, the maximum pain that society was getting dealt. So since then, I guess especially in Australia but most places in the world, although there has been quite different experiences right around the world, we've gone through that relatively intact. The measures that governments have put in place have had significant impacts on economies, on markets and on people's lives. I think broad based it has probably saved a lot of lives, which is obviously, I think, great for society at large.

Paul Taylor:

But the way governments viewed this whole process, which I think is the right way to go, was, well, you have this sort of... And this is the other thing we talked about as well, this sort of thing should be viewed as a one-off type event. It is a one times price earnings event, not a 15. It shouldn't be capitalised into economies, into markets. It is a one-off event. But it's a deep hole. And governments viewed it as a deep ravine, a deep hole and a lot of the terminology was, "Well, we need to build a bridge over that ravine," or the other one that was used was, "Hibernation." So, "Businesses need to go into hibernation, so when we come out the other side, we're in a good spot to restart the economy."

Paul Taylor:

So we've been in hibernation, we've built that bridge through a whole range of different things, through JobKeeper, through a lot of support that governments have given to businesses, to individuals, whether it's ceasing repaying debt or debt moratorium, whether it's ceasing paying rent, et cetera. So, there's been a lot of those sort of hibernation strategies. We're now coming into the next phase. So, to me, I would sort of look at that as maybe phase one or, I don't know how you want to describe it, hibernation or bridge building. We're now in phase two, which is really a restart of the economy. That restart of the economy now is several different factors which is maybe a pulling back on some of the government, well, helicopter money, government intervention. It's sort of restarting. It's also opening. It's pulling back on the restrictions, so opening up a lot of businesses so that people can get back to semi-normal, although not completely normal. And a lot of social distancing restrictions are going to be put in place for a while anyway, for the foreseeable future.

Paul Taylor:

So, I think we've got successfully through stage one. I think the markets have reacted as they always have based on that second derivative and have started to now view this event as a one-off event. There's still obviously a lot of uncertainty in that as we try to restart the economy now. I think we're in a good spot and I think governments have done a great job and institutions have done a great job in placing us well-positioned for that sort of recovery. But we're now entering, really, phase two and that is a restart. That is a restart of the economy. It's probably going to get categorised as a restart, but it's also going to get categorised as where we'll really see how habits have changed, how the economies have changed. We're all working from home, well, not everybody, but a lot of people are working from home. Will that move into the new world? What will be kept? What habits will be kept as we move into phase two and start to come out of COVID-19?

Simon Glazier:

So, we might just explore that a little bit more. I mean, we're already starting to get some questions come through, which is good. But we mention this potential coming out of it and into the new normal. What would be our version of the new normal? We talk about leadership previously, what types of industries or sectors are really going to stand up in this version of the new normal?

Paul Taylor:

Look, there's several. Actually, before I get into that, Simon, it's probably well worthwhile talking about this sort of disconnect in the market as well. So, we've gone through phase one and the most common question I'm getting or a general sense that the market's moved well ahead of where the real economy is. And it's an interesting point. I guess it definitely feels that way and I think that probably, a big part of it really is that markets look 12 months ahead. They don't look at today, they look 12 months ahead. And I think normally at sort of turning points, you do always get this disconnect at turning points.

Paul Taylor:

So the real economy, we're sort of going through the bottoming phase, although a lot of different things can happen. But as we come out, the market's already on the other side. So if we think of this as a U-shaped curve, we're still in that bottoming phase but the market's looking one year ahead, so it's on the other side. So the market's actually looking at June 2021, saying, "Well, actually, by that point we'll be starting to get back to normal." And when you look at the markets, so previously the Australian market, the ASX 200 was about 7,000 pre-COVID-19. It went significantly down below 5,000. We're now back to around about 6,000. So it's sort of saying, "Well, we're on our way back." We're not probably back to normal, what was pre-COVID-19, but we're on our way back to that period.

