Getting back to business

After two years of disruption, will 2022 be the year that things finally get back on track? Speedy vaccine rollouts and restored business confidence point to yes. But will conflict in Ukraine and rising interest rates undo the optimism?

Watch as our Director, Equities, Viral Patel and Australian analysts, Maroun Younes, Monique Rooney and Justin Teo unpick the insights from Fidelity’s annual Analyst Survey which condenses the results of our 20,000 meetings from 156 analysts, while providing their own unique views on their respective sectors of Australian property, energy and internet technology.

Simon Glazier:

Well, we've just gone 12 o'clock everybody. So welcome to today's webinar. My name is Simon Glazier and it's my pleasure to host and introduce today's participants. We're planning on going for about 40, 45 minutes today, and there will be CPD points available in around 10 business days time after today's session.

Simon Glazier:

Now, originally we were going to talk today about the analyst survey that was released towards the end of February just gone, but with so much happening, I think the conversation will go a lot wider and a lot deeper than what we first planned. No doubt we will cover sectors, regions, themes like ESG, and obviously inflation and the like, but please, you can submit questions through the portal. If you're on your phone today, unfortunately you won't be able to submit a question, but we've received plenty to kick us off today, which has allowed us to shape the conversation in ways in which you think it'll be of most benefit. But to lead our conversation today, it's my pleasure to introduce Viral Patel, our Director of Research here in Australia, who will introduce the rest of the team and some of the key members of our research team, not only here but around the globe. So with that, I'll hand over to you Viral.

Viral Patel:

Great. Thank you, Simon. Yes. Welcome everybody and thank you for joining in. Things are changing day-to-day, minute-to-minute now. So this conversation will be as recent as we can make it. So I'm just going to start with a quick summary from the bottom up research that we do, which is the analyst platform. I manage India, Singapore and Australia team, so I get good insight across various different geographies. Then we'll jump straight into Q&As.

Viral Patel:

And so just to kick off, I'm going to do a quick summary of firstly, the analyst survey. So this is a very fast moving world and things are changing very quickly, but some of the key themes from the survey are still very much playing out. The main takeaway that the companies that have so far weathered pandemic disruption will face the year with improved balance sheets and they're still optimistic managers and management, according to the survey. Again, since the survey, there's a few different things that have happened, of course. But those companies will also be tested by more acute cost pressure than they've been used to driven by supply and labour shortages, and destabilising a mix of macro and geopolitical risks. If business as usual ever existed, we may have to wait a little bit longer before that readmits.

Viral Patel:

So the key themes on the survey, one inflation is back. Will it last? Yes, we feel that there's a number of structural factors in place where it is here to stay. Supply and labour shortages are a big driver of that. And the second is COVID stimulus and impacts of tightening. Again, inflation could lead to rate hikes. COVID related fiscal support may diminish, which could be a bit of a detractor to earnings growth going forward in some areas. And then China's dilemma, the slowing growth and balance sheet abilities to further stimulate meaningfully. The third main area with geopolitical issues, there's lots to talk about there. I'll come back to that in a second. And the fourth is reality bites on ESG.

Viral Patel:

ESG has become a big theme in the last couple of years. It's here to stay. The question will be whether governments will have to choose between the political costs of higher prices now against the consequences of acting too slow or too late. So we really need to get onto creating more sustainability. Just quickly focusing now on the current environment and some thoughts from me. Since the analyst survey, the inflation and rates started to play out very much, especially in the US, but of course, since then Russia invaded Ukraine. We'll talk about that too.

Viral Patel:

The Russia, Ukraine situation the views are that this could be a Cold War 2.0. It could continue for a while. It's not something that'll start to stop quickly. While the unified response from the west has been better than expected, unlikely to change any outcomes in the short term. We are hearing that we should be expecting a lot more humanitarian issues, cyber attacks, and other things that could be quite graphic that we could see as Russia further Ukraine. And also Ukraine is not necessarily the end of the game, from what we hear for Russia.

Viral Patel:

Oil prices, of course it's taken an impact. There's been a $30 plus shift from where oil prices were since the Ukraine attack has started. Last night, the US banned, UK bands again. Justin will talk about that in a few minutes. There could be delays in rate hikes, but again, you're adding risk premium and growth outlook could be impacted too. So geopolitical risks are high, but we also feel they're focused right now in that area, the world and the Asia-Pacific region is not seeing too much in geopolitical risk at this point.

Viral Patel:

So just moving on from that, I'm going to do a quick team intro, and then we jump into questions. So Maroun Younes, he's a very Senior Investor of ours in the Sydney team. He's been covering tech sector for a long while. He's also co-PM for Global Future Leaders, along with James Abela, which is a fantastic and growing product. Monique Rooney is another Senior Investor of ours. She's covering REITs mainly and some consumer discretionary. She's taken on as co-PM for Future Leaders fund, also with James on his Australian fund. And then there's Justin Teo. Justin's been at the company for a while. Also a very Senior Investor of ours. He's been covering energy utilities and infrastructure. Very volatile sector complex to navigate in the last two years where you started with the Saudi supply shops, pre-COVID to then COVID demand impacts, and now to the whole Russia, Ukraine situation. So a lot of information that he'll be able to share with us today.

