Fidelity Answers: The Investment Podcast: Recent Episodes
Fidelity International
Fidelity Answers is a podcast channel from Fidelity International's editorial team. From tech cycles to The End of the Cycle, from downside protection to the upside of ESG, we bring you in depth conversations and the latest ideas from our analysts, portfolio managers and investment directors to explore the latest investment thinking.
As well as topical standalone episodes you'll find our series 'The Investor's Guide to China' where we put the economic powerhouse under the microscope with on-the-ground experts; and 'Fundamentals', a series where the analysts discuss the implications of their latest research, from 5G technology to the plight of the Orangutan.
***If you enjoy Fidelity Answers then whey not listen to our other show, 'Rich Pickings: Fidelity's Asset Allocation Podcast', where each month we dive into the latest market trends with Fidelity's asset allocation group, asking them how they're positioned and why. What will the portfolio managers reveal about their investment strategies? What are the team's hot cakes this month? And what would they drop like a hot potato?
Will AI lead to mass layoffs? Are the costs already getting too much for companies? And are the billions of investment already starting to come good? Fresh from a visit to Silicon Valley, US equities portfolio manager Sam Thomas and tech analyst Jonathan Tseng answer these questions and more, with the help of new Fidelity analyst survey data and a macro study that predicts gains in growth. With additional contributions from multi asset analyst Kitty Yang and economist Edoardo Cilla.
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With AI soaking up the lion's share of investor attention (and capital), opportunities are appearing in other parts of the market to pick up quality assets at relatively attractive valuations. Seb Morton-Clark talks to Portfolio Managers Tristan Purcell and Alex Laing, and Director of Research for Fixed Income Rebecca Motta about the options for adding to defensive positions in case the near-term future proves less ebullient than the recent past. With additional contributions from healthcare analyst Emma Newey Clark.
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Asia has proven more resilient than expected to the Middle East oil market shock, but energy security and the AI capex cycle are reshaping the region into a more fragmented investment landscape, fund managers George Efstathopoulos and Terrence Pang tell Stuart Rumble in the latest episode.
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With inflation expectations soaring, and fixed income yields rising with them, what safe havens does the bond market offer for capital in an environment of higher prices and geopolitical shocks? Seb Morton-Clark hears from two of Fidelity's fixed income portfolio managers - Ravin Seeneevassen and Tim Foster - about why they think markets are under-appreciating the risks and how inflation-linked bonds can help.
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What do investment analysts really contribute to the decisions fund managers make and how are those insights used in practice? Fund manager Dale Nicholls joins Stuart Rumble and Taosha Wang to explore three case studies, from China’s fast‑developing robotics sector and emerging small‑cap opportunities to Australia’s politically sensitive rare earths industry. Alongside analysts Reggie Pan, Sam Heithersay and Teddy Gao, he explains how deep, company‑level research shapes investment conviction and feeds directly into portfolio decisions.
Credits
Producers: Patrick Graham, Judy Chen, Rory Fong, Dan Tham
Studio operators: Keith Chuen, Tommy Su, Kelvin Sim
Post production: Tommy Su
Additional support from Alexis Horsburgh and Shani Semenec
Editor: Seb Morton-Clark
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Even with an energy shock, there are reasons for investors to be hopeful about both stocks and bonds. Chief Investment Officers for fixed income and equities, Marion Le Morhedec and Niamh Brodie-Machura take a hard look at markets in what feels like a crucial moment.
Credits
Producers: Patrick Graham, Rachel Reed
Studio operators: Alex Willcox
Post production: Connor Baillie
Social producer: Ben Traynor
Design: Mark Hamilton
Editor: Seb Morton-Clark
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Hostilities in the Middle East are grinding into their fifth week and the impact is spreading through the global economy. What can we say about the likely effects on the ground of the shock facing industry around the world, and how should portfolios be positioned? Seb Morton-Clark digs into the details with Fidelity's Head of Equity Research in Europe, Punam Sharma, and fund manager Marcel Stotzel.
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The conflict in the Middle East shows no immediate signs of abating, and markets are now pricing in a longer period of instability than had been apparent two weeks ago. Does that derail this year's big market trends? Or is this chiefly a period of short-term volatility to look through?
Seb Morton-Clark is joined in the studio by Capital Markets Strategist Carsten Roemheld to analyse views from a range of Fidelity's investment experts including CIO for Equities Niamh Brodie-Machura, CIO for Fixed Income Marion Le Morhedec, Global Head of Macro Salman Ahmed, and Multi Asset Portfolio Manager George Efstathopolous as they consider the state of the Strait of Hormuz and where next for markets.
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What does the make-up of an audience at a Chinese comedy show tell you? Why is gold the hot new thing amongst Chinese consumers? And how should investors sensibly approach Chinese tech?
In the latest episode of The Investor’s Guide to Asia, portfolio managers Nick Price and Cynthia Chen explore all this and more to explore why Chinese equities continue to play a pivotal role in global portfolios. Hosts Taosha Wang and Stuart Rumble guide the conversation, unpacking what long‑term investors need to understand about China’s evolving market dynamics.
We also hear from Analyst Bunny Huang, reporting on the ground in Shanghai, where she speaks directly with shoppers about what’s driving their spending habits. And Asia Economist Peiqian Liu joins us fresh from the National Party Congress in China to share her immediate takeaways and what they could mean for the region’s economic outlook.
Please note that this podcast was recorded on March 3.
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After a decade in the doldrums, a perfect storm has driven prices of raw materials higher. In the race to mine, refine, and use them for everything from the energy transition to AI infrastructure, the commodities and industrials companies essential to the process are finally enjoying a moment in the sun. In the latest episode of Fidelity Answers we talk to portfolio managers Oliver Hextall and Ashish Bhardwaj, and analyst Laura Stafford, about how the trend is likely to develop and who is benefitting.
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Central bank independence has suddenly become a big issue where, for investors, it matters the most: on US interest rates. In this bonus edition, Fidelity Global Head of Macro Salman Ahmed breaks down the implications for the short and the long term.
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What happens if the Federal Reserve makes good on White House demands for lower interest rates but inflation holds up? Fidelity portfolio managers Becky Qin and Philip Fielding discuss the potential for a period of financial repression in the United States and what it will mean for investors, while Senior Sovereign Analyst Andressa Tezine explains the political risks of an election year in Brazil.
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External shocks and domestic challenges made 2025 a tough year for Indian equities. In the latest episode of The Investor’s Guide to Asia, Fidelity International Investment Director Nitin Mathur discusses the chances of a turnaround in 2026 and why we should focus more on India’s long-term growth story.
With Stuart Rumble and Toasha Wang. Additional contributions from Portfolio Manager Terence Tsai and Asia Economist Peiqian Liu.
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Surging interest in artificial intelligence has generated huge gains for tech stocks across the world this year. But with the stock market hitting new highs, there are growing concerns that we might be in the midst of an AI bubble. In this bonus edition of the Fidelity Answers podcast Patrick Graham puts four possible flaws in the AI investment case to Terence Tsai, one of Fidelity's portfolio managers who has invested strongly in the boom and therefore one of the people looking hardest for evidence of when it ends.
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Demand isn’t the main driver of profitability, supply is. In the latest edition, portfolio managers Fred Sykes and Tom Record look for the money left in the AI boom and places to hide if it goes wrong, while arguing investors should obsess a bit less about GDP growth and macroeconomics.
Plus: analyst Srishti Sinha on the risks to a US power sector flooded with datacentre investment.
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It’s one of this year’s global stock market success stories: South Korean equities are emerging from decades in the shadows as reforms of corporate governance change the way foreign capital sees the Seoul market. With the help of fund managers Jochen Breuer and Lynda Zhou, this month’s podcast investigates whether that surge in confidence is really justified, what else needs to be done for it to continue, and where in the region is also making advances when it comes to shareholder returns.
With additional contributions from Asia Economist Peiqian Liu, whogives us her take on China's 4th plenum, and Analyst JaeMin Shim.
Hosted by Stuart Rumble and Toasha Wang.
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What are the challenges - and opportunities - that longevity poses to investors? What are the investment solutions that can support longer lives and how can portfolios benefit? Seb Morton-Clark is joined by the Director of the National Institute for Ageing Nic Palmarini, Fidelity's Global Head of Client Solutions Katie Roberts, and Portfolio Manager Julie-Ann Ashcroft. With additional contributions form Global Head of Macro Salman Ahmed.
Click here for an extended interview with Salman on what older populations mean for economies and the wider world.
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An ageing global population is set to bring profound pressures to bear on the macroeconomic models and norms of the past century. Can we make it all work? Here Fidelity International's Global Head of Macro Salman Ahmed discusses the likely impact on inflation, taxation, public debt and inequality, and the choices policymakers will have to make in response.
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From Indian renewables operators to Bangkok banks, the Asia high yield market has moved on from China’s property sector problems, and annualised returns over the last three years are running in double digits. But what are the risks? Stuart Rumble and Taosha Wang talk to fund managers Tae Ho Ryu and Terrence Pang. We also hear from Fidelity Asia economist Peiqian Liu on the latest macro signals and portfolio manager Theresa Zhou on China’s stock market rally.
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Doubts over interest rates and the over-concentration of stock markets hint at a need for more robust, diversified portfolios going into the final months of 2025. Seb Morton-Clark and co-host Caroline Shaw assess the risks - and what we should be doing about them - with portfolio managers James Durance and Tristan Purcell.
With additional contributions from real estate credit analyst Othman El Iraki.
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Companies' spend into artificial intelligence has been immense. But we're yet to see the tangible output of that investment. Should investors care? Portfolio managers Rosanna Burcheri and (self-confessed AI sceptic) Dmitry Solomakhin, plus technology analyst Jonny Tseng, join Seb Morton-Clark to discuss their thinking around AI.
Watch more from Jonny's research trip to Silicon Valley here.
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From Labubu dolls to EVs to AI, 2025 has turned up the volume on Chinese products and Chinese ideas, but it’s a tune financial investors need to listen to carefully. Hosts Stuart Rumble and Taosha Wang are joined by portfolio managers Cynthia Chen and Dale Nicholls to discuss the changing trends of Chinese consumers, and whether it can support the sort of growth that the government and global investors are looking for.
And Fidelity's Asia economist Peiqian Liu shares an update on the macro backdrop and the impact of the latest tariff announcements on the region.
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Long-dated US Treasuries, the most popular go to assets in times of uncertainty, have done a disappointing job this year of dampening volatility in portfolios. So what might you favour instead? Fund managers Mike Riddell and Tim Foster join Seb Morton-Clark and Katie Roberts to discuss what investors need to consider when they're looking for the bonds that can shore up their allocations.
And analyst Andressa Tezine explains why 2025 might be the year for emerging markets and where to look for yield.
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Through adversity comes opportunity. Six months ago it was unthinkable to back European stock markets over those in the United States. But through a period of substantial change in policy, and even the post-war globalisation consensus itself, that debate has become a live one. Host Seb Morton-Clark is joined by Director Charlie Wood and Fund Managers Marcel Stotzel and Ashish Bhardwaj to discuss whether investors should stick with the new US or look elsewhere.
And analyst Emma Newey Clark explains to Patrick Graham how she's scenario planning for what happens next in the pharmaceutical sector.
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China has responded well to the US trade war. But other, domestically-focused economies, could fare even better. Fidelity fund manager George Efstathopoulos and Asia Economist Peiqian Liu join hosts Stuart Rumble and Taosha Wang to discuss China's prospects for the year ahead and how tariffs could reconfigure investment trends across the region as a whole.
With additional contributions from analyst Kitty Yang on why there's now money to be made in Japanese banks.
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An opportunity for the euro? Time to buy gold? Or the advantages of cash in a crisis where interest rates aren’t already at zero. The opportunities and risks of a period of profound volatility on markets dominate the latest Fidelity Answers podcast with multi asset fund managers Talib Sheikh and Caroline Shaw joining hosts Rosie McMellin and Ben Moshinsky.
And hear why Fidelity’s analysts think tariffs will be more punitive for America than Asia, with Ben Traynor.
(This discussion was recorded on April 9th).
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Tariffs and chip export bans don't sound like good news for Asian technology companies. But Fidelity fund manager Tina Tian and equities analyst Jonathan Tseng actually view current geopolitical tension as a positive for investors in the region. Why? Find out as they discuss all things Asia innovation with hosts Stuart Rumble and Taosha Wang.
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We answer the questions investors are asking. Bottom up? Top down? What’s the best way to look for opportunities in volatile bond markets? Fidelity fund managers James Durance and Mike Riddell talk to hosts Rosie McMellin and Ben Moshinsky about how they’re responding to a sudden shift in the market narrative.
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What do thousands of company meetings tell investors about the state of the world in 2025?
What do leadership teams think about the impact of a new US administration? Where can investors seek value in China? And how are companies embracing AI?
Fidelity International’s annual Analyst Survey answers these questions and more.
Ben Moshinsky is joined by Co-Chief Investment Officer Niamh Brodie-Machura, and analysts Evan Delaney, Alex Dong and Emma Newey Clark to dig through the results.
You can read Fidelity International's 2025 Analyst Survey in full on your local Fidelity website or here.
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As we wrap up 2024, investors remain divided on the future of the Chinese stock market. Bullish investors are betting on policy support to spark a rebound, while the sceptics see structural challenges capping gains in equities.
Who is right? Is China a treasure trove or a value trap? What more can policymakers do to restore confidence? And how should stock pickers adapt to an evolving Chinese economy?
In this special episode, Marty Dropkin, Head of Equities, Asia Pacific, investigates both sides of this debate with the help of two veteran portfolio managers at Fidelity International: Dale Nicholls, who plays China bull,and Nick Price, who presents the bear case.
With an additional contribution from Asia Economist Peiqian Liu.
READ
Read a summary of this episode here.
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If 2024 was the year of elections, 2025 is the year when all of those decisions come home to roost.
As the world’s major economies take increasingly divergent paths in search of growth - where should investors be looking for opportunities?
Carsten Roemheld, Capital Markets Strategist at Fidelity, is joined by Steve Ellis, Global Chief Investment Officer for Fixed Income, Rosanna Burcheri, an equities Portfolio Manager, and Marty Dropkin, Head of Equities for Asia Pacific, to discuss this and how they are positioning for the year ahead.
You can read Fidelity International's 2025 Outlook in full here.
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Did you know that America's most popular free iPhone app last year and the world's favourite fast fashion brand the year before were both created by Chinese companies? The rise of online shopping platforms like Temu and Shein are evidence that China is no longer just selling goods to the rest of the world, but exporting entire e-commerce business models.
In this episode, Marty Dropkin, Head of Equities, Asia Pacific, is joined by portfolio manager Hyomi Jie and investment analyst Sherry Qin to discuss the origin of Chinese e-commerce platforms and follow their journey across the world.
With additional contributions from investment analyst Elroy Ng.
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When it comes to decarbonising the world - the scale of the challenge can feel overwhelming.
It’s going to need astronomical levels of capital, a reconfiguration of markets, and radical regulation. And it needs to happen fast. If you’re an investor trying to align portfolios with climate pathways as well as capture all of the opportunities that are out there related to the energy transition - it's a lot to think about.
In this edition of Fidelity Answers, Katie Constance, Head of Sustainability for European distribution, is joined by Gabriel Wilson-Otto, Head of Sustainable Investing Strategy, and Portfolio Managers Kris Atkinson and James Richards to discuss the practical steps investors can take, where the risks lie, and importantly where to look for those opportunities.
With additional contributions from Adrian Benedict and Nina Flitman.
You can read our practitioners guide in full here, or on your local Fidelity website.
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In this bonus episode, we're hearing about three investment ideas that are exciting Fidelity’s Asia portfolio managers and how they play into the megatrends of artificial intelligence, the energy transition, and shifting supply chains.
Marty Dropkin, Head of Equities, Asia Pacific, is joined by Monica Li, Fidelity International’s Director of Research for China. With additional contributions from three of the company’s portfolio managers who have recently returned from a research trip in China: Dale Nicholls, Taosha Wang, and Madeleine Kuang.
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To read more on the three megatrends discussed in this podcast, please visit fidelityinternational.com
Marty and Monica also discussed the Third Plenum - an important economic policy meeting that took place recently. For our analysis on that, read this article here.
For a more in-depth take on China’s currency and interest rates, listen to the previous podcast episode on the renminbi here.
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Growing numbers of investors are turning to active ETFs. What’s behind this boom, and what role can they play in portfolios? Ben Moshinsky is joined by Stefan Kuhn, Fidelity International’s Head of ETF Distribution for Europe, Caroline Shaw, multi asset Portfolio Manager, and Andrew Craswell, Head of Client Relationship Management at Brown Brothers Harriman to discuss what makes an active ETF active, and how they’re reshaping the investment landscape.
With additional contributions from Portfolio Manager Ilia Chelomianski.
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In this episode, we turn our attention to something that affects almost every investor in China: a weakening renminbi. The Chinese currency has lost almost 10 per cent against the US dollar in the last 18 months.
Is this a result of economic weakness in China or just another chapter in the strong dollar story? How is the renminbi performing against other currencies like the Japanese yen? Is currency weakness a cyclical challenge for the country or a structural trend? And what should investors do about it?
To help answer these questions, Marty Dropkin, Head of Equities, Asia Pacific, is joined by Asia Economist, Peiqian Liu, and Fixed Income Portfolio Manager, Belinda Liao.
With additional contributions from Portfolio Manager Casey McLean.
To read more on the renminbi, please visit fidelityinternational.com
To read Belinda’s article on hedging, click here.
To listen to the previous podcast episode on ‘Japanification’, click here.
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Chinese healthcare is a vast universe, spanning everything from biotech to traditional medicine. It is also increasingly important as a growth driver for the economy as China's population gets older.
But recent policy shifts - both domestically and internationally - have obscured that structural story. Is it time for investors to pause and rethink their approach to the sector? Or should they double down for the growth opportunity at current valuations?
To help answer these questions, Marty Dropkin, Head of Equities, Asia Pacific, is joined by two of Fidelity International’s portfolio managers who invest in Chinese healthcare: Hyomi Jie and Tina Tian.
With additional contributions from healthcare analysts Duanting Zhai and Lizheng Zhu.
They also talked about Hyomi and Duanting’s recent article on medical devices makers in China. To read that article and find out more about China’s healthcare sector, please visit fidelityinternational.com or click the following link: https://www.fidelityinternational.com/editorial/article/will-an-older-china-unleash-the-potential-for-homegrown-medical-tech-84e45f-en5/
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What are the big themes that will shape the investment world in the years ahead? For this final episode of the current series of Rich Pickings, Richard Edgar is joined by Fidelity's Head of Equities for Europe Ilga Haubelt, and Portfolio Managers Kris Atkinson and Caroline Shaw to discuss long-term trends and how investors are grappling with them.
With additional contributions from Global Co-CIO Andrew McCaffery.
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The story of China's economy and stock market has long been one of rapid growth. But as policymakers pivot to focus on the quality - instead of the velocity - of growth, investors are turning their attention to something more long-lasting: shareholder returns.
Dividends and buybacks are moving up the agenda of regulators and companies in China, generating interest for investors across the market, even in sectors of the so-called ‘old’ economy.
In this episode, Catherine Yeung, Investment Director, and Marty Dropkin, Head of Equities for Asia Pacific, are joined by two of Fidelity International’s portfolio managers: Lynda Zhou and Dale Nicholls. Together, they explore a change in the mindset of Chinese management teams, which industries are most prepared to ramp up payouts for their shareholders, and the role of regulators and investors in the process.
With additional contributions from Shanghai-based analyst Bunny Huang and Singapore-based Portfolio Manager Jochen Breuer.
Read
To read more on the rise of dividends in Asia, please visit fidelityinternational.com to find Lynda and Jochen’s recent article or click the following link: https://www.fidelityinternational.com/editorial/article/asian-stocks-enter-the-dividend-age-b65424-en5/
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Where people live within China - and why - is fundamental to understanding the country’s changing demographics. That, in turn, has important implications for the Chinese economy, consumption trends, and where investors should be looking.
In this episode, Catherine Yeung, Investment Director, and Marty Dropkin, Head of Equities, Asia Pacific, take you across China through the lens of Fidelity International’s Asia Economist, Peiqian Liu, and Jarlon Tsang, Managing Partner and Head of China at the venture capital firm Eight Roads, Fidelity’s sister company.
What role do migrants play in the past, present, and future development of the Chinese economy? Which Chinese provinces and cities could be home to the next unicorn? What do emerging migration patterns mean for China's cities and their businesses? And what does all of it mean for property markets?
With additional contributions from Portfolio Manager Hyomi Jie and Shanghai-based analysts Eric Zhu and Fiona Shou.
Read more at fidelityinternational.com
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Asia and emerging markets are our focus this month. Richard Edgar is joined by Fixed Income Portfolio Manager Paul Greer, Asia Economist Peiqian Liu, and Senior Sovereign Analyst Andressa Tezine to discuss whether they're being overlooked by investors. And, as interest rates pivot and pirouette around the world, where income seekers can find harbour.
With additional contributions from Fidelity's Global Macro Economist Anna Stupnytska.
You can read more analysis from Peiqian Liu here, and you can hear more insights on our sister podcast The Investor's Guide to China here.
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In this episode, Catherine Yeung, Investment Director, and Marty Dropkin, Head of Equities, Asia Pacific, tackle a topic that often flies under the radar, but could in fact hold great potential for investors: China’s bond market.
Investors focused on the stock market, and the challenges Chinese property developers are facing, have often overlooked China’s bonds, which have boasted some of the best returns over the past few years.
Hong Kong-based Head of Asian Fixed Income, Lei Zhu, and Fixed Income Portfolio Manager, Alvin Cheng, from our independently run mutual fund business in China, join Catherine and Marty to discuss why the same economic narrative about China is playing out so differently in equities and bonds, and where investors should start their search for opportunities in this vast market.
With additional contributions from Singapore-based Multi-Asset Portfolio Manager George Efstathopoulos and Shanghai-based Senior Credit Analyst Crystal Cui.
Read more at fidelityinternational.com
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How confident are CEOs as they lean in to 2024? Is inflation still a major worry for businesses or has it been banished? How concerned are company managers about shifting geopolitics?
For well over a decade we’ve been asking our worldwide network of sector analysts these questions (and about 80 more) - to get a unique bottom-up picture of the companies they cover. Their conclusions form Fidelity International's annual Analyst Survey.
This month, Fiona O'Neill, Head of Global Cross-Asset Research Capabilities, Gita Bal, Global Head of Fixed Income Research, and Kris Atkinson, Fixed Income Portfolio Manager, join Richard Edgar to dig through the results.
With additional contributions from analysts Liz Brockway, Eric Tse and Aki Takaesu.
You can read the Analyst Survey in full here or on your local Fidelity website.
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From artificial intelligence to US resilience, Richard Edgar discusses the big themes of 2023 with a panel of multi asset portfolio managers: Taosha Wang, Ian Samson and Talib Sheikh. What can the investment stories of the year teach us about the year ahead?
With additional contributions from Lee Sotos and Patrick Graham.
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In this episode, Catherine Yeung, Investment Director, and Marty Dropkin, Head of Equities, Asia Pacific, explore the critical role of transition materials — minerals and elements, such as lithium, cobalt, and nickel, that are essential to developing and deploying clean energy technologies.
Demand for these materials around the world continues to grow so securing a reliable supply of them is a priority for countries trying to get to net zero. China has many of them in abundance and it dominates their production and processing, which in turn makes the country indispensable to a successful and sustainable transition.
Catherine and Marty are joined by Analyst and Portfolio Manager, James Richards, from London and Shanghai-based Director of Research for Equities in China, Monica Li, to discuss what investors can do to share in this boom and prepare their portfolios for a greener future.
With additional contributions from Hong Kong-based Analyst and Portfolio Manager Karen Zhou and Shanghai-based Sustainable Investing Analyst Binyu Zhao.
Read more at fidelityinternational.com
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Richard Edgar is joined by Steve Ellis, Global CIO for Fixed Income, Marty Dropkin, Head of Equities for Asia Pacific, and Global Macro Economist, Anna Stupnytska, to discuss the four scenarios Fidelity's investment teams are watching for 2024.
With additional contributions from Fidelity's Chief Sustainability Officer Jenn-Hui Tan, Head of European Real Estate, Neil Cable, and Head of Private Credit Strategies, Michael Curtis.
You can read Fidelity's 2024 Outlook in full here.
Do you have a question you'd like to put to one of Fidelity's investment team? We're handing the microphone over to you again for our next episode. To take part please send your investment related question to editorial@fil.com by Friday 1st December, and we'll put the best ones to our experts. Look forward to hearing from you!
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In this special edition of The Investor’s Guide to China, Catherine Yeung, Investment Director, is joined in Hong Kong by Louis-Vincent Gave, the founder and CEO of Gavekal, a leading independent provider of global investment research.
They tackle questions from the development of China’s AI landscape and what it means for the country’s youth unemployment, to what the stellar performance of the Chinese bond market means for the country, and the internationalisation of the renminbi.
With an additional contribution from Portfolio Manager Tina Tian.
Read more at fidelityinternational.com
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Richard Edgar is joined by Steve Ellis, Chief Investment Officer for Fixed Income, Gita Bal, Global Head of Fixed Income Research, and Salman Ahmed, Fidelity’s Global Head of Macro and Strategic Asset Allocation, to discuss whether the levers central banks have to pull are working.
With additional contributions from Multi Asset Portfolio Manager Caroline Shaw.
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When you look at some of the big economic issues China is dealing with today—lacklustre growth, a real estate slump, price disinflation, or an ageing population—you quickly realise Japan has been through a lot of the same challenges.
What can we learn from Japan’s experiences? Is there a policy playbook there for how to respond to similar economic pressures for China, or indeed, any other country confronting these challenges?
In October’s episode, Catherine Yeung, Investment Director, and Marty Dropkin, Head of Equities, Asia Pacific, are joined by Miyuki Kashima, Head of Investments, Japan, and Eric Nie, Co-Head of Investments, China, to talk through the lessons learned from Japan’s economic journey and what’s going on in China today.
With additional contributions from Ying Lu, Analyst & Portfolio Manager, and Reggie Pan, Investment Analyst.
Read more at fidelityinternational.com
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This month's guests challenge the consensus on recession risk and sticky inflation - and where central banks are getting it wrong. Richard Edgar is joined by Fixed Income CIO Steve Ellis, Global Macro Economist Anna Stupnytska, and Portfolio Manager Rosanna Burcheri.
And Nina Flitman takes a look at what the destocking trend in the chemicals sector could tell us about wider market stress with three analysts who cover the industry from different asset class perspectives. You can read more on their discussion here.
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When it comes to currencies, it often feels like it's all about the US dollar. Although the greenback has dominated international trade and finance for decades, some subtle shifts have started playing out among the currencies of major economies. Rising geopolitical tensions and the changing structure of global trade are prompting some countries to rethink and scale back their reliance on the dollar, a process now referred to as ‘de-dollarisation’.
At the same time, China has been pushing to increase the use of the renminbi in international markets with the hope that someday it could challenge the dollar as a major reserve currency. This comes despite China's capital account remaining mostly closed and the renminbi not being freely convertible, and also despite the dollar's current dominance as the world's go to safe haven asset.
In July’s episode, Catherine Yeung, Investment Director, and Marty Dropkin, Head of Equities, Asia Pacific, ask Portfolio Manager, Morgan Lau, and Asia Economist, Peiqian Liu, how far can de-dollarisation go? Could it disrupt how companies or countries pay for imports and exports? Or even how the US funds itself as the world's biggest debtor nation?
With additional contributions from Amit Goel, Portfolio Manager, Monica Li, Director of Research, and Shing Zhu, Investment Analyst.
Read more at fidelityinternational.com
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China’s economic rebound hasn’t been as strong as many anticipated. But then, it’s not that surprising, as no one was expecting any major stimulus like in previous cycles, such as the global financial crisis. However, the Chinese consumer was really the one that was expected to underpin and power this recovery.
At the beginning of June, Fidelity’s global investment team embarked on a research trip to Shanghai and Hefei in eastern Anhui province where they met with dozens of companies. To get their on-the-ground insights, Catherine Yeung, Investment Director, and Marty Dropkin, Head of Equities, Asia Pacific, are joined in this episode by portfolio managers Dale Nicholls and Hyomi Jie.
With additional contributions from Eric Zhu, Research Associate, and Eric Tse, Investment Analyst.
Read more at fidelityinternational.com
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Dr Doug Gurr, Director of London's Natural History Museum, joins Richard Edgar to discuss the urgency of tackling biodiversity loss and what the financial community can do to help.
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How do you measure biodiversity? From the forests of Borneo, with the help of a pioneering team of scientists, Fidelity have followed a project to explore if sound recordings - layered with artificial intelligence - could help to solve biodiversity's data issue. Analyst Minlin Lee travelled to Indonesia to see, and hear, the data gathering in action, while Charlotte Apps followed the analysis in the south of France.
Back in the studio, Richard Edgar is joined by Fidelity International's Global Head of Stewardship and Sustainable Investing, Jenn-Hui Tan, to discuss why investors should be aware of nature loss.
With additional contributions from Portfolio Manager Velislava Dimitrova and Director of the Natural History Museum in London, Dr Doug Gurr.
You can hear Dr Gurr's conversation with Richard in full here.
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2021 was a big year for the global fight against climate change. China's president, Xi Jinping, again pledged that China would hit peak emissions by 2030 and be net zero by 2060. Then at COP26 in Glasgow, over 100 countries pledged to cut greenhouse gas emissions and eliminate deforestation.
But that appeared to come to a screeching halt when the world was hit by the triple blow of Omicron spreading globally, the war in Ukraine breaking out, and the Fed starting to hike interest rates. For some people, it looked like fighting climate change took a back seat as priorities shifted towards energy security and economic stability.
Coming back to 2023: China is still the biggest greenhouse gas emitter. But has the country slipped on its path to decarbonisation? Or is progress indeed moving ahead?
In this episode, Catherine Yeung, Investment Director, and Marty Dropkin, Head of Equities, Asia Pacific, are joined by Flora Wang, Portfolio Manager & Head of Stewardship, Asia, and Dhananjay Phadnis, Portfolio Manager.
With additional contributions from Senan Yuen, Head of Investments, China, Bunny Huang, Investment Analyst, and James Richards, Senior Industry Analyst.
Read more at fidelityinternational.com
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What impact will climate change have on portfolios? Should investors ready themselves for a disorderly transition to net zero? And what if it all gets sorted out - what are the investment implications for a greener, decarbonised future?
Richard Edgar is joined by Global Macro Economist Anna Stupnytska and Portfolio Managers Kris Atkinson and Caroline Shaw to discuss how investors can rise to the challenge.
With additional contributions from Fidelity's Global Head of Investment Research Ned Salter.
Listen to more from Ned's Trade Offs series here.
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Chip shortages at the start of the Covid pandemic threw semiconductors into the limelight. More recently, chips have been the focus of trade tensions between China and the US. Now, as China reopens and supply chains adjust, how will the ‘Chip War’ affect the future of the global tech hardware industry, and ultimately the prices of thousands of types of consumer goods?
In this episode, Catherine Yeung, Investment Director, and Marty Dropkin, Head of Equities, Asia Pacific, are joined by Terence Tsai, Analyst and Portfolio Manager, and Tina Tian, Portfolio Manager, as they discuss China's evolving role in the global tech hardware supply chain, the effects of the ‘Chip War’ with US, and what it all means for the economy and investors.
With additional contributions from Miya Huang, Innovation Intelligence Lead in Dalian; Zaf Tiu, Research Associate in Singapore; Chandrasekhar Sridhar, Analyst & NDA in Mumbai; Vivian Pai, Fund Manager, Taipei; Jonathan Tseng, Equity Research Analyst, London; and Vivian Wang, Investment Analyst in Hong Kong.
Read more at fidelityinternational.com
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After the collapse of Silicon Valley Bank, Richard Edgar is joined by Steve Ellis, Global CIO for Fixed Income, Anna Stupnytska, Global Macro Economist, and Gita Bal, Global Head of Fixed Income Research, to discuss the fallout and whether it could be enough to force a rethink at the Federal Reserve.
Asia Economist Peiqian Liu also joins Richard to discuss what China's recovery looks like on the ground.
You can read more analysis on SVB and the fallout on your local Fidelity website or here.
Opening clip:
US President Joe Biden, March 13th, Sky News
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Bunge is one of the world's biggest agriculture commodity businesses. Linking farmers with customers is a complex job. But doing it sustainably? Bunge's CEO Greg Heckman explains how he's approaching that challenge, and the the choices he's faced as chief executive, in his interview with Ned Salter, Global Head of Investment Research.
Hear about the investment implications of that interview in this episode, recorded in November 2022, where Ned is joined by Senior Industry Analyst James Richards and Global Head of Fixed Income Research Gita Bal.
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From farmers to customers, agriculture commodities powerhouse Bunge works with thousands of stakeholders along vast value chains. Its scale means influence - so how is it responding to calls for greater sustainability in the crops it distributes? How is it managing the cost of increased ESG oversight?
In this final episode of the series, recorded in October 2022, Ned Salter, Global Head of Investment Research, talks to Bunge Chief Executive Greg Heckman about the choices and trade offs he's been making since taking the helm in 2019.
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Keeping profits, social responsibility, and public relations on an even keel is no mean feat when you're a government contractor. UK services company Serco employs tens of thousands across the world in areas as diverse as defence, justice, and healthcare.
Rupert Soames joined Serco as chief executive in 2014 and completed his tenure at the end of 2022. In this straight-talking interview, Fidelity International's Global Head of Investment Research Ned Salter hears about his ESG lessons and in particular the social component: could Serco pay their staff more? Yes, but they'd lose business. Should they carry out controversial government policy? Yes, if it's the mandate of a democratically elected government. Is ESG investing a good thing? Not in its more zealous forms, no.