Paul Taylor:

But I think the critical point, and it often gets forgotten about as people try to compare, well, how the market looks, how the real world looks and feels now compared to how the market looks and feels. But I think you need to really consider the market is not about today. The market is about 12 months time. We're already looking. So, if we do, in the middle of 2021, get back to a normalised, well, semi-normalised world as what was happening pre-COVID-19, I mean, that means it should already be up and up through 7,000. Then, at that point, it's then looking at, well, what's going to happen in mid-2022? So even when we're in mid '21, the market's then looking at mid '22.

Paul Taylor:

Now, normally when you're heading in a bit of a linear movement, it doesn't feel as funny or as unusual, because it's just a little bit ahead of where you are. But actually, at turning points it is very much a significantly different feeling because on one side, the real world is maybe still heading down but the market's heading up. But that disconnect always happens at turning points. I think that's obviously where we are now. The market's saying, "Well, in 12 months time we're going to be moving up." So, while it feels very unusual that the market seems to be saying very different things to what we're all experiencing in the real world, I think this actually is what normally happens in some sort of turning point when the real world is still on the downside but the market is thinking 12 months ahead and is heading into the upside.

Simon Glazier:

Yeah. You're right, it does feel, as I said, pretty significant, that mismatch, and we've still got a few risk events that we know are coming like the end of JobKeeper, loan deferment ending, et cetera, et cetera. Do you think the market's looking through that or are we yet to sort of price that in, in that forward looking capacity?

Paul Taylor:

The market's definitely looking through it, I think. It's like I said, markets are normally sort of 12 months ahead of where we are. So, the market today is factoring in what it thinks mid-2021 looks like, and that's what gets in today. Anthony Bolton, who's one of the senior portfolio managers in our London office would always say, which I think is spot on, he would say, "Look, the markets don't follow the economy." So if you think it's going to be a tough economy for the next 12 months, that's almost irrelevant. The market's not going to follow that poor economy. What's important is what economic outlook is getting factored into the markets, but like I said, in 12 months time.

Paul Taylor:

So, I think the market is now sitting here looking at mid-2021 saying, "What's Australia going to look like? What's the world going to look like at that point?" And clearly, by being at 6,000, it's saying, "We're well on our way to getting back to normalcy." But actually, even then it still says mid '21 is not back to where we were in January 2020, because we're still 6,000 versus 7,000 what we were. So even then it's saying, "Well, we're on our way back to recovery but we're not there yet." So, I would imagine if actually it does head back to some sort of semi-normalcy by mid next year, we'll see the market retest 7,000 pretty quickly.

Simon Glazier:

What it would take to maybe adjust that view and think of the market's overbought or we've gone too far? How far have we gone or are we about right at the moment?

Paul Taylor:

So obviously, in these sort of situations, there can be a lot of different avenues we can go down, right? So, like I said, what's getting factored in at the moment is a sort of return to normalcy. Like I said, we're at 6,000 versus 7,000, so what that's telling me is that it's factoring in, in 12 months time we're not going to be back to where we are in January, but we're going to be a reasonable way back. There'll still be a lot of restrictions mid-2021, but we'll be 90% back. So, I think that's it. But clearly, a lot of different things can happen and you've got to be prepared for that.

Paul Taylor:

I've also always talked about you want to get ahead of the market, but you don't want to get too far ahead of the market because there are a lot of different scenarios that can happen in that sort of environment. So, you want to get ahead but not too far ahead. There's obviously a lot of things that can go wrong and a lot of setbacks that can change that. But to me, what is now getting factored into the market is probably about a 90% return to where we were at the end of '19, start of '20. So, if you think it's going to be much worse than 90% of where we were in end of '19, '20, you probably don't want to be buying it. But if you think, actually, we could well be all the way back very close to normalcy by mid next year, that's probably a good buying opportunity still.