Viral Patel:

So I'm going to just jump right into Q&A. And the first question I'm going to ask is to Maroun. And I'm going to start with as I mentioned, Russia, Ukraine could have changed the outlook for rate hikes coming up. So just, what's the outlook, Maroun for long dated growth stops given the recent volatility, Fed raising, Russia situation?

Maroun Younes:

Yeah. Yeah. So look, maybe before I get onto Russia, maybe just take a step back. If you look at the last five or six years, Viral, there's been two key drivers for the tech sector. One has been the fundamentals, and so either it's revenue or its earnings and the other has been really investor sentiment, increasingly positive. And that manifests itself in an expansion in principles. Now, with the changing outlook in terms of inflation, in terms of interest rate rises, QT, all the rest that we touched on earlier, I think going forward, one of those key legs, which is multiple expansion needs to be ruled out. It's quite hard to see how the tech sector will continue to enjoy a multiple rerating from here.

Maroun Younes:

Nevertheless, one of the other key planks, which is growing fundamentals will still be around. So I think going forward, I would say the gains going forward are going to be less than what they have been in the past. And I think you need to be very selective around the sorts of stocks that you pick within the tech sector. So I think the days of just going overweight with tech sector, pinning your ears back and just picking anything that you like is probably behind us. We need to now be a lot more selective, focus a bit more on quality, focus on the stocks that are going to continue to grow top line, continue to grow bottom line. I think the easy days of loss making hypergrowth names are probably going to be a lot more challenge going forward, just given the backdrop.

Maroun Younes:

Now, on Russia and Ukraine, before the invasion, I think the bond markets had priced in six or seven rate hikes. From the Fed now, they're pricing in more like four to five. And so that's going to continue to evolve going forward. I think the US will probably continue to raise rates, but Europe, and we can touch on this a little bit later, Europe is probably going to find itself a little bit more challenged in terms of being able to raise rates. So still constructive on tech. I still think tech with very selective exposures is warranted, but I'll leave it there.

Viral Patel:

Great. Thanks, Maroun. Just while I'm on you and while you've given a quick outlook, just any thoughts on countries and sectors from your GFL outlook?

Maroun Younes:

Yeah. Yeah. So I touched on that a bit earlier. So I think from the invasion, Europe looks increasingly more vulnerable than the US. So Europe is heavily reliant on Russian energy. Justin will probably talk about that a little bit later, but Europe relies to the tune of about 40% of its energy requirements come from Russia. Germany in particular being an industrial manufacturing powerhouse, heavily reliant on Russian energy. So the US is largely self-sufficient in that regard following the Shale Revolution. The other area is also going to be soft commodities as well. Also, Europe gets a lot of its soft commodities from Russia. US is very self-sufficient.

Maroun Younes:

So what does that mean going forward? It means the US will likely face inflationary pressures, but not a whole lot in terms of growth headwinds. Whereas Europe is going to be facing potentially both inflationary pressures, as well as a hit to GDP if they can't meet their energy needs. And that creates a very toxic stagflationary environment. So I think increasingly following the invasion, Europe looks incrementally less attractive. The US looks incrementally more attractive vis-a-vis each other. And then individual sectors would be things like soft commodities, agriculture, energy, and also defence. We can't rule out going forward, governments are going to structurally increase their defence spending.

Maroun Younes:

Germany for a long time held off on spending on defence. Following everything that happened in World War II, Germany has now started to commit to increasing their government spending for the first time in 80 years. France is going to increase spending. So I think you're going to see a lot of European countries increase their spending on defence going forward, and that could open up some opportunities.

Viral Patel:

Thanks, Maroun. So in effect Russia, doing what they've done has pushed Europe to arm themselves more and to also push themselves probably towards more sustainable energy. So moving over to Justin then on the energy side of things. Now, we could talk for a long time on this, but let's just focus on key issues out here. So firstly, Justin, just currently your latest thoughts and views on energy, Russia situation, et cetera.

Justin Teo:

Sure. Thanks, Viral. I think the main takeaway comes down to security of supply. And this links a little to what happened over COVID more generally where a lot of companies were in a just in time inventory system. And now there's a big move to a, what do they call it? A just in case inventory system. Because if the freight tanker can't bring your intermediate good across the ocean in time, that's going to be a problem. And for the Germans, the key problem Maroun highlighted is if 40% of your energy, mostly gas in that 40% goes by a pipeline, part of which covers Ukrainian ground, then you're not going to be able to switch tomorrow, no matter how much energy is in the world.

