What's the outlook for Australian Equities?

Matt Wright:

Good afternoon, everyone. Thanks so much for joining us today. My name is Matt Wright. And I will be hosting the discussion today. Before we get started, again, just some housekeeping, we plan to go for around 40 to 45 minutes today. And if you have a question, you can submit via your Zoom portal. We've had a number of questions already, which is great. And hopefully we can cover a lot of those as we go through today. Also, a reminder that CPD points will be available post today's session. Today, we are joined by Paul Taylor, portfolio manager of the Fidelity Australian Equities Fund. Welcome, Paul.

Paul Taylor:

Thanks, Matt. Great to be here and great to be talking.

Matt Wright:

Of course. Now, couple of quick points I just want to highlight before we start. In June this year, Paul hit that 18 year mark of running the Fidelity Australian Equities Fund, which is an outstanding achievement. And furthermore, over that time period, Paul was able to outperform the index by 233 basis points per annum net of fees, which really is not too many other Australian fund managers that have been able to achieve this over that such long time period. Today, we're going to talk about everything from COVID to inflation, to high bond yields, to reporting season, to portfolio positioning and everything in between. Just to start things off, Paul, you've done an exceptional job navigating through big market events like the GFC. And now more recently, obviously COVID over the last year. It would be great if you can just paint a picture of what's happened over the last 12 to 14 months and where we are today.

Paul Taylor:

Thanks, Matt. It's amazing to look back, isn't it really? The last little over a year has been quite an incredible period. And I think the interesting thing, the place to start at is if we go back to early 2020, I guess most people would say the actual impact of COVID on people's lives and the way they operate and the duration has probably been much worse than expected. But actually the economy and the markets have probably been much better than expected, which I think is a really interesting dichotomy. And if we look at that period going into end of March 2020, the market dropped I think about 35 odd percent, which puts it into one of the major market downturns in Australia's history, although nowhere near the GFC, which was over 50%, as well as in 1929. And we pretty much regained all of that over the last 12 months.

Paul Taylor:

When we do look at all the major market declines, this is one of the quickest rebounds. And once again, early on in the piece, the questions were is this a V-shaped recovery? Is this a W-shaped recovery? Is this a Z? Is this a T? Is this an N? Is this an L? Which was obviously the worst scenario of all. I think now with our hindsight, we can see very clearly it's a very, very sharp V. It's been one of the quickest recoveries through that period.

Paul Taylor:

I think also early on, and I've touched on this on a few of my previous, from the desk of newsletters or previous Zoom or videos on the website. Right at the start of any crisis, whatever it is, you'd have the trade off between judgement and data and information. And right at the start, we really didn't have a lot of information on COVID-19. I mean, we had a little bit through things like the previous SARS and impact from swine flu, et cetera. But we really didn't have a lot of data. Really, in that situation, you got to use a lot of judgement . It's almost 100% judgement . But over that year, over the last year, we've really learned a lot, we've got a lot more data, a lot more information and can make a lot more informed decisions. But right at the start, it is all about judgement . And that judgement really is based on, I guess, historical crises.

Paul Taylor:

And one of the things I had talked about previously as well is that being at... As you said, I've been running the fund now for almost 18 years from inception and been at Fidelity for 24 years. And over that 24 years, I think I added up that I've been through about 10 different crises. I guess the first point is that crises seem to come along a lot much more frequently than you would really think. There's one almost every two or three years. We seem to have 100 year events every two or three years, which I think is interesting in its own right. But you do learn a lot through those different crises.

Paul Taylor:

And early on, you use heuristics or rules of thumb. And one of the best rules of thumb for markets in any crisis is this second derivative, whatever is causing the crisis. Second derivative is really acceleration or deceleration. When you get a change in that acceleration or deceleration, that's often the point of maximum pain. As we saw for new cases in Australia, they were accelerating. And then basically started to flatten at the end of March. And almost to the day, that was the bottom of the market. And I think it links that way because when that acceleration changes the point of maximum pain, it's when governments are doing the most, taking the most action, people, general community, maybe the panic is the highest. And a very bad scenario gets factored into markets. And that's exactly what happened.