Simon Glazier:

Yeah, fair enough. So, there is obviously a lot of variables and probably an observation that we'll talk to next is that the companies that sort of led the market in the previous five years plus are not necessarily the companies that are going to lead the market. And we can talk probably in more detail. Tech stocks in the US, they've really been the sole driver of the market over there. But the leaders in the Australian market, I mean, how are you seeing those and that dynamic changing? The differences between the winners and the losers are probably going to be greater. We're seeing greater dispersion now. Is that going to continue?

Paul Taylor:

Yeah. Look, I think that's the critical question, I think, as we go forward. And to be perfectly honest, that's where I'm spending my time and I think as a team that's where we're spending our time now. So, we're probably less worried about sort of markets. I think we seem to be on a good road to recovery. Like I said, maybe we're not going to be all the way back but we're on a good road to recovery. Our institutions and markets have performed well in this sort of period and shown the resilience in Australia. So, I think we're well on the way to recovery.

Paul Taylor:

But having said that, as you rightly point out, things can change and our habits. I think last time I did this webinar I talked about this, what we've been in is some giant social experiment, right? Now, the interesting thing with a giant social experiment is how things are going to change once we come out of it. And as you rightly say, some industries are going to be huge winners, some industries are going to be losers from that social experiment. Now, I mean, it looks like certain things are happening, but once again, you're not really going to know until you come out of it. And actually, when you look at the trends, a lot of them are sort of accelerations, I think, of trends that were already there, which probably tells you that there's strength in that. So if the trend was already there, it tells you there's some sort of structural movement and then the fact that COVID-19 has just accelerated that trend probably means it's likely to continue when we come on the other side of it.

Paul Taylor:

Now, once again, in previous webinars I talked about we see these sort of changes all the time. So after World War II, coming out of World War II, that was really the catalyst for female participation in the workforce because females had to do the jobs as men went off to war. When men came back, there was still this huge force that was ready to work. So, you get major structural shifts. So, a recovery in the economy post World War II, but a major sort of structural shift that has been a huge positive impact on the world economy.

Paul Taylor:

Now, you can sort of argue also those trends were happening anyway and it was just really, these sort of major disruptions are the catalysts to really kick-start something. And similarly to Y2K, what we saw was a lot of Indian IT firms really step up and provide the sort of requirements to solve the Y2K problems or the technology requirements. Now, when you look at that, that was already happening as well, it's just that the Y2K was really the catalyst for everybody to sit up and take notice and utilise some of those major Indian IT companies to help them get through Y2K. So in those instances, those sort of trends were already happening. You had a disruption, the disruption accelerated the trend and we haven't looked back on the other side of it. And actually, you could even argue that they have been positive developments for the world, so not just a change but actually a major positive change for the world economy.

Paul Taylor:

Now, when we look at a whole range of those ones that are happening right now. So we've obviously got people, people are working from home much more so. If people can work from home, they are working from home. I would say generally that's been seen as a major success. Now, post-COVID-19 you probably will get some resumption back in the office, but I think what the evidence seems to highlight is that at least it maybe agrees with some people more than other people, but as long as you've got the flexibility, people will make their choice. But maybe post-COVID-19, maybe the average person was working one day from home every month or something. Now it's probably going to be two days every week, so it's significantly stepped it up. Now, that was already a trend pre-COVID-19 and that's probably going to accelerate that trend. And there's a range of issues for the technology, for offices, for home supplies. There's a whole range of different issues around that.

Paul Taylor:

The other one that's accelerated is obviously e-commerce as well. So people, because they couldn't go to the shops, they've been out ordering online. And once again, I think that's generally seen as a huge success. There's been a few bottle necks and every time I talk to my local postie he tells me that the package delivery's up about four times, so he said they're struggling to meet it. But while they're struggling to meet it, I think they're getting there. And it's been seen that the system, while there were definitely strains and aches and pains, it is meeting the extra demand, which I think is a phenomenal achievement, really. When you think of the extra demand that just got put onto that system in a very short space of time, it's quite a phenomenal achievement. So, people will go back to the shops once they open, but I think the broad based trend is there to stay and has just significantly widened that gap. And once again, we won't go backwards from e-commerce.

