Investors are strapping themselves in for a dramatic finale to one of the most extraordinary years in living memory.
An epic US presidential election is just weeks away. Wall Street’s third-quarter reporting season will reveal plenty about how companies are actually managing through the pandemic crisis and how it’s affecting profitability. In Australia, the fiscal firepower unveiled in the federal budget will begin to be deployed. Victoria’s lockdown will end – or maybe it won’t, which would be just as momentous.
Having survived the market panic of March and ridden the subsequent recovery, professional investors will need to navigate these potential dramas and look towards 2021 to find the next set of winners.
One of the key questions they need to answer is when to start wading into the stocks most hit by COVID-19, hunting for recovery plays.
In a podcast discussion with Eley Griffiths managing director Ben Griffiths, Antipodes founder Jacob Mitchell and Wilson Asset Management founder Geoff Wilson, moderated by your columnist for the Future Generation Virtual Investment Forum which will be formally launched on Thursday afternoon, there was a clear sense that this moment has arrived.
“We think it is time to embrace the Australian reopening trade,” Wilson says.
He nominates tourism as a key sector, arguing that as Australian reopens, the $50 billion that Australians previously spent on international travel could now be spent domestically.
Although Wilson says sector leaders such as Flight Centre have done a good job of slashing costs, WAM is looking to smaller players, including ferry operator Sea Link, which Wilson says is trading on a price to earnings multiple of 17 times and growing at 30 per cent per annum. Tourism Holdings, the Kiwi vehicle hire and tourism operator, is another WAM pick.
Wilson also likes housing. “We think with these record-low interest rates the housing sector is cheap. The more direct plays there are the likes of Brickworks, CSR and the mortgage broking business, AFG, trading on about 12 times [earnings].”
Griffiths is also keen on a travel stock, which he was buying through the March and April panic and periodically through the rally: Auckland Airport.
While air traffic has been smashed around the world, Griffith says he likes the fact he’s backing a monopoly operator in a good market, with no airport curfew and a great management team.
“I think if we can get a bubble between Australia and New Zealand and if they can get back their other Asia travel, they can be back at 75 per cent of pre-COVID levels fairly promptly.”
His other pick is The Reject Shop, the discount retailer in turnaround mode. “It’s pitched at that end of the market where cost-conscious value consumers will dwell. They’re doing a tonne of smart things in merchandising and remodelling in the business.”
Mitchell sees value in Chinese tech stocks Alibaba and Tencent, which he argues face little in the way of physical competition in the way that, say, Walmart duels with Amazon.
But he’s also betting that much of the fiscal stimulus seen in the coming years will have a climate change bent, and so is backing German car maker VW.
“I think there’s a good chance that a company like VW, which because of ‘Dieselgate’ had to really accelerate their adoption of EV technology, will be in a good position to potentially produce more EVs than Tesla within the next couple of years,” he argues.
The stock is also a good China trade, as the largest Western automaker in that country and the home to luxury brands Audi and Porsche.
Wilson has a final reminder for recovery plays more generally, which he learnt in the 1982 recession.
“What you do find is companies have a fantastic ability of reducing their costs and their cost structure, so when revenue does come back you really get very leveraged earnings growth.”