Paul Taylor:

And as everybody knows, markets also don't reflect what's happening at the moment, they reflect what's going to happen in one and two years time. Markets are forward looking mechanisms as well. Pretty much from that late March, we saw the market bottom. And I mean, we've pretty much recovered it till today. The big issues have been, and a big part of that recovery, I guess the government narrative at the time was that COVID is a one-off. But its nature, it's one off. And it's this giant ravine. And we have to get to the other side of that. We have to keep the economy going until we get to the other side of it. And some of the analogies that the governments use, which are probably two, the two main ones were hibernation. Let's just keep businesses hibernating until we get to the other side. Or the other one was build a bridge over that giant ravine.

Paul Taylor:

And I think, broadly, they've been very successful in the way that they've done that. We already had relatively low interest rates, but interest rates did go down through that period. We've had a really strong monetary stimulus, although I think a lot of the heavy lifting this time has really been done by fiscal policy. We've had as well as effectively zero interest rates, as well as very stimulatory monetary environment. We've had a very stimulatory fiscal environment. And governments have got a lot of money into the economy, into the communities, et cetera. And I guess it's probably reasonable to define those as really helicopter money. Australia had a furlough programme, which is really just trying to keep people in jobs, the JobKeeper, and actually put out a lot of money into the economy. Broadly, that's been successful. Even when you look at the Australian economy, while we went into a recession in 2020 and GDP declined, we're seeing a very strong rebound in 2021. And depending upon your source, probably 5 or 6% GDP growth this year, which is a really strong outcome.

Paul Taylor:

We've also seen unemployment, well, also it ticked up. Pre-COVID, unemployment was around 5.1. It ticked up to about 6.5% through COVID. Although a lot of people argue that got kept low because of JobKeeper and the furlough programme. Maybe shadow unemployment might have been closer to a couple of percent above that. But even now, JobKeeper is no longer with us, unemployment is already back to 5.5% and heading towards 5% over the next 12 months. A very strong employment growth, a very strong economy, and really those tailwinds of monetary and fiscal policy has really supported us through the difficult position.

Paul Taylor:

Now, like I said, we've got a lot more data now and we've got a lot more information on COVID and the impacts and how we should treat it, and we understand a lot better now than we did 12 months ago. But there's still a range of unanswered questions. We're getting better at trying to, either through the lockdowns or through better practises, we're getting much better at it. But still, there's still a range of uncertainties. The domestic economies look like they're coming back to life, and there's reasonable growth. International travel, that's still a little way off, and uncertainty around when that will come back fully. But I think a pretty strong result nonetheless, and one I think people broadly are pretty happy with. A really interesting year. We've learned a lot. And it's actually, as COVID, had a big impact on people's lives and communities. But from an economic perspective and a market perspective, it's actually been probably a lot better than anticipated.

Matt Wright:

Okay. Great, Paul. Thanks for that. I guess, kind of dovetailing into that, if we can just talk around, obviously, the RBA and central banks. Their focus at the moment is obviously what happens with inflation and GDP growth, particularly moving forward to the next two, three, five years time. I just want to get your comments around that and kind of where you think inflation and GDP growth is going moving forward.

Paul Taylor:

Look, I think that's really the question that's an important part of, but there's two big issues impacting markets at the moment. One is COVID recovery. We're seeing that be reflected. As I said, the market is already effectively back to where it was pre-COVID. A strong recovery is already factored in. But the second part of it is now, because of the strength of the economy, there's belief that inflation is going to start coming in and higher interest rates are going to start coming in. And they obviously have consequences on individual stocks, as well as the market. But we take a step back from all of that.

Paul Taylor:

The central banks. If we start with the Reserve Bank of Australia, we are effectively at .1%, effectively 0% interest rates. And the RBA basically said that they don't think they're going to have to touch rates for three years, well, not significantly increase them for three years. Not until 2024. Now, that's a reasonable way out that they think we're still going to be in a very low rate environment. That sentiment gets reflected in central banks right around the world. A lot of them, they don't feel like they are going to be pressured to take rates up, not six months or 12 months. But like I said, they are looking at about three years. I think they think there has been a lot of demand destruction through COVID-19. This big ravine that we are in, there has been a lot of demand destruction. And there actually needs to be a lot of growth just to recover a lot of that demand destruction. That inflation could be way off. Now, we are growing that strongly. And they've also said that they're waiting for real significant wage growth before they... As I said, I think that's three years out.