Paul Taylor:

Some of the other trends are digital delivery of food and beverage, same sort of thing. So because the restaurants were closed, people were either getting takeaway or getting home delivery. I think those companies, whether that's a Domino's Pizza or a Uber Eats, they have really stepped up in this process as well. I think, once again, generally that's been perceived as very positive. People have changed their habits. Obviously, people will return to restaurants in some form, but I think there's a huge success to that home delivery. Once again, that was already a big trend pre-COVID-19. That has accelerated through this process and we'll see that really move on in leaps and bounds, I think, even post-COVID-19.

Paul Taylor:

Another one was just a cashless society, so how are we going to be using cash? So, there was an interesting presentation from the Reserve Bank of Australia that looked at ATM withdrawals. Now, ATM usage or withdrawals has been on a structural decline for a long period of time. But just through COVID-19, the ATM withdrawals absolutely collapsed. And obviously, shops and takeaways that have remained open, there's been a very strong preference to make it electronic, or credit card, or tap and go, et cetera, and not to have cash. It seems that mostly people have stepped up to that, not 100%, but mostly people have stepped up to that.

Paul Taylor:

So, I think the move towards a cashless society in Australia was already significantly down that path. Once again, that was a trend that was happening pre-COVID-19, has been accelerated because of COVID-19. And so, coming out of the other side, I think we'll definitely be heading to a cashless society. The RBA rightly talks about, "Well, we've got to make sure we're, if we move to a cashless society, not disadvantaging certain people." And because obviously now with the lower usage there'll be a trend towards probably closing a lot of ATMs or reducing the number of ATMs, I think especially in some more remote communities or regional communities, you've got to make sure there's at least some opportunity to get money out. But that trend will continue and there's definitely technology winners and losers from all of those trends as well. My view is that all of those trends are here to stay and there'll be significant winners from that change.

Simon Glazier:

There's obviously risks to the commercial office property space, but I'm interested if we can dive in a little bit more in terms of these views and some of the sectoral leaderships or leadership positions. I mean, how have these materialised throughout the portfolio? What are some of your most recent sort of additions or examples you'd like to talk about?

Paul Taylor:

Yeah. So, I think it's a range of different ones. So as you rightly point out, within the property sector that broader trend is probably negative for office and negative for retail, for shopping centres, but positive for industrial. Now, like I said, as we go back you'll get some resumption, obviously, back to those. I certainly don't think it's the death of office or anything like that. But I just increasingly think companies will have a smaller footprint and will have less people coming in. So once again, it just accelerated the trend that was already there. So that, once again, structurally long-term is going to be a lot more difficult.

Paul Taylor:

Same for retail. So people will go back to the retail stores and go back to shopping centres. They are a bit of a hub, a bit of a sort of social gathering place for communities. But once again, it's just a bit tougher and I think people are now in love with e-commerce, with online shopping and will continue to do it. And it's proved itself up. Now, the big beneficiary from that is our industrial property. So within the portfolio, our big property position is Goodman Group, which is obviously in industrial property. But more than that, I think it's not just picking industrial property, it's actually picking what we think is... Goodman Group is the global leader in industrial property, so we think they're very well-positioned for that global trend.

Paul Taylor:

One of the ones I've talked about within sort of technology as well is a company called Tyro. And Tryo are the leading sort of EFTPOS provider in Australia behind the big banks. Now, they continue to gain share on the big banks. They're very well-positioned. Their idea is really to provide the EFTPOS to businesses throughout Australia, but also to provide the software for e-commerce. Then on top of that, as they can see the entire cashflow of a business from the EFTPOS system as well as the e-commerce, and they have a full banking licence, so they can then obviously lend to that organisation and obviously understanding their cashflow situation but also provide them liquidity or cashflow through tougher cashflow times. So, I think Tyro is a big beneficiary of a cashless society and is also a big beneficiary of continuing to gain share from some of the big banks, but also being able to utilise their banking licence to lend to SMEs, having the full sort of knowledge of cashflow of those businesses.