Hear him explain these answers in this episode, and why he sees public scrutiny as an essential part of the job, and then listen to Fidelity's investment team explain the significance of what's been said here.
This interview was recorded in July 2022.
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Managing and looking after people is core to a government services company like Serco. And the risk management that goes with such work demands a very different approach.
In this episode of Trade Offs Fidelity's investment team use highlights from the interview with Serco's former Chief Executive Rupert Soames to illustrate how investors should be considering the 'S' of ESG and why its importance is only set to rise.
Ned Salter, Global Head of Investment Research, is joined by Equity Research Analyst Dominic Hayes and Head of Strategic Initiatives for Global Investment Research Fiona O'Neill.
Listen to the full interview with Rupert Soames here.
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Just how confident do CEOs feel about the year ahead? Do they really expect earnings to grow? Is reaching net zero still a priority?
For answers to these questions (and many more), we’ve asked 152 of Fidelity International’s investment analysts for their views – and brought it all together into the annual Analyst Survey.
Fiona O'Neill, Head of Strategic Initiatives for Global Investment Research, and Gita Bal, Global Head of Fixed Income Research, join Richard Edgar to dig through the results.
With additional contributions from Fidelity International's Chief Executive Anne Richards, Global Equities Portfolio Manager Ashish Kochar and analysts Serhat Birbilen, Michael Gaynor and Vivian Wang.
You can read the Analyst Survey in full here, or at your local Fidelity website.
Follow this link to Trade Offs, our new podcast where we interview CEOs about the tough choices they're making when it comes to ESG.
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After three years, China has dropped its zero-Covid policy, and 2023 has brought a sharp rebound in activity. Road traffic, hotel bookings and many other indicators are approaching or even exceeding their 2019 levels. It's clearly good news for the economy but what does China’s reopening mean for regional and global supply chains?
In the short term, Covid infections have been disrupting manufacturing as well as logistics networks but there are also some longer-term forces at play. The world looks different today than it did even just a few years ago, before the pandemic. The US-China trade war has prompted companies everywhere to hedge geopolitical risks by diversifying their manufacturing into other markets and shortening their supply chains. The slow burn demographic challenge is also pushing up manufacturing costs.
In this episode, Catherine Yeung, Investment Director, and Marty Dropkin, Head of Equities, Asia Pacific, are joined by Evelyn Huang, Multi Asset Portfolio Manager, and Lynda Zhou, Equity Portfolio Manager, to discuss China's rapid reopening and what it means for the country's growth outlook, for its manufacturing competitiveness, and for investors looking to position themselves for the next phase. With additional contributions from James Trafford, Analyst and Portfolio Manager.
Read more at fidelityinternational.com
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Lorenzo Simonellis is chief executive of one of the world's biggest oilfield services and energy technology companies, Baker Hughes. It supports traditional exploration and extraction while also developing the latest energy equipment. As such, it stands in both the 'old' and 'new' spheres of the energy sector.
Mr Simonelli talks to Fidelity International's Global Head of Investment Research Ned Salter about the pros and cons of natural gas at a time of political upheaval and the trade offs he faces while balancing energy security with emissions targets.
Listen to the analysis of this interview by Fidelity's investment team here.
Watch video clips and read bonus material from the interview here.
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What can investors learn from the trade offs an energy CEO is facing and the choices he's making? Fidelity's experts go over the highlights from the interview with Baker Hughes Chief Executive Lorenzo Simonelli, providing context and investment implications.
Ned Salter, Global Head of Investment Research, is joined by Analyst and Portfolio Manager Paul Gooden and Portfolio Manager Rosanna Burcheri.
Listen to the full interview with Lorenzo Simonelli here.
Watch video clips and read bonus material from the interview here.
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Feeding 8 billion people with limited arable land is one of the modern world's most pressing headaches. Add to that a growing concern over the impact intensified farming practices can have on local ecosystems and biodiversity and you get a sense of the challenges facing a company like Bayer.
Founded in the mid-19th century, Bayer is one of Germany's oldest companies. Originally a pure pharmaceuticals manufacturer it diversified into crop science with the purchase of the agribusiness Monsanto in 2019. Its chief executive, Werner Baumann, has overseen that shift and with it the juggling of food security, conservation, and the welfare of farmers and consumers worldwide.
In this second instalment of Trade Offs, Mr Baumann talks to Fidelity International's Global Head of Investment Research Ned Salter about he works to align those issues and what Bayer is doing to boost crop yields while remaining environmentally and socially sustainable.
Listen to the analysis of this interview by Fidelity's investment team here.
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In this episode Fidelity's investment team take a closer look at some of the highlights from the interview with Bayer's chief executive Werner Baumann.
Ned Salter, Global Head of Investment Research, is joined by Equity Research Analyst Panpan Xiao and Portfolio Manager Dmitry Solomakhin.
Listen to the whole interview here.
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As chief executive of one of the world's largest financial institutions for more than a decade Brian Moynihan has led Bank of America through some tumultuous times. The shift from shareholder to stakeholder capitalism - accelerated by the Great Financial Crisis, heightening environmental challenges, and a global pandemic - has demanded careful stewardship, and all against a backdrop of increasing political upheaval.
He talks to Fidelity International's Global Head of Investment Research Ned Salter about how he balances the needs of all stakeholders and the trade offs he faces in guiding Bank of America and the companies it works with on a credible path to sustainability.
Listen to the analysis of this interview by Fidelity's investment team here.
Watch video clips and read bonus material from the interview here.
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In this episode Fidelity's investment team take a closer look at some of the highlights from the interview with Bank of America's chief executive Brian Moynihan.
Ned Salter, Global Head of Investment Research, is joined by Senior Cross Asset Financials Analyst Lee Sotos and Portfolio Manager Rosanna Burcheri.
Listen to the whole interview here.
Watch video clips and read bonus material here.
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As the World Economic Forum in Davos comes to a close, Fidelity's Richard Edgar talks to Chief Executive Anne Richards about her takeaways from the week including the international approach to Ukraine, central bank messaging, and why business leaders are allowing themselves a (tentative) sigh of relief.
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Tune in for a new series that gets under the bonnet of business and sustainability.
From finance to energy to agriculture, how do business leaders balance the needs of all stakeholders and what are the trade offs they have to make in the process?
Ned Salter, Global Head of Investment Research at Fidelity International, interviews chief executives in critical sectors about the difficult decisions they face when it comes to ESG.
Episode One with Bank of America's Brian Moynihan coming soon to Fidelity Answers.
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For our festive special Richard Edgar is joined by Head of Equities for Asia Pacific Marty Dropkin, Portfolio Manager Aditya Khowala, and Global Macro Economist Anna Stupnytska to answer your questions.
If you’ve been inspired to send in a question, our inbox is still open! You can send your questions to editorial@fil.com, and we’ll pick the best ones to put to our investment team in the new year. Looking forward to hearing from you.
You can hear more from Marty Dropkin in the latest Investors Guide to China podcast here.
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China's economy and its markets have faced a number of headwinds in 2022. Slowing growth, geopolitical uncertainty, the impact of the country's Covid policy, and how the PBOC, or the Chinese central bank, is manoeuvring how they ease monetary and fiscal policy as most other global banks move in a more hawkish direction. But despite all that, the opening up of China's onshore financial markets has been kicking into high gear throughout this same period.
In fact, we've seen a drumbeat of announcements about the world's biggest investment companies, Fidelity International included, moving deeper into China's onshore market, either by setting up wholly-owned local subsidiaries or, for instance, many global banks who have been taking control of their existing joint ventures.
In this episode, Catherine Yeung, Investment Director, and Marty Dropkin, Head of Equities, Asia Pacific, are joined by Jing Ning, a senior advisor for China equities, and Alvin Cheng, Fixed Income Portfolio Manager, to discuss how China’s local markets and its onshore investment industry are opening, expanding, and ever evolving.
With additional contributions from Helen Huang, Managing Director, China, Senan Yuen, Head of Investment, China, and Lily Cong, Chief Representative, Beijing Representative Office.
Read more at fidelityinternational.com
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After a year of volatility and uncertainty, how should investors navigate the year ahead? Richard Edgar is joined by Steve Ellis, Global Chief Investment Officer for Fixed Income, Ilga Haubelt, Head of Equities for Europe, and Victoria Mio, Head of Equity Research for Asia Pacific, to discuss the key themes and risks they'll be watching for in 2023.
With additional contributions from Salman Ahmed, Global Head of Macro and Strategic Asset Allocation, and Michael Curtis, Head of Private Credit Strategies.
Do you have a question you'd like to put to one of Fidelity's investment team? We're handing the microphone over to you for our Christmas episode. To take part please send your investment related question to editorial@fil.com by Tuesday 13th December, and we'll put the best ones to our experts. Look forward to hearing from you!
You can read Fidelity's 2023 Outlook in full here.
Opening clips:
Hallie Jackson, NBC News, September 27th 2022
Robin Brant, BBC News, March 28th 2022
NBC News, July 13th 2022
Victoria Valentine, BBC News, February 24th 2022
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Chinese equities markets have been volatile in the wake of last month’s Communist Party Congress in Beijing, where the country's leadership line up for the next five years was revealed. Investors have been looking for signs or signals in terms of what's going to happen as we enter a new phase of the Chinese growth story under President Xi Jinping's leadership.
Against an evolving backdrop of signature policies like common prosperity and dual circulation, China is seeing weak external demand creating challenges for manufacturers. Moreover, monetary policy is diverging between China and the rest of the world, not to mention Covid-related restrictions where domestic consumers are changing their spending patterns as the rest of Asia eyes China's reopening.
In this episode, Catherine Yeung, Investment Director, and Marty Dropkin, Head of Equities, Asia Pacific, are joined by Morgan Lau, Fixed Income Portfolio Manager, and Monica Li, Director of Research, Equities.
With additional contributions from Victoria Mio, Head of Equity Research, Asia Pacific, and Ben Li, Analyst & Portfolio Manager.
Read more at fidelityinternational.com
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So much of the investment conversation is dominated by companies that have already gone public. But it's not always just about listed companies.
Investors in private assets, particularly in equities, for many years have considered Asia and especially China as one of the most exciting markets anywhere. And while there have been challenges and setbacks along the way, the private asset space in Asia and China continues to develop at a really impressive pace.
In this episode, Catherine Yeung, Investment Director, and Marty Dropkin, Head of Equities, Asia Pacific, are joined by Jarlon Tsang, Managing Partner & Head of China at Eight Roads, and Jackie Chien, Director of Capital Markets.
With additional contributions from portfolio managers Vivian Liu and Dale Nicholls.
Read more at fidelityinternational.com
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Fidelity's Chief Investment Officer for Fixed Income Steve Ellis talks to Richard Edgar about the unexpected consequences of the Fed's rate hike cycle and where investors should be looking for protection.
Read more from Steve at fidelityinternational.com or your local Fidelity website.
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Help us make podcasts that give you, our listeners, what you want. Take this short survey and we'll enter you in to a prize draw for £250 of Amazon vouchers or the equivalent donation to a charity of your choice. Entries close this Saturday, September 10th. Go on, click on the link - we really want to hear what you have to say.
fidelityinternational.com/survey
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To many outsiders, Chinese equity investing might conjure up images of a huge momentum-fuelled market where investors revel in speculation and sustainability is an alien concept.
But developments on the ground in China show how stereotypes like this are swiftly becoming outdated. The country's markets have been changing shape over the last decade as institutional influence expands in the onshore market and foreign investors increase their exposure. A growing awareness of ESG has followed close behind.
In this episode, Catherine Yeung, Investment Director, and Marty Dropkin, Head of Equities, Asia Pacific, are joined by two of Fidelity’s sustainable investment team: Director of Sustainable Investing & Portfolio Manager Flora Wang and Global Head of Stewardship and Sustainable Investing Jenn-Hui Tan.
With additional contributions from Richard Edgar, Editor-in-Chief, Eric Zhu, Consumer Staples Analyst, and Binyu Zhao, Sustainable Investing Associate.
Read more at fidelityinternational.com
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Fresh from meeting industry leaders in Silicon Valley, Portfolio Manager Hyun Ho Sohn and analyst Jonathan Tseng join Richard Edgar to share their thoughts on how the tech sector will fare in a high-inflation environment. Global macro economist Anna Stupnytskaputs it all in perspective and we join Portfolio Manager Aneta Wynimko on a West End shopping trip to see the world from the consumer’s point of view.
With additional contributions from Global Chief Investment Officer Andrew McCaffery.
Listen to the full interview with Andrew McCaffery here.
Help us make podcasts that give you, our listeners, what you want. Take this short survey and we'll enter you in to a prize draw for £250 of Amazon vouchers or the equivalent donation to a charity of your choice. Entries close September 10th. Go on, click on the link - we really want to hear what you have to say.
fidelityinternational.com/survey
Opening clips:
Norah O'Donnell, CBS Evening News
Greg Milam, Sky News
BBC News
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Help us make podcasts that give you, our listeners, what you want. Take this short survey and we'll enter you in to a prize draw for £250 of Amazon vouchers or the equivalent donation to a charity of your choice. Entries close September 10th. Go on, click on the link - we really want to hear what you have to say.
fidelityinternational.com/survey
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What do companies really think of sustainability? What are they doing to improve their ESG credentials? These are some of the many questions 161 of Fidelity International's investment analysts around the globe have been asked as part the annual ESG Analyst Survey. And with 15,000 meetings with management teams a year under their belts their insights are invaluable for any asset allocator.
To dig through the findings Richard Edgar is joined by Global Head of Research for Fixed Income Gita Bal, Head of Strategic Initiatives for the Global Investment Research Team Fiona O'Neill, and Fixed Income PortfolioManager Kris Atkinson.
With additional contributions from Global Chief Investment Officer Andrew McCaffery and analysts Marcel Stötzel and Eric Zhu.
You can read more from this year's ESG Analyst Survey here.
Listen to Andrew's CIO update here.
Help us make podcasts that give you, our listeners, what you want. Take this short survey and we'll enter you in to a prize draw for £250 of Amazon vouchers or the equivalent donation to a charity of your choice. Entries close September 10th. Go on, click on the link - we really want to hear what you have to say.
fidelityinternational.com/survey
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The phrase "common prosperity" has certainly been getting a lot of air time recently, both domestically in China as well as around the world. Investors have come to know this campaign through a series of tighter regulations across a number of industries within China. But what does it really mean for companies and investors, or even the broader economy? Hosts Catherine Yeung, Investment Director, and Marty Dropkin, Head of Asian Fixed Income & Hong Kong Investments, are joined by Equity Analyst & Portfolio Manager Yuanlin Lang and Senior Credit Analyst & Portfolio Manager Ming Gong to find out how the three key sectors of healthcare, education, and housing - commonly referred to in China as the 'three mountains' because they represent the rising burden of the cost of living for many households - are adjusting. With additional contributions from David Hoidal, CEO of the Shanghai-based hospital operator DeltaHealth, and Tina Tian, Equity Portfolio Manager at Fidelity. Read more at fidelityinternational.com
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From the energy transition to withdrawing from Russian assets, the conflict in Ukraine has put environmental, social and governance issues in the spotlight for businesses and investors. Carsten Roemheld is joined by Portfolio Manager Caroline Shaw, and Portfolio Manager and Director of Equities for the Emerging Markets team Punam Sharma to discuss how companies can navigate these challenges, and the implications for asset allocation.
With additional contributions from Fidelity's Global Chief Investment Officer AndrewMcCaffery, and analysts Ben Eaton and Calum Emslie.
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Now over two years into this pandemic and the world is still battling some serious supply chain disruptions - all the more so, of course, with the war in Ukraine and sanctions on Russia, plus Covid-related lockdowns in China. How are companies reacting to the constant stream of disruptions and what are they doing to help mitigate risk? What should China investors be wary of and where are the opportunities?
Catherine Yeung, Investment Director, and Marty Dropkin, Head of Asian Fixed Income & Hong Kong Investments, are joined by Fixed Income Portfolio Manager Belinda Liao and Equity Analyst & Portfolio Manager Terence Tsai to discuss how China is navigating through these supply chain disruptions.
With additional contributions from Charvi Pandey, Equity Analyst, and Ben Li, Equity Analyst & Portfolio Manager.
Read more at fidelityinternational.com
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One month on from the start of the war in Ukraine, the knock-on effects for the global economy and the old world order are becoming clearer. With disrupted supply chains, persistent inflation, and a realignment of geopolitics, we take a closer look at how investors can navigate these seismic changes. Carsten Roemheld is joined by Global Head of Macro and Strategic Asset Allocation Salman Ahmed, Head of Multi Asset Investment Management for Europe Eugene Philalithis and Senior Sovereign Analyst Andressa Tezine to discuss the implications for asset allocation.
With additional contributions from Director of Global Equity Research, Fiona O'Neill.
Read the latest thinking from Fidelity International here.
Read Salman's piece on Remapping China risks.
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A lot of the financial headlines we’re seeing about China lately involve debt of one form or another. It could be a real estate company that borrowed too much and got into trouble or a new macro policy aiming to rein in leverage in the banking system. But it’s important to differentiate between bad debt and good debt. While companies going bust may be newsworthy, this can also help in reducing so called ‘moral hazard’ if it results in credit risk being priced better by investors. While another positive force is China’s onshore bond market which has nearly doubled in the last five years, and is now the second biggest bond market in the world.
To help explore China's debt markets, Catherine Yeung, Investment Director, and Marty Dropkin, Head of Asian Fixed Income & Hong Kong Investments, are joined by George Efstathopoulos, Multi-Asset Portfolio Manager, and Monica Li, Equities Director. With additional contributions from Olivia He, Portfolio Manager, and Claire Xiao, Credit Analyst.
Read more at fidelityinternational.com
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Volatile markets, unpredictable governments, rising costs - how does one begin to run a company in such uncertain times? How are managers feeling about the coming year, what are their plans and what are the implications for investors? We’ve asked over 150 of our global research team for their views as part of Fidelity International’s annual Analyst Survey.
Carsten Roemheld digs through the key findings with Global Head of Research for Fixed Income Gita Bal, Director of Global Equity Research Fiona O'Neill, and Portfolio Manager Caroline Shaw. With additional contributions from Global Chief Investment Officer Andrew McCaffery and analysts and portfolio managers Cenk Simsek, Rebecca Clements and Alice Li.
Read the full annual Analyst Survey from Fidelity International here.
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In our first episode of the year we hear from some of Fidelity's keenest central bank watchers about the policy moves they're expecting in 2022. How many hikes will the Fed push through, what path will the PBOC tread, and when does the ECB make its move? And how are all these expectations being reflected in allocations? We also hear where energy prices are heading and why.
Carsten Roemheld is joined by Global Economist Anna Stupnytska and multi-asset Portfolio Managers Charlotte Harington and Matt Quaife. With additional contributions from Energy Analyst and Portfolio Manager Paul Gooden.
Read more at fidelityinternational.com
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How do you forge a sustainable future when you're the CEO of one of the world's biggest mining companies? BHP Chief Executive Mike Henry talks to Fidelity International's Global Head of Research Ned Salter about the balancing act he and other corporate leaders face and the importance of minimising ESG trade-offs.
This is an edited version of the video interview which you can watch here along with more from Fidelity International's Sustainable World Summit.
Read more at fidelityinternational.com or your local Fidelity website.
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The pandemic and COP26 made 2021 a big year for sustainability. In this final podcast of the year we round up the main themes and ask where next for investors and ESG. We look back at Fidelity International's inaugural Sustainable World Summit and some of the highlights from speakers including the UN's Special Envoy for Climate and Finance Mark Carney; Former President of the European Commission José Manuel Barroso; and Chief Executive of mining giant BHP, Mike Henry.
Carsten Roemheld is joined by Fidelity's Head of Corporate Sustainability and Enterprise Relationships, Victoria Kelly.
Watch interviews and highlights from Fidelity's Sustainable World Summit here.
Read more at fidelityinternational.com or your local Fidelity website.
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China’s labour pool is shrinking as the population ages and more people retire than enter the workforce. How people save and invest as they think about wealth preservation signals big challenges and opportunities for China’s pension system development. So, how will government policy seek to ensure that the corporate sector remains dynamic and innovative, and can keep attracting the talent it needs? What sectors stand to benefit as a very different, younger generation increases its purchasing power?
To help investigate these questions and more, Paras Anand, Global Chief Investment Officer for Asia Pacific, is joined by three of Fidelity’s portfolio managers, each with a keen interest in the changes underway in China’s population: Aneta Wynimko, Hyomi Jie, and Morgan Lau. With additional contributions from Casey McLean, Portfolio Manager, Catherine Yeung, Investment Director, Lily Cong, Chief Representative for Fidelity’s Beijing Representative Office, and Ren Cheng, Senior Research Advisor at Fidelity Investments in the US.
Read more at fidelityinternational.com
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Chief investment officers and economists assess the policy dilemmas and big investment themes of 2022.
Richard Edgar is joined by Steve Ellis, Global Chief Investment Officer for Fixed Income, Romain Boscher, Global Chief Investment Officer for Equities, Anna Stupnytska, Chief Economist, with additional contributions from Neil Cable, Head of European Real Estate investing.
Read Fidelity International's 2022 Outlook
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Climate change is a complex and ever-changing challenge for markets. In this podcast we hear how investors can map a path through the transition while also helping in the battle against a warming planet.
Richard Edgar is joined by Global Head of Macro and Strategic Asset Allocation Salman Ahmed, and two portfolio managers already investing with climate-focused strategies: Cornelia Furse and Kris Atkinson. With additional contributions from Global Chief Investment Officer Andrew McCaffery.
Read more at fidelityinternational.com
Listen to the full Andrew McCaffery interview here
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Regulation in China is nothing new. But anyone observing the financial headlines in recent years, and certainly over recent months, will have noted a real pick up in regulatory activity that has affected some of China’s biggest and most dynamic companies. So, how should investors think about this regulatory new normal? Which sectors align with the country’s new strategic goals and ultimately stand to benefit? And how is all of this likely to impact the quality and quantity of economic growth in the world’s second biggest economy?
To discuss this recent wave of regulatory action in China, Paras Anand, Global Chief Investment Officer for Asia Pacific, is joined by two of Fidelity’s Hong Kong-based investment team: Dale Nicholls, a Portfolio Manager with a focus on China, and Asia Fixed Income Investment Director, Vanessa Chan. With additional contributions from Fidelity’s Tina Tian, Analyst and Portfolio Manager, David Cochrane, Equity Analyst, Ming Gong, Senior Credit Analyst and Portfolio Manager, and Catherine Yeung, Investment Director.
Read more at fidelityinternational.com.
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A reckoning in China, a debt ceiling in the US, soaring energy prices in Europe: in the month’s Rich Pickings we gather the experts to help make sense of it all.
Richard Edgar is joined by Global Economist Anna Stupnytska, Head of Asia Fixed Income Marty Dropkin, and global equities Portfolio Manager (and a contrarian investor) Dmitry Solomakhin. With additional contributions from global Chief Investment Officer Andrew McCaffery.
Listen to the full interview with Andrew McCaffery here.
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In this month's Rich Pickings three of Fidelity's equity analysts pitch what they think is the most exciting investment opportunity in their sector to a critical panel of portfolio managers.
Richard Edgar adjudicates as analysts Johnny Tseng, Emma Newey, and Alex Laing as they present to portfolio managers Charlotte Harington and Aditya Khowala. We also hear about Fidelity's core asset allocation from Global Chief Investment Officer Andrew McCaffery.
Listen to the full interview with Global CIO Andrew McCaffery.
To read more go to fidelityinternational.com.
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China's role in global affairs is more important - and more complex - than ever. From geopolitics and economics to the battle against climate change, the country's participation in global issues presents investors with opportunities but also requires unwavering attention. Central to any analysis must be an understanding of how China hopes to portray itself and why the country seeks certain roles on the world stage.
To discuss China's place in the world, Paras Anand, Global Chief Investment Officer for Asia Pacific, is joined by Louis-Vincent Gave, Founder and CEO of Gavekal, a leading independent provider of global investment research. With additional contributions from Arthur Kroeber, Gavekal's Head of Research, Velislava Dimitrova, a Fidelity portfolio manager, and Alice Li, an analyst based in Fidelity's Hong Kong office.
Read more at fidelityinternational.com.
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Is inflation here today, gone tomorrow? Or in for the long haul? This is the question preying on the minds of central bankers and investors alike. But never fear: Fidelity's analysts and macro team have been poring over the data and in this month's Rich Pickings Richard Edgar talks to them and others from the investment desks about what happens next and what it means for allocations.
Joining Richard are Global Economist Anna Stupnytska, Multi Asset Portfolio Manager Matt Quaife, and Chief Investment Officer for Fixed Income Steve Ellis. With additional contributions from Global Chief Investment Officer Andrew McCaffery and Global Macro Strategist Max Stainton.
Listen to the full interview with Global CIO Andrew McCaffery here.
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Fidelity International's first ESG-focused Analyst Survey reveals our analysts believe the opportunities to be had from the decarbonisation megatrend now outweigh the risks. The report sheds light on those sectors where there's most to be gained and where companies are being reticent about burnishing their sustainability credentials - and why.
To discuss these and more findings from the analysts Richard Edgar is joined by editor of the survey George Watson, Head of Global Research for Fixed Income Gita Bal, and Director of Equities in Europe, Terry Raven. We also hear from some of the analysts themselves: Alex Laing, Lulu Xiong, and Karens Muljadi.
You can read the survey in full here: fidelityinternational.com
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China might dominate headlines but there's a lot more to Asia Pacific than a single country. We're talking developed economies with well-established capital markets benefiting from proximity to the world's productivity powerhouses.
To hear about some of the unsung heroes of the Asia Pacific region Richard Edgar talks to Hong Kong-based investment director Catherine Yeung, and portfolio managers Dale Nicholls in Singapore and Paul Taylor in Australia. We also hear from Global CIO Andrew McCaffery on how Fidelity's core allocation is positioned for this phase of the pandemic.
Listen to the full interview with Andrew: Fidelity CIO on why we're calling it a miniboom
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The Investor's Guide to China from Fidelity International takes you deep into the workings of the Chinese economy and its financial markets. Paras Anand, Chief Investment Officer for Asia Pacific, brings you a cast of investment experts working in the world's second largest economy. Hear how they're uncovering this rapidly developing market and avoiding its pitfalls.
Episode 8: Despite trade tensions China continues to be the world's dominant exporter. And thanks to the post-pandemic lead of the Chinese economy its capital markets are proving especially attractive to investors. But will these growth drivers be enough for a country facing high levels of debt and an ageing population? What will reshaped economic policies mean for foreign investors? Our investment teams have some ideas.
Joining Paras to discuss China's trade and other elements of the country's growth trajectory are Alex Zhang, a portfolio manager based in Shanghai, Wen-Wen Lindroth, Lead Cross-Asset Strategist, and Marty Dropkin, Head of Asian Fixed Income. With additional contributions from portfolio manager Bertrand Puiffe and Shanghai-based credit analysts Crystal Cui.
READ: China bond defaults signal a coming of age as state safety net shrinks
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Efforts to mitigate the economic impact of Covid-19 have left us with debt mountains higher than after the second world war. As governments begin to roll out big post-pandemic fiscal programmes and increase the debt still further the role of central banks becomes increasingly vital to the stability of government finances. What does that mean for the functioning of global markets and the construction of portfolios?
In this month's Rich Pickings Richard Edgar talks to Fidelity International's Head of Global Macro and Strategic Asset Allocation Salman Ahmed together with portfolio managers Charlotte Harington and Tim Foster. With additional contributions from Global Chief Investment Officer Andrew McCaffery. You can listen to the full interview with Andrew here.
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Andrew McCaffery, Global Chief Investment Officer at Fidelity International, talks to Richard Edgar about the current psychology of markets, The Fed's stance (is it right?), and how to think about asset allocation at this important juncture.
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The results are in for Fidelity's annual Analyst Survey. Over 140 sector experts from across the world have been asked for a detailed picture of how they expect to see their companies perform in the coming year, from the health of balance sheets to the confidence of management teams, and the outlook is encouraging. Richard Edgar talks to the survey's editor, George Watson, to hear the key findings, and to Fidelity's global head of research, Ned Salter, and global economist, Anna Stupnytska, for the fuller context and investment implications. With additional contributions from analysts and portfolio managers Tom Robinson, Christine Miyagishima, and Ben Li.
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What impact has the Covid-19 pandemic had on climate policies, companies' approach to environmental issues, and the market for green securities? Editor in Chief Richard Edgar talks to three of Fidelity International's climate investment specialists to understand what's in store for this expanding market: portfolio managers Velislava Dimitrova and Kris Atkinson, and Global Economist Anna Stupnytska.
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Exclusive research carried out by Fidelity International reveals the changes taking place in the boardrooms of China and amongst its investors. In this podcast, Editor in Chief Richard Edgar discusses the research with Global Head of Sustainability Jenn-Hui Tann and Portfolio Manager Flora Wang and what it's telling us about corporate engagement in China. We also hear from Terence Tsai, an analyst working alongside some of China's biggest companies to help them build more sustainable practices.
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The Investor's Guide to China from Fidelity International takes you deep into the workings of the Chinese economy and its financial markets. Paras Anand, Chief Investment Officer for Asia Pacific, brings you a cast of investment experts working in the world's second largest economy. Hear how they're uncovering this rapidly developing market and avoiding its pitfalls.
Episode 7: China's One Belt One Road (OBOR) initiative launched in 2013 as an economic strategy to improve trade connections through a series of massive infrastructure projects. Belt and Road now touches two thirds of the world's population and a third of the global economy. It has not been without its fair share of controversy though and in recent years strained geopolitics have hampered its progress. But could a post pandemic world with a greater emphasis on regionalisation - as witnessed by the recent signing of the Regional Comprehensive Economic Partnership (RCEP) - give Belt and Road a new lease of life and fresh direction?
Paras talks to portfolio managers Lynda Zhou and Alex Duffy, and sovereign credit analyst Nathan Sribalasundaram. With additional contributions from portfolio manager Sumant Wahi and Shanghai-based analyst Alex Dong.
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With US elections round the corner we thought this episode from our sister podcast, Rich Pickings, would be of interest to listeners. Fidelity's Global Head of Macro Salman Ahmed talks to Editor in Chief Richard Edgar about what the radically different policies proposed by the two potential administrations could mean for markets and investors.
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The Covid-19 crisis has seen a dramatic turnaround for the banking sector. Vilified for the Global Financial Crisis, banks this time have been a key part of the solution acting as essential shock absorbers for economies across the world.
But as debts rise, rates fall, and economic growth peters out, what will it mean to be a lender in a crisis? Has the role of banks changed for good? And what could that mean for the proliferating fintech companies - and investors? Richard Edgar hears from the experts: Shanghai-based equities analyst Monica Li, and cross-asset analysts Federico Wynne and Lee Sotos.
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What are Fidelity's almost 150 analysts saying about the state of the corporate world? Where does management sentiment stand across all regions and all sectors? Richard Edgar talks over the latest findings from Fidelity's Analyst Survey with Global Head of Research for Fixed Income, Gita Bal; Director of Equities, Terry Raven; and editor of the survey, George Watson.
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The Investor's Guide to China from Fidelity International takes you deep into the workings of the Chinese economy and its financial markets. Paras Anand, Chief Investment Officer for Asia Pacific, brings you a cast of investment experts working in the world's second largest economy. Hear how they're uncovering this rapidly developing market and avoiding its pitfalls.
Episode 6: China boasts the biggest consumer market in the world by population with large parts of it still under-penetrated. Wealth and technology are fuelling the sophistication of tastes and diversifying demand, often in unexpected ways. Success in this market is only for the most nimble, bold and canny of businesses and mapping the patterns of Chinese consumption is essential to any investor in the region.
To understand the trajectory of consumption in the country and what it means for markets, Paras talks with portfolio managers Hyomi Jie and Dale Nicholls, with additional contributions from analysts Ben Li and Jason Fu.
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A commodity price crash, an extraordinary demand shock, and a mooted 'green' recovery have brought the structural changes facing the energy industry into sharp relief. As societies are forced to think more carefully about how to build resilience against future crises we look at the impact on an industry that underpins every aspect of our lives.
Richard Edgar, Editor in Chief, talks with equity analysts and portfolio managers Paul Gooden and Tom Robinson, and with fixed income analyst Christine Miyagishima. With additional contributions from European utilities analyst, Boya Zhao-Robinson.
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When will things get back to normal and to what extent will companies and economies bounce back? These are just two of the questions being answered by around 150 analysts in this month's survey.
To provide context to the latest results Richard Edgar, Editor in Chief, talks to Marty Dropkin, Global Head of Research for Fixed Income; Fiona O'Neill, Director of Global Research for Equities; and George Watson, Survey Editor.
Additional contributions from Sherry Qin, Harriet Wildgoose, and Tom Robinson.
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The 2020 pandemic has opened the eyes of governments to how critical a robust digital infrastructure is to their economies. The time spent online by businesses and consumers for both work and leisure has rocketed - and early indicators show that these changes are structural. There's no going back.
To find out how the Covid-19 crisis is changing the companies at the heart of our digital infrastructure Richard Edgar, Editor in Chief, is joined by Gita Bal, Global Head of Research for Fixed Income; Sumant Wahi, Portfolio Manager with a focus on connectivity; and Ranjeev Juty, Equity Research Analyst covering streaming services and video gaming.