Paul Taylor:

I think the other thing with interest rates and inflation, I think their, I guess, signalling is even if inflation is a little bit higher, they're probably accommodative of that. I think they are very keen to see growth resume in economies. They want that for employment. They want that to normalise economies. And they're probably willing to put up with a little, not out of control, but probably a little bit higher inflation to get that growth.

Paul Taylor:

And I think also, one of the issues around, I guess, at least the helicopter money, but broader, the big fiscal stimulus has been that government debt has significantly increased. Now, Australia is not in a bad position. Pre-COVID, our government debt is very low, our corporate debt is very low. The debt in Australia is held at the household level. But because of the fiscal stimulus, I guess government debt has increased. It's still in a reasonable spot, it's not completely outrageous. And it's very manageable at this level as well. Australia is still very fortunate, I guess, against a lot of countries in the world and against their own history. But one of the things I think authorities also look at is that this equation of you want G to be higher than i, growth to be higher than interest rates. And if that happens, it's almost a natural paydown of the debt, which obviously helps with the government budget and balance sheet, et cetera, as well.

Paul Taylor:

What I mean by that is GDP is growing at some higher rates. Like I said, we're potentially looking at five and maybe slightly higher percent in 2021. If growth is at 5% but interest rates are at 1%, what it means is that the economy is growing at 5%. And if you assume the government take is the same percentage of the GDP, so you don't get major changes in tax policy, it will mean that the tax take by government in absolute terms should grow 5%. Now, so that your intake is growing much faster than one of your big cost, which is obviously, or not a big cost, but the interest cost is going to be outgrown. Naturally, you're going to be paying down the debt. It's a very natural way to repair your balance sheet. But you need growth to be much higher and interest rate to be so low. And I think that's also part of the reason why maybe they're happier. Even if there's a little bit of inflation, they're happy to let that happen, because it's much more important to keep the growth going. I think that's how governments can look at it.

Paul Taylor:

I guess the other issue, we're fundamentally at zero interest rates. I think it's fair to say interest rates are going up. And I don't think that's really the question. Well, interest rates are going up, but the question is are they going up in six months? Are they going up in a year? Or are they going up in three years or five years? And I guess I'd be much more in the camp that is a lot, because I think what the central banks are saying is a sensible approach to all of this. And I think I was much more aligned to that three year view, that we'll start to see them coming through. It's still probably lower for longer.

Paul Taylor:

I think the other thing to note is there is some inflation in the system right now, and people will see it. But it's actually more to do with supply side than it is to do with the demand side. Demand is improving because we are in this COVID recovery, but we still got some supply side issues. For instance, I guess on certain industries, you've got some wage pressure, because historically, I think people know from my previous presentations Australia has been the best performing stock market in the world over the long term. And a big part of that reason has been strong population growth that Australia has achieved.

Paul Taylor:

Now, we need that population that drives employment growth, but of course, it helps meet certain labour demands. You can see it already in the economy as, whether it's the hospitality, entertainment, food and beverage sectors are coming back to life. A lot of the time they were very reliant on international labour or people coming in and being a little bit more transient. They were very reliant on that. Now, obviously, we're not getting the international people in. There is a real pressure point in terms of weight in that particular sector wages, et cetera.

Paul Taylor:

We are also seeing inflation come through on a range of building products, building materials, whether that's might be steel or concrete, et cetera. Now, once again, that's a bit short term, because that's a logistical issue. We just can't get the product. And also people talk about difficulty in getting cars or secondhand cars or new cars. Just getting them into the market, there's logistical issues. The demand is improving, but the supply can't respond for those very specific COVID reasons. Now, like I said, while I think interest rates and inflation will go up from here, we are at very low levels, I actually think it's still a bit further out. But it's not going to be a straight line. I think you're going to see this shock two type approach. At the moment, you're getting a little bit of inflation coming in, but there are COVID related supply constraints.