Paul Taylor:

So, I mean, in terms of some of those, that's e-commerce, working from home, cashless society. In terms of the digital delivery of food and beverage, we think Domino's is incredibly well-positioned. So, that doesn't mean that the Uber Eats of the world won't succeed. So that's the aggregator model, the Uber Eats. Domino's is the vertically integrated model, which we actually think is superior because from when you order online, you get your pizza or whatever you order through them delivered in 15 minutes, piping hot, fresh. So it's a very strong consumer proposition and that's not just delivered to your home but it could be to the office, or it could be to somewhere else where you work, or it could be to the park or the beach, or wherever you are.

Paul Taylor:

So, we think that's a very strong proposition and that's actually a big trend that's playing out not just in Australia but right around the world. So, that sort of digital delivery of food and beverage, in the US, that's expected to grow 10 times, sorry, seven times in the next 10 years. And even in Australia, it's meant to double in the next three to four years. So, very strong trend and we think the vertically integrated are much better positioned in that sort of environment.

Simon Glazier:

Yeah, yeah. And I suppose one thing, just thinking about the market probably a little bit more, one of the benefits of the Aussie market is the ability for corporates to recap, raise money, et cetera, and there's been a lot, right? I'm keen to get your take on some of the cap raising. Is there any, if we've participated in any, or any that you can talk to, I suppose, in a little bit more detail?

Paul Taylor:

Yeah, that's a good question and actually an important one because I think that Australia has done fantastically well through this process. So, Australia would be the global leader in its ability to recap very quickly. Similarly, we did very well through the GFC, but now have done well through this COVID-19 period where companies, our market structure, the regulations around it, have been really, I think, done very well to be able to raise capital very quickly and make sure businesses are in good shape for the future. I think that's been a real positive specifically for the Australian market, actually, and I think we have been a global leader in that.

Paul Taylor:

As you would expect, we have participated in multiple of those recaps and pretty much all of them have been fantastic opportunities for us because they put the company, and especially, it's even more relevant, I think, in COVID-19, because as we talked about, it's really a deep ravine and it's about getting the company from one side of that ravine to the other side. And that is all about balance sheets. So, a lot of these balance sheet repairs have just made sure. And really, in that environment we wanted to back great companies that had good structural long-term opportunities and make sure that recap was putting them in a good position post-COVID-19.

Paul Taylor:

So the ones that we participated in and actually in a significant way, not just a small way, we were involved with the Ramsay Healthcare recapitalization, which we thought was actually, that was a fantastic one because we love, well, several different things. So Ramsay, obviously, private hospitals have been negatively impacted by COVID-19 as the government effectively stopped all non-elective surgeries. And the private hospitals, that's the sort of big part of their everyday business. So, that really stopped. The private hospitals also went into negotiation with the state governments to provide the facilities and resources, if required under the sort of COVID-19 crisis, which I thought was a very strong position. We also thought that the resumption of that business will be pretty quick. So, the government obviously previously announced the resumption of elective surgery. Ramsay is not just a big private hospital operator but probably the quality operator that's gaining share in these sort of markets as well. So, we thought that we a perfect recap and that recapitalization and all that has gone very well.

Paul Taylor:

Oil Search was another one. So, oil has been very significantly negatively impacted through this crisis, although now we're starting to see, obviously as everything starts to reopen, that's a big demand driver. So through COVID-19 nobody was flying, well, hardly anyone was flying and hardly anyone was driving, and the demand for oil was very, very low. So, the oil price took a big plunge. On top of that, which I talked about last time, you saw the supply change significantly for oil or sort of a supply disagreement. So you had higher supply than required, lower demand, which really tanked the oil price. That has been sort of recovering for that period. So once again, that was a very significant investment in Oil Search during the recap and that's been a great investment as well, so that's worked really well for us.