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The Investor's Guide to China from Fidelity International takes you deep into the workings of the Chinese economy and its financial markets. Paras Anand, Chief Investment Officer for Asia Pacific, brings you a cast of investment experts working in the world's second largest economy. Hear how they're uncovering this rapidly developing market and avoiding its pitfalls.
Episode 5: Technology and innovation. It wasn’t long ago that China was regarded as just a manufacturer of finished goods, an imitator rather than an innovator. But now the world is waking up to the technological prowess of China's companies. The proficiency reaches beyond the corporate world too: the online existence we've all been thrown into during lockdowns has long been a way of life for Chinese urbanites.
Talking to Paras about how investors should think about China's growing command of the sector in the context of the country’s broader economy are portfolio managers Raymond Ma and Tina Tian, and senior technology analyst Johnny Tseng, with additional on-the-ground reporting from analysts Yuanlin Lang and Sherry Qin.
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The latest survey of almost 150 analysts shows the first signs of dispersion in expectations for sectors. We look at which are likely to do better during the Covid crisis and why. Plus, new ESG-focused questions reveal how social issues are moving up the agenda at almost all companies.
Richard Edgar, Editor in Chief, talks to Marty Dropkin, Global Head of Research for Fixed Income; Fiona O'Neill, Director of Equities; and George Watson, Survey Editor.
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As the Covid-19 lockdown transforms consumer behaviour there is one sector that has had to adapt faster than any other: retail. Shuttered shops have forced companies to either expand their delivery businesses or rapidly develop them. The pivot has affected not just the retailers but their suppliers and even their landlords who are racing to keep up.
In this podcast we take a closer look at the changes that these businesses are making; the short-term adaptations as well as those that could prove to be permanent. Joining Richard Edgar, Editor in Chief, to discuss what it means for the high street, for shopping centres, and for the owners of those buildings, are Adrian Benedict, Head of Real Estate Solutions; Rebecca Clements, Senior Credit Analyst; and Serhat Birbilen, Equity Research Analyst.
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Market volatility has given the research team the perfect opportunity to put Fidelity's sustainability ratings through their paces and ask the question: do good ESG credentials lead to a better performance in a downturn? The results are eye-opening.
To explain the research and what it means for sustainable investing at Fidelity and beyond, Editor in Chief Richard Edgar is joined by ESG Analyst Ana-Victoria Quaas, Director of Quantitative Research for Fixed Income Joe Hanmer, and Head of Equities and Global Head of Equities Research Ned Salter.
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The CIO updates are now publishing exclusively on our sister channel, Rich Pickings.
With fixed income and equities markets seemingly entering a more benign phase after record swings in recent weeks, should we be looking to the oil price instead for a better guide to future prospects? And as central banks pump in trillions of liquidity, could inflation be on the radar? Chief Investment Officer Andrew McCaffery discusses these topics with Editor in Chief Richard Edgar.
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How are economic data playing into markets and what is scenario planning telling us about how to approach different asset classes during the pandemic? Chief Investment Officer Andrew McCaffery talks to Editor in Chief Richard Edgar about where we find ourselves after the Easter break and how the support of central banks is influencing investor behaviour.
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The global coronavirus shutdown will put a significant dent in corporate earnings this year, according to 150 Fidelity analysts surveyed this month, raising concerns about a looming solvency squeeze.
Marty Dropkin, Head of Research for Fixed Income, and Fiona O'Neill, Director of Equities, join Editor-in-Chief Richard Edgar and Survey Editor George Watson to discuss the context for and implications of the findings.
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Fidelity's Chief Investment Officer Andrew McCaffery talks to Editor in Chief Richard Edgar about why we might see a change in market leadership as China and other parts of Asia benefit from their handling of the pandemic, and what public rescues of private companies mean for sustainable investing.
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Fidelity's Chief Investment Officer Andrew McCaffery talks to Editor in Chief Richard Edgar about where markets find themselves in response to both the pandemic and the oil price, the possibilities emerging in credit markets, and how the crisis might re-frame the active-passive debate.
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It's hard to see into the future when so much is up in the air. But in this podcast we try and decipher some of the early indicators of what a post-coronavirus world might look like. What changes will take place in the corporate landscape and how will the role of the state play out? Which companies will emerge stronger and which will be utterly transformed? What about the future of markets themselves? Answering these questions and more are Paras Anand, Fidelity's Chief Investment Officer for Asia Pacific; Ned Salter, Head of Equities; and portfolio manager with a consumer and demographics focus, Aneta Wynimko. Hosted by Richard Edgar.
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Fidelity's Chief Investment Officer Andrew McCaffery - complete with his new home podcasting kit - talks to Editor in Chief Richard Edgar about where we are in the coronavirus crisis, the speed and consequences of huge government stimulus interventions, and how analysts and portfolio managers are looking for idiosyncratic opportunities.
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Chief Investment Officer for Fidelity International, Andrew McCaffery, talks to Richard Edgar about how latest market developments square up to similar past events, how he's advising portfolio managers, and what's helping him to navigate the liquidity and logistical challenges of the pandemic.
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Over 150 analysts across Fidelity's global network have reported on how they think their sectors and companies are positioned to manage with the fall-out from the coronavirus pandemic. Their observations are based on the very latest conversations they've been having with their companies' management teams.
Discussing the findings with Editor in Chief Richard Edgar are Global Head of Fixed Income Research Marty Dropkin and Director of Research for Equities Fiona O'Neill.
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As the most advanced electric car designer and one of the biggest traditional car manufacturers make big pushes this year to bring electric vehicles to the mass market we ask our analysts whether 2020 is the year EVs finally put their foot to the floor.
While neither Tesla or Volkswagen have been without their controversies in recent years, both now offer game-changing interventions for the electric car market: Tesla with its finely-honed technology and proof that a company can turn a profit selling these vehicles, and VW with its colossal scale. But significant hurdles remain. So just how big a risk are the companies taking and what could success mean for consumers and investors?
Richard Edgar, Editor in Chief, talks to Oliver Trimingham, Equity Research Analyst, and Lucy Van Amerongen, Credit Analyst.
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The Investor's Guide to China from Fidelity International takes you deep into the workings of the Chinese economy and its financial markets. Paras Anand, Chief Investment Officer for Asia Pacific, brings you a cast of investment experts working in the world's second largest economy. Hear how they're uncovering this rapidly developing market and avoiding its pitfalls.
Episode 4: Environment. China holds a unique title as the most polluting and greenest nation on the planet. It generates more renewable energy than any other country but also builds the most coal-fired power plants. How should investors approach this dichotomy? And what does the country's commitment to peak carbon emissions by 2030 mean for markets?
Talking with Paras are three China and sustainability experts: Belinda Liao, a portfolio manager with a focus on Chinese credit, Jenn-Hui Tann, Fidelity's Head of Sustainability, and Marty Dropkin, Global Head of Fixed Income Research. We also hear from equity analyst Alice Li about the state of China's third largest power source - wind energy - and portfolio manager Bertrand Lecourt explains the opportunities he sees in China's water and waste sector.
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Fidelity's Analyst Survey, now in its 10th year, asks over 150 investment analysts to report on what they've learnt from their research and the 15,000 company meetings they've held over the he past year. The information builds a unique forecast of what they expect to see from their companies and sectors in the year ahead.
In this podcast, Editor in Chief Richard Edgar draws out some of the key findings from this year’s report with editor of the survey, George Watson, Deputy Head of Research for Equities, Fiona O’Neill, and Global Head of Research for Fixed Income, Marty Dropkin.
Enjoy Fidelity Answers? Try our sister show, Rich Pickings: Fidelity's Asset Allocation Podcast.
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China’s onshore credit market has seen immense growth but it still presents challenges for investors - not least in relation to defaults, which are on the rise. While more defaults are a good thing for the Chinese market and investors in the long run, research shows that bondholder recovery rates have fallen. This podcast explores what's fuelling this new dynamic and how market participants should be thinking about it.
This popular article, first published in September 2019 and which you can read here, draws on the work of a white paper that provides a comprehensive look at the rising number of defaults in China - why the are occurring, why they are a good thing in the long run, and what investors should do about them. You can read the white paper here.
Enjoy Fidelity Answers? Try our sister show, Rich Pickings: Fidelity's Asset Allocation Podcast.
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Fidelity's investment team has just returned from a research trip to the US West Coast where they met with some of the biggest names in technology. They dug into a range of issues with their hosts including privacy, regulation and competition, as well as the latest innovations and their potential applications. One of the most interesting was 5G, which promises to increase network bandwidth significantly and in the process revolutionise connectivity and consumers' digital experiences. But 5G presents a battleground for supremacy between the US and China. So who will win this high-stakes contest and what else will this disruptive technology do?
Richard Edgar, Editor-in-Chief, talks to Sumant Wahi, Portfolio Manager, and Jonathan Tseng, Senior Technology Analyst. With contributions from Tina Tian, Investment Analyst, Ranjeev Juty, Equity Research Analyst, and Amit Lodha, Portfolio Manager.
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This is a special edition of Fidelity Answers following a popular white paper on the topic of factor investing in fixed income. It will be of particular interest to professional investors working in credit markets.
We find out why factor investing in bond markets has been so much slower to catch on than in equity markets, and the ways our fixed income team is approaching the challenge.
Joe Hanmer, Director of Quantitative Fixed Income, tells us how the multifactor strategy his team has developed selects companies and bonds; Lucette Yvernault, Head of Systematic Fixed Income, explains how the model goes from theory to practice; and Jennifer Jackson, Associate Trader, sheds some light onto the execution of systematic portfolio orders. Hosted by George Watson, Investment Writer.
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Engaging with governments on sustainability issues is much harder for investors than engaging with companies. But despite the challenges, doing it well can lead to stronger economic growth for the issuing sovereign and positive alpha for investors.
This article was originally published on our website in April 2019 and is written by Jan Berthold, Sovereign Analyst, Martin Dropkin, Global Head of Research for Fixed Income, and George Watson.
Read by George Watson.
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The Investor's Guide to China from Fidelity International takes you deep into the workings of the Chinese economy and its financial markets. Paras Anand, Chief Investment Officer for Asia Pacific, brings you a cast of investment experts working in the world's second largest economy. Hear how they're uncovering this rapidly developing market and avoiding its pitfalls.
Episode 3: Corporate governance. Trust in Chinese companies has always been a challenge for investors. As more of them list on global indices, management, disclosure, regulatory alignment, and state involvement are all coming into greater focus. The corporate landscape in China is maturing, and levels of transparency and accountability are improving. But investors are still working out how far corporate governance has come in the country and to what extent the trust gap is closing.
Joining Paras for this episode are Anthony Bolton, former portfolio manager and now special adviser at Fidelity, and Shanghai-based portfolio managers Lynda Zhou on the equity side and Alvin Cheng for credit. We also hear from analyst Monica Li about her on-the-ground research into China's booming healthcare sector, and from Fidelity's Head of Sustainability, Jenn-Hui Tann, about the emergence of dual-class share listings on China's stock markets.
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The Investor's Guide to China from Fidelity International takes you deep into the workings of the Chinese economy and its financial markets. Paras Anand, Chief Investment Officer for Asia Pacific, brings you a cast of investment experts working in the world's second largest economy. Hear how they're uncovering this rapidly developing market and avoiding its pitfalls.
Episode 2: Stock picking. China's businesses operate in a unique environment and understanding that matrix is imperative to those hoping to identify the best companies for investment. What are the most effective strategies for finding the winners and what are the warning signs of those to avoid? Joining Paras to take a closer look at China's equity market are Jing Ning, a senior portfolio manager at Fidelity with some 20 years experience investing in the country, and Casey McLean, an investment analyst with a focus on China's technology stocks. With additional contributions from portfolio manager Hyomi Jie and Fidelity's head of Asia trading, Kelly Clark.
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Transcript
Paras Anand Hello and welcome to The Investor’s Guide to China from Fidelity International. I'm Paras Anand, Head of Asset Management in Asia-Pacific, and each episode I'll be taking you deep into China's economy to find out what's driving the country, where the exciting opportunities are and perhaps areas where we should be a little bit more wary. Today: stock picking - the art and science of researching and understanding which companies to invest in, whether those be SOEs - state owned enterprises - or POEs - privately owned enterprises - acronyms you'll be getting very familiar with.
China is in many ways still an emerging market and it comes with its own idiosyncrasies. But as markets continue to open up - and there's been big news just as we record this episode - China offers significant rewards if you have the right tools. And bringing their toolboxes with them today to join me in Hong Kong are two of Fidelity's China experts. First we have Jing Ning, one of our senior China equity portfolio managers. Jing you've been looking at this market for some 20 years. What's the biggest misconception that you tend to come across when people think about investing in China?
Jing Ning Every year I meet probably dozens of investors, they’re very interested in investing in China and they want to know what's going on from the policy and consumption story and new technology in China. But with that being said I can't feel there’s always a wall of worry with China. Everyone is asking about: China has been growing their credit very rapidly in the past decade and when is it going to stop. They've been building the bridges and railways and infrastructure investment - when is it going to be stopped? And I think the more pessimistic question is always asking, when is the reckoning moment that's going to come? So there hasn't been a year - I can be very honest with you - there hasn't been a year, if I visit my investors globally in Europe and Asia, that they I haven't asked this question, right. So there’s always been this wall of worry on China.
Paras With Jing is Casey McClean. Casey, you’re an investment analyst who's covered Asia Pac for almost two decades. The last 13 years you've been really focused on China. You've covered almost every sector during your career in the region. From an analyst’s perspective, what are the big changes that you've observed?
Casey McLean I think the biggest changes specifically with China really is the composition of the market. I think if you look back 10, 15, 20 years ago it was dominated by industrials, materials, financials, property. China was back then really the outsourcing factory for the rest of the world. But if you look at the market composition now it's changed a lot. You’ve had the emergence of internet. There's a lot of consumer brands with their own genuine brand value in China. And there's more and more services being delivered in the market every day. I think what's changed is China's gone from a an industrial manufacturing centre to a place of genuine innovation. And that innovation is being rewarded in the market as well.
Paras So let's dive into the topic of today's podcast which is stock picking. Jing, how do you go about stock picking and what makes your investment approach unique?
Jing You know China's an emerging market. The market is quite chaotic. Everyday we're dealing with policy changes, new competition, and there's always new changes to business models. I think for investors in the China market you really have to know your company well and it takes years, sometimes it takes ages to know the company, especially [because] you know your company better in a downturn than in the good times. Sometimes I tell my investors, although there are so many noises flowing around in the China market every day the key is to build conviction and what comes with the conviction is to know your company really well. And that takes time.
Paras And Casey, how do you distinguish a good company from a from a bad company in a market like China?
Casey For me, the first point of my process when I'm looking at a company will be to screen out any bad actors by looking for stocks that are potentially accounting manipulators or have some bankruptcy risk or what not. But I try and look for companies that have a minimum level of quality. I'm not saying high quality, I'm saying a minimum level of quality - one that's able to earn a return on invested capital above its cost of capital across a full cycle. There's a lot of cyclical companies in China, especially within the tech sector which I'm looking at. So I don't worry about what they earn last year, I worry about what they're going to earn next year. And if you pick a stock at the right point of the earnings cycle you can be rewarded for that.
Jing Yeah, I think another thing is that most people coming to China are looking for growth. They're looking for the next Alibaba, the next Tencent, and people are constantly looking for the next growth story. But Paras, as you know, I’m probably one of the very, very, few value investors in China and actually I think that value plays a very interesting angle in China. The value story in China is not dull at all, it’s quite interesting. For example, Casey and I, we looked at a company called Lenovo. It was two years back and at that time Lenovo didn’t fit into any definition of a growth company. But when we looked at it, it used to have a great company history and it got into temporary trouble and we believed that the company still had a decent chance to turn around and to be a growth company sometime, a couple of years later. Would you say Lenovo was a value stock or growth stock? I would say it’s a very interesting growth stock but with an extremely attractive valuation at that time we looked at it.
Paras Was it hard to get excited about Lenovo, Casey, as a technology investor?
Casey Lenovo is probably not quite at the leading edge of some of the technology companies that you can look at out there. But I agree with Jing, it was very attractive value. It was spinning off a lot of cash flow from its main division which was PCs and if you could get confidence in their mobile division - which has been loss making for a long time - if you got confidence in that turnaround story there was a lot of money to be made. And so you do need to have very high conviction in those turnaround situations. But doing a lot of work and sitting down with management - we had a full day with management and every head of every division - we were able to gain that conviction. And fortunately that division did turnaround quicker than the market was expecting and they've gone on to do better things.
Paras Turning to Jing, you talked at the beginning about this ‘wall of worry’ that investors often climb and one of the things that's often reflected to me is that corporate governance is a huge area of concern. People worry about protection for minority shareholders being different to what you might see in other parts of the world, balance sheets, ownership structures can often be sort of convoluted. So how do we consider those risks. What do you consider when it comes to corporate governance?
Jing You cannot invest in China without thinking about corporate governance risks, that’s for sure. But for me, I think about the issue as many different layers of grey rather than straight black and white. Because when I talk to many companies, and sometimes they do things I wouldn't like them to do like related party transactions and they do irrational acquisitions. We you ask them, ‘Why you are doing that? You’re destroying minority shareholder value. As a result, your market value has been going downhill. And the usual answer I get from them, amazingly, is, ‘We don't think it’s a big deal. Why do you think it’s a big deal?’ It’s all about corporate culture and the way they think about what is a right form of governance for the minority shareholders. I think Casey, you probably agree with me, that the active manager plays a role here?
Casey Yeah, definitely I agree. I think there is perhaps a perception and a reality that the level of corporate governance in China is lower than in some of the developed markets. But what I try and focus on is the delta in that corporate governance. It's the improvements which drive better quality in the companies and potentially the re-ratings in stocks. And you've seen evidence of that over the last few years particularly among some of the bigger SOEs who have really improved their capital allocation and doing a lot less national interest investing.
Paras And you've talked a lot about this idea of trust and building trust in companies. How do we do that? How, Jing, in your process do you go and build trust in companies and the management teams that run them?
Jing For me, people are the number one top priority in any business you look at. So usually when we meet a new company, identify a new interesting investment idea, the first step is you go to meet with senior management - CEO and CFO - but I don't think the research work usually stops here. Usually we'll try to meet further staff to try to meet the middle layer of the management - we want to meet the head of sales, the head of marketing, the head of PR and to understand the culture. But that takes time.
Casey That's right. I think increasingly over the last few years we've been engaging, collaborating with companies a lot more and they're a lot more open to these discussions, dialogues, two-way streets here. We're not an activist investor in any way but we're trying to work together to generate better shareholder value.
Paras So you actually feel your voice is being heard. When you go and see these companies and you engage with them, you feel that even as a minority shareholder your voice is heard and listened to.
Jing Yes, sometimes. Every year we try to identify some companies and we send angry letters, we call them angry letters - just basically complaining about something that they have done, not taking care of the interests of minority shareholders. Sometimes they don't pay us dividend and sometimes we think they should do more. In the beginning most of our letters get ignored and we get no consequence whatsoever but gradually, very interestingly, and I think Casey would agree with me in the case of Sinopec, we sent a letter to them, to the board, asking for a sustainable dividend payout policy and they actually responded to us and said they would seriously take a look at our proposal. I'm not anticipating any fireworks coming at the end of the day, they're going to change their behaviour overnight, but that's a very encouraging development I would say.
Paras And looking at the composition of the market, they're obviously state-owned enterprises as well as private companies. Casey, should investors approach those differently?
Casey Not necessarily. At the end of the day you're just trying to find a company that's going to deliver a good return. But I think there's different risks that you need to be aware of when you're looking at those two different groups of companies. In private companies the potential for fraud, accounting manipulation, those things are probably higher. And they're also smaller, more nimble companies. They can move fast - they can break things though at the same time. Whereas you look at some of the SOEs, they're larger companies, they move more slowly. And I guess the biggest risk with those is that they have to undertake national interests and support the Chinese economy and other companies.
Jing I think that basically what Casey is saying is there's always two sides of the same coin. SOEs - they’re taking the state support but on the other hand they will of course take on social responsibility, and private companies, they’re very nimble and very flexible but on the other hand they have a very strong incentive to do well and of course they will have incentive to cheat you to maximise their shareholder value.
Casey But there can also be a valuation disconnect. Often the SOEs trade at a big discount to the private companies. And like we say, if you see this delta, the improvement in corporate governance or their earnings profile, that can be a great opportunity especially for a value investor like Jing.
Paras So it really seems that it's all about making sure that you understand the individual company and doing the on-the-ground research.
Jing Yes.
Casey Yeah, that’s right.
Paras Well, on the subject of on-the-ground research we spoke earlier to another one of our portfolio managers, Hyomi Jie. Our Asia Editor, Neil Gough, caught up with her for some window shopping in Shanghai to hear about her approach to consumer stocks and in particular how the trend of premiumisation is playing into her investment thinking.
Neil Gough I'm standing here at a sprawling hypermarket in Shanghai with the Hyomi Jie, a portfolio manager at Fidelity International who focuses on China's consumer sector. We're at RT Mart in Yangpu, a mainly residential district a few kilometres north of Shanghai's historic riverfront Bund. It's a typical weekday morning in the summer and the store is busy with all kinds of shoppers from across generations. They're picking over produce, looking for bargains, stocking up on bulk items like rice. And this is a retail supercentre. They sell everything from leather shoes to air conditioners to live lobsters. Hyomi, you actively stock pick within China's retail sector and I'd mentioned to you previously that I was interested in seeing how you carry out research on the ground and I assume that's why you brought me here today? Is that right?
Hyomi Jie Yes. Yes exactly. You come to this store and you see what kind of consumers are coming to the store and what kind of things they're buying, in which aisles they're spending more time. So that helps me to gain a bit more insight into what kind of brands are gaining traction and what kind of products are gaining interest from the everyday consumer.
Neil One of the trends across the consumer space that we talked about before was premiumisation and how customers are upgrading their purchases across a whole bunch of different categories. How does that play out in an environment like this, in a supermarket?
Hyomi Premiumisation is a trend that's going on across all the sectors in consumer, I should say. It's really driven by the growing income of Chinese consumers and expanding middle class and their desire to want and aim for higher quality products. And in a supermarket environment you can see that people will choose higher quality, higher price items within the same brands, or they might move up to the perceived higher-end brands. But also within the fresh produce that is happening as well. If you see that in the traditional supermarkets you can see the piles of meat products in the very typical Chinese supermarkets.
Neil And some in front of us here today. I see the butcher swinging his cleaver here in the background.
Hyomi That’s right, that's very normal and that's still the majority. But you can see in a small section, which is expanding, you can see that there’s branded pork, branded beef, and it is packaging in a small format that's suitable for a single households and younger generation who don't want to spend too much time cutting and cooking.
Neil So individually wrapped in plastic as opposed to a giant slab of ribs or something like that.
Hyomi Indeed. The per unit price should be higher by easily 20-30 per cent but from consumers’ perspective maybe you can actually save food by not buying too much at once. Also it's much easier for you to prepare your food.
Neil So you're paying more per unit but you're probably wasting less on the whole. What does it mean for a company at the bottom line level? Are you seeing that feed through in revenue and in sales?
Hyomi It's still a small portion of their revenue but the companies who can take advantage of this kind of trend with better marketing and better merchandise will obviously be able to attract more customers to lead to better revenue and at the product level, at the unit level, they should be able to generate better returns and better margins.
Neil Beyond supermarkets, when you look across retail, what other areas are you seeing premiumisation playing out? What are some of the other sectors?
Hyomi I should say that in services the premiumisation is also happening. The overseas travel has been growing faster than domestic travel in a very consistent way for the past few years. And that’s shown in the duty-free stores’ revenue growth trends in the past few years.
Neil And then when you're not running around the aisles of supermarkets like these what are some of the other things you're doing on the ground to carry out research when you're coming to China? Because I know you do travel here quite often.
Hyomi When I come to China I try to spend my time here as much as like locals. So, I take Didi and go to other department stores or I go to meet my friends and on the way I get to see many different things like what's happening, what's changing. Also, the payment pattern is definitely changing in China. So, it is indeed a cash free economy at the moment. You really need to pay for things with Alipay or Tenpay. Another thing that I have been doing for more in-depth research is to spend a couple weeks with a Chinese family doing homestays. So last year I spent two weeks in Shenzhen with a Chinese family of four members where I could learn about their consumption behaviour, their aspirations, what they care about for their children and their parents and their wealth creation, all these things. Soon I'm going to go to Chengdu and will spend another two weeks with a Chinese family over there.
Neil Thanks Hyomi. That's a really interesting look at how stock pickers are doing their research on the ground in China.
Paras So Jing, Hyomi paints a rich picture there. She's spending time in the new engine room of the Chinese economy as we can hear, in these shopping malls and spending time with families, really going in deep to help her understand the country's changing consumer trends. But stepping back a little bit, what about the equity markets more broadly. How have they been developing?
Jing I think there is a key element currently missing from the whole story which I think is very important going forward which is the income element in China. The income story globally has been a very popular strategy but very few people associate China with the income element because people come here looking for the growth story, they’re not looking for the dividend story. But China is actually changing into a very interesting income story. We're not growing 10 per cent every year, right? This year we're going six, next year we’ll probably be growing at five or something. But for corporates they’re free cash flow is improving and with cash coming in they now have an opportunity to think about another capital allocation perspective which is paying dividends.
Paras I mean when I think back to some of the changes we saw in the European market, so going back 10, 15, 20 years ago, companies were prevented from paying dividends because boards would often think that you were taking money out of the out of the pockets of the employees and giving it to shareholders. But I've always thought that there's an association with companies paying dividends and treating minority shareholders well with a maturity of an investment market. So, Casey is this good news from an analyst’s perspective?
Casey Yeah, it definitely is Paras. I think the thought process for some of the Chinese companies in years gone by was that dividends were simply paying money out of the company away to foreigners. That's gradually changing and I think there's a recognition that the capital structure is more important. And they have made some significant progress. It's been helped by the government: SOEs are now mandated to pay out 30 per cent of their earnings. And I think if you look at the market as a whole I think it trades on about a 2.5 to 3 per cent dividend yield, which is actually higher than the US, the S&P 500. So, it's still got a long way to go but they've definitely made some significant progress.
Paras And of course it's such a strong signal of the continuing evolution of these markets. As I mentioned earlier in the introduction there's another significant development, which is that the Chinese regulators have dropped quotas for foreign institutional investors, or QFII. This is a really big deal, isn't it Jing?
Jing It is. It is indeed a very big deal. That means that the market will in some way become open access for everyone. You don't need a quota to buy China A shares. That actually brings a sweet memory for me. I remember back in 2004 I was at the door of CSRC [China Securities Regulation Commission] applying for the QFII license and applying for the QFII quota and we got thrilled when the regulator awarded us $50 million QFII quota. And we thought that was quite an achievement back in 2004. And now, 15 years later on you don't need a quota to buy China A shares - very exciting as well. So, I think that with the years it’s moved along, and without a quota or any kind of restriction tacked on to it that just means that the market becomes a very friendly, even playing field everybody.
Casey Yeah, I remember I had a similar circumstance about 10 years ago, as well. I remember applying for an additional QFII quota and the process was very laborious, very bureaucratic. It was almost government-to-government-style negotiations and removing that sort of hindrance to foreign investors is a huge plus for the opening up of the China markets.
Paras And obviously when we think as investors we're always thinking about investing for the long term and there's a difference that often people think about between long term investing and and then thinking about the market in China which they see as being very volatile and retail driven. Do you think that there is an opportunity reframe the investing proposition for those domestic savers?
Casey Yeah, I think it's a gradual process. But all of these measures that the government’s instituted to get foreign investors, foreign institutions investing into China means that they're less driven by speculation, they become less short term, the market becomes much more fundamental-based. And I think if you have a long history of following those fundamentals you’ll have a big advantage in the A share market as it develops.
Paras So what exactly do recalibrations like these mean on a practical level in terms of trading with and inside the country? Investment director Catherine Yeung spoke to Fidelity's head of trading in Asia, Kelly Clark, to find out. And a short caveat before we hear the interview: this conversation was recorded before the latest announcements around the scrapping of the QFII quotas.
Catherine Yeung We've seen a whirlwind of changes relating to access and regulation for trading when it comes to the Chinese markets. Volumes have skyrocketed but there's still a number of hurdles to navigate. I'm with Kelly Clark, Fidelity's head of Asian equity trading, based here in Hong Kong. Kelly, you've been in the market now for eight years. Can you share some of the biggest changes you've seen over this period?
Kelly Clark Sure. For starters, when I first started trading the only way to access China was through QFII. And I was actually at a hedge fund at the time so the only way we could do that was synthetically, which made it very difficult and very expensive to actually access the market. So, I would say the biggest change in my tenure has been Stock Connect, which went live in 2014 and that was far more affordable to reach. You didn't have the issues with putting cash upfront or with repatriating cash back out of China. So it made it much more palatable to invest in. That also piqued the interest of the MSCI and FTSE and why you have the interest I think you have in it now.
Catherine So, in layman's terms, Kel, what's the key differences between QFII and Stock Connect, especially from a trading perspective?
Kelly You've got the ability to trade with different counter parties, again you can move cash more freely, it's a lot more familiar and the counter parties that you’re trading with as well. It was just a lot easier to access and open accounts.
Catherine With QFII?
Kelly So QFII still has its advantages. You can trade during Hong Kong holidays, which you can't do through Connect. You can also invest in the full universe of stocks versus the limited amount that you have in Connect, which is about 1200. The bigger one being now that it's the only way that foreigners can access the Star IPO Board.
Catherine Yes, the Star IPO Board, I'm glad you mentioned this - so this is a science and technology exchange similar to Nasdaq?
Kelly Correct. So I think the driver of this, as you mentioned, was for the Nasdaq. So for new sort of unicorn tech type companies to come to market within China.
Catherine So we are seeing more foreigners - whether it's institutional money, retail money - going into the market. This is obviously being driven a lot by the Chinese government's policies to open up the capital markets, both equities and fixed income. So when we have the second largest economy in the world, a government who's very pro opening up the capital markets, can you please put into perspective just how big China is?
Kelly So China actually represents 70 per cent of all of the turnover in equity in Asia.
Catherine If we're seeing all this turnover, is it an easy market to trade?
Kelly It's a liquid market to trade. I wouldn't qualify it as easy because it's actually still very volatile considering you've got the retail investor base that you do. I think there's still a few hurdles in getting more foreign investment into China. One of them being access to hedging instruments, so futures would be the main one there that everybody's looking for as a way to hedge out their index risk. So, there are there steps that the government's taking there or that the exchanges are taking there too in sourcing solutions for that issue. There's also a number of nuances still around settlement cycles, funding, broker settlements, but again they're pretty small nuances and the government is focused on getting those looked at.
Catherine Kelly, thanks so much for your time. I mean it's a fascinating market to trade and to watch the developments in terms of the progress. Paras, that's all from us here on the trading floor in Hong Kong.
Paras So Casey, with your tech focus on China what do you make of the launch of the Star Board that Kelly just mentioned?
Casey Yeah, the Star Board is a really interesting development. It's another one of these baby steps to opening up and broadening the Chinese markets. But I think the fact that it's a registration rather than approval structure to list a company there is is quite important. It means that these loss-making companies, these high-tech companies which are innovating, can list and it gives them a new source of funding. I think from then from investor point of view it also opens up the opportunities to some of these smaller innovative companies that were probably only available to PE or VC type investors previously.
Paras And Jing, you’re a self-proclaimed value investor. Have you been looking at technology stocks at all recently?
Jing Of course. Actually, last year a very decent amount of my time was looking at the technology sector, in particular in the context of the trade war between the US and China. A lot of technology stocks were falling victim because of that and valuation for some of them looks really, really compelling even from the perspective of a value investor.
Paras Trade wars was one of those things that we talked about on the last episode and we made a call that it would be not a short-lived phenomenon and so it's proved. But for a stock picker such as yourself, Casey, how do you deal with a backdrop of trade wars when you're trying to find individual opportunities.
Casey Like Jing says, the tech sector really has been in the crosshairs of the trade war and the volatility that that's brought has made it quite difficult, especially when the sentiment of the market can turn on a dime after just a single tweet. But having said that, it did introduce some value into the sector and there have been buying opportunities. And if you focus more on the longer-term trends there is an opportunity for Chinese companies to become more self-sufficient in some of the tech areas, take some revenue, some business opportunities off the US companies. And so I am increasingly looking for those opportunities on a long term basis.
Jing I think like the Chinese always say, every crisis comes with an opportunity. So when we think about a trade war of course the relationship between these two countries - I think, in my personal view - is fundamentally changed going forward. But that actually leaves an opportunity for China to rethink its supply chain. They want to reduce their dependence of some of their key supply chain components to external parties and they want to rebuild some of the supply chain companies. And, of course, they want to build a domestic economy to fend off any uncertainty coming from global trade. And I'm hoping that this trade war will push policymakers to really seriously think about market reform because when one door is closed you want to open the other window.
Paras So it really sounds like when we come to think about China from a stock picking perspective that despite all of the development of the market, all of the maturity and some really key changes that we've talked about with respect to companies looking at returns to minority shareholders, actually there's no shortcut to doing your homework properly.
Jing Of course. For me, I have been investing in China for the past 15 years. That market for me today versus 15 years ago is equally challenging, equally new, and equally interesting. It’s just like a brand new market.
Casey Yeah, I don't I don't think there's any substitute for boots on the ground and kicking tyres.
Paras Great. Well that brings us to the end of our show today. Thank you to my studio guests Jing Ning and Casey McClean, and to our other contributors: Hyomi Jie and Kelly Clark with Catherine Yeung. And thank you for listening. If you like what you've heard then please rate and review us on your podcast app, we really appreciate it. And if you want to read more of what's been covered today then please go to our website. Our producers were Seb Morton-Clark and Neil Gough and our editor is Richard Edgar. Until next time, from Fidelity's Hong Kong studios, goodbye.