Paul Taylor:

Now, if we are able to get into a full recovery from COVID, you will actually see those logistical bottlenecks and you will see those labour bottlenecks go away. That will be a reliever to inflation. Actually, you will then see inflation coming back down. Like I said, it's going up in the long term, but I think you're going to see a bit more of a shock two type approach in the short term.

Paul Taylor:

I think the other thing is authorities have probably learned from the issues they had in 2016, or there's a few different lessons. People will remember back to 2016, interest rates, inflation were very low. Then there was, okay, we're bottom, we are going up, we are getting global growth, inflation is going to come into the market. And the Fed in the US, central bank in the US started to take interest rates up and stop quantitative easing. And basically, they did that. I guess, it was quick, but it wasn't hugely quick. Interest rates went up, the market got spooked. And then straight away, the Fed dropped its interest rate. It gave up very, very quickly.

Paul Taylor:

And there's a few different things. I think they've learned that necessarily austerity doesn't really work. When you're trying to get growth going, you don't want to bring austerity in too quickly. And you don't want to take interest rates up too quickly, because it will put a cap on growth very, very quickly. You really want to extend that out. And that's why I think the central banks are saying, well, nothing for three years. They want to get the growth going, they don't want to cap it, they don't want to stop it very quickly. And they've learned from their mistakes back in 2016. They've learned that austerity is probably not the right approach when you're trying to get things going again. And also, you don't want to put interest rates up too quickly. That's also a big mistake. And like I said, specifically in this environment where you've got a lot of demand destruction, there's a lot of growth that needs to happen just to get over the demand destruction.

Paul Taylor:

Yes, interest rates, inflation is going up from here, but to me, it's a three year issue, not a six month issue. And central banks, governments have learned from their previous mistakes of bringing in austerity too quickly, increasing interest rates too quickly. And you saw what happened in 2016, they had to give up on that very, very quickly. I see the tailwinds of monetary stimulus and fiscal stimulus hanging around for a reasonable amount of time. Now, that monetary, to me, that's a very clear path. Fiscal is an interesting one as well. Fiscal, through last year and early this year, it's really been what you call helicopter money, which is the furlough scheme of JobKeeper. And it's basically just getting money out as quickly as possible to people. And then they are out spending, which is driving the growth in the economy. But the government has already stopped JobKeeper end of last month. And you can already see they're trying to be a little bit more targeted with their fiscal stimulus. Very focused on certain industries and sectors that probably haven't recovered due to special circumstances. They are very targeted on certain industries.

Paul Taylor:

The other thing I think you'll see is probably a move away from helicopter money, just getting it out to everybody, to more targeted industries, but then also probably much more focus on infrastructure. To me, the infrastructure is a great one, because it still gets money out into the economy, it still grows the economy, but they're nation-building. We've got so many nation-building projects we could be undertaking. And that's a much better outcome than obviously just dropping money from helicopters. Monetary stimulus is still with us for another three years or so. And fiscal stimulus is going to be with us, although it's being maybe shepherded in a slightly different direction, away from helicopter money towards infrastructure and much more towards targeted sectors and industries.

Matt Wright:

Great. Thanks. But you've covered a lot of stuff there, which is great. And obviously, talking around JobKeeper rolling off, monetary and fiscal stimulus, inflation, growth, maybe if you can just touch on a little bit around reporting season in Fed, and then how you've kind of changed the portfolio moving forward.

Paul Taylor:

It's actually a really good reporting season. We have had not just reporting season, but we've had I think now seven months in a row of earnings upgrades, which is quite a little bit unusual is a market saying that sell in May and go away. And there is a little bit of nervousness as we head into May as well. And basically how that saying has come about is that typically what happens is you start the year in January with really optimistic outlook and the world is great and blah, blah, blah. But then slowly through the year, your estimates get readjusted to reality. And by May, you start to see some of the downgrades come in. But like I said, for last seven months, we've seen upgrades. We've seen the economy being much better than expected because of the fiscal and monetary stimulus. We've seen upgrades coming through. And if I just look at overall where the market is, now we are on about a 19 times price earnings ratio, which is a little bit higher than expected, but reasonable given where we are with interest rates.