Paul Taylor:

Other ones have been, and I won't maybe go into as much detail, Lendlease was another sort of significant recapitalization that we invested in. Once again, very good, as was Vista. Vista is a small position in the portfolio but we actually took a significant stake in the recapitalization. Vista is really a technology company, but they are the customer relationship management system for movie theatres. So basically, when you go to the movie theatre, your point of sale, what sort of food and what sort of movies you watch, that's all captured under whether it's loyalty programmes or some sort of CRM with those systems. Vista is actually the global leader in those CRM systems, so fantastically well-positioned. But obviously, through COVID-19, nobody was going to the theatre. So, they raised the capital to make sure their balance sheet was in a really strong position regardless of how long COVID-19 went on for. Once again, it has been a very good investment for us and one where we think Vista will be very well-positioned long-term and that actually, in this environment, there'll be very strong demand for the CRM system.

Simon Glazier:

Yeah.

Paul Taylor:

And maybe the last one, Blackmores we invested in as well. So, Blackmores have been a little bit up and down. They've got strong growth into China. But it's obviously a product, I think, that is in demand during these sort of periods and I think will continue to be in demand, that vitamins will continue to be in demand. Sales into China, they got negatively impacted initially, so we took the opportunity to buy into that stock and then took a very big position for the recap as well. That's one where we see strong structural growth into the future.

Simon Glazier:

Yeah, that's really great, Paul. I suppose I might just pause there. I know we started late, but we've hit the 45 minute mark. Look, we've got a lot of questions still to cover off, so we might, for those that can hang around and hang around for another 15 minutes, if that's all right with you, Paul, but just give the people, if they do have something else booked in, the opportunity to sort of leave us today. But if you do leave us today, thank you very much for joining us. We really appreciate your time and your support. 

Simon Glazier:

But Paul, we spoke there about the Chinese demand for Blackmores. We've read recently that there's a bit of China rhetoric around travelling to Australia to study, et cetera. Being our major trading partner historically, do you see that being in doubt going forward and if so, what are the implications then on, say, iron ore, other resources and other export commodities that we typically rely on China as a buyer?

Paul Taylor:

Yeah. No, excellent question and it is an important one as well because we are linked to China and we do have a strong trading relationship with China. And in fact, maybe to sort of link, so hopefully people saw Paras Anand's presentation last week. One of the trends he talked about, which I think is an important trend, is sort of what he called regionalization.

Paul Taylor:

Now, I actually think Australia is a key beneficiary from that regionalization. And that's not just China, but that's the whole of Asia. So at the moment, about 60% of trade in Asia comes from other Asian countries, so that regionalization is an important trend as well. And the beauty of Australia in Asia is that our economies seem to be incredibly complimentary. So Australia is very strong in primary industries, so iron ore and agriculture. And there's also really strong in tertiary industries, so services, education, et cetera, which you touched on.

Paul Taylor:

So, our number one export is iron ore. Our number two export is education. But China and Asia are very strong in the secondary industries and manufacturing, et cetera. So, there's really not a lot of competition going either way. So, like I said, it's almost like a puzzle piece that fits together. So, Australia is incredibly well-positioned for regionalization but also complimentary to not just China but all the Asian economies. So I think, and once again Paras touched on this last week, obviously Asia is likely to be a growth engine within the world. Can you guys see me okay?

Simon Glazier:

Yep.

Paul Taylor:

Yep, good. Asia's likely to be a growth engine within the world as well. So, I just think Australia is very well-positioned. Now, having said all that, as you rightly point out, it does also sort of make us vulnerable to, I guess, trade disputes or geopolitical risk. So the sort of US, China trade tension and Australia being the deputy sheriff in the region, et cetera, can put strain on some of those trade relationships as well.