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From the Asian Financial Crisis of the 1990s, through dotcom's boom and bust, to the collapse of Lehman Brothers via bank bailouts and QE - the last two decades in emerging markets have been anything but dull. But how as an investor do you weather the economic cycles and prosper?
Ten years on from taking over Fidelity’s flagship Emerging Market Equities Fund, Portfolio Manager Nick Price looks back on his career with Fidelity’s Editor in Chief, Richard Edgar.
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The consumer staples sector - big stable companies with reliable cash flows and strong balance sheets - is often referred to as 'defensive' because the stocks perform well in the market even when everything else is falling apart. People can be relied on to always buy food and shampoo. But years of cheap debt have seen some of these companies, many of which face disruptive forces from changing consumer trends, take on leverage to see through big M&A deals, bringing into question the defensive qualities of their businesses. The size of these companies is so large that there is concern that a de-rating of their debt could even up-end the whole market.
Richard Edgar, Editor in Chief, is joined by two of Fidelity's analysts who have taken a closer look at the issue: Gita Bal, Director of Research and Senior Credit Analyst, and Heidi Rauber, Senior Equity Analyst.
We also hear from three portfolio managers - Matt Siddle, Aneta Wynimko, and Kris Atkinson - about why views on what makes a defensive stock are changing.
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Three portfolio managers with a focus on income strategies in different asset classes discuss how they go about building for income in uncertain times.
Richard Edgar, Editor in Chief, talks to Peter Khan for fixed income, Chris Forgan from multi asset, and in Hong Kong, Polly Kwan for equities.
Transcript
RICHARD EDGAR Things aren't easy for income investors. There are now $12.5 trillion dollars of debt around the world with negative yields and the hunt for positive yielding assets continues to drive valuations higher and push investors further up the risk spectrum and that risk is becoming all the more real as volatility picks up, growth slows, and central banks change their tone. All this at a time when the need for income has never been so great as aging populations around the world need to fund their way through increasingly lengthy retirements. So what can be done? How can investors build portfolios that will safely deliver on income in uncertain times where the rules seem to be turning on their heads? With me and poised with their answers are three Fidelity portfolio managers each focused on income strategies but each representing a different asset class. First here in the London studio is Peter Kahn. Peter, welcome. You've got some 25 years of experience investing in fixed income under your belt. What drew you to bonds?
PETER KHAN Well, believe it or not Richard, I was foolish enough to leave the beginning of the first tech bubble 1.0 back in San Francisco in the mid to late 90s.
RICHARD It was possibly a good time to leave.
PETER Well it might have been. Timing is everything, of course, they say. But for me having started out my career in financial markets with the focus on equities that was to me a little bit of a one-dimensional market at the time - or so I thought - and I was very much more attracted to thinking about multifaceted impacts of the combination of the bottom-up stuff together with macro factors that tend to dominate in fixed income spaces - that sort of puzzle appealed to me.
RICHARD So complexity was it was part of the appeal for you.
PETER Well said.
RICHARD Okay, well also here in London from the multi asset team is Chris Forgan. Now, Chris, income is often seen as one of the more defensive styles of investing. Are you yourself cautionary by nature? Does this explain your career?
CHRIS FORGAN Yeah, I think I think it probably does actually. Certainly how I was drawn into this particular area of investments. I look at what’s attracted me over the years in terms of investment styles and managers and I think have a natural cautionary nature that underpins what I do and that very much is at the heart I think of a multi asset income approach.
RICHARD It seems like it was predestined then, Chris.
CHRIS Yes. Yes.
RICHARD Okay. Well joining us from Fidelity's Hong Kong office representing the equity team in Asia is Polly Kwan. Polly, welcome to you. You've been based in Asia for all of your career - not typically regarded as a region with much of an income focus. How did you end up managing a portfolio with that income focus?
POLLY KWAN I started at Fidelity in Tokyo back in 2000 where there was an increasing push of capital management and also return to shareholders in that country. So I witnessed that companies which did more shareholders returns got more appreciated by the market in terms of share price performance. So that's how I have a bigger belief in terms of dividend payments. And also later time moved to Hong Kong from Tokyo and started covering property. Property is a sector that needs more balance sheet and cash flow analysis - that helps me to do my job today because if you want to invest in a company that can pay you dividend today and tomorrow you need to take an all rounder approach looking at not just P&L but also balance sheet and cash flow.
RICHARD So it's a rounded view that appeals to you, as well.
POLLY Yes.
RICHARD Okay, well thank you all very much for joining me. Now, Peter, let's come back to you. We're in a new world, aren't we: the traditional reliable income assets - government bonds, high quality corporate credit - they're not doing what they used to. Are investors keeping up with this new reality?
PETER It's very difficult to keep up with the new reality of basically return-free risk in those high quality segments that used to be the foundation of investors’ portfolios, particularly low risk tolerance investors just looking to clip a coupon to keep up with inflation. The degree of financial repression that we have today…
RICHARD It certainly doesn't sound very appealing.
PETER No. It implies that you need to stretch a little bit to... basically run to stand still. In keeping up with inflation, with generating an income stream from fixed income assets now implies that you've got to go down in quality, not necessarily too far down in quality but you certainly need to introduce some asset classes into the mix of asset allocation in your portfolio that traditionally wouldn't have been there in past days. So I mean specifically things like high yield bonds and emerging market corporates and to a certain extent hybrid instruments can be the sort of additional spice in a portfolio that on a well-diversified basis will allow you to achieve what it is that that you need on an income basis.
RICHARD So you've got to get a lot racier with your fixed income allocation which perhaps people haven't been used to and that's the worry.
PETER That's right. And I mean we've been hopeful that we would leave these times behind, these special times post financial crisis that were seen, even last year, as potentially an anomaly. Now that we are so deep into the expectation of QE 2.0 or QE infinity the idea is that we really must say that the new normal perhaps endures for a lot longer than we previously thought and that of course has led to this buzz word of ‘Japanification’ or ‘Japanisation’, depending upon who you speak to. This sort of locking in the low rate, low inflation, low growth environment in perpetuity is at the top of investors’ minds.
RICHARD And Polly that's the area of course that you talked about. You started your career in Japan and it’s a country that's had to deal with this sort of environment for a very long time. Talking about your clients outside Japan though how are their demands changing when you're talking to them about income equity strategies?
POLLY Asia has always been perceived as a growth-only kind of region. However, I have to say that the attitude both from the management side and also from the investor side have changed over time. I mean, of course, you know with this low interest rate environment naturally people are seeking a higher income, but also it has to do with the demographics itself. I mean in Asia we are no different from other parts of the world. If you look at it overall we are facing an ageing population. So with an ageing population actually more investors want to have income on top of growth. So when they think about Asian equity, if you are investing into something that has long term growth - we still believe there is a long term growth potential in Asia equity - but along that journey you'll receive some dividend payments. This is something very, very nice to have, especially for an aging population.
RICHARD We’ll come to demographics in a moment but just thinking about the company managements that you talk to. You're saying that attitudes amongst them are changing, that they're beginning to be more prepared to hand over dividends. Is that right?
POLLY Yes, because a lot of the corporates in this part of the region they suffered in the crisis in terms of their share price. They have been thinking hard about how to have a more stable kind of share price and they know that there's a need from the investor side that they will appreciate some kind of sustainable and consistent dividend pay out that will have good support to the share price. So that attitude has also changed.
RICHARD One way of making your shares stickier, I suppose, for people hanging around for that as well.
POLLY Exactly.
RICHARD Chris, coming to you. People are looking for new, clever ways to generate income. Is multi assets benefiting from that?
CHRIS Yeah, absolutely. I think multi asset has seen huge growth in terms of demand, in particular for income solutions. We can go where we see opportunities and we can retreat from areas where we see threats. And as Peter alluded to earlier, you think about your traditional income assets and your government bonds, your high quality investment grade, which are certainly lower yielding today than they historically have been. We can continue to hold those assets for their defensive characteristics but blend them with other assets such as high yield, such as equity income, both from Europe but also from Asia as well.
RICHARD And alternatives as well, I imagine.
CHRIS Yes. This is the other exciting area that somewhat exploded in the last 10 years, post the financial crisis, is the onset of the alternatives universe where we're able to access some attractive opportunities both from a return perspective but also from an income perspective. When I talk about alternatives I’m talking about things like infrastructure, renewables, loans, and asset leasing-type vehicles. The drivers of these asset classes are often quite different to what drives mainstream asset classes - equities and bonds - and so when we bring them into a portfolio and blend them with these other asset classes it’s clearly very additive in terms of delivering a lower volatility outcome for the end client.
RICHARD What are you looking for when you do build a portfolio? Just briefly describe how do you do that blend. What's the recipe?
CHRIS Well, we're very much looking at the opportunity set in front of us. Does this asset from the fundamental level look to be offering value going forward? Are we getting paid to take on the associated level risk? What's the driving force of that risk underpins it today? And what's the income generation and how does that therefore sit alongside the other assets could be potentially could invest into? In terms of the portfolio, is it adding exposure to something we already have or is it bringing something differentiated to the overall portfolio mix? And obviously if it's a latter - and in particular with alternatives that's what you get - then it adds value to the overall portfolio mix, particularly in terms of delivering a diverse well diversified portfolio often with lower levels of volatility.
RICHARD So that's the appeal of alternatives, that you're getting a different type of revenue stream, but you've all talked about this different world where the usual sources of income just aren't there. Thinking about the particular assets that each of you is looking for for income, if everyone else is piling in and seeing the appeal of bridges or whatever it might be then aren't the prices of those assets driven higher as well?
CHRIS Yes. In a lot of ways they react in manners we've seen with traditional asset classes over the years so therefore we appraise them the same way and if the price of the asset has been driven higher and we think that's ultimately made the asset expensive or it's unsustainable then we'll clearly look to retreat away as we would with any and any other investment.
RICHARD You make it sound so simple. Peter, how about you? Is it just going further and further up the risk spectrum?
PETER Interestingly, I mean Chris is absolutely right in terms of the forces that are at play that you've highlighted. But in thinking about an income focused portfolio, particularly within fixed income, that definitely creates an environment where you tend to, in sort of extreme euphoria cycles, you tend to see that dash for trash kind of dynamic kicking in and people going all the way down into the most remote and illiquid assets that they can find in order to extract that additional value that they believe is there. And we haven't necessarily seen that happening year-to-date within fixed income market performance. If you think about the high yield market for a second on a risk-adjusted basis it's actually the higher quality elements of the market that are producing the best returns year-to-date and that's because investors are indeed discriminating and concerned about a combination of factors notably liquidity and the potential for default losses to impair their values further down the food chain. If and when we do get a recessionary environment developing in the US economy or the European economy then you'd really anticipate that the lower quality assets are going to need to offer a much better compensation for the intrinsic risk that you're taking than they do today. And we have a bit of this investor schizophrenia going on at the moment in that people are getting crowded into as much income that they can possibly acquire but they’re, at the same time, afraid of taking that final step down into the mire, if you will, to pick up the juiciest of assets because they just don't know how deep that swamp can be - to completely mangle the allusion there.
RICHARD Yes, whatever it is it sounds grim. Polly - the dash for trash: that's perhaps not how you would describe finding income in equities.
POLLY I do agree that over the short term when there is a chase of yield then the higher dividend yield stocks become very expensive compared to where they should be. However, there is a difference if you want to invest into the long term. I always tell people, do not only look at today's dividend yield but you want a company who can pay you today also who can pay you at least the same amount of dividend tomorrow. So don't fall into that dividend trap, that I would call it. Having full analysis not only on the P&L but also very solid analysis on the balance sheet and also cash flow to make sure that all the companies are going to pay at least as much dividends that they can pay today tomorrow. So that is the difference and there’s still a lot of stock picking opportunity.
RICHARD So that's the analysis you can do just looking at a spreadsheet. What about the conversations that you have with managements? What do you look for there? What gives you confidence about the dividend tomorrow?
POLLY Investing using a dividend strategy - company visits and doing due diligence with a company is very, very important. I think if an analyst does a decent job in terms of looking at the dynamics in an industry, the balance sheet, cash flow, they can do a good forecast in terms of earnings, but whether a company will pay you a dividend tomorrow: it comes down to the management decisions. So knowing the management well enough, knowing the track record, knowing their thinking - any concern, any investment plan that they may have in the next 12 to 24 months - that makes a big difference. That actually is part of a major step I need in order to assess whether a company will make that dividend payments that I'd expect in twelve months’ time.
CHRIS It's definitely fair to say that when you think about equity income investing it actually tends to on the whole be the more defensive area of the market you get exposure to. You see that particularly in risk-off periods in markets that traditional equity income investors tend to perform certainly better than the wider market on average. You saw that certainly through the volatility we saw last year, particularly in Q4, where the natural defensive nature of a lot of these managers or investors comes to the fore. So it's a positive that underpins that approach.
RICHARD And capital preservation?
CHRIS Yeah, absolutely. Very much about strong balance sheets, cash flow generative companies that can maintain the dividend over time.
RICHARD All three of you are sort of nodding at that aspect. Peter, I mean how do you build that in? That thinking.
PETER Well, I think there is a lot of common aspects in what Chris and Polly have said and a lot of correlation between these different flavours of income products that we're trying to manage and deliver superior returns for clients. A lot of that correlation to interest rates will mean that we tend to move together but there can be significant differences in alignment of interests between management, creditors and shareholders over time. So it's interesting to hear what Polly has to say in terms of the priorities for her screening companies, and Chris as well, in portfolios whereby you have confidence in the ability to generate growth in cash flow to service the dividend. That's clearly one part that's very important for a credit analyst to think about as well, but when the rubber hits the road we may also have comfort and confidence as bond holders to own names …
RICHARD You come first.
PETER Exactly. So when push comes to shove the dividend can be switched off to the benefit of interest service or assets can be sold and depending upon the nature of the documentation, around the bond instrument in question. The proceeds of that asset sale may or may not need to be delivered to creditors. So that's an additional factor that we'd be thinking about where naturally we'd have the same inclination as our colleagues in multi asset and equity to say, we'd like to back off of a name that simply is not able to continue growing and its capital structure may no longer be appropriate for it, but if there are enough levers to pull in the balance sheet or in the cash flow to divert down that debt sluice rather than dividend sluice then we may still be comfortable and confident enough to own some aging industries, if you will.
RICHARD You might go where Polly fears to tread.
PETER We might, which sounds perverse, right? Given an investor might think fixed income should be more risk averse than an equity investor. But it’s just thinking about the combinations and permutations of available capacity to service the debt where things diverge.
RICHARD Now you're both obviously sometimes looking at the same companies just different instruments from them. And you alluded, Peter, to the fact that a credit analyst might also be looking at some of the same indicators from a company. How much cross pollination is there between the two sides though from equities and fixed income? How much do you look at those same companies together?
PETER Increasingly. Certainly on the financials side there's been a lot of good coordination for many, many, years on this front. Particularly going back to that post financial crisis episode where the global financials needed to raise a lot of capital - credit analysts working very closely together with equity analysts to really understand what was on the balance sheet and what the value of that might be, how much capital cushion is required is kind of integral to the thinking about how we might want to position ourselves in the debt capital stack of national champion banks in Italy, for example. And it's increasingly happening more in industrial space, technology space, and consumer space as capital markets grow around the world and we see new issuers coming to the market from regions outside of developed markets. To have the context of understanding where that kind of business, that kind of capital structure might trade elsewhere in the world, and then overlay some additional thinking about, well this jurisdiction is a little bit more risky or these instruments are a lot less liquid than those that we naturally see, helps us to calibrate and develop an expectation.
RICHARD And Polly, it may be a blessing that you don't invest in Italian banks, for example, but how do you combine that different view in your approach?
POLLY In terms of talking about stock picking, I mentioned the P&L - and of course in Asia everybody wants growth - but I look at the balance sheet, whether a company is taking a reasonable level of debt and I need to see a company that can generate free cash flow that can cover that dividend. When companies in Asia, they move to a direction of focusing more on a dividend or setting up a dividend policy, that also leads them to think about the capital structure more. Early on, Peter mentioned about when in a bad time how a company can services its debt - I mean, from my side, because equity shareholders, if things go bad we are the last to collect any money left on the table: in Asia we still want growth but I want them to grow on a very healthy capital structure.
RICHARD Which is what you want as we get towards the end of the cycle. When that end happens, none of us seems to know for sure, it's been going on for as long as I can remember. Chris, how do you cope with it? How do you cope with unpredictable messaging from central banks, the effect of politics - I won't name them now, it seems rude to - but how does that influence what you're thinking about as you manage your portfolios now?
CHRIS It's certainly bringing more risks and more challenges to how we look to construct our portfolios. But overall with these heightened risks that we perhaps see on the horizon alongside slowing growth globally at this juncture it certainly points to taking a more defensive positioning to one's portfolio, looking to be more diversified across asset classes and asset types.
RICHARD Peter?
PETER Without a doubt, right? I mean the uncertainties that we're dealing with on a day to day basis are very difficult to forecast and very difficult to hedge but they need to be incorporated in the expectations about where things might get to in terms of radical changes in regimes and the market tail seeming to wag the dog of the FOMC policy - the Federal Reserve - at the moment is just one of them that we clearly need to factor into our thinking about how quickly regimes may change. But actually for an income-based investor a lot of this minute to minute and day to day stuff probably creates more opportunity than threat and a lot of it can be considered noise. But if the cycle ends in a way that's unanticipated it will come back to the point that Polly made earlier about quality and confidence in balance sheets that will make a difference particularly for fixed income investors. When you do need to add a little bit of risk into the mix because there is no free lunch to generate your income stream and you have a reasonable allocation to high yield you want to have a reasonable confidence that most of the significant positions in your portfolio are indeed worth the paper they're printed on, so to speak.
RICHARD They’re robust enough.
PETER Yes, the high conviction levels in the companies being able to one way or another to redeem that debt. And it's that kind of environment and modelling around stresses that I think will become evermore important in the thinking about constructing portfolios in the future.
RICHARD So you're able to ignore the vacillations, the noise, as you put it.
PETER I'd love to be able to completely ignore it, but…
RICHARD Well, you can you stand a little bit above them. But one thing you can't ignore because it's something that is affecting all of us everywhere in the world and Polly referred to it early on is the demographics that are changing - an aging population around the world. Almost everywhere. How does that play out in your world? What concerns you about that side of things?
PETER I don't know if it's necessarily a concern because that would be sort of the silver lining in the cloud for fixed income as an asset class: as populations age and need to have more focus perhaps on capital preservation then they will tend to allocate a little bit more to fixed income. So the risk is, from our perspective, that we can no longer rely upon past history to dictate exactly how cheap fixed income assets can become in the event that growth picks up and inflation picks up because there is such a significant pool of savings that are looking for a desirable income stream, that are willing to commit to additional fixed income exposure at lower and lower levels. So that's one of the dynamics that's currently at play in the market - the buy the dip on the back of the central banks is a short term cyclical thing, but buy the dip on the back of the demographic trends and debt disinflation dynamics in the global economies - that's a more structural thing that we need to contend with.
RICHARD Much bigger picture.
PETER It's about managing people's expectations too.
RICHARD And this new reality that we began with, of course. And Polly, I cut you off earlier talking about demographics but what are your thoughts? You’re in a part of the world where China is aging, other parts of Asia are much younger. How do you adapt?
POLLY I think, like I said before, I think investors overall there is increasing demand for income but at the same time I think the one beauty about Asia in particular is that we are just at the beginning - very, very early stage in terms of companies starting to have a consistent dividend payout. So there is still a lot of opportunity. And another example is a lot of developed markets already have REITs but REITs are a relatively new thing. Not that many markets in Asia have REITs set up yet. So that will be an extra investment instrument that we can have from the equity side that can generate decent dividends; stable income. At the same time, if you believe in the overall growth story in Asia asset price appreciation will also benefit the investor as well. So I always tell my investors, if they buy Asian stocks, buying something with an income you get the valuation buffer, you enjoy the long-term growth story in Asia, but you also collect a dividend paycheck every quarter, every six months.
RICHARD I've got one more question for each of you, a final bit of advice. What should someone consider, what are the opportunities they should watch for at the moment, for those people who are who are looking for income? Chris, let me come to you first.
CHRIS I would probably talk closer to home really on this one. Linking back to your previous question, just talking about demographics. You mentioned earlier that people are obviously living longer nowadays and requiring a form of income in retirement. We can look across all these asset classes to bring a solution together that can be very targeted in nature. And later in life you're wanting the assurance of your capital going forward, so a more defensive approach, and focusing very much on the downside is a strategy that can sit along perhaps other income solutions in retirement.
RICHARD Successfully pitching your home turf there. Now let me ask my single asset class managers here what they think the opportunities are. Polly, let's come to you first.
POLLY I think opportunities we are facing in Asia: one, another topic that we didn't really touch upon, which is in the spotlight these days is the trade war. A lot of people when they invest in Asia are very scared about the potential negative outcome from the trade war. And that's why, for example, a lot of the tech stock got so down. But as an income fund manager one thing I can tell you, the beauty about Asia is that we have quite a few tech stocks that have very solid balance sheets, some of them even in their cash balance sheet have very good free cash flow. So if you're a long time investor and you believe that this trade war is still going to resolve one way or the other, actually you get a pay, in the form of dividends, to be patient and waiting for that. So I think this is one opportunity that people can look into in Asia.
RICHARD And Peter, a final word to you.
PETER Two interesting things - one, you mentioned at the beginning was $12 trillion of negative yielding debt, and the second thing that Polly has just left us with was a trade war resolution ultimately coming about. The combination of those two factors is probably the biggest danger for fixed income investors at the moment because once we have the pressure valves released and perhaps so much of this monetary stimulus is no longer required we are going to see perhaps a shift in interest rates. We wouldn't expect that to be your father's shift in interest rates, or mother's shift in interest rates, of 100, 200, 300 basis points but 50 to 100 basis points back up in yields will create some capital loss for investors who are currently getting crowded in. So I think at the moment the sensible thing to do is not only to decrease the duration of the portfolio but the offset to that in order to maintain an enhanced income stream is to diversify and to consider almost a barbell approach of high quality investment grade credits and government bonds if and where you can find them with a positive yield and a positive real yield, namely something like US treasuries, and then adding some high quality emerging markets and high yield credit to the mix. It helps to provide investors with a good risk-adjusted balance in the portfolio.
RICHARD Ever alert to the dangers. Well thank you Peter Kahn as well as Polly Qwan and Chris Forgan. Now if you want to read more about income investing we have a whole edition for you on the topic online, just search ‘Fidelity Answers’. And if you like this discussion please do rate us on your podcast app. That's it for me. The producer was Seb Morton-Clark and studio management was by a technical army: Connor Baillie and Alex Willcox here in London, and Tommy Su in Hong Kong. Thank you very much indeed for listening. Goodbye.
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The Investor's Guide to China from Fidelity International takes you deep into the workings of the Chinese economy and its financial markets. Paras Anand, Chief Investment Officer for Asia Pacific, brings you a cast of investment experts working in the world's second largest economy. Hear how they're uncovering this rapidly developing market and avoiding its pitfalls.
Episode 1: It’s an historic time for China's capital markets. Company shares and bonds have are drawing international attention after being included on global indices for the first time. But how open is China really to investors? Exactly how far down the road to liberalisation does China stand today and what should investors watch for next? Joining Paras to answer these questions are Lynda Zhou, a Portfolio Manager based in Shanghai, Bryan Collins, Portfolio Manager and Head of Fidelity's Asia fixed income team, and George Efstathopoulos, Portfolio Manager in the Asia multi asset team. With additional contributions from Alex Zhang, Investment Analyst.
Click here (or below on Apple podcasts) for more episodes from this series.
Transcript
PARAS ANAND
This is An Investor's Guide to China, a new podcast from Fidelity International. I'm Paras Anand, Head of Asset Management in Asia Pacific and I'll be taking you deep into China's economy. What makes the country tick, the areas that are most exciting, and the ones to avoid. Fidelity has built up decades of experience in China and each episode I'll bring you Fidelity's portfolio managers, research analysts, and other specialists who cover the market and can share with you their expertise. The past year has been historic for Chinese capital markets. Company shares and bonds have stepped into the international spotlight, included on global indices for the first time. But how open is China really to investors? Exactly how far down the road of liberalisation does China stand today and what should investors watch for next? To help me answer these questions I'm joined by three of Fidelity's China experts. With me in Shanghai is Lynda Zhou, a portfolio manager who's based in the city. Lynda, you're based here but how long have you known Shanghai?
LYNDA ZHOU
I'm actually Shanghainese. I was born and brought up here but I went to Hong Kong to study and further work. And then the last year, it's basically the opening up of the China market that bought me back. So I relocated the whole family back to Shanghai after almost 20 years.
PARAS
And joining us from Hong Kong we have Bryan Collins, a portfolio manager and head of our Asia fixed income team. Brian, how much does China figure in your Asia portfolios?
BRYAN COLLINS
China's a significant part of our portfolios directly and indirectly. But you could easily account for half of the exposures that we have and growing. frankly. And, of course, indirectly China has a significant influence on Asia, less the rest of the world.
PARAS
And also in Hong Kong we have George Efstathopoulos, a portfolio manager in the multi asset team. George, how close are you to the Chinese market?
GEORGE EFSTATHOPOULOS
In recent years we have found ourselves increasingly participating in China across the cap structure whether it is China bonds - sort of CGBs - sort of the saver part of the cap structure. Increasingly, the past year or so, in China high yield and more recently in Chinese equities, as well. So particular important for us in recent years.
PARAS
Thanks George. And thank you all for joining me today. Lynda, Fidelity’s been in China for a decade and a half and you can see that the Shanghai skyline has changed beyond all recognition in that time. But what about the country's financial markets. Where are we in that journey?
LYNDA
That's actually a very interesting question for now because we all know that China is still a relatively closed up market. You know we have the capital account is still pretty much closed. The financial markets, just in the past two to three years, the opening up happening… what is really encouraging is in the past one year we do see that speed of opening up actually accelerating quite a lot. It’s probably because it's one of the negotiation conditions of the trade war but we're still very happy to see that process.
PARAS
And Brian and George you’re both very frequent visitors to China. But from your vantage point in Hong Kong what's your take on the pace of change? Bryan?
BRYAN
I would say it's a little mixed. I mean it's very rapid. I very much look at the domestic capital markets in China and see them as not developed but rapidly developing. So in some respects the rate of growth - the size of the market, for one - has been impressive, immense. We've never seen this before in terms of the growth of a debt capital market or a capital market more generally. The good thing for China is that it's got large established developed markets around the rest of the world which it can effectively mirror or at least reflect or take the best of, if you will. We've seen some good improvements with the regulatory oversight especially around the banking system and around regulating shadow banking, for example, and shadow financing channels over the last couple of years in particular. Yet on the other hand there are some aspects, little things, which still have a long way to go. One of the obvious ones that we feel is significant for the onshore domestic bond markets is simply allowing greater use of really basic derivatives like bond futures, government bond futures, for example, which are available and they're used, but for example as international participants we're not yet able to use that as some other participants. Now we feel that that will change and will obviously continue to develop and there's always this balance between making sure that the development of any capital market is measured, it's controlled, it's not excessive or creating any kind of systemic risks. But on the other hand, given the size, the fact that the bond markets is 13 or so trillion US dollars in size, we expect within the next five to six years that number to be easily 30 trillion US dollars in size - that's as big as the US debt capital markets. So if you think about it in size terms they're going to equate each other very soon but when you think about the depth and breadth and the sophistication of the two markets, China's well behind. So it's got lots of room and opportunity to continue to grow.
PARAS
And we're seeing that same sort of development also in terms of the A--share market as well when we think about index inclusion. George, when I look at the Chinese market, despite the sort of the development of it the depth of it liquidity of the market the volatility of the market still gives me the impression that it's still a very immature or sort of developing market. What's your perspective on that?
GEORGE
I think it is a more retail-driven market. So retail investors onshore in China, they're responsible for roughly about 80 per cent of trading activity, of turnover, when they hold about 20 per cent of the outstanding. These numbers are slowly changing with the inclusion that we saw we are seeing a little bit of those dynamics change, it's still very early days. I think about 10 per cent now of the outstanding is held by foreign investors so this will gradually change dynamics and will have a positive impact on volatility. But having said that, I'd also like to mention inclusion. Typically what happens when a country gets included in an index you tend to have the ‘buy the rumour, sell the fact’, that's what happened with UAE, Qatar, and even going back with Taiwan and Korea many years ago. And this time around, with China, it's been the exact opposite. We knew there was going to be inclusion sometime earlier this year - we didn't particularly know the extent of it - but last year, despite decent earnings growth in China, we saw a huge compression of multiples. So we didn't really see this buying the rumour, selling the fact, that then created a very interesting buying opportunity on the back of very attractive valuations.
LYNDA
After the valuation compression of last year the market is definitely becoming more interesting. And last year it was because we got multiple surprises from both inside and outside. I think the outside one - the trade war one - is probably still going on, but inside-wise the financial market deleverage has almost come to the end. So it does look more interesting from now.
PARAS
And let's stay with trade wars for a bit. Obviously we're in this environment now, tariffs being imposed by the US on China and the retaliation that we're seeing. George, how serious is this and how much of an impact is it having on your asset allocation views, as you’re thinking through the portfolio. Is this a short term situation or something that you see extending for quarters ahead of us?
GEORGE
The key thing that we're monitoring on trade wars is: what is the impact on the Chinese economy? And from our perspective we've done a lot of work trying to understand from the bottom up what does it really mean and the impact it has and today versus 10, 15 years ago, the impact today is very different because today the Chinese economy has managed to transition from an export driven economy to one [where] a big part of GDP growth is driven by the consumption story. So trade wars 15 years ago would have had a much bigger impact than what it has today.
PARAS
I'd like to I'd like to come in on currency though because I think one of the things that I'm finding particularly surprising is how weak the currency was as we went through 2018. But despite all of these headlines around trade wars, when you actually look at the currency, yes - we see a little bit of weakness but really it's been more resilient maybe than one might have expected as we look through 2019. Bryan are you seeing value in the currency or do you feel that there's further weakness to come?
BRYAN
The RMB is an evolving currency. For all intents and purposes it's a managed trade-weighted currency. And especially you can start to see how domestic monetary policy in China is playing a bigger role in the direction of the currency. So you mentioned that it was weak during 2018 which was the reverse of 2017 versus the US dollar because monetary policy growth trajectories are actually diverging, so that's what currencies should do. In 2018 the PBOC was easing monetary policy, the US Fed was actually starting to hike. Growth trajectories between the two were actually starting to diverge: the US was stronger, China was starting to moderate. So you should see a currency behave that way, like a natural stabilizer. That's what they do. That's one of the great things about having a currency.
PARAS
But I want to bring out this point on value though. Lynda, when you look at the currency do you see value?
LYNDA
It’s a tough question because as an as an insider people are always trying to diversify because we see the credit expansion speed - it's so much faster than your nominal GDP growth. That's why internal-wise, domestic people always have a fear of the currency depreciating, that's why they're willing to put money into things like property or even hard liquor. But just not keep cash.
PARAS
But in the context, George, of your portfolios you can be hedging out currency. Are you hedging the currency at the moment?
GEORGE
We have been hedging the currency for the past month or so. I'd say roughly two weeks before the trade war shenanigans came back to surface. And the reason for that is we thought that the currency had gone a long way so far this year, it was pricing in a lot of good news. The hedging cost as a result had come down quite significantly. Last year, hedging cost we're about three and a half to four per cent - almost the entire coupon you'd be getting from the bonds. On the other hand, a month ago they had gone down two basis points. So from our end, pricing was very good news and hedging costs were very low, we thought that was a good opportunity to reduce some of our renminbi exposure.
BRYAN
The interest rate differentials have completely converged between China and the US. So those hedging costs are negligible now. I wouldn't say there's value in the currency only because there are downside risks. There are psychological barriers if you will, particularly for the domestic consumer and domestic confidence that seven is an issue. But frankly it should be able to break through that. If China needs to be able to adjust to a relatively high level of debt to GDP, if it needs to use that as a tool within the trade war negotiations, maybe, but currencies need to go up and down to be a natural stabiliser and the problem is with a closed capital account, with a managed currency, its ability to do that has both very strong pros and cons.
PARAS
Just turning to the economy more broadly. One of the things that international investors really struggle with, Lynda, is actually trying to get a read on the Chinese economy. From inside the country, what's your view on where we are in the business cycle? How do you get a read on the economy?
LYNDA
It's also not very easy even for a domestic person because the volatility in the GDP number is very low and to some extent doesn't really reflect how the economy changes. So we do have some better indicators, things like power generation and things like discretionary spending on some of the key items. I think these are more close to the reality, [these] types of parameters. And also I have some personal channels.
PARAS
Tell me?
LYNDA
I’m based in Shanghai so I take taxis - [it’s a] shared car system - twice a twice a day.
PARAS
So you take taxis twice a day?
LYNDA
Yeah. It’s actually quite good value because we still got a lot of internet giant subsidies on shared car services. So I talk to the drivers twice a day. The interesting thing is these taxi drivers, they are not full time taxi drivers, most of time they have another job and [often] they're actually SME owners. So in their leisure time they can earn some additional money.
PARAS
SMEs - small companies?
LYNDA
Small medium enterprises. They can give you really first hand information of what's happening on the ground. Like, for example, one of the drivers last year, he raised pigs. He told me it was very tough last year, in his business. And he was thinking that he may close down his business and switch to another one. That's typically a signal of the trough of the cycle of the pig market.