Paul Taylor:

Then we're still expecting greater than 20% earnings growth. That's a really strong... And like I said, we've had upgrades into that, not downgrades. That's a really strong outcome for companies and earnings. I think as the years gone on... If I go back to March 2020, as we went into that, once again, people will hopefully remember from the calls around that time and the newsletters I've put out, there's probably three or four key areas that we have been focusing. And I guess, if I look at the portfolio, I always talk about an evolution rather than a revolution. We've continued to add to a range of those different sectors. Probably the cheapest sector was the resources sector. And it's been one of the best performing. Once again, at that time, there was a simple belief that China was the first in and would be the first out. That commodities would be a key beneficiary of China, obviously, driving its economy and stimulating its economy. And we've seen that.

Paul Taylor:

And we've had also a few unusual things happen as well. On the iron ore side, there's very strong demand from China, but supply has been constrained as well. Australia's key competitor is Brazil. Brazil has been particularly hard hit by COVID, and haven't been able to get the supply out to China. And on top of that, they've had a range of tailings dam collapses, and issues around that. And government is closing some mines, because they really weren't up to scratch. You've had a range of supply disruptions out of Brazil due to safety and COVID. And that weak supply continues, and a strong demand continues. We've seen over the last year, all through COVID, the price of iron ore really take off. And now we are up above $170, which is a phenomenal result. Resources has been a good... And we've added to that through the period. Some of the bigger names would include companies like BHP, Mineral Resources, Independence Group, which we think are aligned to that strong commodity growth. And we continue to hold those names.

Paul Taylor:

The other area is we did... The interesting thing, I think, through the whole COVID is that with those very strong trends that were happening pre-COVID, COVID didn't really change trends, it seemed what it did was accelerate them. And when we're coming out the other side, we still think a lot of those trends are going to continue. One of the obvious ones e-commerce, that was already happening pre-COVID. It got accelerated through COVID. And we still think that's going to be a key trend post COVID. And that there's a lot of businesses benefiting from that, but there's also a few that have been hard hit by that move away from bricks and mortar towards e-commerce.

Paul Taylor:

Digital delivery of food and beverage trend pre-COVID got accelerated through COVID. I guess those trends are habits that people get into. And then once they're happy with that habit, they just keep going. Digital delivery of food and beverage, e-commerce, work from home. Now, even a work from home, well, people will start going back into the office. And I know even businesses we talked to, I think people want to be in the office, they want to learn from their colleagues, they want to have time with their colleagues, they want to discuss a lot of issues, but they have loved the flexibility of working from home. I think that even once we normalise a bit more, people will still want to embrace that, at least a couple of days working from home if they can, if they are in job specific positions that can do that.

Paul Taylor:

Cashless society, another big trend pre-COVID. That was a structural cash, it was a structural decline in pre-COVID. It got accelerated through COVID. ATM using just collapse through COVID. And we're still very much on a trajectory for a cashless society post COVID. Playing a lot of that thematic to that period has been very helpful for us. Companies like Goodman Group, which is industrial property, a strong beneficiary of e-commerce, because you basically need the sheds, et cetera, in an e-commerce world. Goodman Group industrial property has come down on cap rates, increased in value. And Goodman Group is probably the best industrial property developer owner in the world. And they've continued to be a key holder for us through that period. Domino is another key beneficiary of the digital delivery of food and beverage that has been growing very, very strongly. And they've done incredibly well pre-COVID, through COVID, and post COVID.

Paul Taylor:

And then the third area probably is those businesses that are much more right at the coalface of some of the COVID issues. But you obviously need to be the most careful with this group. You need to be very focused on balance sheet. Basically, if a company has been really hard hit, you need to, obviously, make sure they've got the money to get to the other side. Then they need to be there to get the recovery. And for us, we're looking for balance sheet. And often through COVID, the opportunity came up through rights issues or through placements, where we could put more management in that company at a better price, repair the balance sheet. It was a bit of a win-win scenario. And they'd be companies like, I mean, an interesting one is Ramsay Health Care. And people don't often think in this term. People think about travel and airlines and entertainment and hospitality. But hospitals got very hard hit through COVID, because elective surgeries had to end, didn't move forward. And then they set up agreements with the states to really not make profit through that period as well.