Justin Teo:

And we've seen a reaction from the government security supply-wise, where the chancellor sanctioned two LNG import projects today. Unfortunately, it takes two years to build these projects at a minimum. And so even if Qatar, Australia, other LNG exporters could send the cargos, they don't have the capacity to send that through. And I think that's a forgotten part of European energy supply because they also run a connected electricity grid. Australia obviously has its own grid, and the east actually doesn't connect to the west because of how big the land mass is. Whereas in Europe, you have a lot of intercountry dependence.

Justin Teo:

And so what we've seen is that the US and UK overnight decided that they would sanction imports. To be frank, the US is almost self-sufficient in oil now per the Shale Revolution that Maroun talked to about. Whereas in Europe, there is a huge dependence on external energy. And also more than that, they have a conundrum now that Viral alluded to around sustainability. And this comes down to countries like France of about two thirds nuclear power that does not have any dependence on Russian imports at all. But Germany has shut down most of its nuclear reactors. And that was the decision made about 10 years ago post Fukushima nuclear incident in Japan. And I guess we're having this energy transition dilemma now where we want to have lower carbon fuels, but we also want to have consistent, I guess, power supply. And so outside of, I suppose, the Russia, Ukraine situation, there is a debate about renewables and how consistent the power is. But I might pass back to Viral.

Viral Patel:

Cool, thanks Justin. Just around the sustainability theme, ]I think on the energy side, I think a year ago, we would've probably been a bit more cautious in energy companies because of the amount of investment they would've had to have put in and whether they would've delivered the margins, et cetera, to invest in them. Now things have changed. I mean, not only has sustainability taken on a bigger and more important role from us as investors too, and the rest of the world. So it's something that should happen. But with the Russia, Ukraine situation, oil prices jumping, security, supply issues, how does that change your view of energy sector?

Justin Teo:

I think the key change comes down to the amount of emissions abated by companies divesting assets to other owners, zero basically on a global basis. So if a public company says, "I don't want to, because investors don't want me to," and it sells to a private equity company, I'm not sure that's any better for the emissions globally. And that, I think recognition has changed in the last six to nine months, post [inaudible 00:14:38] 26 in November, where there's recognition that we need power, we need to have a gradual transition. And 2050, 2030, they're quite far away. And I suppose as we invest in technologies, the high oil prices, higher gas prices, they can encourage governments to invest and accelerate, I guess in R&D.

Justin Teo:

R&D, like Maroun will know in the tech sector, it's not a linear curve. It probably will be a step change, but it's not a step change where tomorrow we can have hydrogen traps. I think a good example is Angus [inaudible 00:15:16] in Australia. He's put money towards hydrogen refuelling. Viva Energy, one of the companies in Australia is trialling it. And these $20, $30 million investments, they're not $20 billion investments like an LG plant. And the reason for that is from a company's perspective, the risk/reward, it's uncertain, I think. And the risk factor is very high in an early stage. And a lot of these developments are led by Australian government funded institutions, like the CSIRO, the Department of Defence in the US has been a huge funder of many of these technologies through the past.

Justin Teo:

And I guess for us as active investors, it's really encouraging management teams to have a good balance, because some of those moonshot bets will pay off in the same way that a technology company or a startup is basically making a moonshot bet at a pre-revenue stage. The tricky part for us as investors, a lot of these companies in my space are hybrids. They're not a pure play on hydrogen. They're not a pure play on these innovations. And I suppose for us, it's companies like Santos and Woodside that are investing in the clean energy space. It's just today, over 90% of their business is not in that clean energy space. And over time I see that transitioning to be much more balanced.

Viral Patel:

Great. Thank you, Justin. So let's move down to Australia now. While the situation is terrible in Europe and in Russia and Ukraine, there are far reaching impacts even for sectors like property out here, which are in many ways Australia specific, but still the macro impacts are felt out here. So just Monique, so Monique on property and real assets, what was and possibly still is a rising rate world and with the impacts that you think Russia could have on that, can you should just share your views and your thoughts on the rates and then macro and then impact on Australian property?

Monique Rooney:

Yeah, sure. Thanks, Viral. I mean, look, first of all, it's probably worth pointing out that property has benefited from a low interest rate environment. You've seen a large flow of capital into property assets. This has led to cap rates compressing to record lows and asset values at record highs. So obviously, in a rising interest rate world environment, you would expect that some of that benefit comes undone. So cap rates unwind and asset values are impacted. It's probably worth mentioning to date, despite bond yields where we haven't seen any impact. In fact, transactions are still happening at pretty crazy values. And it's also probably worth noting that typically there is a lag. Value is quite backward looking. So I think it will probably take a little bit longer to translate through the direct property market than some might think.

Monique Rooney:

But look, I think in a rising interest rate environment, rental growth outlook is very important. So for example, Goodman Group, they've sold a lot of their secondary assets and they're left with their core prime holdings that are in very good locations and they're seeing double digit rental growth. So these assets, I guess if cap rates unwind, their rental growth should provide an offset. So these assets will fare much better through and arising interest rate environment compared to a some of the secondary assets that we've seen transact at a 3% cap rate. They're in areas where basically more supply is coming on and there is basically no rental growth.