PARAS
And how did you act on that? What did you do on the back of that information?
LYNDA
Usually it will give you some idea of a kind of turning point and also it just gives you an idea. So after that I need to prove that. So I talked to the really big scale pig raising companies to see if it's really close to the downcycle of the market. I think that probably gives me some of the information earlier, you know quicker, before I really picked up some news from Bloomberg or from a sell-side report. It's really first-hand information.
PARAS
One of the things that I'm really interested in at the moment is the role that monetary policy is playing. Bryan, I don't know how effective you think the Chinese authorities have been in terms of their use of monetary policy to manage the economy? Should the folks at the People's Bank of China - should they be talking to the pig farmers as well?
BRYAN
For what it's worth I'm certain they are because that's an important component of inflation. Food in particular is a big part of the consumer price index and it's just a big part of the disposable income. And I think what we've noticed with the PBOC is that their monetary policy framework, their formalised open market operations, have really stepped up quite meaningfully in the last couple of years - officially from November of 2015. So monetary policy is now becoming a much better tool and you can monitor that through, again, the formal open market operations, you can look at it with short end funding costs. So this is actually a much better indicator, we would say, of what the central bank is actually doing rather than just what they're saying. And so you can actually start to see over the last couple of years that tightening of monetary policy. The easing of monetary policy over 2017 and ‘18 respectively were very clear to see and that helped us with our positioning, it helped us get conviction, it helped us to add risk at the end of last year. And the other thing that I think is very relevant to that - it's all very interconnected as you can imagine - is obviously the currency and interest rate differentials (we talked about that before). But then it's even just looking at the credit impulse, that credit growth within the economy. This is critical in assessing and evaluating the cycles and the mini cycles that we see within China, all very related to each other, because monetary policy is not just credit growth, we also need to add things like fiscal impulse or local government spending, for example.
PARAS
And if we turn to macro prudential measures more broadly. George, again, to ask the same question: despite lots of different economies and governments talking about macro prudential measures, you could argue actually that China's been one of the most effective at using macro prudential measures to control the economy. Am I right in thinking that?
GEORGE
Last year we have had the deleveraging campaign and that has been working but at the same time it has also had some unintended consequences. And actually that links up very much to what Bryan talked about - the credit cycle and the credit impulse. What happened last year was that companies that needed liquidity, that needed credit flow the most, these sort of private companies, small and medium sized enterprises - these companies did not have access anymore to lending. And as a result we started seeing an increase of defaults, more spread volatility in the onshore bond market, and that's important because small and medium sized enterprises in China, private companies in China, they make up a big part of China's employment - about 70 to 80 per cent of urban employment. And if we think of China and the political spectrum in China, they key objective here is, I would say, social stability. How can we relate that to the economy and something more tangible that we can monitor? I would argue that that is employment, essentially not seeing unemployment rising. If private companies are having issues - and not issues because they've been poorly managed but issues because they're not finding access to liquidity - then that is a bad thing because it can lead to rising unemployment. Now that was identified as an unintended consequence by the PBOC middle of last year, they started stepping up on that front. And as a result, from our perspective, that was a catalyst to start adding to risk especially in Chinese corporates.
BRYAN
The macro prudential policy that we've also seen, which I think is a little bit mixed but I think you're right Paras, it's been a pretty good example of how it can work, certainly at scale, that's for sure. Clearly, we've seen over many years quite extensive policy controls around the property market, around lending standards, that's actually created some distortions frankly, it’s a mixed result if you will. The other macro prudential policy - it's probably torturing and stretching the term and the definition a little bit - has just really been about the cost of funding. So the overall cost of funding, the allocation of capital within the economy, has been very heavily skewed towards state owned enterprise and with good cause - through decades of rapid development this is a necessary, very valid way to create capital, to generate fixed asset investment, infrastructure and everything that goes with it. The problem however is over time, if the cost of capital is not priced correctly you then get a misallocation of capital. And one of the nice things that we see about the development of a domestic bond market is that it starts the process of pricing capital better. And when you price capital better you get a much higher chance of that capital being allocated more efficiently. It's not perfect. It just means that good quality companies get rewarded with a lower cost of funding and vice versa. It's a work in progress. The bond market helps you do that. But that's, I would argue, the number one financial market reform for China: the efficient pricing and allocation of capital, and the bond market helps with that but there's still a lot more to be done.
GEORGE
And not just the bond market, also the inclusion of China into the Barclays indices etc which will slowly find international institutional investors coming into the market and again helping with pricing that risk more efficiently.
LYNDA
Just on that misallocation of capital point: this round of easing I got a very different feeling because from the recent April PBOC monthly commentary you already feel that they started to tighten a little bit after the first big scale of easing. So this time round their mentality is very different. They want to just control the liquidity enough to support the economy, not [let it] collapse, but they don't want to really pump the system with abandoned liquidity and create a lot of bubbles or in another words, allocate capital in a very inefficient way. So I think it's also a kind of mentality, an attitude change towards the easing and definitely that brings more credit financing to direct equity financing or bond financing.
PARAS
And Bryan you mentioned property and traditionally property is where up to 70 per cent of Chinese household wealth is tied up. And my colleague Richard Edgar has hit the streets in Shanghai to see what's happening in the property market and what that could actually mean for the broader economy.
RICHARD EDGAR
Paras, I'm in downtown Shanghai, the centre of the Pudong business district, in fact just outside our offices. You can probably wave and I'd see you. But I'm about to go on a ramble to see some rather different areas, different neighbourhoods and the story they tell about China's economy today. My guide is Alex Zhang, Fidelity's real estate analyst here in China. Alex welcome to you.
ALEX ZHANG
Welcome to Shanghai.
RICHARD
Thank you very much. What an exciting time to be covering real estate. I know that you think that Shanghai is a little bit like China in miniature - if you could call a city like this of 26 million people in any way mini - but tell me about the development here in this business district, what are we looking at right now?
ALEX
Sure. We are now standing in the very centre of Lujiazui financial town and there are around 40 buildings in this area and in those buildings we have over 200,000 people working for the financial industry.
RICHARD
And 30 years ago what was here?
ALEX
Fields and some very shabby neighbourhoods. And when the Chinese government decided to develop the Pudong area as the starting point of opening up we started to see a lot of building. Some of them were built in the 1990s but also some of them are what built in 2010.
RICHARD
So this is possibly the scene that most people think of - most foreigners certainly think of - when they think of Shanghai. But you're going to take me to a rather different place.
ALEX
Yes of course. For the residential community in this Lujiazui area there are two camps. One is about five to 10 minute walk from our office. And the other is around 20 minute walk from the office. I'm actually living in the 20 minute camp.
RICHARD
It sounds like we've got some exercise to get on with, why don’t you lead on.
ALEX
Yes, of course.
RICHARD
Right, Alex, not an awful lot of exercise. We've only been walking about seven or eight minutes and here we are in the area that you were telling me about. It’s much more residential, it’s leafy - we've got lots of trees down this street, very attractive and helpful on a very sunny day here in Shanghai. Tell me about the shops that we can see around.
ALEX
As you can see the most popular are property agents, restaurants, coffee bars, juice bars. And I think all of these represent the fast-growing service industry in China. So definitely it's a structural trend. However, we can also see with all of these tenants the turnover rate is very high.
RICHARD
The turnover rate?
ALEX
Yeah - or the churn rate, which means a lot of people are trying to open their own shops. However, some people succeed to survive but some people just have to close down just after the tenant lease period.
RICHARD
This is your neighbourhood. You walk up and down the streets every day. How often do you see new shops here?
ALEX
I have to say very often. Actually, in front of us these three shops, I didn't find them during the last weekend.
RICHARD
Really? They’re brand new?
ALEX
Yeah.
RICHARD
And how long do you think they'll last?
ALEX
It depends. I think the property agents probably could last quite a period because they are the experts about demand. And these dumpling shops, I think they mainly serve the mid to low end customers, they can actually also survive quite a long time. But this one which is a stewed meat kind of shop is quite a specific demand, so I'm not quite sure how long they can survive.
RICHARD
So dumplings - yes; stewed meat - maybe not.
ALEX
Yeah.
RICHARD
And how important is property as an investment to people here in Shanghai?
ALEX
The property price went up about 30 per cent in 2015 and another 30 per cent in 2016. But after two years of skyrocketing the Chinese government came in with interventions to curb the property bubble in late 2017. So since then we’ve seen a 15 per cent drop from the peak and which bottomed in February this year and edged up 6 per cent since then.
RICHARD
It’s been edging up 6 per cent? I mean that's a pretty good edging up, isn't it. Has that government intervention and the slowing of the incredible racing away of prices, has that changed the way that people think about property?
ALEX
Definitely property has become less attractive as an investment.
RICHARD
And this is something close to your heart as well? Not just professionally.
ALEX
Yeah because I bought my apartment in this area in early 2016 so I enjoyed the rally in 2016. However, I also experienced the drop in 2017 and ‘18. But definitely I don't view that from an investment angle, I more treat it as a living purpose. I think one of the purposes for the government to control the property bubble is also to prevent property from crowding out too much consumption. So I think there will definitely be a structural trend for the Chinese household to allocate their assets out of property and gradually into other types of assets like equity, fixed income, and other type of things. And also on the other hand you have more disposable income to be allocated to consumption. So that's definitely both good for the capital markets and consumption for the next decades.
RICHARD
Alex Zhang here on the leafy streets of almost central Shanghai, thank you very much indeed.
ALEX
Thanks very much.
PARAS
Lynda, I want to explore this point that Alex raised on consumer trends a bit more. Does what he said really chime with your own outlook?
LYNDA
I think it's quite common to think in that way but from my kind of experience I actually do feel the opposite way. I think that having your property price rising actually creates a lot of wealth effect and increases your consumption power. And second, it also increases your expectation for future growth. So I do think that the wealth effect takes a big part from the property price. It's probably quite good for consumption. And also I did experience a very big drop in the Hong Kong property price back in 1987 when the property price dropped 70 per cent. So that's definitely going to decrease our consumption not increase.
PARAS
One of the things that I discovered meeting Chinese companies over the last year is that it seems as if local brands are starting to resonate with consumers arguably more than international brands. And we're very used to this idea that international brands like Nike have global resonance. But what's really surprised me is the prominence and growth and appetite for local brands. Is this is a real shift that we're seeing?
LYNDA
It is a very strong phenomenon that’s emerged in the past decade. I think there are two reasons behind that. First one is you have local brands that have really had a quality improvement. In terms of value for money it can give you a better utility. So there is fundamental reasons why the local brands are emerging. And second, also from the consumer perspective, we’ve got a young generation - their consumption pattern is very different from my generation. They're very focused on tailor-made demand and also very focused on experience. And also they’re quite focused on a kind of interaction or feedback. Sometimes the local brands are really good at that, they're very fast at changing their models, their designs, to better tailoring the younger generation customers. Whereas international brands - for example, it's a very typical example, is like a P&G, when they want to launch a new product and try and fit into the younger generation they need tonnes of process approval from their US-based R&D centre but the local cosmetics or FMCG brands they change really, really fast.
PARAS
But one of the emerging stories really though is about increasing household leverage. On the credit side, Bryan, is increasing household borrowing a concern for you?
BRYAN
The level of household debt is always something we need to be thinking about in any economy, particularly around the rate of change. Someone's property or properties plural as is often the case within China and the mortgage associated to that is typically the largest part of that household debt. That wealth effect and everything that we've talked about is obviously an important part of that. The good thing is generally speaking we don't see excessive levels of debt in the household sector other than the investors and even then it's been difficult to have excessive amounts of debt within the household sector. But as we start to think about things like auto leasing, for example, if we start to think about the use of consumer credit, this is a much trickier part of the household debt problem because usually it's a higher cost of funding, it usually brings forward consumption and of course it's harder for that to sustain rapid growth. And that actually is what brings about cyclicality within more developed economies like the US, for example, which is very much domestic driven with a large amount of domestic credit focus and household debt focus. The development of China’s credit scoring systems or social scoring systems is clearly a way to try and rein in and self-regulate if you will. But I guess I'm not concerned about household leverage at this point of stage but my goodness it's increased quite significantly over the last few years so it's definitely something we need to be watching and mindful of.
GEORGE
One more thing to add to sort of link up to that is you know monitoring household leverage levels but simultaneously monitoring savings rates which historically and continues to be one of the highest globally. If that starts deteriorating at a time when household leverage is moving upwards that would be a more worrying dynamic. Haven't really seen that yet happening in a meaningful way.
LYNDA
I agree with Bryan. It does rise very, very quickly. But my feeling is that it’s still pretty much linked to the mortgage. So mortgage debt is still so far the largest part of the household leverage. So again it links back to the question of property prices. My view is property prices are going to be stable, not collapsing. And as long as that’s the case I don't think the mortgage-type of household leverage is going to be a big problem.
PARAS
Well that's a really helpful insight. If I wanted to bring this all together: what we've really learned today is that the Chinese market, the capital markets, are continuing their process of opening up but really we've seen the pace really accelerate over the last 12 months. Also really interested to hear that our view on the management of the economies by the Chinese authorities, we're giving a lot of credibility for both the efficacy of monetary policy as well as the macro prudential measures. And that whilst we're seeing a maturing real estate cycle and potentially a kind of a more mixed outlook for real estate that in fact the consumption story continues apace. And of course we'll be keeping a very close eye on pigs.
That brings us to the end of our show today. I'd like to thank my guests Lynda and Alex in Shanghai and Bryan and George in Hong Kong. The producers were Richard Edgar in Shanghai and Neil Gough and Seb Morton-Clark in Hong Kong. If you like what you've heard today do subscribe, rate and review us on your podcast app. Until next time, thanks for listening and goodbye.
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Twenty years is enough time for innovations to become widely adopted but not quite long enough to render the world unrecognisable. Real estate generally has a long life span, stretching into decades or even longer, so changes to the landscape are relatively slow. However, there are trends in motion set to alter the shape of what our towns and cities will look like in the future.
Kim Politzer, director of research for European Real Estate, and Adrian Benedict, investment director for Real Estate, unpick five key themes - sustainability, autonomous vehicles, intergenerational living, mixed-use schemes and smart cities - and gaze into the future to imagine how they will influence the real estate industry in 2039.
Click here for the full article.
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Orangutans spend most of their lives in the treetops of the jungles of Sumatra and Borneo. But today they're critically endangered, largely because millions of hectares of their habitats are being cleared to make way for palm oil plantations. The palm oil producers are under increasing pressure from consumers, NGOs and investors to lessen their environmental impact. And it's working.
From the jungles of Southeast Asia, we move to the steel mills of northern China, where the government is closing the least profitable and most polluting plants in part to reduce the thick toxic smog that can hang over the homes of hundreds of millions of people.
So what do these two stories of environment-related pressure mean for the industries in question? Will short-term pain bought on by external pressures lead to long-term gain for the companies - and investors - involved? And what might that mean for other sectors facing similar challenges?
In this podcast, Asia Editor Neil Gough talks to Fidelity's Forest Shultz, an equity Investment Analyst who focuses on metals and mining across Asia, and Minlin Lee, a Research Associate who covers equities including Malaysian and Indonesian palm oil producers.
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Fundamentals is a new show from Fidelity Answers that taps the brains of our analysts for on-the-ground insights from around the world about the industries and businesses you're investing in. From trends to disruptions, from political upheavals to changing regulation, how are corporates responding to the growing complexity of global business and less predictable markets? Who will be the winners and who the losers?
-> Advances in material technology are paving the way for a smartphone revolution and it looks as though China will be the one leading the way. In fact China, long regarded as a copycat and laggard in the tech sector, is set to become a world leader not just in smartphones but a whole host of other related industries. What could this mean for the way you use your phone? What about the impact on suppliers and other big players in the smartphone sector? And how should investors be thinking about what could be the biggest gear shift in the industry since Apple launched the iPhone?
In this podcast, Asia Editor Neil Gough talks to Fidelity's Casey McLean, an equity analyst covering tech hardware, semiconductors and the smartphone supply chain across Asia, and Peter Carter, an equity analyst with a focus on tech hardware and industrial automation in China.
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Click here for more episodes from this series.
Fundamentals is a new show from Fidelity Answers that taps the brains of our analysts for on-the-ground insights from around the world about the industries and businesses you're investing in. From trends to disruptions, from political upheavals to changing regulation, how are corporates responding to the growing complexity of global business and less predictable markets? Who will be the winners and who the losers?
-> Shipping is the lifeblood of the global economy but it's also one of the world's worst polluters. Of the entire global transport sector, shipping accounts for 90 per cent of its sulphur dioxide emissions, a gas with grave environmental impacts: deforestation, acidic rivers, and poisoned wildlife. In an effort to tackle the problem the UN's International Maritime Organisation plans to introduce new caps to further restrict the amount of sulphur dioxide generated by commercial shipping. The regulatory impact is likely to be immense and not just for the sector - manufacturers, retailers, consumers, even fuel prices themselves.
In this podcast, Editor in Chief Richard Edgar talks to two of Fidelity's senior analysts about the forthcoming law: shipping credit analyst Jonathan Neve, and North America energy equity analyst Paul Gooden.
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Fidelity's 165 analysts have conducted some 16,000 meetings with corporate management teams across all sectors and regions in the past year. Our annual Analyst Survey distils all of that information to build a forward-looking, bottom-up picture of the corporate world in 2019.
In this podcast, Richard Edgar, Editor in Chief, picks apart what's been learned from this year's survey with Fidelity's Global Head of Research for Fixed Income, Marty Dropkin, and Director of Research for Equity, Michael Sayers.
Things may not be as sunny as last year but as you can hear in this show, context is everything. Plus, there are still some reasons for confidence in the year ahead. Listen on to find out more.
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What could global markets look like in 2029? Will a worldwide recession have reset the economic and corporate clocks? How will changing tastes and technology affect the way we invest - could they even change the way we define investing? And what about ourselves: how might shifts in social norms, in gender equality and other issues around diversity affect our approaches?
Tackling these themes are Head of Asset Management in Asia, Paras Anand, Wen-Wen Lindroth, senior credit analyst and Marty Dropkin, Director of Research for Fixed Income. Hosted by Richard Edgar, Editor in Chief.
Transcript
Richard Edgar Today we’re thinking about the world in 2029. How will we be investing in a decade's time? It's hard enough forecasting what's going to happen tomorrow - ten years is a very long time but we're going to give it a go. What can global markets look like, for example? Will a worldwide recession have reset the economic and corporate clocks? What about the world of asset management itself? How will changing tastes and technology affect the way we invest? Could they even change the way we define investing? And what about ourselves? How might shifts in social norms and gender equality and other issues around diversity affect our approaches?
Joining me in the studio to guide us through these questions and lead us to what I hope will be the sunny uplands of 2029 are Fidelity's Head of Asset Management in Asia, Paras Anand, Wen-Wen Lindroth, Senior Credit Analyst, and Marty Dropkin, Head of Research for Fixed Income. Paras, first of all, when we're looking at the world in 2029, 10 years from now, are you a glass half full or a glass half empty person?
Paras Anand So if we're talking about the real economy, the global economy, I'm definitely in the optimistic camp. There's quite a big conversation out there at the moment that says that we've had a very sort of extended economic cycle, where we're very ‘late cycle’ is the term I hear a lot. And that there is a kind of an expectation that a recession is inevitable. And the debate is really around how deep will that recession be. Whereas I look at many factors within the global economy and could see that actually as we look at 2019 and actually for sort of five, 10 years beyond that, we may actually be in an extended period of growth for the real economy.
Richard Edgar So that's all right then. Wen-Wen, let me come to you. You work in credit. Do you share this optimistic view about the economy as we go forward?
Wen-Wen Lindroth Well, I think the underlying drivers when I look at the US are pretty healthy. Not quite so sure about Europe. I think one maybe out of consensus view I have is that we could see some strong growth in the real economy but have the markets not perform quite as well over the next 10 years.
Richard Edgar Ok. And Marty, how about you? What should we be looking out for as we approach the 2020s?
Martin Dropkin I think the thing we need to be prepared for is what does the world look like in a low rate environment if we if we need to think about that for the longer term. So rates have clearly risen this year although have backed off a little bit from that. But I think given the state of growth and given the outlook for inflation we're probably going to be prepared for a lower rate environment for some period of time.
Richard Edgar Long enough to take us through to 2029?
Martin Dropkin It's a long way off so it's hard to say for that long of a period. But I do think we might be in this sort of blissful state where we see a modest amount of growth in the overall economy and a reasonably low rate environment that will keep things moving along in a similar direction.
Paras Anand I would definitely sort of challenge that view. I think this idea that we are going to sustain a low rate environment, is very much the kind of the environment that we've been in over the last 10 years, it's really the direction we've been in really in the last sort of 30 years. We are classically unprepared for what a change in that environment looks like. And I think one of the things that could take us in that direction is if, for example, we saw that a tightening of monetary policy actually caused the economy to accelerate. And the question is, how could that happen? That seems a very counter-intuitive perspective. But effectively I think that what's happened is we've continually reduced the price of money; is that actually the velocity of money has collapsed. So, the multiplier effect that people think that you would incur by increasing the stock of stock of money has not been there. So perversely you get to a point where you increase taxes so much that there’s actually a lower propensity to pay taxes. So you have this almost inverse correlation: so you start tightening monetary policy, obviously that has a positive knock on effect to the profitability of banks, banks are prepared to lend again, the multiplier effect kind of kicks in. And in those sorts of circumstances you end up with inflation that you're not really prepared for.
Richard Edgar But first of all, you were nodding along to this, Marty? And we're talking about a big picture here. You were talking about the 30 years that have been. As we look forward to the next 10 - in that big picture sense - does that make sense?
Martin Dropkin Where I agree with Paras is on a sort of one or two-year view with the tightening of monetary policy. I'm fully expecting - as are many people - an increase in volatility, we've already seen that in the last few months. I think we're in a world where that will continue. The other side to that argument is demographics; with an aging population the need for refinancing of central bank issuance that's going to continue to keep pressure on deficits. There's going to be this counterbalancing effect where central banks and others are going to have to manage down the rates in order to just keep the economy going; to maintain a balance between the cost of debt and the need to refinance that debt.
Richard Edgar Because it's a very distorted world, isn't it? Particularly over the last 10 years in terms of the money that has gone into the system; pumped in there by central banks. Some are arguing that we need almost a violent disruption of the status quo rather than the slow mechanism of demographics that you're talking about, Marty. But something much more violent, Paras, to change the landscape.
Paras Anand Yes. And I think that the disruptive factor that comes into play is that for a very long period of time - it could be the next three or five years - I think that the central banks will position themselves very much behind the curve. But there will come a point where if they feel that they're not able to control the economy you end up with some step changes. But I think what we should also emphasise is that the types of things that we're talking about, if they do come to pass, will actually benefit a lot of people in the real economy.
Richard Edgar How so?
Paras Anand Because, for example, you get returns to labour the like of which you haven't had for the last 10 or 15 years or so. The equation between the returns to labour versus the returns to capital will be reordered.
Richard Edgar And how will that mechanism happen? What will be the driver for that? If you start to see wages go up; the massive accumulation of wealth with the asset owners that starts to reverse somehow. How is that happening?
Paras Anand Let's talk about your starting point at the moment. You're looking at most economies, most large blocs - whether it's Japan, whether it's even here in the UK or the US or Europe, your starting point already is unemployment is quite low so there's not a lot of slack in the system. So any environment which describes the idea that demand surprises on the upside over the next three to five years then the valve that moves is going to be real wages.
Richard Edgar Ok, so that's the people side of it. Wen-Wen, if I turn to you. You would see a compression in margins - if wages are going up - for these companies. What would the impact be there? Because we've had companies that have been sustained for a long time, they've been able to carry on because there's not so much inflation, there's cheap money keeping them going. How would that change?
Wen-Wen Lindroth I think we will see wage inflation because of the lower slack, as well as just political pressure in several different countries. In the US, for example, a few years ago, the election of Trump, also the rise of Bernie Sanders in my mind is very much in line with the populist fervour, the populist movement. Those who perhaps lost out over the last 20 to 30 years really coming back to bear on the political landscape.
Richard Edgar There's a rise in populism in many, many places around the around the world. How will that - again if you take this on a 10-year view - how do you think that might have shaped things? I mean it’s an impossible question because it's so broad and so long in its view, but the tectonic plates are definitely shifting, aren’t they?
Wen-Wen Lindroth Yes, absolutely. But you know this can also happen through gradual or peaceful means. So as costs go up, and labour costs do form a major part of the cost structure of most companies, as those costs go up and there is more return to the workers as opposed to their shareholders, as Paras has pointed out, that means that profit margins are going to go down. And I guess back to my original point, I think that could also mean pressure on securities.
Richard Edgar Primarily your concern is whether these companies that you cover are going to be able to honour the debts that they've taken on. Do you get more worried as you look at the landscape as it as it begins to change?
Wen-Wen Lindroth Certainly anything that reduces cash flow is an issue for credits and so from my point of view obviously it's a threat. But at the same time, I think we should also recognise that the way that excess value has been allocated over the last 30 years and the way more and more has gone to shareholders - that's a trend that could perhaps be reversed without necessarily really damaging the underlying corporate.
Richard Edgar Marty?
Martin Dropkin Picking up on Wen-wen's comments, there’s a tangent here and sort of tying in what Paras was mentioning, there's this underlying premise that growth is good. The topic I've been reading a little bit about recently is that growth isn't necessarily always good.
Richard Edgar That’s a fascinating concept sitting where we’re sitting right now.
Martin Dropkin Well, let’s think about it in the world of sustainable investing and the environment and the impact on our climate where coal-fired power plants are increasing the temperature in the world.
Richard Edgar The wealthier we are the more we consume and the more of the world’s resources we’re consuming.
Martin Dropkin Exactly. Growth leads to the need for more power plants, leads to more toxic things put into the environment. So what if we end up in a world where - and it's a bit conceptual - where we decide that we need to reduce the amount of output and that is considered for the greater good of humanity? I know it's a bit pie in the sky but it is a concept out there and you can see over the next 10 years, with pollution on the rise, that this is a concept that will become a reality in many countries.
Richard Edgar Paras you talked about a different way of measuring growth but perhaps it's a different way of valuing things altogether, whether it's assets or whether it's the way that an economy is developing.
Paras Anand Yes. Whether we look at the level of organisations or we look at it at the level of economies we will have a much deeper sense of balance or looking at things in the round. So whilst I would disagree with Marty - I think we are likely to see and will continue to see growth in the economy - I think there will be a much greater attenuation to the broader stakeholders within that sort of growth. I think where we're moving from is a world where we had a very singular concept of what good growth was.
Richard Edgar It is an interesting point though, isn't it? If we’re using up the world's resources, I wonder if in 10 years’ time the way you value assets might not be based on profit or the EBITDA - it’s not going to be the same calculation.
Paras Anand Yes. I think my theory on this is that much more will be it will be based around the view of duration. So if you look at the fundamental acceleration that we're seeing in the creative destructive process around corporates: going from 40, 50 years about 25, 30 years ago to what’s forecast to be 14 years and probably lower by the time we get to 2029, then actually there will be much more attenuation to terminal value than there will be in terms of short term profits.
Richard Edgar Ok. Wen-Wen?
Wen-Wen Lindroth I just wanted to add to this idea that maybe our parameters are changing. Maybe going forward it's not going to be all about earnings per share or return on equity. We are looking at other ways to value companies and attach long-term value to them. But I think that definitions and parameters are getting redefined on all different fronts as well. For example, we're rethinking GDP and questioning whether that is the right way to measure growth and sustainability in an economy.
Richard Edgar That brings us to our next topic actually which is about the disruption within asset management itself. Marty, let me let me come to you. Do you expect that to continue? Where will the industry be in 2020?
Martin Dropkin Clearly, we're in a world where fees are going down. The data is more and more plentiful and so the need to figure out what to do with that data, how we incorporated in our analysis - the velocity of that is increasing; the way clients look at potentially investing versus the way an asset manager will look at it versus an asset owner. I think there's a lot of different topics to discuss there. One of the core ones that I think is near and dear to the fixed income world is, how can we continue to embed a quantitative element to fundamental research more and more? Clearly, we’re already doing that. Topics like behavioural finance have entered into them into the scope of thinking in the last number of years and we're doing a lot of that ourselves. But how do we continue to embed that? How do we utilise that data? How do we process it more efficiently? Clearly, we’ll always need to meet with management teams to try to get a sense of corporate governance, that clearly brings in an ESG theme to it. But how do we pick apart data that enables us to look at that in an even more efficient way?
Richard Edgar Quant beginning to pervade investment at every level. And I suppose everyone will be at it - it's a quant arms race.
Martin Dropkin Well, it is. And what does quant mean, right? So I'm not talking about macro investing here where you’re looking for changes in minutia about Treasury rates. I'm talking about how we can use big data, how we can use artificial intelligence to drive better decision making. I think we're at the early stages of that right now. We're already embedding nudges into our investment platform where perhaps we're enabling analysts and portfolio managers to look at a wider range of investments just by utilising the data better. I think the more we sort of embed that into the process the more we'll keep on and it will be a circular benefit to the whole process.
Richard Edgar You mentioned fees. How will they change in how they're presented to clients?
Martin Dropkin Yeah, I knew you'd bring that up. More efficient and more transparent. Well transparency is a given, I think. Clients are demanding it, asset owners are demanding it. We will have to expose our views a little bit more efficiently and a little bit more quickly. I think the fee structures are going to be compressed in a way that we will have to just make sure that our analyst teams and our portfolio management teams are just utilising the data the best they can.
Richard Edgar Just taking that idea of transparency, Wen-Wen. How important do you think that will be to the investors of 10 years from now?
Wen-Wen Lindroth I think it will be particularly important to the up and coming millennial generation. By 2029 they still won't form a majority of assets under management. According to studies it will be something like 16 per cent. But in terms of what's important to them transparency ranks very highly.
Richard Edgar So a small group still but becoming more influential.
Wen-Wen Lindroth Indeed. In fact, I think their cultural impact is probably going to be bigger than the actual assets under management.
Richard Edgar Why do you say that?
Wen-Wen Lindroth Because they are leading on culture. And technology is changing so quickly, changing the way that we relate to each other, even for the older people like us in this room. We are being led by younger people.
Richard Edgar And Paras - how do you think, looking at the industry as a whole, how do you think it might change? Is it, as Wen-Wen’s saying, it’s being led by the louder voices of people with different views, or you've given lots of ideas on the economic side of how things are changing.
Paras Anand Yes. So I have quite a different view on thinking about the medium term prospects for the industry and a big part of that is influenced by just remembering that there are very few things in the world of markets and investments that are structural and actually things do work in cycles. I actually think that there could be a very real prospect that we look at the industry in 10 years’ time and actually what we've done is rediscover the value of active investment and rediscover the value of fundamental analysis. Now, why do I say that?
Richard Edgar Well, I was going to say, you would say that wouldn't you?
Paras Anand Well, absolutely, as Warren Buffett would say, never ask a barber if you need a haircut. But I do feel that in the last 10 years and particularly in the last five years we've seen a boom in the types of strategies that really think not about a share or a security as being a part ownership of a business but really as being a price that correlates with other prices. So thinking about things like factor investing or smart beta or outcome orientating investing, they're not really interested in the share as a unit of the underlying company, they’re actually looking at shares and they're common behavioural characteristics. So in a sense they’re sort of one step abstracted from reality. And therefore, if you are, as I was saying earlier, in an environment where some of those fundamentals are going to change more profoundly over the next 10 years then you can’t live in that world of abstraction. Most innovation in finance actually ends up kind of turning in on itself after a period of time so I'm always wary about terms like ‘structural’, like ‘innovative’. I don't think disruption applies to our industry as a phrase.
Richard Edgar That's quite a profound thought, that it will carry on as it has done. And Wen-Wen?
Wen-Wen Lindroth I think the clients’ needs and what they're interested in and what they want to achieve is going to require more active management and more innovation, if I may use that word. And in terms of how we provide that service when we think about baby boomers and so many of them retiring and living longer, needing to save more, some of them needing to work longer. You know they have very specific needs that they need to have filled. And then when I think about the two probably largest up and coming groups - Millennials and Gen X - and then also women and the differences in how these groups want to invest their money - it's going to take more active management.
Richard Edgar You've taken this to another area that I'd like to cover as well, which is diversity and inclusion. Because I know that that's something that you’re a champion of. The concept of diversity and inclusion is not new but the #MeToo movement seems to have given it very much more urgency. How do you think that is going to be reflected in asset management?
Wen-Wen Lindroth I think that the #MeToo movement is going to have a very lasting impact on business in general because what it's done is pulled back the curtain on power imbalances in the workplace. And I see this as sort of being very much attached to the entire women's movement that erupted in 2017 with the women's marches etc. The way I would talk about this is not to just focus on gender diversity but to think about the quality of a management team and whether they are incorporating cognitive diversity. And it's not so much that I go in and take a look at the board or take a look at the management team and really analyse it for diversity, however, you can see that when a company is really able to navigate risks well it's because it's got the right combination of people making the decisions. There's been a lot of research done about the benefits of cognitive diversity, how it increases profit margins, return on equity, generally speaking you have lower leverage.
Paras Anand Simply put Richard I think that for any company in any industry, any organisation, the environment is getting more complex. Success factors as we've talked about are getting less homogenous and hence I think you need in any industry much more of a multidisciplinary mindset and much more cognitive diversity in order to succeed. Also, I think that there's a deeper recognition that, given that you need to ensure that you’re attaining any advantage that you can, a lack of diversity means that you are not even mirroring the diversity of your customers. So you've got that responsibility as well. So I think this is going from something, which a bit like we talked about with other sustainability factors, these are things that have been talked about as kind of nice to have things, I think they're becoming absolutely fundamental.