Paul Taylor:

To me, you can put off a knee operation for six months, you can't put it off for two years. To me, it's almost a guaranteed demand recovery. And for a great quality company like Ramsay Health Care, which is still well below its pre-COVID levels, you've got a good recovery trade and a stronger balance sheet because they raise money through the process. They are very attractive recovery plays. Also, companies like Helloworld, which is a travel agent, which has really been hard hit. Now, whether they come back in a year or two, it could be further out, but, one, the share price is well below what it was pre-COVID. They're not really making money but they're not burning money, which is the key thing. And they've got a really strong balance sheet. Even if they don't fully recover for another couple of years, they are in a really strong position for when that recovery comes.

Paul Taylor:

Also, recovery plays like Ardent, which own Dreamworld. Very valuable land that Dreamworld is on. The Main Event, which is their US business, is seeing a good improvement. They brought RedBird in. They're very good operators. And performance continues to improve. You've got very good recovery plays. Like I said, need to be focused on the balance sheet. I guess the other thing is, as I said right at the start, it's a V-shaped recovery. And if you look at the markets, we are pretty much back to where we were pre-COVID. A lot getting factored in. But what I've tried to highlight there, I just think if you look below the surface, things are not quite the same. And I guess things like Qantas are seen as the ultimate recovery play. But Qantas share price is almost back to where it was at points in 2019. Not back to its peak, but at point. I mean, a lot is already getting factored into what are the, I guess, poster children of the recovery.

Paul Taylor:

And I just think you need to look things like, as I said, Ramsay, Helloworld, Ardent are well below where they were pre-COVID. The recovery hasn't really been fully factored into those stocks. There's probably just better opportunities in a few of those names. Those are probably the three areas we focused on, resources, some of those longer term trends that have accelerated through COVID that's going to continue post COVID, and the industries that have been hard hit by COVID but haven't yet seen the full recovery from COVID.

Matt Wright:

Great, Paul. That was fantastic. All right. I guess one of the questions that keeps popping up with some of the advisors that are asking is around the buy now pay later sector, if you can touch on that. Obviously, there's a lot of excitement in that area. CBA with Klarna, and obviously launching their own product. And PayPal as well. It'd be good to get your thoughts and comments around the sector. And specifically, obviously, Afterpay.

Paul Taylor:

I guess the starting point is we don't own Afterpay, we don't own anything within that space. We obviously own financial. The big ownership stocks that we own in the financial sector are Commonwealth Bank, Suncorp and Macquarie Bank, which I didn't touch it up before, but we think they are all key beneficiaries of this steepening yield curve argument as well. And we added to those through the last year as well. I guess when Afterpay got to $9, I kicked myself for not buying. It went from nine to 150, or whatever. And I guess what kept... There's probably a couple of things that kept us out, and probably still keep us out today. I mean, it's come back a little bit, but not a lot. Obviously, the industry has been a great invention, especially millennials love it. And there is a real fashion to it. And retailers like it because it drives sales growth as well. The number of people that buy things and do it via Afterpay has really grown as a penetration.

Paul Taylor:

From a customer perspective and a demand perspective, it's been a real success story. But the big issues around it, one, we haven't had a credit cycle in this space yet. We don't really know if things get bad or ugly, how... Sorry. I'm about to sneeze, but I think I've just fought it off. We don't know whether there will be huge write-offs if things go bad. I think we've probably moved away from that now. We are in a much better position on that than we were back then. But the real overhang is things like regulation. A lot of their key competitor, to have... In this environment, they don't do any credit checks are anything. Well, while regulation is so tight on other sub-sectors within financials and very much protecting the consumer, to have this one space that is completely unregulated and there's no protection for consumers, it seems a real anomaly. And I just think that's just a matter of time before regulation has to come into that space. And once regulation comes into it, it completely changes the proposition.