Monique Rooney:

They're the types of assets that will be impacted the most. But I guess, yeah, to Maroun's point, it is a bit of an evolving situation in Ukraine and Russia. And I guess, expectations around the pace of rate hikes or the pace, or I guess how high that they go, we have seen a pretty sharp sell off in property stocks. You're now seeing as well, some of the companies trading at some pretty significant discounts to NTA. So I guess if it is to not be as bad as what is currently feared, then perhaps what's currently priced in property stocks right now, it shouldn't be as much as what's basically priced in is what I would say.

Viral Patel:

Cool. And just in the property sector, can we just split up a little bit between industrial, retail and office please? Just curious there.

Monique Rooney:

Yeah. Look, industrial, obviously demand is far outweighing supply, so you are seeing very strong rental growth. It is in pocket. I mean, not all industrial assets for the same, so you want to be in the good assets in good locations. But we're seeing record low vacancy. It's sub 1%, I guess in Sydney and Melbourne and very, very low in key cities across the world. So I guess the migration to eCommerce, as well as Justin talked about, people moving from a just in time to adjust in case inventory means that the take up in space is very strong. So a very positive, I guess on the industrial outlook there.

Monique Rooney:

In terms of retail, obviously they have had structural challenges with the growth in online, but we've obviously been through a bit of a period where COVID has significantly impacted, I guess earnings, and they've had to provide a lot of rent relief. So I guess the long term structural challenges are still there, but I guess there's been a lot of bad news. And I guess for the retail side of things, where as hopefully the [inaudible 00:20:53] conduct does come to an end, you are seeing some positives, better leasing spreads coming through, occupancy has actually been quite strong. And so, I guess we're moving through a bit of a recovery phase there. And I guess as well in a high inflation environment, I guess the centre groups of the world, they're typically a CPI plus 2%. So they do have some leverage to obviously a high inflation market, which is worth noting.

Monique Rooney:

And then, yeah, look, office is being tough. Prior to the pandemic, we were sitting in at record low vacancies. It was very strong. And obviously, you've seen vacancy go from four, 5% to double digit now. And so what I would say is, and also we were cycling a period of very, very high rents. So at the moment you've got as well, corporates are currently dealing with the hybrid working. What does that mean for space requirements? You've seen in incentives at elevated levels, but what I would say is they're starting to hear some green shoots come through, I guess on the office. But it's probably more a flight to quality. People use this opportunity with lower rents to basically upgrade to better offices in good locations. So you definitely need to be more selective, I guess in the type of office assets that you own.

Viral Patel:

And just as a point to note, Justin and Simon are in office today. Maroun, Monique and I are not in office today. So as you can see the background. So anyway, Monique, just again a question for you given the issues we've recently seen in the construction industry, like Probuild collapsing, et cetera, how will companies locally, Lendlease, Dexus, Mirvac et cetera manage these risks for existing contracts and going forward?

Monique Rooney:

Yeah. Look, I mean, it's probably worth mentioning first of all that Mirvac and Lendlease don't have any direct exposure to Probuild. Dexus has the MLC redevelopment, although that was largely complete. It's been in hand over stage. So there's only a really small amount remaining left on that project. And they've got a bank guarantee in place, which should help type the loose ends on that. But look, I think that where the risk is obviously of subcontractors and crossover there. Mirvac and Lendlease are a bit more unique that they've got their own construction arm. And so when I've spoken to them, the crossover that they see, it's about 10 subcontractors they've both identified, which is pretty immaterial in the scheme of things. But look, supply chain challenges, cost inflation, it's definitely an issue for the industry.

Monique Rooney:

I know it doesn't help when you see headlines like timber prices are up 40%, but there are other offsets, I guess. So when I speak to Mirvac, they are talking about three to 4% cost inflation coming through. Lendlease sees that a little bit higher, but I definitely think being a tier one developer, there's definitely advantages of scale in what they can procure, but also, they've already locked in a significant amount of their cost for this year and for next year. And I guess just being a tier one, their knowledge, Lendlease is global in terms of pricing of new contracts. I think they're pretty good at that in terms of making sure in their feasibility that they've got more to adjust for further cost inflation, which certainly helps.

Monique Rooney:

And then I guess on the subcontractors, I mean, it's interesting. And I was actually having this conversation with Lendlease at the result before Probuild collapsed. And they obviously highlighted this as an area of concern, especially in the Australian market. And basically, they've got a pretty tough selection process of their subcontractors. They're constantly in good communication about their health. They want to work with them and help them. They're tracking how they're tracking relative to plan, basically. And so they are working very closely with them. So look, I think the Probuild and probably impacts to come, there's definitely going to be impacts to the industry. But I do think the Lendleases, the Mirvacs and the the Dexus' of the world are probably in a better position to manage through this than a lot of the smaller developers.