Richard Edgar So that's how it feels at the moment. Casting our minds forward a decade, what sort of conversation are we going to be having about then?
Martin Dropkin I wanted to tie back to something that we've all talked about, which is transparency. The challenge for asset management is to continue to attract the best talent that we can whether that be approaching gender diversity, racial diversity, educational diversity, and transparency is only going to help there. And that has to start in schools, that has to start fairly early on. If we want to attract more females, more people from different backgrounds to this industry, then we will have to start to embrace it within the educational system. But I think the more we can open that up and show what asset management is then I think the more we'll be able to attract the right talent.
Richard Edgar And Wen-Wen, if you think about your companies and the discussions that you’re having outside the company as well as within. What do you expect to be talking about in 10 years’ time?
Wen-Wen Lindroth In fact I think if we succeed we won't be talking about it anymore. It will just be a given and we will be post-gender, post-race.
Richard Edgar Is 10 years long enough to achieve that?
Wen-Wen Lindroth I think that's a little optimistic but looking further out the goal is not to need to focus so much on this because it just is a given.
Richard Edgar And briefly, Paras, what do you think? In 10 years’ time what sort of conversations?
Paras Anand I think we'll be having a very different conversation in 10 years’ time. And I think the different conversation will be that less of our people might look to doing their entire career in one industry and that there may be a greater propensity for people to do a period of time in finance, a period of time in software, a period of time in media. And these sort of portfolio careers which we currently associate with much more senior people, in terms of their late stage of their career, they might start much earlier and that's maybe something as an organisation that will have to equip ourselves for.
Richard Edgar It sounds like a very different world in some ways but some constants too. So hopefully the best of both awaits us in 2029. Paras, thank you very much indeed. Also to Marty and Wen-Wen and thank you for listening. Goodbye.
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What's going on on the high street and how is it affecting real estate investment? What disruptions are emerging in the asset class and where can the opportunities be found? In this podcast, Adrian Benedict, investment director, talks to Mark Young, vice chairman at Stifel Investment Bank, Alison Puhar, Fidelity UK fund manager, and Kim Politzer, head of research for real estate.
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Significant shifts are underway in the pattern of global populations. Many developed countries are becoming older while a number of their developing counterparts are beginning to reap 'demographic dividends' as their younger contingent boom. What do these changes mean for societies, companies, individuals, and investors? To find out, Editor in Chief Richard Edgar talks to Fidelity's Head of Solutions Design, David Buckle, Global Head of Fidelity's Work Place Investing business, Julian Webb, and Aneta Wynmiko, Portfolio Manager.
TranscriptRichard Edgar: The pattern of populations is changing. In many places, especially the developed world, people are having fewer children, but they're living longer. Emerging economies have quite another trend though, a boom in the under thirties, sometimes too many for their countries to find work for. You've probably heard all this before. It's not a surprise, but what do these huge shifts mean for societies and for investors? What challenges are there for governments, businesses, and individuals as we work out how to support or employ the old, the young and indeed ourselves? Well, with me in the studio to discuss demographics are three Fidelity experts. First, David Buckle, Head of Investment Solutions Design here at Fidelity. Now, David, part of your job is to think in novel ways about how people can fund their retirement. What's the most significant shift that you've seen in the way the industry is approaching this? David Buckle: By far the most significant is the notion of needing to invest in the retirement phase as opposed to cashing out at age 65. Richard Edgar: And in other words that it's not a done deal, you're going to carry on trying to coup some returns for the many years that many people are retired nowadays. David Buckle: In a pension sense we all live too long and therefore the money doesn't last. So it needs to grow at least through the first phase of retirement to make sure it lasts for the rest of your lifetime. Richard Edgar: Jolly good. Well with me also is a Portfolio Manager Aneta Wynimko who runs Fidelity's demographic and consumer funds. Now, Aneta, I imagine that both the areas that you cover complement each other: the impact of changing populations and their behaviours. What's the most interesting trend that touches both of those? Aneta Wynimko: Well, the most interesting and fascinating trend is how people today in their fifties think that they are still young and how they spend their money. So we all talk about ageing and we all talk about the population declining, the spending power declining, but I think psychologically people are younger in their minds. Richard Edgar: They're younger older in a sense. Jolly good. Okay. And completing our line-up today is Julian Webb, Global Head of Fidelity's Workplace Investing business. Now, Julian, you're responsible for the pension schemes have some 1 million end investors all over the world. How are the needs of those members evolving? Julian Webb: They are certainly changing in light of what we're seeing in terms of global demographic changes. I think the most fundamental thing is that people now have their own responsibility for their retirements. I think the shift has clearly moved from state to either the private individual or indeed their employers. So I think people are now recognising they need more support and help to save for an adequate retirement income. Richard Edgar: So a lot of people are having to get their heads around this, it's not just the people around this table. Well Julian, David and Aneta, welcome to you all. What's wrong with an older population? [Skip to here] David, could you set the scene for us, please? What challenges do the demographics pose in places which are getting older? David Buckle: Yes. There's two big ones. The first one is that when you retire, you have to fund until the point of your death. The longer you live, the more the money's got to last. That's the clear driver in demographics and because that phase is actually quite short and in the sense of a lifetime, just a few years extra longevity actually mean quite a big impact to the work your savings have to do. The second thing is there's a question mark about how much the state can provide with the demographic shift of how many young people are supporting how many old people. It's not clear how much pension provision can come from the state in the future. Richard Edgar: So how do the economics underpin all of this, affect those points thatyou're making? David Buckle: They're not helpful actually. Economic growth is how many people are working and how much is each one producing. The population growth of the world is slowing so there's less people, or less growth in people, so we need them to be more productive. And with an ageing population actually typically that corresponds to a lower productivity. Richard Edgar: In fact, poor productivity is a symptom that we're seeing in many economies, particularly these economies that are growing older. David Buckle: Indeed so. Yes. The investment upside [Skip to here] Richard Edgar: Okay. Well, Aneta, all of this sounds very worrying and yet the demographic fund that you co-run looks for the opportunities that these shifts throw up. So you're looking for the good news. Aneta Wynimko: Yes, always. Richard Edgar: Radiate some optimism in this discussion, please. Aneta Wynimko: Okay. So the demographic fund is a long-only fund so obviously we are looking for the good news. And for us the most exciting news is the fact that older people will have to spend money on basically trying to stay younger and healthier longer. And this is a very clear trend; the medicine technology - there are many companies that are coming up with solutions. The baby boomers, retiring baby boomers, have very high spending power. And as I said before, they think they are young, they want to enjoy their life, and their spending patterns are shifting from things which are may be necessary to things which are maybe much more discretionary that allow them to enjoy life and stay healthy and fit. Richard Edgar: So what are the types of things that you're looking for? Where do you specifically start to pick up on those changing trends? Aneta Wynimko: Something which is maybe very superficial, but skincare companies are a big beneficiary of ageing because as we know - or as we hope - skincare products help us looking younger and I've seen studies that show a lady in their fifties buys five times more products than lady who is in her twenties. So obviously companies that sell skin care products are quite a clear beneficiary. Richard Edgar: That's a really good statistic. Have you go the same for men in their fifties and how much that compares with men in their twenties? Aneta Wynimko: We are now talking about the metrosexual men who care about what they look like a lot, actually. And in Asia we are seeing increasing demand from men for skincare and this is driven partially also by social media where you want to project your image and look young. So we are seeing quite a strong trend of growth, but it's not the baby boomers. I think it will be the generation of millennials. As they get older they will spend more and more on skincare. Richard Edgar: Interesting. Now, Julian, I'm dying to ask you about your skincare regime and your social media profile. Julian Webb: We can certainly talk about that. Richard Edgar: You look fabulous. For those of you who are watching in black and white, Julian looks great. Ageing workforces and corporate adaptation [Skip to here] But we've got people who are living longer, they're feeling younger, as Aneta was explaining they want to look younger. They're also staying longer in work. How are the companies having to adapt to an ageing workforce? Julian Webb: I think this adds potentially a lot of value and benefit to employers, particularly as the more senior in age their workforces, the more experience by definition they can bring to that organisation. Hiring young talent can be quite challenging into an organisation, so retaining your senior, more experienced talent, I think is also important. So what we're seeing are a lot of large employers in particular having a much more flexible approach in terms of when people would expect to be retiring, they are designing their benefits structures in a way that accommodates an older workforce as well. So I think employers absolutely understand this. However, to David's earlier point, they're probably comes a point in time where the older generation become less productive. So equally employers don't want an ageing workforce that is becoming less productive. So they want to make sure that they are financially secure so they can actually retire at an appropriate age and not just to have to continue working for income purposes. Richard Edgar: I suppose there's an element of education as well. Not just of the companies but of the employees as well. Julian Webb: Very much so. Very much so. And one of the big, big trends that we're seeing, particularly in the US, is this concept of financial wellness. So I think historically employers have really focused on retirement savings and making sure that their workforces are adequately catered for - for retirement income. But I think increasingly, whether it's for the older generation or indeed the younger generation, this concept of financial wellbeing - financial wellness beyond retirement - in other words, beyond retirement savings. So whether that's on short term cash flow, debt management, your family's financial wellness as well. So we're seeing employers setting up these programmes to inform and engage with their workforce on this broader topic of financial wellness. Richard Edgar: David? David Buckle: Yes, and it extends into retraining as well. It's unlikely - given that this is all at the same time as a technological revolution - it's unlikely that people will have a single career for this force lifespan. So the likelihood of needing to switch gears mid-career is becoming greater and these milestones that are now available for how close are you to retirement point, you will probably need to check those milestones at the same time of potentially shifting gear in your career. Financing longer (and longer) retirements [Skip to here] Richard Edgar: How do we pay as countries, as economies? How do we think about paying for people in their retirement? Because that has to change as well. David Buckle: Yes. There's typically three pillars which people lean on. The first is the state, the second is the company, the third is the individual. Richard Edgar: And the state's stepping back in many places. David Buckle: Yes. You just look at the sheer numbers. The number of people retiring, the number of money on the balance sheet and it's likely that that's going to have to shift. Certainly as an individual saver planning for retirement, I don't want to rely on that government piece as a significant part of my retirement. Julian Webb: I would just quickly add: I think the state clearly plays a really, really important role in retirement provision, but particularly for the less well off. And I think what we're seeing is this shift from governments focused on good quality, adequate state provision for the lower paid, and then for medium to higher paid individuals, putting more emphasis on them to save for their own retirement and become less reliant on the state. So I think that's quite an important shift. But I think overall this is a fact that actually countries do want to backtrack a little bit on this provision - that's either by reducing the absolute amount of retirement income that the state provides or often, and increasingly, increasing the age when you become eligible to take those benefits. Richard Edgar: So transfer of responsibility to individuals, but at the same time there's a transfer of risk from the companies that were providing defined benefit schemes to defined contributions. So there is an awful lot for people to get their heads around. Are they succeeding in this preparation? Julian Webb: I think it's just started, in reality. I mean, this move from defined benefit guaranteed retirement income to defined contribution has really been evolving over the last 20 years. But I think the reality is in a lot of the countries, in particular the sort of more mature countries, that actually the concept of defined benefit is more or less disappeared. A lot of people say, well that's a negative thing, but actually it can be a positive thing. So if we bring it back to the demographic changes and the flexibility that the workforce is looking for, actually having defined contribution can be a significant advantage. So for example, in retirement, we know that when you just retire you've hopefully got your health, you need to enjoy your free time, you need more money so you need a higher income at that point in time. And then as you become older, actually you're less mobile and probably have less opportunity to enjoy your free time and you need less money. And then the third and final sort of cycle actually as you go into later life you perhaps have less good health and you need healthcare. Richard Edgar: So a spike in health healthcare spending. Julian Webb: That's right, and therefore you need more money at the end. Whereas the defined benefit plan by definition gives you a pretty static level of income throughout your retirement. Richard Edgar: Okay. And these are the patterns Aneta that you were talking about of how you're trying to a spot where the opportunities are. Aneta Wynimko: Yes, because we see obviously a lot of the developed countries but also some of the emerging market countries ageing quite fast, but this ageing, at this point in time, is mostly the baby boomers moving to a kind of bit more advanced age - let's not call that old age - and it's a time where they still have a lot of savings, spending power and willingness to spend and enjoy their life. And maybe they are not thinking so far ahead. But also this is the population that has a lot of wealth in their houses. They have experienced the global housing boom and they have quite a lot of money saved in the main asset that they possess. So obviously the question planning forward for them is, when they get into the eighties, will they be able to release the equity from the house and use that to pay for their retirement and for the care that they will need? So I think people in their late sixties are not yet so concerned about the need to actually have savings and maybe that's not very responsible on their part because time flies quite fast. Richard Edgar: Although that generation, that cohort, have got assets and this is quite different to people who are following them. And they are also the people who tend to vote. Budgets and ballot boxes: The role of the state [Skip to here] And I just want to bring in governments here, David, because part of the problem in sorting out some of the fundamental issues around here is that the electoral cycle is too fast for anybody really to grasp the nettle and make some of the painful changes that perhaps need to be done. David Buckle: Yes, that's correct. Yes. The cycle of retirement is way longer than the cycle of an election. And of course as we get an older and older society, they represent a bigger and bigger group that the governments are trying to pander to win votes. But I think the overarching problem here is that pensions, state pensions, actually haven't been around for that long. And when they started you received them when you were 65 and the life expectancy was 49. So it was really designed for people who unexpectedly lived on. So the notion of, you retire with still 15, 20 years of life left and you do cruises and golfing holidays and all of those things, that was never really planned for from the government's perspective. Richard Edgar: So what is the answer? That we realise that things aren't as good anymore and people like you and me have got to work until their mid-seventies, mid-eighties, or beyond? David Buckle: Likely we've got to work longer. But more important, if you're able to save, start saving. That’s the most important message. Julian Webb: Yes. And I think there are particular countries and governments that are a bit more progressive on this. Richard Edgar: So where is doing it well? Julian Webb: Well, I think the UK actually is doing it pretty well because when you talk to other governments and policy makers often they are referring back to the UK as a potential model to follow. So for example, in the UK we still have very, very generous levels of contributions that you can make into a pension plan with full tax relief. I mean there are exceptions if you are paid lots of money then it gets scaled back. For the vast majority of people, these are still, on a relative global comparison basis, very high levels of contributions with tax relief. I think I'd also say that the government by introducing auto enrolment has been seen to be very progressive because this has now brought a lot more people into the workplace retirement environment, which they wouldn't have been in prior to that. And then finally, I would just say that these days when you retire in the UK, you have complete flexibility as to how you wish to receive your income. So I think that's had political consensus in the UK, all of the political parties are behind it. It is a very long term strategy. By comparison we see other countries who limit the tax relief or limit contributions because of the cost to the state here and now, rather than taking a longer term view. Richard Edgar: Aneta, when you're thinking about where to invest, do you take that into account? Do you start looking at where you think people are going to have money to spend in retirement? Another example might be Australia where they've got a well-funded a system there. Does that sort of decision play into your thinking? Aneta Wynimko: Yes, I do think about it, but I must say it's very hard because at the end of the day it's about how people make their choices and most of consumption globally is actually from wealthy people. So most of the opportunities to invest in consumer facing businesses is catering to wealthy people. As we all know, they control most of the stock equities, they control most of the housing assets. And this is why I think the outlook for their consumption and also for the consumption from the world that they will be passing onto their children is quite healthy. The issue is definitely when it comes to people that have not saved, that are not planning for the future - and this is the majority of the population - and that will have implications for companies that sell products, that cater to that level of population. So I do think about it, but an aggregated basis, it doesn't look as bad as it might seem on average, kind of per capita basis. Richard Edgar: Once again, a nice positive side to this discussion. Aneta Wynimko: I clearly come from equity. On the flip side: Demographic dividends and cultural variation [Skip to here] Richard Edgar: Give me an example of some of the countries then that are appealing to you at this broad level. Aneta Wynimko: So in the demographic fund, we are looking at the dependency ratio and that helps us to identify countries where for the long term the opportunity for consumption is very good because the ratio of those who don't work to those who are in the working force is good and stable over time. So there's a number of countries. Vietnam is a good example. India is a very good example. Indonesia. But most of the countries in the developed world - I mean Japan is leading the pack - but the ageing of western European countries is quite fast and obviously the same applies to China. The US actually has quite good demographics. It's being muddled a bit by the anti-immigration policy now, but this country still has quite descent demographics and as a result quite a good outlook for consumption. Richard Edgar: But some of the countries that you highlighted there, they're basically emerging markets - you picked on some in in Asia. They are a different background, a different type of place to invest with different challenges as well. So how do you factor all of those things in when you're thinking about many years in advance? Aneta Wynimko: You can look, for example, at a place like Vietnam which has a very young population. A country that today benefits from the fact that a lot of the factories are being moved from China - where labour is becoming too expensive, partially as a result of scarcity of labour in China - to Vietnam. And you can see the creation of jobs at the low end, moving toward more sophisticated, higher value end jobs. And as a result, what we are seeing are companies like Zara going there and opening shops and having a big success. So we've seen that story played out in many countries before and we can see that happening in the next decade. Richard Edgar: Exactly. So a growing middle class, more spending, and what have you. We've seen it all before. David, the question I want to ask you is the countries that have the demographic dividend at the moment, so they've got a bulge of people in the lower age brackets, are they simply going to be places with a problem in years to come in the same way that Japan is at the forefront now and developed markets like, say Germany - choosing one that's about to have a problem in Europe. David Buckle: Not necessarily. My personal experience of trying to design products for these differing countries is it's more to do with the cultural expectation of how retirement is managed. So for example, in the western world, it's very common to have some kind of life annuity product which pays you an income through retirement and then when you die the product's over. Whereas in parts of Asia, where I speak to, the response from consumers there is to say, no, we don't need that much money in retirement because there's an expectation that your family takes care of you, but it wouldn't be acceptable to have that nest egg disappear on death. The idea being that that's then transferred to those that have looked after you as part of your estate. So managing the cultural issues tends to be a bigger problem than the demographic that you've referred to for emerging economies versus developed. Richard Edgar: So what are the products that you then have thought through for those markets? David Buckle: For those ones I've just described there, something with a lump sum balloon payment at the end, for example, and potentially lower income through retirement to compensate would be more attractive to some of the Asian countries. Multinationals and the spread of best practice [Skip to here] Richard Edgar: Julian, you think about this from a global point of view as well, and on the business side. How are employers adapting? Particularly ones that may be operating in lots of countries? Julian Webb: Yes, we are very much seeing these global, multinational companies wanting to increasingly have a sort of consistent common approach to retirement provision and the broader sort of financial provision for their workforce. So to David's point, it is very different country by country in terms of state provision, but actually these employers want more consistency so they want more fairness, more equality across all of their workforce. I would also add that particularly US-based organisations are actually now putting more workforce and increasing their workforce profile outside of the US. So increasingly they are coming to Fidelity and asking us for help with solutions in these emerging markets where they are now actually employing quite large volume of employees. Richard Edgar: Is it enough to start bringing about change in those markets, perhaps accelerating some of the developments that are already happening in the developed economies? Julian Webb: I don't think it's going to be a sudden change, but what I do know is that governments and states pay close attention to what these multinationals are doing. Often they are incentivising these companies to set up businesses in these locations and they watch very closely how they employ their staff and what benefits they provide. So I think this will be very much something which will drive change through these large companies and their changed programmes, delivering change into government and into state as well. Richard Edgar: So at a government level they're taking notice. What about the changes that you're seeing in the way individuals are able to start thinking about the way that they save? Because certainly right at the beginning of your career it just seems so far away. Most people don't want to think about it. I certainly didn't. Julian Webb: And I think that is the reality. So I think increasingly both individuals and their employers are giving a lot of thought to this and really thinking - perhaps talking to somebody and engaging with somebody in their early twenties - about a two or even five-year time horizon and certainly not a 30, 40-year time horizon. So for example, it may be about their short term cash flow, they're management of debt - increasingly actually student debt on a global basis is becoming an issue; we often think about it as an issue here in the UK, but it's certainly an issue in the US as well. And I think increasingly what employers are looking for is, what's a simple effective way of engaging with our workforce, whether it's on a short, medium or long term horizon for their financial wellbeing. So as an example, we have come up with some core principles, what we call retirement guidelines. And one of these, as an example, is what we refer to as a savings factor. So what multiple of your annual salary do you need to save at a particular age to make sure that you can retire on an adequate income? Richard Edgar: To show that you're on track; a milestone that you're going to be okay. Julian Webb: Exactly right. So if you're, for example, in your twenties, it may be once times your annual salary as a cash equivalent that you need to have already saved for your retirement. If you're in your thirties, it may be four times. If you're in your fifties, it's probably going to be closer to eight or nine times. So a very simple way, as you say, of people just making sure that they remain on track and we can deliver this service and this information in an easy way to access. So for example, through a mobile app or on a website. So the use of technology comes into play because I think increasingly people want just an easy, simple, intuitive way of accessing this information, Richard Edgar: Real behavioural changes then right across the board. A fascinating topic, Julian, I know that we could carry on talking about this for much longer, but I'm afraid we're all out of time now. So Julian, David and Aneta, thank you so much for joining me and thank you for listening. Bye-bye.
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How can investors remain on the right side of markets as monetary policy and geopolitics conspire to ramp up volatility? How can they hope to navigate this strange, and thus far atypical late stage of the economic cycle? To help provide a footing Richard Edgar, Editor in Chief, brings together some of Fidelity's top investment brains to tackle these difficult questions: Sonja Laud, Head of Equity, Steve Ellis, Head of Fixed Income in Europe, and James Bateman, Chief Investment Officer of Multi Asset, map a path through this new and uncertain world and explore some of the potential opportunities that could emerge along the way.
Transcript
Richard Edgar: Hello, I'm Richard Edgar, and this podcast is For Investment Professionals Only. For the best part of a decade. The global economy has grown and grown, but there are early signs at the tide maybe turning, and if that's the case, then bar running for the hills, what's an investor to do? The old rules have either been forgotten or no longer work in a world very different from the one before the global financial crisis. I'm Richard Edgar and today I've gathered some of Fidelity's leading thinkers to help come up with the answers for how to invest in a world less certain. Joining me in the studio are Sonia Laud, head of equity, Steve Ellis, head a fixed income in Europe, and James Bateman, chief investment officer for multi asset.
A ten year bull run: What's surprised you most? [Skip to here]
Now, a question for all of you before we get going. At the risk of being indiscreet, you're all old enough to remember the crisis of 2007 to 2009, but young enough for it to have shaped your career and perhaps you're thinking. So what I'd like to know first of all, is what surprised you most in the years since during the great bull run. Let me come to you James, first of all.
James Bateman: So I guess I, I'd probably begin Richard by saying I'm quite surprised we've all got jobs. It did feel in '08 - I was in the office block in London next to the Lehman's building, watching everyone leave - it did feel like that was the end of the financial services industry. And actually the fact that finance is booming, maybe in different ways, but actually that the industry is in pretty good health, you know, whilst there's been some issues in trust with the industry, clients are still investing. We're still seeing a real equity market. We've seen the debt markets return to normality as well. All of that to an extent is a surprise.
Richard Edgar: Not without an awful lot of help from the central banks.
James Bateman: Not without an awful lot of help. But I think, in September '08 you felt the end was nigh and by March '09 you were enjoying the start of a bull market. I mean, that was quite surprising how quickly, animal spirits began to return.
Richard Edgar: Steve, how about you?
Steve Ellis: I think the thing that's really surprised me since 2008 has been the extremely subdued nature of volatility and I think it goes back to what you were saying, Richard, about the help from central banks in supplying huge amounts of liquidity. The balance sheets of the G3 central banks has increased by about 18 trillion dollars since then. So this provision of liquidity I think is responsible for the very subdued nature of liquidity of volatility rather. But it still has very much surprised me that we haven't seen more regular bouts of volatility given the fact that debt levels and the global economy now are so much higher than they were even back on the eve of the crisis back in 2008. You would still expect, given the leverage that has been building up, particularly in corporates and off balance sheet banks, etc. That you would have seen much more periodic episodes of volatility and risk aversion. But markets have been extremely resilient and durable.
Richard Edgar: And an eerie calm perhaps? We'll come to that I suppose later on.
Steve Ellis: I think it's very possible actually because the liquidity taps have been turned off right now and certainly the Fed is beginning to unwind its balance sheet and raise interest rates and that could certainly cause some problems going down the road.
Richard Edgar: Sonja, what about you? What's surprised you about this remarkable period over not quite a decade.
Sonja Laud: I guess bringing the market perspective in a bit broader, not just fixed income is how well we have all done in terms of asset price inflation. And I think the most striking feature to me is the fact that markets across the board, including fine wine, old timers and any other kind of sellable asset class has done particularly well and has outperformed the real economy. That is a striking feature. So it's not only that we have jobs, but how well those with jobs have done on the back of the extraordinary monetary policy support. And this is why to me the most important question is if - as Steve has just highlighted - we have now turned off the taps, what is going to happen? Because we have to assume, and this is something we have witnessed already since the beginning of the year, that actually markets can underperform the economy just because we have a very distinctive change in the way we have been supportive for the past ten years.
James Bateman: Can I come in with one comment on that? I think Sonja hits a very important point there, that you've seen a disparity in the returns from being an asset owner to being someone who actually works and yes, we all have jobs and actually yes, in a lot of countries unemployment is low, but we haven't seen wage inflation - we're seeing tentative signs now - but after a decade from the start of the crisis the average worker isn't materially better off and that is a very unusual situation nine plus years into a bull market.
Where are we? Where are we headed? [Skip to here]
Richard Edgar: Well, I think you've all set us up for a discussion then. And what I'd like to turn to now is what's the situation at the moment? Where do we find ourselves right now? Sonja? So what characterises this particular cycle and where we are at the moment?
Sonja Laud: I think the striking feature of 2018 is the reassessment on where we are in the cycle, how asset price inflation stacks up, how valuation levels stack up and the volatility that has started really is just a sign of this reassessment because people are trying to figure out whether the risk and the risk profile of their portfolio and asset allocation is adequate for where we are in the cycle. And the idea that growth might have peaked obviously raises a lot of question marks and we haven't even touched on politics or the other headlines that are around and really kind of raising uncertainty and unfortunately means we struggle.
Richard Edgar: Indeed, I mean all the rules seem to have been chucked up into the air at the moment. So you can't look at anywhere and expect it to behave in the way that it might have done before if we got to this stage in the cycle. What you, James?
James Bateman: Absolutely, Richard. And I think what's interesting - I'm not going to thump the table because it will make a dreadful noise on the microphones - but if I did thump the table with our water glasses on it, you'd see the water wobble, and then the wobble sort of gradually decrease and go. And actually that's what's happened this year with volatility that yes, we had a spike in volatility, but you've seen that volatility again recede in the market. And what's so odd at this point in the cycle is there are so many reasons to worry, you know from basic valuations, prospects for future earnings beyond maybe next year, geopolitics, etc. And yet actually we see one period of volatility and then we see that gradually reduce over the year. And that is absolutely atypical at this point in the cycle.
Richard Edgar: So if there's not a jarring spasm that comes from somewhere, it sounds like it's going to be the turning off the taps that is the critical thing here. Steve, I'm looking at you because the Fed is clearly fundamental to what happens next. What should we be most wary of as it transitions from quantitative easing into tightening?
Steve Ellis: Well Richard I think it's the key thing for markets right now is the move from QE to QT in reducing their balance sheet, which was about four and a half trillion dollars, and Fed rate hikes as well, which are obviously tightening dollar liquidity and also the huge amount of dollar issuance - Treasury issuance - that's taking place because of the budgetary expanse at the very late cycle. So that's draining a huge amount of liquidity. And what the important thing here is Richard, is that dollar liquidity has been drained in what we call the offshore dollar liquidity market. In other words, this is kind of the euro dollar market which stemmed from petro dollar. It's the huge amount of dollar liquidity which is flowing around the global economy, seeking yield and seeking exposure to risk assets in an environment of very subdued volatility.
Richard Edgar: But it's now heading home?
Steve Ellis: Well, the reason why it hasn't so far hit the US, I think, is that at the same time you've had a huge amount of dollar repatriation because of the profit repatriation etc invoked by Trump. And so if you think about the statistics here: so since April, money supply, M2 money supply in the global offshore dollar liquidity market has actually fallen by $2.4 trillion. It's been a huge drainage of liquidity and that's why emerging markets have been under so much pressure because it's really tightening liquidity for corporates, sovereigns, who have been borrowing in huge amounts of dollars in the last few years. Whereas in the US M2 money supply has actually increased by about $350 billion because of that money coming back onshore. In other words, you've seen a capital account drainage from the offshore - from the emerging markets - back into the US. So money supply growth has actually been quite robust in the US and that's why you're seeing very good performance of asset prices in the US, whether it's investment grade, high yield, US markets, etc. But sooner or later that tap will turn off as well and it's going to be a lot more difficult for risk assets, I think.
Richard Edgar: What might stop the Fed? It's not obliged to look internationally at the picture, it's mandate is just to look within the US. What could knock them off course?
Steve Ellis: Well, I think you have to have some severe market dislocation first. And whether that happens indirectly - so in other words, because of what's happening in emerging markets right now - which seems frankly a very low probability that it's going to derail the Fed from continuing with its Fed rate hikes and drainage of dollar liquidity. I think it has to be something onshore that has to happen. In other words, we see a massive spread widening in US high yield, US investment grade, which causes a very sharp tightening of monetary conditions there. I think that's the only thing that can really derail Fed and suddenly caused them to go on hold and to stop the rate hiking cycle and or to taper the balance sheet unwind. And it's very possible they could early next year.
Sonja Laud: This is very important because I think this is a bit of a change because I think under Powell we have seen a much larger focus on the domestic issues than before. Janet Yellen would normally refer, or we would see her much more as a global central banker than what Powell does and it will have implications because you know, it just shows the interconnectedness of the global financial system.
Richard Edgar: Whether they like it or not they are a global central bank.
Sonja Laud: They are indeed, but the point is that obviously we focused a lot on Argentina and Turkey and there were lots that would claim that they're idiosyncratic risks, and I hear this, but at the bottom of this is still the problem that Steve has just outlined and we're talking about a shortage in dollar liquidity. and you could add the underperformance of the global banks from an equities point of view that literally point in the same direction. There is stresses in the system that so far have only really focused on the weakest links, but we should not ignore them because they might have wider repercussions going forward.
The Chinese Engine: more fuel in the tank? [Skip to here]
Richard Edgar: Well, let's look at the other side of this. So if we're looking at the Fed for interest rates, growth has been driven globally really by China, James, in recent years - double the contribution of the US, but that might be ending or at least slowing at the moment. How concerned should we be?
James Bateman: So I think we need to look at China in two contexts. One is, it's had a phenomenal level of growth for decades. And secondly, it's slowing, yes, but from very high rates to still quite high rates. And the second bit of context is at the last five year congress, the party was very clear it intended to enact policies that would solve some of the rural urban divide, but at the same time would slow growth. So we'd expect slowing growth, they forecast that was going to happen, It's happened and is happening. So the real concern is not does growth slow, but is it, what often gets good at hard landing, does it fall below maybe a, a reasonable expectation and my best guess is actually no - that the fears over China are over exaggerated partly because it's a very easy and popular narrative to go with because the data is somewhat obtuse, it's hard to really know what's going on. But when you actually look at China what you've seen is a couple things One is yes, infrastructure, real estate markets rolling over a bit. You're seeing actually consumer confidence in at least some areas, uptick, some areas flatline, but it's still positive - all but one bit of data and therefore you look at it, you say actually you've seen a bit of a rebalancing, a bit of a change. But then roll back and take a big picture look on China and say, well actually, what they'd call their secondary or tertiary cities, but those cities with populations actually about the size of London - so not small cities - and have virtually no infrastructure yet are industrialising fast. And in a world in which you have a country that has cities with populations of five to 10 million with virtually no infrastructure that are in the process of industrialising and being used as a source of labour, often actually by the west, or in joint ventures, there is a phenomenal potential for upside. Clearly there are risk factors, right? And you know, we can't ignore the potential for a trade war or the fact we're in a trade war depending on how you'd like to define it. My guess is that's a bit of a storm in a teacup and in a couple of years we'll go back and say, okay, maybe there are some tariffs in place, but it's been broadly resolved. But that does create some short to medium term downside risk. But do I believe the engine of growth is derailed? If that's how you define China? No, I do not.
Richard Edgar: If America does or doesn't see itself as the world's central banker, does China consider it has a role in global growth, Sonja? Or is it purely domestically focused? Because they sort of came to the rescue last time.
Sonja Laud: That's a very interesting question and I think it's something that will be redefined over the next decade or so because we're literally on the edge of seeing the old world order changing quite dramatically. And in that context we have the question around the world central bank and the reserve currency and the world's kind of growth driver and so far it has been a clearer picture on who's who. This might change over time and I think if you look at the shorter term picture, obviously in this big kind of unknown, whether the new normal for Chinese growth, I think we all agree will not provide a new stimulus and that's an important differentiation because it means for us from an asset or evaluation point of view that there might be not a new catalyst that kind of we could hang our hat on and say, oh wow, that's great. And that's the big differentiation because for the past couple of years China always provided this new stimulus where this time around they might not do this and just accept that it will be a lower level and more sustainable level of growth. And I think that's the big differentiation. I think for the time being that's more important and obviously has a domestic motivation because it's around obviously the indebtedness, the sustainability of new debt levels and hence you probably could argue this is more domestically oriented, but we have seen a much greater awareness of their responsibility in terms of global foreign policy and their kind of position on the world stage, which is a big change to the past.