Paul Taylor:

Now, I think while they will be short-term issues and you will see, from time to time, as you did with barley or beef, et cetera, you will see from time to time issues flare. But I genuinely believe that's likely to be short-term issues, not long-term issues. So, I always think in these situations, logic should always out. It doesn't always out in the short-term, but it should always out in the long-term. And like I said, with regionalization, with the fact that we've got very complimentary economies, the whole trade should be a win-win for China and Asia, it should be a win for Australia. So when you're in that sort of environment, in the long-term that should be a really positive place to be. And I think that's the dominant feature within Asia. So while you will get short-term concerns and issues and geopolitical risk, I think in the long-term there's such strength in the complementarity of the economies that that will be the overriding feature.

Paul Taylor:

Now, the other thing that's also important to note, I think there's a lot of interest. So, in Australia we have a very large Chinese community. So, we've already got very strong links to China just through Australians that were of Chinese heritage. Once again, when we do surveys in China or when other people do surveys in China, when they talk about places, when the question is asked, "Where would you like to visit?" Australia ranks very highly with the Chinese. I know there's been some comments from the Chinese government about, I guess, warning tourists of some risks associated with travelling to Australia. But overwhelmingly, the Chinese people want to come to Australia, whether that's to live, to work, to visit as a tourist, or to come to study, there's a very strong demand. Australia ranks typically one, two or three in pretty much every study.

Paul Taylor:

The other places, Hong Kong was normally number one, although that's obviously less so now. Japan is always high on the agenda and then it's Australia. So in the last one I saw, Japan was one, Australia was two. I think that's going to continue for a whole range of reasons. I think Australia is people love the wide open spaces, our outdoors. We're very different from a lot of the rest of the world. It's obviously seen as a very safe destination and, actually, some of these points, I think, will actually accelerate. I mean, I'm quite positive about long-term prospects for Australia because going through COVID-19 I think it's shown the strength of Australia, that it is a very safe place, that we've got strong institutions, that our markets work very well and it continues to be a very attractive destination for people who want to come and live here, people who want to come and work here, people who want to come and study here, people who want to just travel here as a holiday destination. So, yes, short-term issues but long-term I think there's too much in its favour for things to go astray.

Simon Glazier:

Yeah, that's great. And again, just mindful of time. So we might do a few quickfire questions, if that's all right, to round us out for the last few minutes. But you have been very positive on market, forward-looking, looking through any potential volatility in the underlying economy, obviously our partners, our trading partners. On the flip side of things, is there anything making you nervous or slightly concerned to the downside at the moment?

Paul Taylor:

Oh look, I think, like I said, all of those. All of the above, I guess is the answer. So, in the short-term the US, China trade relations is an issue and how China can react. I think that you've got to stay on top of it. But like I said, I think it's short-term rather than a long-term issue.

Simon Glazier:

Yeah.

Paul Taylor:

We are now in the process of reopening the economy. Now, it looks like everything's well in place to do that, but that's still a major thing. We're just about to restart an entire economy or a large part of the economy. Things can go wrong that you're not thinking of. So I just think anything that's a significant change, I think there's always a risk there because sometimes there's unintended consequences of different things. Turning off the JobKeeper Allowance. I think we've been in a good position to have that sort of money coming into the economy. I think people have been saving their money as well. So, what happens as we come out? Will people be more cautious on how they spend? Will we actually see the savings rate continue to increase through that period?

Paul Taylor:

So I think there's just risk around change, I think probably at the moment. And we're also pretty much at zero interest rate. So, my general view is that we're going to probably stay, it's going to be lower for longer, that's been my base case for a long time. But once again, you do want to try and normalise these things through time. And look, the ability to normalise that will be interesting. I think we will be in a continued environment of significant monetary stimulus as well as fiscal stimulus. Now, on the fiscal side I think the helicopter money will stop, so the money that's just handed out to people. The helicopter money will stop. But I think governments will stay focused on continuing to invest in infrastructure. I think that would be their preferred positioning going forward. So, I think we will see monetary stimulus through a low interest rate, but we'll see fiscal stimulus, but rather than helicopter money, we'll see it coming through in major infrastructure investment. And obviously, we try to position for that within the portfolio as well.