Viral Patel:

Great. Thank you, Monique. Justin, just coming back to you on a question. Iran for years has been sanctioned, because they didn't sign the nuclear treaties and they were doing whatever they were doing. With the oil prices where they are, and I'm sure the strain that they're feeling as a country, there could be a scenario where they, where they sign and they're allowed to supply. How does that alleviate? How much would that alleviate anything on the oil side?

Justin Teo:

Yeah. I think Iran, it's important to think it was back in the Obama era that really entered a US style sanction environment. And back then, if you think of the global oil supply demand market as 100 million barrels a day, Iran is five and six in the past. With sanctions, it's reduced by more than half. And the primary buyers of Iranian cruder, those who don't really care about US sanctions and Chinese and Russian refineries have been key buyers of that, because you have to avoid the US dollar system to do that. With Iran potentially coming back. What you end up with is probably a million barrels a day of very quick return of supply.

Justin Teo:

And part of that is things moving away from almost the grey market requires towards the open market of someone buying with US dollars. And it will probably take at least several months to, I guess, ramp up to preexisting capacity, because it's an oil flow. It's not like press the button and turn it on. There's lot of mobilisation. There's a lot of drilling required. And it's easy to forget that sometimes for me, especially in a spreadsheet when you're doing an oil supply and demand model. And coming back to maybe the later point about companies exiting Russia, I think that's still quite relevant where you've seen Shell, BP, a few other companies and not just in the oil sector, in consumer sectors too hold production.

Justin Teo:

One of the reasons Russia let these companies in, because they own the ground. They're sort of, why am I letting a foreign company in is they want the technology. And a lot of that is deeper drilling. And before the Obama sanctions, Exxon was doing lots of drilling in the Arctic. And that was very advanced technologies, 20 K PSI pressure, thousands of metres underground, underwater often. And what you saw when that happened was the Russians weren't able to actually extract that oil themselves. They took a long time. And that's what a part of these US sanctions before the oil embargo sanctions recently, overnight, which to do with, we're not going to send you parts, we're not going to send you equipment and that's going to limit the ability of supplies.

Justin Teo:

So that's probably why there were a lot of news stories about US envoys going to Venezuela to try and resurrect supply. But that's probably a worse situation to Iran in some ways, just because the economic situation is much more dire in terms of trying to restart the overall, I guess economy let alone the state owned oil enterprise. But one of the interesting parts, I guess for us is when we were allowed to fly before, the annual at a minimum energy trips with the global energy team, including Texas. And you'd see all the US shale companies, you'd meet companies like [inaudible 00:28:19] with operation [inaudible 00:28:20] their shell, and really get an understanding of their business. And why do they feel comfortable operating in Russia? Because for them it was probably 5% of their portfolio. And they're thinking about in the same way that we think about a diversified portfolio. I'll pass it back to you, Viral.

Viral Patel:

Thanks, Justin. And I think the next energy conference is coming back in person for us in may, as long as we don't buy over Russia, Ukraine, it would be okay. Just last question for you, Justin, while we are on the Russia topic and this last question for Russia is you also have a bit of a commodities hat on. You work very closely with Sam, et cetera. Any impacts outside of oil and energy on commodity impacts of either Russia or Ukraine?

Justin Teo:

Definitely the soft agriculture, I guess, is the way we think about the other key commodity impact that Maroun alluded to as an opportunity for GFL and that's because Ukraine produces a significant amount of wheat for Europe, and Russia itself is actually a significant exporter of wheat. There's no global shortage of wheat, but the supply chains to get wheat where there's demand is a problem. And I think that's something that would just take a lot of time, and obviously seasons. Crops are seasonal. And two or three years from now, I'm sure we would've rerouted the supply chains, but coming up in the next, I guess, seasonal area for food demand, that's where there's going to be a crunch point. And you are seeing things like ammonia, which limits connected to fertilisers. You are seeing those links showing that there's tension in that market.

Justin Teo:

But the other aspect, I suppose, comes back to freight where you're starting to see a bit of a normalisation from, I suppose COVID disruption. And now you're seeing perhaps a different rerouting that needs to happen. And there are well documented backlogs at ports, not really related to supply in the true sense, but really in the midstream or the middle logistics segment. And I think that's where we probably don't really know what the second [derivative 00:30:19] impacts are yet.

Viral Patel:

Cool. Thank you, Justin. Just moving to Maroun. Maroun, with tech having sold off recently, how would you think about attractive tech exposure? What would you need to see if things get bullish and you get good insight from Fidelity world over? So [inaudible 00:30:41], I think.

