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The stock market Covid couldn't kill

7 Sep 2021 1 month(s) ago

There are three possible investment themes when positioning for the end of the lockdowns.

As lockdowns continue it seems that listed companies are weathering the storm well. After this, one wonders what kind of shock would see the market fall sharply, although of course some corporates have been hit hard, like Qantas. The market, of course, always tries to assess the future and so it is looking to price in what happens when reopening finally happens.

Even if there is a big drop in the US markets – something that is very possible because it is partially held up by the US Federal Reserve printing money and pumping some of it into the stock market (especially buying back corporate bonds with its quantitative easing program – the Australian market is underpinned by strong dividend income. Plus it is bolstered by the growing pool of superannuation capital, now 50% bigger than the value of the ASX. That means the local market is far less likely to follow the usual habit of: “when Wall Street sneezes the ASX catches a cold.”

Nevertheless there is a ‘pandemic’ out there and it has had an effect. Wilsons said that the market so far is surviving the ‘delta variant’ pretty well. “Despite the challenges, estimated earnings expectations for 2021-22 remained?intact through August, standing at 20% according to Refinitiv.

“In this regard, the earnings outlook has survived Delta’s force – something we thought was likely in late July. Whilst S&P/ASX 200 earnings at an index level had upgrades, just 40% of companies had positive earnings per share (EPS) revisions. This might have been seen as optimistic, with domestic lockdowns likely to?still be limiting mobility late in 2021.

“Companies across many sectors, like healthcare, retail, travel and tourism, are operating at only partial capacity. There remains a sense of optimism that catch-up can occur, which in some cases can begin perhaps as early as October.”

Here are the earnings revisions for August, with materials and financials having big upgrades and utilities and energy big downgrades. The S&P/ASX 200 on average had upgrades:

Wilsons says that the companies that have been affected by the lockdowns are largely those not listed on the stock market. The bigger companies are fine; not so much the small and medium companies which don't get on to the stock market.

“Results season left us comfortable that the earnings recovery pathway we have outlined through the course of the past 12 months remains intact. Corporate earnings for the market should go through 2018-19 levels during the second half of this fiscal year (FY22). Dividends and capital management both came in ahead of market expectations through August, a reflection of earnings rebound and also part normalisation of payout ratios. As Australia (and the world) reopens and activity normalises, corporate earnings?will likely expand to record levels.”

All very bullish, but how should investors approach it? Wilsons outlines three themes:

  1. Looking through the valley. Investing for when things get better, Qantas being the obvious one. “In many cases, investors are prepared to look through the next 3-6 months and into better times ahead.”
  2. Peak or plateau - The winners from lockdown. “This debate is set to continue as to whether the winners from the lockdown can maintain elevated activity levels when economies reopen. Can share prices and multiplies survive this test?” The supermarkets and producers of staples are especially focused on in this debate.
  1. It is structural - growth across?all seasons. These are companies that improved their financial position because of rather than in spite of, the lockdowns. Wilsons says: “The third group of companies continued to walk in rare air. These companies continued to post strong growth despite the difficult operating environment. ?In some cases, the dislocation caused by COVID is bringing forward growth in companies like Charter Hall Group (CHC), Goodman Group (GMG), ARB Corporation (ARB), Breville Group (BRG) and Nick Scali (NCK). Once COVID passes, it is unlikely the growth rates of these companies will fall below the market for any sustained period. Domino's Pizza Enterprises (DMP)?lifted its medium-term aspirations as it continues to consolidate the take-out pizza market in several geographies. James Hardie Industries (JHX) and ResMed (RMD) continue to grow well above the market, benefiting from strong internal focus and execution. Large structural tailwinds across retirement savings – Pinnacle Investment Management Group (PNI), cloud computing – Nextdc (NXT), Readytech Holdings (RDY), Afterpay (APT), Xero (XRO), global healthcare leadership?- CSL, RMD, and online classifieds - Carsales.Com (CAR), REA Group (REA) continue to benefit existing players. While some investors suggest many?of these companies are trading above fair value on unsustainable earnings multiples – as we have seen in this results season – the ability of strong franchises to further penetrate their chosen markets continues to be underestimated by?the market.”


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