Paul Taylor:

I think the other overhang, I guess, is it's obviously been a very attractive space, and one that's worked. What that does is that that brings competitors. And we're going to see more and more of that. I always think it's interesting, you can have a very fast growing industry, but... And I always talk about telcos within this space. That if you look at the last decade, one of the fastest growing areas is telecommunications and data. You just looked at how everybody has moved online and what's getting done online. But telcos haven't made it. They haven't really made any money. And they haven't really improved over the last decade, really because it's commoditized. There has been very fast growth, but it's commoditized as a whole lot of competitors have come into the space or it's a more level playing field. And I think that that could happen within the buy now pay later space as well, where you get a lot more competitors come in and more aggressively compete for their business, because it's such a good business, which means that it commoditizes the product.

Paul Taylor:

Now, just one example of that is, and you said Commonwealth Bank are entering this space for one of their product or through a startup business. And one of the things that they are offering in that startup business is to do it with no merchant fee. Now, Afterpay have a very big merchant fee on it. And at the moment merchants are happy. Because there's a big uplift in sales, they're happy. They don't complain about the merchant fee. But if competitors start to come in and say, "All right. But we're prepared to do the same thing, but have no merchant fee." All of a sudden, that's starting to commoditize that business, starting to bring down returns to that business and just be a much more competitive business.

Paul Taylor:

For consumers and merchants, it puts them in a much better position. The merchant can now say to Afterpay, "Well, either get rid of the merchant fee or we'll go over to this other competitor." And Afterpay got a choice. They can either get rid of the merchant fee and just do things at a much lower return basis. Or they could not do it, but then potentially lose the client, lose the merchant, which then will lose the customer as well.

Paul Taylor:

The two big things is there's going to be a lot more competition in this space, a lot more high risk that the industry will get commoditized. Either it could still continue to grow very rapidly for the next five years, but returns are going to go down because of the competition. And then also, which is probably even the bigger issue is that I just can't see this sector being the anomaly that doesn't get regulated when everything else in financial services is so heavily regulated. And the bigger it gets, the more it attracts the regulator's eye as well.

Matt Wright:

Thanks, Paul. Look, we've only got about a minute and a half left. I wanted to quickly ask you one last question. You might have to answer in 45 seconds, though. I hope you've got 45 seconds to answer this question. It's obviously a question that's come through a couple of times now. It's just around the iron ore price. Do you see the current price as being at the extreme point or? Where do you kind of see that moving from now?

Paul Taylor:

Well, we're definitely up there. I think when we look at the previous cycle, what people call the supercycle, we went through $200. We were up in the $220-230 range. And what tends to happen with it is that you do get these pinch points, which then spike it up. But then eventually, a supply will come on and match it. And what tends to be is high cost. BHP and Rio are the low cost producers in the world. But there's a lot of high cost production of iron ore that can come on if people think $200 is going to be sustainable for the long term. Supply will eventually come on. I think with iron ore, though, we're still in a very positive environment, because I think most people still think, well, it's 170, but long run prices are maybe closer to $80 a tonne. Right? When you look at most estimates in markets, people are projecting $80 a tonne. But then they're might be a few years out, but they're projecting it to come back to $80 a tonne.

Paul Taylor:

And I always talk about, effectively, what happens then is you got to beat the fade. And this is exactly what's happened with iron ore. It doesn't even have to go up, it's just got to stay higher for longer, and you're going to get big upgrades in the companies, because the market saying it's 170, it's going to go to 80. If it can just stay a little bit higher, it beats the fade, and you get earnings upgrade. And I think that's more a realistic scenario than saying, well, we're going to go from 100 to 200. But like I said, to get strong performance, you don't need the iron ore price to go from 170 to 200, you probably just need it to stay above 100 for a prolonged period. And that will actually deliver really strong cash flows. And often, that's almost better. And also, like I said, it encourages supply to come on. The more higher it is, it just encourages new supply to come on. I think they can be good investments, even if the iron ore price comes back a little bit.

Matt Wright:

There we go. That was more than 45 seconds, but I'll let you get away with that. We might just wrap things up there. Paul, thank you, again, for all your great insights and for continuing to manage the fund the way that you've done for, obviously, nearly 18 years now. And thank you, everyone on the call, especially for your questions as well. It's been great. Again, CPD points, that will send out within the next two weeks. And please do not hesitate to contact your Fidelity sales manager if you have any further questions. On that note, thank you very much. And have a great afternoon.