Maroun Younes:

Yeah. I touched on this earlier. I definitely think you want to be looking at the quality end of the spectrum within technology. I think you want to be looking at companies that ideally are profitable and are compounding their earnings at, at a very attractive clip going forward, and also have a structural growth runway ahead of them. And it's just all about the maths. So if you have a company that can grow its earnings at 20% per annum for the next five to 10 years, even if it's multiples are slightly elevated today, and sure they've come down from where they were back in January, for example. But even if they're slightly elevated, let's say they're trading at 30 times or 35 times PE versus the market at 20 times, for example. If you're growing earnings at 20% per it doesn't take a lot of years to grow into those earnings.

Maroun Younes:

So I definitely think you want to be looking at companies with structural growth tailwinds, really good management teams. Very important that they can not only generate earnings, but also convert that into cash. That's pretty important and it gets lost sometimes. And then yeah, compounding earnings. So if you look in Australia, for example, WiseTech is one that we've spoken about for over long period of time, meets all of that criteria. And it's actually even in the selloff, it's fared relatively well versus the rest of the sector. It actually even had a good bounce following a reasonably good result in February.

Maroun Younes:

So I think opportunities like that will continue to exist. I'm reluctant to say about being bullish on the sector or not, only because I think you can still be bullish on certain individual stocks without necessarily being gung ho bullish about the entire sector. So I think the days, and I touched on this earlier, the days of just going overweight tech and loading up your portfolio with any tech name that you can find, I think that's done and dusted. I think that the time now is to really pick a handful of names that are very high quality, that can do the job to the next five to 10 years and concentrating your positions in them, and then cutting off that tail of junk, particularly loss making names.

Viral Patel:

Cool. Yeah. Thanks, Maroun. That very much also points to us as active investors, we've always been focused on the good names. And even more so in this environment going forward, the money from the poor quality names that will be coming out will go towards a higher quality name. So that's definitely a big pro of actively seeking our best [inaudible 00:33:15] opportunities. Monique, just coming back to you, your other hat that you've worn for years, even before you came to Fidelity was around discretionary and consumer discretionary. Supply chain issue, inventory, there's so much happening. In Australia specifically, could you give us some insights on consumer discretionary? Are there going to be sales on? Are we going to buy good, cheap products?

Monique Rooney:

Yeah. Look, I mean, obviously you have seen, yes. Supply chain issues as also highlighted by the analyst survey, it's a global issue. It's well known the chip shortages and consumer electronics that have been impacting availability of product, and then obviously the shipment delays as well. So be it Breville, for example, given the LA port congestion, they had a lot of stock still stuck on the ship as opposed to in-store across the key Christmas selling period. Yeah. So look, I think it was a pretty consistent theme over the February reporting season. We saw a lot of consumer discretionary companies building inventory. I'd say the reaction by the market was probably more negative actually, I guess on this. I think if you look at a company like Breville, for example that deals in home appliances, coffee machines, certainly the shelf life of that product is far longer.

Monique Rooney:

They've been struggling to keep up with demand. So it probably makes sense. But then I guess on the other side of things, you have apparel retailers. You've seen [inaudible 00:34:45] go pretty aggressive on inventory build. And obviously, that has more risk given that they're dealing with seasonality. So look at the end of the day, it probably comes down to the consumer environment that we'll look to sell into. Obviously, consumer has been very strong in the back of stimulus that we've had come through, but then also consumers lack of ability to spend on things like services, like going overseas as well. And I think the consumer environment has certainly held up a lot stronger than what a lot of people anticipated.

Monique Rooney:

So look, I guess it's a bit of a balancing act. If the consumer environment with a high savings rate continues to be strong, then having a high inventory position can be very beneficial, but equally on the other side of things, if things do soften, obviously having more inventory can lead to high dis discounting, clearance of stock. And obviously, if you're a power retailer with seasonality, then inventory can pretty quickly become obsolete. So it's definitely a balancing act. Trading to date, I guess all the updates we had exceeded expectations. So far the consumer is pretty strong, but look, at the moment things continue to evolve pretty quickly. So I guess we'll just have to see how that pads out throughout the year.

Viral Patel:

Great. Thanks, Monique. So there's a further impact that we are having. Everything that's happening in Russia and all that stuff is impacting global supply chains and disrupting things. Coming back locally, as you can hear outside the window, the winds and the rains and the devastation in Queensland and Northern New South Wales, and even in Sydney, actually. So Justin, maybe if you can talk a little bit about what's happened recently in the major cities, but more impact on economies, investments, communities that you see from the recent rains and floods?

Justin Teo:

Sure. So I think the effective rain and flooding from an immediate insurance perspective, I think is well publicised. A lot of reinsurance limits have been hit, but what does that mean? It means someone's going to have to repair these things. And when I look through who can do that, it's really a subset of the people that Monique was talking about. These are from her point of view, subcontractors or contractors, and these are the engineering construction firms. And that includes the downers of the world, the cynics of the world that do these large scale civil works. But also not so much as large scale as civil, a lot of potholes, I guess if you've been driving around Sydney or Melbourne recently. And then that's got to be filled in an asphalt plant. And it's probably a local asphalt plant, because you can't transport it and it needs to stay hot.