Richard Edgar: As the country matures.
Sonja Laud: Absolutely. And so for the next 10, 20 years is really the question how we will see this relationship between the US and China develop because inevitably China will be the larger economy versus the US and interestingly obviously now Mr Trump seems to try to defeat the world order they have established partly post World War II. So there will be lots of interesting side effects that will come about this development.
Steve Ellis: The point you make about China is very important because when I think about the world, I boil it down into two factors. On the one hand you look at the Fed, the Fed set the global cost of capital through the fed funds rate and indirectly by 10 year treasuries, etc. And you know that interest rate differential will drive the dollar. So the US really sets the cost of capital. I look at China and I see China assessing the global rate of growth and so the two work hand in hand. So you think back to 2015 when China devalued its currency in August of that year and it was going through a massive capital count reduction. So there's money pouring out of China, the currency was depreciating very rapidly. There we did see a volatility spike in markets and by February of 2016 China was in a real mess. Their growth was stalling. They cannot allow growth to go below five per cent or so. So they turned the taps on in massive style and they did credit expansion of around about $4 trillion, which is about 43 per cent of GDP in one year. It was a bazooka. It was an enormous, a massive amount and it lifted all boats. So I think that's where you saw the cyclical recovery. So on the one hand you had the Fed who was still maintaining very low interest rates, etc and tapering. But it was China that really stimulated the global economy and lifted all boats. Now you're in a situation where Chinese growth is again stalling, which is not surprising given the fact that China has really maxed out on debt and that debt is having less and less, having diminishing returns, is becoming less and less productive for every dollar of debt. And so therefore is a huge misallocation of resources. They're in trouble again. So what do they do? They go back to what they always do and they want to stimulate. And so the question for markets right now is whether or not China can do another bazooka and I just don't think they can. I think Sonja is exactly right.
Richard Edgar: You think they're spent?
Steve Ellis: I think they will do everything they can to at least mitigate the slow down, but not to re-stimulate because their biggest maxim at the beginning of the year was financial stability, was deleveraging. And so therefore all they can do is a fiscal response here, but just to really soften the blow but not to actually re-stimulate and we're off to the races again.
Navigating strange markets [Skip to here]
Richard Edgar: Okay. You've mentioned markets and I want to move us away from the big picture. We've got the scene now set into how this translates into markets because we are in this peculiar market at the moment: the unloved bull run, James. Where do we go now? Is there a bubble that feels it has to be popped? Are we at that stage?
James Bateman: I mean, you know, Richard, you never know where you are in the market cycle until you've got past it. So we're all trying to guess the impossible. But I think my starting point on that is, first of all, it's completely true, we know we're unlikely to see economic growth materially accelerate from here, that suggests we're probably late cycle and we look at valuations and think given what's gone on probably late cycle. Conversely, perhaps the other thing that surprised me since the financial crisis, is how unenjoyable this bull market has been. I'm yet to see anyone particularly enjoy it. And I think part of that, the emotional scars of '08 that will last with us throughout our careers, sadly, but equally there hasn't been that sense of animal spirits that hasn't been that sense of excitement, there hasn't been that sense of stocks at any price.
Richard Edgar: But maybe this time it's different and there won't be the animal spirits there won't be the last hurrah.
James Bateman: Well, and the challenge is that debate between saying we're in a new paradigm and whenever you say that normally you're proven wrong. And so it's entirely conceivable that when we look back in 10 years’ time at why we had a bear market, the answer will be the repricing of assets based on a zero rate for risk free based on excess central bank liquidity, all these other things, and we'll say actually the bear market was so obviously coming because people are taking too much risk chasing yield or chasing returns and all these other things. And therefore all you saw was a reversion as rates rose, for example. That is entirely conceivable. But I think it is also entirely conceivable that we do see a period of excess momentum in an area of the market, and that's the point at which you start calling a truly sort of late cycle boom that you want to de-risk from. There is one thing I'd add, which is clearly you have seen a lot of froth in the FANGs. I don't think we can talk at all without talking about...
Richard Edgar: Froth in the fangs - my favourite phrase so far.
James Bateman: Good. I'm pleased that you like that Richard, I've been rehearsing it for a while.
Richard Edgar: Very Dracula style.
James Bateman: But you know that momentum in the tech stocks is there and it's such a narrow one that in a way maybe I'm a bit less worried because it's only a few stocks, but Sonja, clearly you can elucidate.
Sonja Laud: Yeah. No, I think you're absolutely right. And I think that is the reason why it has not been an enjoyable bull market because it was just a handful of stocks. And I think it's very - I don't know whether we have any historic precedents where market leadership from a regional sector and stock perspective has been so narrow that without any exposure to those, you had no chance whatsoever to produce what we obviously as an active manager is called alpha. So there was very little chance to outperform the broader market. To my mind, it is a sign that it's a very unhealthy backdrop as well because it tells me that investors are hiding in what has been perceived as kind of relative winners. It clearly has worked and we've debated at length how is this going to be resolved. Can we assume that either the factor, or the style, because obviously in that context we have to mention that value has underperformed dramatically growth. Quite obvious because if it's around tech stocks, it's tech sector and it's the US, then it's clear that it can only be found in growth and momentum. So can we expect, in the context of the end of cycle assumption, that this is going to turn dramatically. And I think here we came to the conclusion, no, it can only be a negative resolution i.e. we have to see those segments - so the US, the tech sector and the FANGs and the BATs, I guess I have to include - to at least market perform or underperform before we then obviously alongside hopefully a new economic cycle, see what then would be a much better value backdrop than what we have right now.
Richard Edgar: But they're not a classic bubble, are they? There's not hype around those particular companies, they're very successful companies.
Sonja Laud: There I would disagree. The hype is not broad enough to make it kind of this hyperbolic kind of expectation that the whole market will expand towards the end - so this last hurrah - because there's only five stocks. Can we see them outperform? Yes. But the point is - and we haven't talked about opportunities yet - the expectation that we have is at least we should start looking at other areas because they have been left out so dramatically, which is so unusual about this last part of the market.
James Bateman: You're right, Sonja. The interesting thing though, and the thing that I haven't completely reconciled in my own head, is you've had this, really since the financial crisis, this growth in factor based strategy, smart beta strategies, a lot of which are minimum volatility, minimum variance, etc - phenomenal weight of money going into them. And yet they're almost the anti-FANGs because theoretically those are not low volatility stocks, maybe they are...
Sonja Laud: They are part of those factor models.
James Bateman: I know they are, but why are they?
Sonja Laud: It is self-fulfilling.
James Bateman: But you've got something that is only going up and the buyers of those strategies, to my mind, are people who think they are buying things that don't have a lot of positive price momentum and therefore actually will do well in a down market, which segues into your question which I know I'm supposed to be answering. But therefore actually that is one of your risks of disillusionment. One of the things that causes, of course, a bear market in a crisis, is people don't get, weren't getting, from their investments, what they thought they were getting. And I think you've got two areas that worry me. One is actually people who think they've got low volatility, low risk stocks and maybe have the FANGs. The other is people who've bought what they perceive as safe stocks because they are yielding an income, giving an income, but actually either that income isn't sustainable or simply their valuations have been pushed up so much that they still have real risk of capital loss. And I am slightly worried - we saw earlier in the year, and I've talked about it a bit, the sort of Capitas of this world and the Carillions, which were companies that simply were not sustainable business models. I think one of the things that could crack is perceived safe companies because they had a yield aren't safe because there was a lack of free cash flow behind them. So those are the things that worry me. Where do you go in that environment? My starting point is - and Sonja alluded to it - value ex-financials and I view that to an extent is a bit of a two way bet, more than Sonja does I think, that I think there is a possibility of a change in leadership that says FANGs start underperforming other areas of the market, the weight of money simply rotates into them and that pushes those up. The second point though, which is perhaps more important is value, again ex-financials, in a down market could be a very attractive place to be within equities and you have to think not just where do I want to be in terms of between asset classes, but also within. And to my mind, traditional value is the one area that could be a relatively good two-way position in the current environment.
Richard Edgar: Okay, well we'll come to positioning for this potential downturn, or whatever comes next, in a little while. But Steve, let me come to you. We've got all these distortions and peculiar behaviour in the equity markets. What about in credit? How are things behaving there and what is the transition that you're seeing at the moment?
Steve Ellis: Well, you know, the big theme in the last few years in credit markets has been a hunt for yield and that's been perpetuated by a very low interest rate environment and just the need to find some form of return and that's generally come from the yield rather than say from duration, etc. And I think we're getting to a point where now as interest rates are going higher, it's going to make it more difficult. We're still in a very low volatility environment so people are still hunting for yield at least for the time being, but we've seen quite resilience in some markets, in particular in US high yield and investment grade. Also in US high yield because frankly for the reasons I mentioned earlier in the US you've seen money coming back on shore so some money supply has been relatively robust in the US, supply has been very, very low in the US high yield market, so I've been actually quite surprised at how resilient it is. Whereas other parts such as a emerging markets, you've seen a very large sell-off in spreads and you've seen quite sharp dislocation in those markets.
Richard Edgar: Is it postponing the inevitable though in the US?
Steve Ellis: Well I think so, but for the key question for credit investors in fixed income investors in general is really what happens next year. It's normally the Fed is the catalyst for market corrections. Every cycle ends because the Fed over tightened and there's the risk that, when you look what's priced in now for the Fed, we're now at 2 per cent Fed funds target rate. We've got two hikes priced in for this year and one and a half next year. So if the Fed actually continue through and actually deliver on those rate hikes we're going to have a Fed funds rate closer to 3 per cent, so that's your hurdle rate, is now going to be higher and higher. And the question is, does this actually pushed the US over the edge? Does it actually generate a recession? Because frankly, if you look at high yield spreads across all markets, even investment grade for that matter, we've heard a very virtuous cycle in the last 10 years or so. You've had very low interest rates and very low yields have actually made it very easy to refinance amidst huge amount of liquidity. And now as interest rates are going higher and liquidity is now being drained, that hurdle rates going to get more and more difficult for sovereigns and for corporates to refinance. So the virtuous cycle, you know, you think about the number of zombified companies in the world - there's been many studies looking at the reason why they're still an ongoing concern and still actually trading is that just by virtue of very low interest rates in the ability to refinance. In any other normal circumstance they would have gone bust, but we have an economy which is hugely unproductive because of the provision of very low interest rates. And so they, they're keeping afloat. But that can unwind if you see treasury yields moving higher and Fed funds rate moving higher and it's going to get more and more difficult for them to refinance, then that unwinds the virtuous cycle and to turn into a vicious cycle.
Bricks and elastic: The role of inflation [Skip to here]
Richard Edgar: So there's already a signalled path from the Feds but there's the risk of central bank policy mistakes, which are the thing that we're all scared of. What we haven't talked about is inflation, which could be on the rise. Oil has risen dramatically over the past year. We're beginning to see wages rise in the US. How does that change the dynamic?
Steve Ellis: As James said, wage rises in the US and elsewhere have been very subdued up until now, but now with labour markets appearing to be quite tight it could be that it's like pulling a brick along the floor with an elastic band: nothing happens for a long time and then suddenly the brick moves very rapidly. And we could see a very sharp spike in wages here. And you look at things like Fed surveys and you look at the Atlanta Fed survey of inflation expectations, it does show that core inflation is going to move higher in the US and if that's the case, then the Fed have to act, they have to tighten, they have to keep progressing with Fed rate hikes. And that's the problem is that if inflation is indeed in the system - and I'm not quite convinced in my mind whether or not it is because I do think there are some powerful disinflation forces in the global economy as well - but if US inflation is pushing higher, at least in the short term, it means that the Fed will have to just carry on with the tightening of the balance sheet and Fed rate hikes and that I'm afraid could actually tip the US into a period of stagflation.
James Bateman: Maybe I should come in there. So I'm clearly - and Richard knows this from a lot of discussions we've had - the big worrier about inflation at Fidelity, and as one of my colleagues said to me recently, 'Well, you'll be right in the end, you just got to wait.'
Richard Edgar: A stopped clock.
James Bateman: Exactly. Maybe that's true, but - and Steve has just won the prize for the best analogy of the year probably with the brick and elastics, so well done - but, you know, inflation is a worry to me and inflation is a worried because I actually think a lot of the deflationary factors that we've had over the past 10, 20 plus years have ended. And first of all, I think EM cheap labour as a source is certainly less. Secondly, and this is the big one to me, I don't believe the internet is a deflationary force. I think the internet is a price discovery mechanism and prices have been discovered. So you had a period of effectively deflationary impact because everyone could ascertain the cheapest price for anything and that's ended. And in a world where that's ended - and actually a world where we no longer have sticky prices or menu costs because of the internet. The risk is...
Richard Edgar: ...because people can change them at will...
James Bateman: ... is that you change your prices very quickly. The risk is that if - and we heard actually from one of the US equity analysts only this week that companies are seeing the ability to pass through cost increases, wage cost increases, quite rapidly. It's very easy to do that in a rapid cycle. You see your competitors are doing it, you do it, it becomes a vicious cycle of price and wage inflation. So I think the risk of inflation getting materially high from certainly what we've been used to for the last 10 plus years is really there. And the central bank policy to that is inevitable.
Opportunities [Skip to here]
Richard Edgar: So a very different central bank situation, a very different monetary approach. Sonja, were to the opportunities lie in a market like this?
Sonja Laud: I think before identifying opportunities it's very important that these adjustment processes will be with us for a long period of time. So we have to be very nimble and very mindful that this is not done in a quarter's adjustment, you know, speaking of emerging markets etc. So the immediate reaction function, yes, can be very short term, but there will be an ongoing reassessment of what actually opportunities are and how we should look at these in the context of a potential final stage of the cycle, changing monetary policy, and obviously from an equity markets perspective, this extreme market leadership. So that's kind of the framework we try to put in place before then starting to say, okay, where do we feel we should start looking for good opportunities? And that means to start with all the sectors that have been dramatically left behind and where we feel that actually we have sufficient visibility on the business model, the cash flow., the earning stream, and where there has not been a massive build-up in leverage. Again, so another framework to look at individual companies.
Richard Edgar: That's a quick little checklist.
Sonja Laud: This is where then obviously the dividend yield will play a different angle because if we look at the importance of the dividend yield then this is well documented over the long term. Interestingly, over the last five years, we've had a much larger contribution for multiple expansion than we had from earnings growth and dividend yield. If we agree that because of the changes from QE to QT that were not at least repeat itself, then the dividend yield and the earnings growth will be much more important to determine the attractiveness of underlying stocks. And that means that if I look at some of the left behind sectors, and again the most important part is do not buy just the yield - you buy the business model, you buy the earnings stream and the cash flow - and if that comes with a 5 per cent dividend yield, to my mind is a very good starting proposition. Because in our own capital markets assumption 5 per cent is pretty good. And so this is what we have really started to look at and gives you a good idea on where the opportunities are. And you will not be surprised there is quite a few companies in those left behind sectors which I think are now a good starting proposition to look at because they should provide you with more stability in what will be inevitably a much more uncertain environment because as I said, the reassessment and the readjustment process will be with us for quite some time.
Richard Edgar: And it sounds like it's not a broad brush approach to sectors.
Sonja Laud: Not at all. So you might find good companies within healthcare. You might even find good individual stories in utilities, but again, be mindful: rising interest rates, bond proxies, sectors left behind. So there's lots of things to capture. Hence what we've said for a number of months now, obviously the active selection is key to your success going forward. But hence, having a good framework on what you're looking for and what you assume is going to be the changing environment will help you guide you and navigate the market backdrop.
Richard Edgar: Steve, what about fixed income? How you readjusting to this? What's your approach when you're looking for the opportunities?
Steve Ellis: Well, I think in fixed income you have to keep this pretty simple and I think the biggest opportunity right now is more in the short duration income type strategies where you try to mitigate some of the risks from rising yields and by having a short duration type of fund exposure, but also you still need the income and that's a key thing for many investors. So it's very much a defensive type of strategy but still generating sufficient income to provide the return that investors require.
Richard Edgar: And James, what strategies are you deploying now that you weren't a little while ago? How are things now changing in multi asset?
James Bateman: So I think, Richard - and I do not disagree with anything that's been said so far - I do think it's a time when alpha matters more than beta. That in two contexts. One is - and a thing we learned from '07 was you had this weight of money moving into passive '07, massively disillusioned in '08 - you do not want to be passive late cycle in most markets both because returns can become muted, but also when you see a downturn, the last thing you want is to own the whole index. The second area of alpha that I really want to focus on is alternatives, be it whether it's long short equity, market neutral, etc. Strategies that aren't reliant on a direction in the market to generate a return, but instead reliant on skill are vastly more attractive at this time because they are immune from market changes, immune from all these environments, provided the underlying managers are making the right decision. And therefore that reliance on alpha in both areas is very important. I just tangentially add, of course there are what we like to call esoteric beta areas of the market, be that asset leasing or social infrastructure, etc. Areas where you can invest in a beta, in a sense there is a beta but it's not highly correlated to equities and therefore, again, it just provides you some immunity from those traditional asset classes where there are some natural concerns at this point in the cycle.
Richard Edgar: So time now to move beyond the obvious and into a little bit more variety.
James Bateman: Exactly. That's a much better way of putting it. Thank you, Richard.
Our greatest fears [Skip to here]
Richard Edgar: We're coming to the end now. I just want to ask each of you what keeps you up at night? It's been this long bull run. It's been odd, but it hasn't been bad. Sonja, what worries you?
Sonja Laud: The complacency that markets still show towards the idea that we're facing a regime shift. The idea that we are very used to the support from central banks and massive amounts of liquidity supporting all asset classes. I think we have just seen the first inklings of what might be ahead of us and I think we have to be very, just aware and nimble to make sure that we're not missing what might be quite profound shifts in markets.
Richard Edgar: Be aware, be very aware. James, what about you? What keeps you up?
James Bateman: Too many things is obviously the answer, Richard. But specifically, I think what really worries me is investor disillusion. What we've seen since the financial crisis is the millennial generation essentially not participating in the stock market, basically saying it's not for me. What worries me in the next bear market is those investors, which is the majority of the population across the world who have participated in this bull market, have invested, become disillusioned because what they've owned, which they perceived as safe or perceived as low volatility because they thought it was generating an income turns out not to be as safe as they thought. And we know investors have been pushed up the risk spectrum, particularly the older generation who are seeking an income. There is a real risk for capital loss and that disillusionment could mean in the next cycle, there simply isn't much money on the table because not many people wish to deploy money in traditional markets. So that maybe is what worries me the most that when we see a bear market it could have a big psychological impact on investors for a very long time.
Richard Edgar: Okay. And Steve, I've deliberately come to you last. I notice that the glass in front of you on the table here is half empty. From a fixed income point of view, what keeps you up?
Steve Ellis: Well, I do work in fixed income. Therefore, by our very nature we tend to be more on the bearish side. I think that the biggest risk for me and what keeps me up at night is what I mentioned earlier - the subdued nature of volatility. And not only that, the implication of that is that when, as an asset manager, we stress test our funds and the funds really assume that the low volatility environment will persist. And so there's a risk that if volatility does spike that it could cause everyone to reassess and to sell risk assets all at once. And I think the thing that makes things worse is that the technicals in the market very, very difficult to sell because it's a very small exit door with some of the counter parties - the banks, in other words - having a much lower balance sheet tolerance and therefore the liquidity that they provide to us is going to be much less. So if we do see the vol spike as a result of the Fed tipping us over the edge with Fed rate hikes and drainage of dollar liquidity it could be a very small exit door for us to get out of.
Richard Edgar: Everything is freezing up. Well, between you I think you've given me enough to worry about tonight, but I'll take comfort also from the areas where you all think there are opportunities in the months to come as we come to the end - perhaps - of this great bull run. Let me thank now Steve Ellis, head of fixed income PMs in Europe, Sonja Laud, head of equities, and James Bateman, CIO of Fidelity's multi asset. Thank you all very much indeed. And thanks to you for listening. We've got lots more on this topic in our latest edition of Fidelity Answers - just google 'fidelity answers' and you should be able to find it. Goodbye.
See omnystudio.com/listener for privacy information.
The world of passive investing has enjoyed phenomenal growth in recent years - the result of a fundamental shift in investor behaviour or simply the consequence of a unique market backdrop? And now that market dynamics and monetary policy are beginning to shift, could we be witnessing what might be the 'peak' of the passive bull run? What could that mean for investors?
In this in depth discussion, Richard Edgar, Editor in Chief, talks to Fidelity experts Nick King, Head of ETFs; Sonja Laud, Head of Equity; Head of Research for Fixed Income, Marty Dropkin; and Head of Investment Solutions Design, David Buckle, about where they see the relationship between active and passive investing heading and how investors should be thinking of the two as we potentially edge towards a new era for markets.---This podcast is for investment professionals only and should not be relied on by private investors. This podcast is provided for information purposes only and is intended only for the person or entity to which it is sent or downloaded by. It must not be reproduced or circulated to any other party without prior permission of Fidelity. Fidelity Personal Investing does not give personal recommendations. The value of investments can go down as well as up so you may get back less than you invest. For other important legal notices please see our website. Transcript
Richard Edgar: The world of passive investment has enjoyed a glorious decade. Assets have flooded in following impressive returns, all delivered at a fraction of the cost of actively managed funds. But it’s not as simple as that. And as the market has matured the debate has intensified over the relative pros and cons of tracking an index or handing money over to portfolio managers to try to outperform the broader market. And it matters more than ever right now: market dynamics and monetary policy are shifting. Are we witnessing what might be the peak of the passive bull run? If so, what will passive providers need to do to keep up? How should active managers seize the moment? And how should investors best incorporate both in their portfolios?
Well I have a flock of fidelity experts joining me in the studio today to answer those questions. Nick King head of ETFs. Nick, what do you reckon has been the most exciting development in this market?
Nick King: So I would say it's the sheer scale of flows into the passive products. Flows over the decade from 2007 to 2017 where almost 3 trillion dollars - so huge sums of money.
Richard Edgar: Not to be sniffed at and you're delighted with it too as head of ETFs.
Nick King: Yes, absolutely.
Richard Edgar: Sonja Laud, head of equity, is here as well. Sonja, there's been a huge focus of late on the costs of active management. Has it been tough as an active manager recently?
Sonja Laud: I think it's fair to say that yes, it has been tough. Although I would say that the debate has been rather one-sided because obviously active is not only about the cost angle but more in terms of what the product really is producing for the end investor. As such I would hope that the debate going forward is more granular and is really looking at what the net return is that each product can contribute to the asset allocation.
Richard Edgar: And a granular debate is what I expect we'll be having in this discussion as well. Marty Dropkin - hello to you - head of research for fixed income. I want to know is the active and passive argument a daily debate on the fixed income floor as well?
Marty Dropkin: It's less so than it would be in an equity world and that's because in fixed income the active passive debate is more of a continuum. There's a range of topics that we can talk about. It’s about a 10 per cent share of passive on the fixed income side but it's also a trickier thing to manage, to actually calculate.
Richard Edgar: Ok. Finally, David Buckle is here as well - head of investment solutions design. Now, David, as somebody who uses both active and passive in tailoring investment products to clients’ needs, have you noticed a change in attitudes amongst clients?
David Buckle: Yes, the key one is the attitude is it isn't active versus passive, it's low cost versus high cost. That's the driver of the flows into passive.
Richard Edgar: So perhaps we'll hear a little bit more about that. Well welcome to you all.
Market dynamics and the growth in passive [skip to here]
Let's talk first of all about the context here. Nick, let me come to you. You’re the passive guy in the room, if I can put it like that. You described the incredible growth of passive in recent years. It's a very agreeable market backdrop though that has supported the passive products. Give us a flavour of how well it's done over recent times.
Nick King: Taking equity markets as an example, the MSCI World Index has returned nearly 12 per cent per annum from 2009 to now. When returns from beta are so high it's easy for alpha to be forgotten. And then in addition, the correlations between stocks over this huge bull run have also been very high making it fairly difficult for active managers to generate alpha.
Richard Edgar: So we’re doing very well, almost without trying.
Nick King: Indeed. And I think on top of that, regulatory change is clearly also providing a tailwind for passive investing, placing a greater scrutiny on costs and transparency. Those two things coupled really have been the perfect environment.
Richard Edgar: But the environment is changing, isn’t it? And it can’t last forever. Sonja, the tectonic plates in markets of shifting. You hinted at this. Can you set out the new landscape that’s emerging? Now we don’t want to sound like we’re talking our own book here - Fidelity is a largely active house - but are there sunnier times ahead for active managers?
Sonja Laud: I would think so. And I think it’s important to understand what actually has led to this tremendous performance profile for passive i.e. you know what has been the driver of beta over the past couple of years. And I think here in particular it’s worth mentioning the unprecedented central bank support that actually has led to return dispersions being extremely low for global equity markets to have such a great year performance. And as such, the big question mark: if we are really heading from quantitative easing towards quantitative tightening is that finally the backdrop that will lead to higher return dispersions, which obviously is a much better backdrop for stock seeking, for active stock selection, and we believe that actually indeed this is what is happening.
David Buckle: Actually could I just jump in there. I think as an extension of Sonja's point, the fact that it's cost which is driving this is also effected by the level of interest rates. If interest rates are at 5 per cent it's less of a worry if you're paying an extra half a per cent for your fees on your product. If interest rates are zero it's hugely more impactful. So it may well be that the interest rate environment also drives the adjustment of pressure on fees.
Has passive peaked? [skip to here]
Richard Edgar: Nick, the question posed by this podcast is: has passive peaked? Would you agree with that?
Nick King: I think there's still scope for passive to continue to grow, particularly in fixed income markets where the level of passive assets isn't as high as it is within equities. But I would also agree with my colleagues that given that we have had this tremendous bull run with valuations being fairly high right now, I think that this is the type environment in which active investing can clearly add some value. So the flows will possibly slow down somewhat I think.
Richard Edgar: And Marty, what about the bond market? Because we've got a lot of different things going on here. How's it going to play out in your world?
Marty Dropkin: There probably is scope for more passive to appear in the fixed income world, but we do view it as a continuum. If you break down fixed income by asset class, I think there are certain asset classes which are much more prone to passive type funds. There are certain asset classes, picking up on what Sonja was talking about - about dispersion on the equity side - the same phenomenon will exist on the credit side. We think as rates start to rise we'll start to see credit dispersion and in an asset class where downside protection is really what you're looking for, with asymmetric returns, that idea that we have to avoid the losers becomes that much more important. And that's where the active side really kicks in.
Richard Edgar: Because you just can’t do that if your if you’re buying an index?
Marty Dropkin: Exactly.
Richard Edgar: And indices in fixed income are quite a different beast to equities.
Marty Dropkin: Yes. It’s almost a four letter word in fixed income…
Richard Edgar: Yes, my maths - I’m just trying to spell out indices… almost a four letter word.
Marty Dropkin: Almost.
Richard Edgar: I thought you were meant to be good at maths?
Marty Dropkin: I wouldn’t tout that. But fixed income has become much more a benchmark agnostic kind of asset class right now. In particular, when you see the rise of total return and asset return mandates, central bank mandates that are pushing on those particular areas, benchmarks become irrelevant almost. And so the idea of trying to outperform a benchmark becomes a non-issue. And that’s why I talk about this continuum of active versus passive. I think David talks about lower fees - that's clearly an issue in fixed income. That's probably rates driven as well. It's also just market driven, but I think as we leverage our research base across the entire continuum of funds that we run that becomes more the question I think.
Richard Edgar: And actually how passive is passive in terms of: there's a bewildering number of indices, Nick, in equities. You're still having to make a choice there. There is no binary, “It's either active or passive.” Is there?
Nick King: Yes, I agree. And I wouldn't say that what we've really experienced is just a shift from active to passive products. It's actually an unbundling of exposures. So institutional clients rather than historically investing the majority of their assets passively are now looking to separate their allocations to beta, to style risk, factor risk, and also to more idiosyncratic alpha. So I think it's just an evolution of what historically was classified as alpha has now been separated into different types of risk.
For and against: the academic case for passive investing [skip to here]
Richard Edgar: David, standing back a little bit, what is the case - the academic case, if you like - for passive investing?
David Buckle: The standard one is based on two things. Firstly, that because the active managers are trading amongst themselves, the average performance of the active management community must be zero. And then the academics went on to study if that was empirically true, found some results related to the US, and then the pushback was, “Ah, yes, but that's the average manager. What about a good manager?” And the academics then pushed back and said, “Well, they can’t be persistent because you can’t have, in the long run, negative performing managers. So in the end everyone must be zero.” They did some more empirical studies, showed there wasn’t much persistence. The point that those miss…
Richard Edgar: So far we’re keeping a lot of academics in work it seems…
David Buckle: Indeed, and I’m sure we will in the future because the point that’s being missed here, which is that next area I'd like to see for study, is that there would still be a role for active managers if an investor felt they could time their investments into actively managed products.
Richard Edgar: Explain that then.
David Buckle: Yes. So let's suppose there isn't any persistence in active management but you know as an investor when the good period is going to be for a particular fund. Then you would say, “I’m going to now enter that fund with an intention of exiting that fund.”
Richard Edgar: So there’s an active decision that's going on the part of the individual investor: “I’m going to give this fund manager my money or another one.”
David Buckle: Correct.
Richard Edgar: But that is quite a skill. Multi asset teams do that. But are you expecting individual investors to be making that?
David Buckle: They already do. And the point is, Richard, in terms of, “Is there a role for active or a case for active?”, is it's not a matter of whether they are good at it or not, it's a matter of whether they perceive themselves to be good at that. And then they would naturally have demand for active funds.
Richard Edgar: And Sonja, I’m sure you hear this as well. But David's already touched on one of the criticisms of that research.
Sonja Laud: Yes. I think part of the support for passive obviously has been the failure of some active managers to perform, although I think the whole argument has been led rather one-sidedly by the US market. Because what we have seen, if you look in more detail, it's been particularly the US fund managers and large caps that have had a horrific time over the past couple of years. Yet this is one of the most popular areas for active engagement i.e. investors love to own their actively managed US funds. With these managers struggling so badly it has become more one sided: “Oh yes, active cannot perform.” Rather than: “It’s US active managers.”
Richard Edgar: And that's because the market itself has done so well. There's been extraordinary beta and not much dispersion.
Sonja Laud: Yes. The leadership has been extremely narrow. the US market has been the worst in terms of return dispersions, the lack of volatility, and a very narrow leadership. As an active manager, if you didn't own the 10 leading stocks you had no chance whatsoever to outperform.
Richard Edgar: But if you were to go to small caps, or better still in emerging markets say…?
Sonja Laud: Exactly, you’re hitting on the most important points: it's the cap - the large versus small cap - and it's the efficiency of the market. The more efficient the market and the larger your cap spectrum the more difficult it is to outperform. So you have had large categories around emerging markets, small cap, that actually have delivered positive alpha over that time period. Yet because it's the US market that is the most popular, you have seen this rather kind of broad based “Active cannot perform” statement.
Richard Edgar: And Marty, it's all the harder still when you're making credit selection.
Marty Dropkin: What’s interesting is the same phenomenon that Sonja just described exists in fixed income. And if you think about the aggregate fixed income market, you really just needed to own treasury bonds for the last 20 or 30 years and you would have been doing very well. You would have had incredibly good returns. As rates start to rise and the market starts to probably look at some lower duration asset classes like a high yield asset class for instance, that's where credit work comes in and that's where differentiation comes in and that's where your need to kind of drill in and understand individual companies really steps up
Richard Edgar: And Nick King?
Nick King: So I would say it's about the combination of active and passive. It's using passive instruments where you think the markets are very efficient and generating alpha is going to be difficult. And then using the active products where you think there are opportunities for alpha. And actually it's this combination of both passive and active products, which groups like David's are putting together and actually using those passive instruments in a very active way.
Market threats: the economic impact [skip to here]
Richard Edgar: What are the dangers of passive?
David Buckle: The hidden danger of passive investing is that everyone goes passive and the market will cease to operate. That's an and point we probably won't ever get to.
Richard Edgar: Explain that because people would still be holding shares or credit. But why does that mean it's not working?
David Buckle: Well, why would there be a share? If you think, the secondary market is there because people want to get in and out of the primary market. They're happy to give money to a company if they think at some point they could get that money back. The secondary market is to do that - is to transfer your ownership to somebody else. If everybody goes passive there would be no transacting other than someone has retired and wants to sell their share and therefore someone who's trying to save for retirement can then buy the shares off them. But that would be the only transactions. And the notion of daily trading - it just wouldn't be there anymore. And as a result there wouldn't need to be a secondary market in that environment and then that would have an impact on the primary market. If everyone went passive there is the risk that it would actually slow down the efficient allocation of capital into an economy, which has a feedback loop to investors because that would lower the long term returns for investing.
Sonja Laud: I guess we have to go right back to the original purpose of capital markets; why we're here and what we as intermediaries are expected to achieve when we are handed capital and obviously employed in the market. And it's about the efficiency of markets, it’s the price discovery mechanism, but it's the long term impact obviously, the societal impact as well, and what we aim to achieve in improving corporate governance and the companies we invest in. And this is where the whole overall ESG complex comes in because here, clearly, the idea around engagement with corporates plays a much bigger role than what we sometimes claim to do in normal circumstances.
Richard Edgar: We’ll come to ESG in a moment, but I just want to come back to this idea about the role of active management within the economy. And I guess the point here David is that it's like natural selection, in terms of the efficient allocation. That we want the companies that aren't performing well - whether it's on the credit side or in equities - to fall by the wayside for that continued improvement.