Simon Glazier:

And just a really quick one on banks. What of banks, how are they looking?

Paul Taylor:

What are they? What do they do?

Simon Glazier:

Well, yeah. Yeah, 101. What of banks, what do we think of banks at the moment?

Paul Taylor:

Well, and this'll answer for a whole lot of the market, I guess to me, when you go through this sort of crisis, what you really want to do, I think, is I'm continually looking for opportunities to upgrade my portfolio, right? So, what you got through COVID-19 was you got opportunities to buy high quality companies at good prices that look great over a five year period. Now, the banks, I mean, I've got a significant position in... So, I'm overweight Commonwealth Bank, I'm underweight ANZ and Westpac and I've got zero exposure to NAB. So, net-net, I'm underweight the big banks. And I'm very happy with that because I think the banks will recover because they've been hard hit into COVID-19.

Paul Taylor:

But fundamentally, I don't think you'll see a lot of new money go there because structurally there's still a lot of head winds for the banks. So what you really wanted to look for during this crisis was a company that was knocked down that you thought was a high quality management team, high quality company, good industry structure that had good long-term fundamental prospects, so that you could get a great company at a really good price. That's what you wanted. Now, like I said, the banks will recover but just, there's so many structural head wins for the banks. I think it'll be difficult for them. So the banks, they've been on a structural decline, we've just had a big blip, they'll bounce back up, but I think you'll continue to see broadly the structural decline happening in the sector. So, I think they'll be a funding source. Through this sort of rally, I think you'll see them as a bit of a funding source for other better ideas in the market.

Simon Glazier:

Yeah, yeah. And again, just conscious of time. We might wrap it up, Paul. But one opportunity for some final comments and then we'll wrap it up there, if that's all right?

Paul Taylor:

Yeah, definitely. I mean, like I said, I think we've been through stage one. We survived stage one and more than that, I think we did well through stage one.

Simon Glazier:

Yeah.

Paul Taylor:

We're now in stage two and I guess where I'm spending my team, where the team's spending their time is really looking at how the world might change. What trends are going to be there for a prolonged period? Where are the structural growth opportunities? And we talked a little bit about that. I think, well I know that's where I'm spending most of my time at the moment. I think that's where the opportunity is going to be.

Paul Taylor:

I guess I would also just leave on a note that, the market has obviously moved a long way, but I continue to be relatively positive on markets and particularly the Australian market. I think, as people would have seen from my presentations over many years, Australia's been the best performing market in the world over the long-term. I think we remain very well-positioned. I think if anything, the COVID-19 crisis has elevated Australia's reputation globally. It has shown the strength of our institutions. It's shown the strength and functioning of our markets and I just thought put us in a really good light globally.

Paul Taylor:

We have been, as you mentioned, in the US it's been a funny sort of market because it's all been about those six super stocks. Whereas, in Australia, it has been much more broad based, which I think, once again, puts us in a very good position. And I think what has driven Australia in the long-term, post-COVID-19 more people are going to want to live in Australia, more people are going to want to work in Australia, more people are going to want to visit Australia, more people are going to want to study here. So, I think a lot of those key trends favour our economy, favour our companies and really a very positive long-term outlook, which is what I focus on.

Simon Glazier:

Yeah, yeah, agree. And I think, yeah, it would be good to see us embark on this re-emergence out of lockdown and really see our economy start to build and grown and strengthen in the areas that we need to and to see our employment get back to the levels that we're used to, I think is a great outcome. It probably won't happen straight away, but hopefully that's something we can build on as we go.

Simon Glazier:

So, thank you. Thanks again for your time, Paul. Thank you, everyone that's joined us today. If we've missed anything today, please reach out to one of the team from Fidelity. We're here, we'd love to talk to you, we'd love to speak with you. But thank you very much and bye for now.