Justin Teo:

So when I think about all those combined, what it is that you probably end up with government stimulus of some kind in a regional sense to help repair, because there is a local council versus state versus federal element to this. But ultimately, it doesn't really matter which level of government does it from the stock level, beyond what I would call the mum and pop level of contractors. And so for the larger, it's really going to be, do I need to build extra flood protection for the future? Do I need to dig some proper sea walls, I suppose, further out or maybe towards the river? And that work will take multiple years to do. And I think it will be a priority, especially as we head into an election. I think as everyone knows, an election budget is a spending budget, but we haven't seen all the measures yet, but I wouldn't be surprised to see a few more and that would simulate some of this stuff.

Viral Patel:

Great. Thank you, Justin, and a question for you, Maroun. Following on from Justin's one on Russia and supply of ammonium nitrate, what do you know about that in Russia and how much is that going to constrain things around the world?

Maroun Younes:

Yeah. So Russia is a large producer of ammonium nitrate. I think it's around about two thirds of global production comes from Russia. So it is the key thing. Ammonia is used a lot in fertilisers. We've spoken quite a bit about soft commodities, agriculture. So firstly, there are two opportunities that could come up as a result of this non Russian fertiliser producers could benefit via a rising cost. Even if they don't sell additional production, just the fact that spot price of ammonia goes up. So there could be opportunities there in fertiliser producers. And then also within soft commodities, something like soybean, for example uses a lot less ammonium nitrate than something like wheat. And so Justin spoke about wheat a little bit earlier, which is directly impacted by Russia and Ukraine because they are two of the largest producers of wheat.

Maroun Younes:

But then also if you have farmers outside of Russia and Ukraine incrementally switching away from wheat into something like soybean, which consumes less ammonium nitrate, and therefore that allows them to better weather, the increase in fertiliser prices that they have to pay themselves. Then you could get a second order impact on wheat supply outside of Russia and the Ukraine. And so even something like wheat, for example, you could see wheat spot prices increase from there. So that'd probably be the two key things I'd point to.

Viral Patel:

Great. Thanks very much, Maroun. Any last thoughts, Monique from you on the water situation? And again, any specific sectors or property companies that you feel are more likely to be impacted given the Queensland and Northern New South Wales flooding?

Monique Rooney:

In terms of property? Oh, look, there's certainly been certain malls that I guess have been impacted in Queensland and I guess regional. I mean, at this stage in terms of office, it's been pretty good. It hasn't been impacted as much. And I haven't really heard much on the ground in terms of industrial. So look, it's probably still working through and speaking to companies to find out the impact. But look, I think at this stage it's probably going to be pretty minimal in terms of they operate pretty large portfolios. So if it's a couple assets in the scheme of things, it'll be manageable, I think on the property side of things.

Viral Patel:

Yep. Yep. No, thanks, Monique. And I think the world we've had, we've had protests in Hong Kong, we've had fires in Australia. We've had COVID and Delta and Omicron, and now floods. I think lots of us have learned companies, people, individuals to be resilient. And the malls have clearly been one sector that have learned in the last two years how to face these impacts and get through it. So on that note, I'm just going to say I think in this world, one of the important things to do is gratitude and keep on having that. We live in a fantastic country in Australia. We have good families and [inaudible 00:41:59]. We have fantastic colleagues to work with, as you can see on this client call, and we have excellent clients. So a whole lot we are grateful. So I'll hand it over to Simon before we sign off.

Simon Glazier:

Yeah, absolutely agree. And well said, Viral. And got to say team, really grateful for your insights. Some really good information there. Just one question I have before we do close this discussion. I mean, obviously you're speaking to a lot of your peers across the Fidelity research team. I mean, there's nearly 200 right across the globe assessing bottom up, top down, sideways, ESG and all the rest of it. Putting my Australia hat on and comparing us to the rest of the world, how do you see the Australian market as an investment opportunity when compared to other parts of the world? And Justin, I might start with you if that's all right?

Viral Patel:

And just add on the last results, Justin, the outcomes of the last results where we see Australia has done better than many other countries.

Justin Teo:

Sure. No, I think the year to date market performance, I think Australia and Canada are the two best performing stock markets. And they have pretty common economies, if you think about it. Financials and resources are a huge part of the index. And I suppose the other side of that is Maroun's space with tech. And as you have a, I guess rising rate environment, you do tend to get a later cycle commodity push. And that happened a few times in '08 and '12 and whatnot. And so with that composition, and BHP now is the largest company in the ASX, I think that is a key driver of returns. And an interesting part of BHP is that they've made that they're made that future facing pivot towards what they're calling battery or electric vehicle metals.