David Buckle: And the opposite, Richard. Play a hypothetical situation: back in the 80s, Microsoft says, “Hey, we've invented Windows,” and there's no analysts. How do they get the capital to develop Windows to make it into what it is today? If everyone's passive the money doesn't flow to them because they're not in the index. So it's more that side of it than getting rid of the ones which are no longer wanted.
Richard Edgar: It's just completely static. And actually I suppose the danger [is] also on the on the credit side. So if you think about market weighting, it's going to the companies that already exist and our very large, and on the other side, in credit, the companies that are already heavily indebted that are in an index that money is flowing to.
Marty Dropkin: That's absolutely right and I think it's also pointing to this idea that credit is an asymmetric asset class. You buy a bond at par, at 100, and the best you can expect is to get a coupon and get your money back at the end of it. So in a passive world that's great. But the reality is that some companies do default and some companies take on too much debt, just as you've indicated Richard. [With] some companies something changes with the company - they've decided to make an acquisition [for example] which puts them in a precarious position. And in a passive world you wouldn't really pay attention to those things, you would just continue to buy the bonds as they sit in the index. Whereas what it takes is some research to figure out which ones of these are going to default - and they do default.
Richard Edgar: So if passive is only about a tenth of the market in fixed income, it's much larger than that in equities?
Nick King: Yes, I'd say more like a third.
Richard Edgar: A third. Ok. Has the pendulum gone too far yet, David?
David Buckle: No I don’t think so. It's hard to put a number on it. The pendulum has gone too far when the market stops operating correctly and we’re clearly not there. In equities, the trend is in the direction that's already been laid out. I have to say in fixed income I'm not so convinced. One thing that hasn't been mentioned yet regarding indices in fixed income is the indices in fixed income are what we call “constant maturity”: the bonds inside them are continually refreshed to keep it at a 10 year maturity. What we're seeing, is there's demand from investors who say, “Well, I know what my cash flow requirements are and therefore I need to hold the bonds to maturity. But I have no intention on continually extending the maturity, I just need them for the next 10 years and that's that.” So the notion of an index in fixed income is really quite different from the notion of an index in equities.
The investor’s perspective - who really cares? [skip to here]
Richard Edgar: That's the backdrop I suppose for us now. What are clients thinking about when they're making the decisions about incorporating either of these approaches - or it’s not either: you talked, Marty, about a continuum. There's a whole spectrum of different levels between the two ideas. So Sonja, from your experience of talking to clients?
Sonja Laud: I think what we've experienced is a rather one-sided debate for quite some time, which was obviously backed by the very positive beta backdrop, which allowed a very strong focus really just on the cost angle because passive seemed to fulfil everything that was needed. And if we consider the usual requirements of a client between risk, return, and now cost added to it, then obviously it's a triangular relationship that was very well helped by the market backdrop on the return side. Risk was very nicely manageable as well with volatility coming down, hence a very strong focus [of] “Ok, now let's just drive down costs.” If we are right in our forward looking statement that this is about to change, and that the beta return profile will moderate quite considerably, then investors will have to go back to the drawing board to find out how they can achieve the risk, return, cost angle that they have in mind. And what we've been experiencing so far is that there’s a lot more on net returns i.e. if there’s an active product that actually can deliver the excess return required then the clients are happy to see how this fits in the triangular relationship of the other two components, to make sure that they can achieve all of them. So a bit of a move away from just the cost angle to “Ok, now let’s get realistic on the other two as well.”
Richard Edgar: David, this is your bread and butter. How does it play out as you design solutions?
David Buckle: Yes, I think the key point is that most of the investors I speak to are really agnostic on the notion of passive versus active. They simply state an objective they’re trying to reach and there’s a cost restriction to reach it. So they are perfectly happy having a combination of active [and] passive. But the other element, which might be worth bringing Nick in for, is there's often a desire to have a particular fund structure - a type. And hitherto ETFs have been connected with passive (if you have any ETF, you’re passive). We have a lot of investors who like to use ETFs for other reasons - not because they're passive. So that's led them to have a passive investment, but that wasn't really the driver.
Richard Edgar: Was it the liquidity instead?
David Buckle: Yes and the fact it's on an exchange.
Richard Edgar: Nick?
Nick King: Yes, so many clients do like the convenience of the ETF wrapper. That's why we've chosen to offer our passive and smart beta products in a combination of mutual fund and ETF wrappers. But as David says, so far the vast majority of exchange traded products are index tracking products simply because there needs to be this requirement for transparency in order for the capital markets partners to provide liquidity on exchange for these products. However, there is a marketplace developing for active products and that's a space that we're going to watch closely.
Richard Edgar: Marty?
Marty Dropkin: There's an interesting follow up on the liquidity angle particularly within fixed income which historically has been a less liquid market. And when you think about ETFs and the bonds that go in ETFs - and there's a whole industry now to try and track which bonds are sitting in ETFs and which ones aren't sitting in ETFs and the market is trying to figure that out. That brings back the whole continuum of active and passive to the forefront as well. Which is: is it active? Is it passive? Is it actually passive if it's sitting in an ETF and everybody's already trying to game the system to figure out which bonds to buy.
Richard Edgar: And the answer is?
Marty Dropkin: The answer is: it depends.
Richard Edgar: Excellent.
ESG: can passive be ethical? [skip to here]
Well Sonja, you brought up ESG (environment, social, governance) questions - stewardship. First of all, before we talk about passive, this is a very much more important aspect of investing nowadays than it was in time gone by. Your argument, I assume, would be that only through active can people engage with the companies to try and bring about change?
Sonja Laud: Overall, we are now witnessing much bigger demands towards us as the asset management industry to consider more societal issues in our selection process so that the pure corporate governance, improvement, and engagement goes beyond and is more specific towards those issues. Passive is well equipped to look at the best in class model and put it in a wrapper. Yet if we say we want to see improvement and engage with companies that probably today do not have the best ESG rating, this is where obviously we as active managers have a much bigger role to play. Because we can engage with corporates to say, “Ok, how do we get you from an ‘E’ rating to an ‘A’ rating?” And that obviously is a journey that from an investment and return angle could be potentially very interesting. And it's something we believe obviously only active can deliver at this point.
Richard Edgar: Nick, would you agree? Because if you're chucking money in an index that's it, that's the end of the engagement isn't it?
Nick King: I would say as the market for ESG products develops I think there’ll be a place for both active and passive products. At the passive end, there's a number of ESG data providers out there which can be used in a systematic strategy to get exposure to stocks which have good ESG credentials at low cost in a very transparent way. However, the passive products will always need to hold those companies. So whilst it can select those which have strong ESG characteristics it can’t exclude stocks because it doesn't like a particular element of its governance model.
Richard Edgar: That's a sort of backward looking approach - talking about companies that already have good ESG credentials or not. What about actually bringing about change? How does that happen?
David Buckle: I think ultimately here there is an argument you could make for passive management - and the active community would have to try and defend against it. And there's an argument for being active, which the passive has to defend. And this is the strongest argument for the active community. And the passive are defending it by saying that they're becoming more active. But the reality, as Nick's mentioned, is a passive manager cannot sell a security which is a big part of the index regardless of the efforts they might make to make it better on an ESG score.
Richard Edgar: Sonja, how do you see this developing?
Sonja Laud: I think there will be greater differentiation around the level of engagement, because as we know, [with] passive there are some claims that there would be greater engagement around voting at AGMs and things like that. Yet to me engagement really is sitting down with management to discuss what are the weak links in the ESG reports, what are the areas that we are concerned about and what is management doing to address these.
Nick King: And I think that's very consistent with how we would distinguish between active and passive now. So you've got low cost, systematic exposure to equities. You can take that further and have ESG equities that way. And then as we also invest vast amounts of time in fundamental research for our active products you can further that with additional ESG research. So I think there's space for a broad range of products across the spectrum.
Richard Edgar: So from an investors point of view, as well as society's needs then, having to balance the two different approaches and what they're able to deliver.
Active and passive: future symbiosis [skip to here]
We're almost out of time so I'm going to ask each of you know to think what is it that you'd like to leave in our listeners minds when they're thinking about active and passive, and this question, has passive peaked? Let me come to Nick first.
Nick King: I think the way you phrase your question is exactly correct: it's passive and active not passive versus active. And I think that there really is a place in portfolios for both. It's about identifying the places where you just want very efficient, low cost exposure to a particular asset class or segment of the market. And then using allocations to active and factor products where you want to have the potential to add some value.
Richard Edgar: Marty?
Marty Dropkin: We're just exiting a period where rates have come down and we’re starting to see rate rises. With that, I very strongly believe we will start to see more credit spread dispersion which means that this era of beta-like returns - whether it's equities or fixed income - is likely to slowly come to an end. And as that comes to an end and as differentiating between companies becomes that much more important that's where active will kick in.
Richard Edgar: Sonja?
Sonja Laud: I think investors really should be prepared for changes in the market backdrop and changes that will unfold over a long period of time, because we have to be realistic that 10 years of unprecedented monetary support will take a lot of time to normalise. I think investors will do very well to reassess their current allocation, not only in the context of a more moderate return profile going forward, but in the context of: maybe there's too much passive. Where are the areas we feel are the greatest opportunities not only for active but in general to invest in right now.
Richard Edgar: So time for a review. David, finally, what would a portfolio of the future look like?
David Buckle: It'll be a combination of active and passive. I don’t see it as a binary thing. But the one message I would leave - this is a message to any investor - is you have a duty of care for the market. And there’s a prisoner's dilemma: passive is cheaper wo what everyone wants is for them to be passive but everybody else to be active to keep the market going. So as much as you might choose some passive, do be cognisant of the fact that the more you move into passive the more you’re creating the risk that you’ll disrupt the market that you need to make your investment.
Richard Edgar: There’s a symbiosis between the two, perhaps?
David Buckle: Indeed.
Richard Edgar: I'm afraid we are out of time now. Nick King, head of ETFs, Sonja Laud, head of equity, Marty Dropkin, head of research for fixed income, and David Buckle, head of investment solutions design at Fidelity. Thank you all. And thank you for listening to what I hope you agree has been a fascinating debate. Goodbye.
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Could you be overlooking investment opportunities in Asia? What's the best way to find exposure in the region? In this podcast, Richard Edgar, Editor in Chief, talks to Fidelity’s Gary Monaghan, Hong Kong-based Investment Director for Equity, and Luc Froehlich, Head of Investment Directing for Asian Fixed Income, about who is putting their money where in Asia - and it might not be what you expect. They also discuss the recent addition of Chinese mainland listed stocks to the MSCI flagship emerging markets index and why it’s a game changer for investors.---This podcast is for investment professionals only and should not be relied on by private investors. This podcast is provided for information purposes only and is intended only for the person or entity to which it is sent or downloaded by. It must not be reproduced or circulated to any other party without prior permission of Fidelity. Fidelity Personal Investing does not give personal recommendations. The value of investments can go down as well as up so you may get back less than you invest. For other important legal notices please see our website. Transcript
Richard Edgar: Why should I reconsider my allocation to Asia? That’s the question Fidelity answers. In this podcast we explore the very latest in the investment world in Asia, challenge some received wisdom, and find out who is putting money where in the region - and it might not be what you expect. I’m joined here in our Hong Kong studio by two investment directors and experts on the region: Luc Froehlich from fixed income and Gary Monaghan who covers equities. Welcome to you both.
We’re recording this just after the announcement of which Chinese mainland listed stocks are to be included in the MSCI flagship emerging markets index - that’s a benchmark for over a trillion and a half dollars’ worth of assets. Gary, is this a game changer for the region as well as for China?
Gary Monaghan: It is, in that Chinese mainland shares can no longer be ignored. I think it’s fair to say that if we if we consider where investors have been putting their money for the last 10 years, or even longer than that, it’s been very easy to ignore the mainland because it's not in the index. Suddenly they move into the index and you can no longer ignore it. So in that sense definitely it is a game changer. And what it also means for asset manufacturers - if you like, the likes of Fidelity - is that if you haven’t already been looking at A shares you’re going to have to start doing that and it's not an easy task. The companies generally report in Mandarin. The company reports will be written in Mandarin as well. So you need to get your analysts in place in order to do that and it’s not an easy task.
Richard Edgar: Well I’m sure you’ve been brushing up your own Mandarin, Gary. But nobody is denying that is one of the greatest hurdles to investing in China: that the companies are of course reporting in their own native tongue. So you’ve got to be able to master that. How do we cope with it?
Gary Monaghan: Quite simply, there is no substitute for having people on the ground. So we’ve got analysts here in Hong Kong, Singapore, Shanghai as well, who speak the language and go meet the companies face to face.
Richard Edgar: Luc, in the fixed income world you must be fed up with the attention that your equities colleagues are getting with all this MSCI A share index excitement, but is there a halo effect of raising the profile of investing in the region in all asset classes as a result of all this?
Luc Froehlich: Well Richard, I’m actually not fed up. We have also a little revolution going on. Actually a few weeks ago the Bloomberg Barclays index announced that they were also going to include China onshore in their own index. So this is causing a little revolution in our bond markets too. As Gary mentioned, it is definitely attracting more attention toward the onshore market in China. The inclusion is going to lead a lot of the benchmark followers - which is a large amount of institutional money - to direct a bit more attention toward the onshore bond market. So we are talking about 5 per cent in this Bloomberg Barclays index - 5 per cent for China onshore. It’s not very large. If you compare this to the size of the China onshore bond market, which is about 12 trillion US dollars, it’s a drop, but it’s a beginning.
Gary Monaghan: And I was going to add to that - what we’ve seen in the last 12 months is equities have done a very good marketing job in terms of talking about MSCI including A shares. And when we go to meet clients the questions are always directed towards the equity world. And it seems to me that it’s often not ignored but not well known that this is happening in the fixed income space as well. And that's something which I think is quite important because it's not just equity money coming into the mainland but the fixed income money as well, which is probably on the whole a bigger wall of cash.
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Richard Edgar: How are their clients changing? Who is putting money into China? Is that changing?
Luc Froehlich: On the fixed income side, if you look at the bond market, the main players are still institutional money. If you look at the overall China onshore bond market, overall we have about less than 2 per cent of foreign ownership. And if you look at the composition of this ownership it’s mostly institutional clients like central banks, sovereign wealth funds. The retail investors should come, but later on.
Richard Edgar: The message hasn’t reached that far yet. Or is it confidence - a lack of confidence?
Luc Froehlich: It’s simply a different stage of development of the market. You would typically see first the institutional money going there - they have more resources to analyse the market and following that the retail investors.
Gary Monaghan: Yes, it’s exactly the same really for the equity space in that the key that unlocked the A share market for investors was Stock Connect. And that is really something that institutions can use and it’s not that easy for the retail guy to do that unless they invest in companies like ourselves.
Richard Edgar: And thinking about the questions that these institutional clients are asking you both - how have they changed over the past couple of years?
Gary Monaghan: Much more receptive I think to A shares. Before it was very easy to ignore because it was never in the benchmark. Also you could pretty much say, “We don’t know the companies very well. There’s corporate governance issues…” and then you could just ignore the entire market. But don’t forget the market itself. If you look at Shanghai and Shenzhen, they’ve got a market cap of about 7.5 trillion. Compare that to Tokyo, which is 6.8 trillion. So the mainland is actually a bigger market than Japan. So you can’t ignore it. But people were because of the point that they were not in the index.
Luc Froehlich: We see a similar development on the fixed income side. I’ve been in Asia for the past seven years and what I would say is we are entering the third phase. The first phase was going to Europe, meeting some international investors, and the question was, “Why? Why would I put my money in Asia and specifically in China?” A few years after that the question was actually, “Can you give me a positive argument for me to invest in Asia or in China?” Because they wanted to convince their investment board to start putting money in China and in Asia. And now we are entering the third stage and third stage is, “How? How do I do that?”
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Richard Edgar: Gary, let’s talk a little bit more detail now about the MSCI. It’s about to push huge companies - some still unknown abroad - onto the world stage. What impact is that going to have on their business?
Gary Monaghan: Well first of all you should see more, let’s say foreign institutional investors on the shareholder register, which can bring some more questions. So you tend to get maybe a little bit more activist type investors and particularly a greater focus on ESG which as you know is a key theme at the moment.
Richard Edgar: And something that management teams perhaps until now have not had to concern themselves with.
Gary Monaghan: Not so much. I mean it is a growing theme globally anyway so it shouldn’t come as a surprise to any company. But as you get more international investors on the shareholder register do expect to see a lot more focus on ESG, corporate governance, and just general questioning around what’s going on with the business and the direction it is heading.
Richard Edgar: What are they going to do with the money that this investment represents?
Gary Monaghan: Well hopefully the good companies will get a greater percentage of the cash that comes in. Particularly if you think of us as an active manager we can choose the businesses that we invest in. So hopefully the better companies get more cash which they can then reinvest in the business, at hopefully greater rates of return.
Luc Froehlich: One of the comments that I frequently hear from international investors when I tell them, “Hey, look at this market, it’s growing so fast.” I often hear, “Well, that means the companies are just piling up more debts. So actually from a risk point of view this is not a good thing.” It’s actually not really the case. It also has to do with the stage of evolution of the company. Most of the companies in Asia, in particular in China, have been extremely reliant on the banking system - using loans to finance their working capital or their expansion. Now if you continue evolving, becoming more sophisticated, you need a larger amount of capital which the bank cannot provide you. So you need to go to the capital markets. The other thing is that the more sophisticated you become, the more diverse you want to your sources of funding to be. That’s also a motivation for these companies to come in to the Asian US dollar bond market or international market. So it’s not necessarily the same company issuing more debt, it’s actually more companies. And we see that every month you have a maiden issuer - a new name coming on the market. It requires a lot of research power, but at the same time that’s significantly increasing the diversification potential in our space.
Gary Monaghan: So if we’re thinking about, let’s say away from the very mega cap companies in the A share market, do you see them starting to use fixed income markets? Because I’m assuming a lot of the smaller companies don’t really have much experience there. Are we seeing that happen more and more, do you think?
Luc Froehlich: The challenge that these companies have at the moment is twofold. Firstly, for smaller companies they tend to be higher risk, more in the high yield space, and in China onshore there is not yet a high yield market. Most of the high yield companies that you’d find are actually fallen angels. That’s the first thing. The second thing is that at the moment, if you see these little names trying to issue on the US dollar bond market, they would have to pay a yield that would be so high - just to make their offer palatable - that it would not make sense for them. So it is going to take time for the small guys to come on this market.
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Richard Edgar: Gary, you mentioned active management but I wonder whether the inclusion in an index heralds the decline of active in China because now investors can park their cash in a fund that tracks that index, get the exposure and get the diversification, for example that China offers, but they can do it very cheaply.
Gary Monaghan: First of all, what you have to remember: the inclusion at the moment is what they call a 5 per cent inclusion rate. So effectively they’re there capping the size of the Chinese stocks to only 5 per cent of their true size. And there’s only 234 that are moving into the index. There’s about 4,000 to 4,500 listed companies. To be frank, a big chunk of those are relatively uninvestable for investors like ourselves because of liquidity constraints and such. But there is a lot of companies which are not in the index for a start, so active managers can look beyond the boundaries of the index, which creates alpha hopefully if you get your stock call right.
Luc Froehlich: This is actually another question that I frequently get: “Why would I use active management to invest in a market like China onshore?” I’m very open about the use of passive investment in certain markets - highly developed, efficient markets - it can make a lot of sense, especially as a compliment to an active strategy. Now if you look at specifically the China onshore bond market, one of the big challenges there is to properly assess the credit risk of issuers. Onshore, they have a different rating system; the local rating agency only use three ratings - AAA, AA, A - and effectively it’s only a relatively recent trend where we see differentiation in the credit spreads of the different rating groups So the challenge if you are an international investor and you try to follow those ratings, especially if you are doing it passively, is you are just going to invest randomly and you don’t know which are the credits - the spread of which are going to widen and the ones that are going to tighten. So it is really a market where active management makes a lot of sense.
Richard Edgar: Much less diversification in terms of the official rating but your point is that there is diversification in the reality of how companies are being managed and the risk they represent.
Luc Froehlich: Absolutely. It is a normal market but the ratings don’t necessarily reflect this reality.
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Gary Monaghan: If you’re investing with active management you can choose the company managements you believe are working on your behalf as a shareholder. So don’t forget that if you are investing in passive, particularly in China where there’s a great deal of state owned enterprises (SOEs), you’re embracing certain risks that maybe you’re not aware of. Particularly if a large chunk of your passive market is a state owned enterprise, you are investing in companies where you don’t really have a say in what’s going on. And the management is generally government driven somewhat and they can be called upon to do national service and sometimes that leads to poor capital allocation.
Richard Edgar: So in other words, the company is being asked or told to behave in a way that suits the country rather than shareholders.
Gary Monaghan: So I could be a state owned bank and Luc may be coming up with the best new idea we've ever seen but you happen to be an industry that employs 2 million people and the government may say to me, “Well, you’ve got 500 million dollars, you’ve got to give it to Richard because they’re keeping two million people employed,” whereas really if I'm thinking from a shareholder perspective and future growth I should be giving that money to Luc and then he can create incredible returns and that’s the industry of the future. So without really realising it sometimes in passive you’re putting money to companies where you don’t have the greatest control and there can be some misallocation of capital.
Richard Edgar: And what about the governance in normal companies that have a normal structure - or one that we’re more familiar with perhaps than some state owned enterprises? What about the management priorities there? Is that different, or is there a development that has yet to happen in some of those companies?
Gary Monaghan: One thing when people talk about China - and this is actually true for Asia, it’s not just a China story - people will say, “Oh, corporate governance is poor.” I think we have to think about what we mean by that. Actually quite often, particularly when you’re meeting companies that are not the mega caps who’ve already got experience, the company will be owned majority by the founder and a couple of his friends, let's say, and they've never really had to deal with shareholders before. So it’s not that they’re cowboys and they’re going to run off with your money and they have fraudulent accounting, that’s not true at all. It’s just that they haven’t had to deal with the expectations of shareholders. That’s not bad corporate governance it’s just inexperienced corporate governance.
Richard Edgar: So do we engage then with companies like that? That’s a large part of what Fidelity investment professionals talk about externally. So what are the conversations like?
Gary Monaghan: There’s no other substitute to having your feet on the ground and going to talk to them. Whether that’s through the analysts, the portfolio management team, or quite often for equity capital markets team whose role is corporate engagement to discuss some of the things that we hold dear from our investment perspective. And discuss things that we will vote on and talk about.
Luc Froehlich: That’s a very important point and it’s something that’s sometimes misinterpreted outside of Asia. Effectively, if you look at large or even small Asian companies, the ownership is usually more concentrated. It’s usual to have the founder who is the chairman who is the CEO. There is nothing really wrong about that. But to some extent it also explains the explosion of the bond market in Asia. If you look back in 2010 when the European bank started pulling out of Asia, we saw a lot of these issuers coming on the market. They effectively had to change their mentality, show more to investors. If you issue a bond and you want to get it rated you need to disclose quite a lot of information, like when you list a company. This has really helped to improve the governance of the companies that we cover.
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Richard Edgar: So these are still emerging. There’s some way to go still, but a lot of development has already happened.
Luc Froehlich: Yes. I would just be careful with the term “emerging” because it’s a slightly different topic. But one of the things that I usually struggle with investors that are not necessarily familiar with the Asian space is that Asia gets put in the same bucket as emerging markets. And it leads people to say, “Oh, Asia is so expensive, look at LatAm - you get much better yield, much better returns etc.” You are not comparing apples with apples. The reality is that when you invest - I’ll focus on the fixed income side - in Asia, you invest in about 16 different markets.
Richard Edgar: And some of them are very developed.
Luc Froehlich: Some of them are highly developed. If you look at countries like Hong Kong or Singapore, they have a very high level of development. If you look at the GDP per capita of Singapore, it’s actually higher than the GDP per capita of Germany. My point is that it’s a little bit dangerous to talk about “emerging” because we are talking of a good mix between developed and emerging economies.
Richard Edgar: You make a really interesting point because people are beginning to shift from emerging market debt to Asia for precisely this sort of reason. That you change the risk profile. There is the diversification away from other debt markets but you are lowering the risk perhaps that goes along side that.
Luc Froehlich: I don’t know if we’re lowering the risk. I think there is more awareness for what Asia has to offer. Until recently, when people were looking at Asia they were mostly looking at the yield that you can get - this chase for yield. And effectively, if you look at the investment that you can make in the bond market in Asia, you would get a much higher yield than you get in Europe you would get a similar yield as you get in the US but for lower duration. It’s a very attractive proposition just in terms of a risk profile. Then people also start looking at the different sectors where you can invest in. If you focus on the Asian US dollar bond market, it’s a market that has grown by about 20 per cent on an annual basis every year over the past 10 years. And this has led also to the emergence of new sectors. A few years ago, if you wanted to bet on the consumption of gaming you would have had one or two names. Now you have a real sector. So what people are seeing is not only about yield it’s about diversifying their portfolio into different industries.
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Richard Edgar: And the types of outcomes that people are looking for has moved on as well, Gary. Asia isn’t just about growth now.
Gary Monaghan: No. There are other factors that we see as being quite interesting within the region. For example dividend. It often shocks people to think of Asia as a dividend market but if you look in markets like Thailand where the yield currently is around 2.7 per cent, Taiwan where it’s above 3.5 per cent. We’ve got markets - as Luc said it’s diversification - that offer different things for different types of investors. And actually someone was saying to me yesterday that they’d read a study that one of the key drivers for share price return and share price capital growth is an increase in dividend within the Asia region. So it’s telling you that there are other factors other than growth. But of course to grow your dividend you generally have to grow your business and grow your cash flow. So it is linked but there are other factors which we find quite interesting.
Richard Edgar: Luc, when investors put their money into Asian fixed income what exactly is it that they’re buying?
Luc Froehlich: One point that we’ve touched is this good balance between developed markets and emerging markets. I couldn’t stress enough this point. Besides this, what they’re also buying is diversification, lower correlation with other markets. We started by talking about the China onshore bond market. Again a lot of people are looking at this market because it offers slightly higher yield than other markets. But from my point of view what is the main benefit - especially in a market where a lot of people talk about stretched valuations, are scared about volatility - what China onshore is providing you with is an asset class which has close to zero correlation with other asset classes. So you tell me what it is better in your portfolio in terms of diversification. I think this is really what institutional investors are more and more looking for. They go beyond the yield and look at the diversification potential.
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Gary Monaghan: And I think apart from that, [for] a bigger picture type of view, buying Asia and particularly the equity market is you’re buying a future. New businesses are developing in the region which don't exist anywhere else in the world. Tencent is a great example. This is a platform through their WeChat platform that has multiple functions that don’t really exist in the west. And western companies will look in and say, “Wow, I wish we could do that.” So you’re investing in the future. You’re investing in the future growth as well. So just to throw out some stats: we’ve got 4.5 billion people in the region which is about 60 per cent of the global population; 35 per cent of the global GDP. Yet that is growing faster than most places in the world. So you’re looking at places like Indonesia - 5 per cent plus GDP growth, China - 6.5 per cent, India - around 7 per cent growth. So that 35 per cent of GDP, which should grow over time if we continue to see the current trajectory, which we don’t think will slow down.
Richard Edgar: There seems to be no reason to see a change in Europe or the States at the moment.
Gary Monaghan: We do expect GDP to continue growing at the rates that we’ve been seeing. Yet at the same point in time, Asia ex Japan is only 4.5 per cent of the global equity index.
Richard Edgar: So there’s an enormous mismatch there. I know it’s the same in fixed income as well, that the proportions that are allocated to Asia are much smaller than they ought to be on that measure. There are perhaps reasons for that though. We’re coming to the end, so after an inspiring discussion perhaps on the good reasons for investing in Asia, what are the things that investors need to watch out for? What are the potential downsides? Because you can’t just plough in.
Luc Froehlich: The traditional risk that is seen in markets like Asia, is the higher volatility. This is typically what people would tell you - that in a period of uncertainty you’re going to see much higher volatility in emerging markets, including Asia. It’s actually not been the case. If you go back to the Brexit referendum vote or the Trump election what we’ve seen actually is that the Asian US dollar bond market, especially on the investment grade side, has been a safe haven. Because you are able to shift money into an environment which is pretty well sheltered from the rest of the world and where your opportunity costs are actually not high at all.
Richard Edgar: It’s an amazing turn of events. Gary?
Gary Monaghan: It is. And alongside that increased volatility I must say that there is generally greater retail participation in some markets which does sort of create more churn. And so therefore you can be on the wrong side of that. So there’s an element of risk there. But also one of the things which I mentioned earlier: there’s a lot of state owned enterprises in the region and they are a big chunk of the market and if you are a passive investor in particular you are taking on state owned enterprise risk which is you don’t always know what’s happening with the capital that the company has. So there are elements of risk that you have to be aware of. Therefore going back to the point of why active - that’s one of the key selling points for active in the region is you try and avoid those areas. Not all SOEs are bad, I want to say that, but there is a risk of capital misallocation.
Richard Edgar: Luc?
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Luc Froehlich: So we are going hear, probably over the next few months if not years, about more default in China. This is already making the headlines of all or most of the national newspapers. The reality - the way we see it from on the ground - is it’s a positive development. It’s a positive development in the sense that it improves the capital allocation. The bad companies that are piling [up] debt, who are just doing M&A in an inconsiderate way - they are going to be sanctioned. The government is stepping away and saying, “Look, investors, you need to realise the risk that you are taking.” So it is beneficial for bourse companies because it helps them allocate capital properly. If you’re a good company you should pay less for your funding. And it’s good for investors because now when you put your money in the company you know that you’re going to be compensated for the risk that you’re taking.
Richard Edgar: So it’s a more efficient market that is maturing and that brings with it benefits.
Gary Monaghan: And one other risk to think about is that you are taking on institutional risk and by that I mean that you’re still seeing some developments within the regulatory environment. It could even be legal fields, in some cases governments - Thailand is a great example - where we’re going to see some elections, the first elections for a number of years, next year. So there are those risks as well that you’re embracing when you’re looking at the region. But again you just need to be very selective.
Richard Edgar: So plenty of opportunity but go in with your eyes open is perhaps the best way to summarise it all. Let me thank you both: Gary Monaghan and Luc Froehlich for joining me.
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Wealth distribution, emerging threats to the status quo, and why inequality is turning into an important sustainability risk - both at a macro and company level.
This is an audio version of an article published in April 2018.
Credits: Written by Paras Anand, CIO Equities, Europe; Ian Spreadbury, Senior Portfolio Manager; Wen-Wen Lindroth, Senior Credit Analyst; and Grethe Schepers, Europe Editor. Read by Grethe Schepers.
This podcast is for investment professionals only and should not be relied on by private investors. This podcast is provided for information purposes only and is intended only for the person or entity to which it is sent or downloaded by. It must not be reproduced or circulated to any other party without prior permission of Fidelity. Fidelity Personal Investing does not give personal recommendations. The value of investments can go down as well as up so you may get back less than you invest. For other important legal notices please see our website.
See omnystudio.com/listener for privacy information.
How do investors think about ESG considerations and what impact does it have on the process that leads to a final investment decision?
Richard Edgar, editor in chief, talks to Mike Dolan, director of research, Alvin Cheng, credit analyst, and on the line from Hong Kong, portfolio manager Bryan Collins, to examine the step-by-step process in the case of an investment in ChemChina, the Chinese state-owned chemical giant.
This podcast is for Investment Professionals only and should not be relied on by private investors. This podcast is provided for information purposes only and is intended only for the person or entity to which it is sent or downloaded by. It must not be reproduced or circulated to any other party without prior permission of Fidelity. Fidelity Personal Investing does not give personal recommendations. The value of investments can go down as well as up so you may get back less than you invest. For other important legal notices please see our website: www.fidelity.co.uk/professional/about/
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Flush with cash and ready to spend: the results from this year's Fidelity's Analyst Survey reveal a corporate world brimming with hopeful expectation for the coming year.
The exclusive research - which canvasses over 140 of Fidelity's analysts from all sectors across the world - details healthy balance sheets, plans for increased capital expenditure, as well as any likely impact from inflationary pressures.
Providing context and bringing the findings to life in this podcast are three of the experts from the survey:
- Gita Bal, consumer industries credit expert
- Oliver Trimingham, equities analyst for industrials
- Marcel Stotzel, equity analyst with an expertise in IT
Hosted by Richard Edgar, Editor in Chief.
This podcast is for Investment Professionals only and should not be relied on by private investors. This podcast is provided for information purposes only and is intended only for the person or entity to which it is sent or downloaded by. It must not be reproduced or circulated to any other party without prior permission of Fidelity. Fidelity Personal Investing does not give personal recommendations. The value of investments can go down as well as up so you may get back less than you invest. For other important legal notices please see our website: www.fidelity.co.uk/professional/about/
See omnystudio.com/listener for privacy information.
Populist upheavals, Brexit, a capricious US administration - political surprises in developed markets have seen local currencies experience unusual volatility. The moves have forced investors in those markets to think twice about political risk and the best way to approach it, including what can be learnt from markets where such uncertainty goes with the territory. Richard Edgar, Editor in Chief, spoke to two Fidelity portfolio managers on different sides of the globe - Aruna Karunathilake in the UK and Alex Duffy in Singapore - to hear what lessons could be passed on.
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This podcast is for Investment Professionals only and should not be relied on by private investors. This podcast is provided for information purposes only and is intended only for the person or entity to which it is sent or downloaded by. It must not be reproduced or circulated to any other party without prior permission of Fidelity. Fidelity Personal Investing does not give personal recommendations. The value of investments can go down as well as up so you may get back less than you invest. For other important legal notices please see our website: www.fidelity.co.uk/professional/about/
See omnystudio.com/listener for privacy information.