Justin Teo:

And I'm talking nickel. They're not so keen on lithium, but they like copper. And across that, they're getting rid of the fossil fuel side and the [inaudible 00:43:58] sides looking to buy that. And I think that's an indication of where Henry, the CEO of BHP is looking to position the company and in arguably, Australia going forward in a very successful commodity export. And I think future commodity exports could include green hydrogen, blue hydrogen, lots of different things. It'll just take time, but we have the infrastructure and expertise. And I think the stability of the, I want to call it regulatory, but also the community acceptance, I suppose of a lot of these initiatives in the natural resource space will heed the market well in the environment we're in today.

Simon Glazier:

Yeah. Perfect. Thanks, Justin. Monique, any final thoughts from you on us comparable to other regions?

Monique Rooney:

In terms of, I guess the property side of things? I mean, look, Australia is a pretty small market. But I think as well across, I guess on the property side of things, supply and demand always is a factor in capital investment into Australia. And I think it's pretty favourable. As well, I guess there's some unique things to Australian property compared to other countries in terms of fixed rental increases. Office is saying three to 4%, as well retail, four to 5%. These are attractive characteristics that other markets don't necessarily have. So yeah, look. For a while their Australia has, I guess screened pretty well and favourably too on the property side of things. So whilst we might be a small country in terms of interest from offshore, there's definitely been far more in recent years that perceive our sector relative to other parts of the world as a good place to invest.

Simon Glazier:

Perfect. Thank you. Maroun, final thoughts?

Maroun Younes:

Look, in tech, I think Australia six months ago was a lot more expensive than the rest of the world. And I think a lot of that was scarcity of supply. If you look at a market like the US, there are hundreds if not thousands of technology names to be able to choose from. And so you can be a lot more discerning. In Australia just given the narrowness of the market and the tech sector in general, it is a relatively new thing. It's probably only evolved over the past six or seven years. So there hasn't been a lot of high quality names for investors to get exposure to. And so you've seen a handful of companies get to quite large valuation premiums versus their tech peers around the world.

Maroun Younes:

So even though the results have been relatively good, I think the Australian technology sector would need to just reduce some of that valuation premium versus the rest of the world there. And that'll happen over time as investors increasingly position more towards perhaps commodities or agricultural energy. And then just ongoing supply of high quality technology names that come over time, I think will develop a slightly more discerning technology space. But right now, there are a couple of names that are trading at significant premiums.

Simon Glazier:

Yeah. Thank you very much. That's a really good wrap up. So what I take from that is versus our global peers, obviously there's opportunities and risks everywhere, but given our history of quality exports, although there might be a change in the mix, our exports will continue to be strong over the longer term. The consumer demand dynamic continues to play out post COVID, and we'll see a potential rebound as we rebuild from the floods and the water damage, et cetera. And then I think Maroun, as you say, the strengthening and probably the increasing exposure to tech across our market is again, something to look for longer term. So with that, that's a great [crosstalk 00:47:58]

Viral Patel:

Can I, Simon-

Simon Glazier:

Sorry, Viral. Yeah?

Viral Patel:

Can I just add one more thing with my hat from the other country? India is doing really well too. So India as a market is benefiting not only from global uncertainty, but in many areas. At some other point we can talk about India is doing well. But on the tech side, as Maroun said, there have been some really big IPOs in the last year in Southeast Asia and other areas where using US multiples without necessarily having the same stability, robustness and outlook, you can see how the share prices have dropped dramatically. So I just wanted tie up with what I see from my other teams too. So back to you, Simon.

Simon Glazier:

Perfect. Good insight. And probably, that's a good way to finish in that. Please, if we've missed anything today, speak to the team, send us a note, but check out the website. There's a lot of content on there, not only from the team based here, but the team offshore. Particularly with what's going on, there's been no shortage of information and insights that we're happy to share. So with that, thank you very much for joining us and it's bye for now.

 

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

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

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

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

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

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

Monique joined Fidelity in February 2019 as an investment analyst covering the property and consumer discretionary sectors. Since October 2021, she has also held the position of assistant portfolio manager of the Fidelity Future Leaders Fund to support Lead Portfolio Manager, James Abela.

Prior to that, she worked in equity research for investment banks Morgan Stanley (2014-2019) covering the consumer and gaming sectors, and Deutsche Bank (2013-2014) covering emerging companies. Before this, she worked at wealth management company, Ord Minnett (2011-2013) in equity research and corporate finance also covering emerging companies.

Monique holds a Bachelor of Commerce from the University of Sydney.

Justin joined Fidelity in March 2017 as an investment analyst covering a broad range of sectors including renewables, industrials, utilities, mining, infrastructure & transport, chemicals, and oil & gas. Prior to that, he was working in equity research at global investment bank and financial services firm, Credit Suisse, in London. In his most recent role there, he worked in the European oil & gas team and from 2013-2014 in the Australian mining, energy & ESG team. 

Justin holds a Bachelor of Economics (Hons), Finance (Hons I) and Economics (Extended) from the University of Sydney. In addition, he is a Chartered Financial Analyst (CFA) Charterholder.