Sleepless Australian fund managers can be forgiven for feeling a bit exhausted as 2020 draws to a close. It has been a year of highly unpredictable events, mostly playing out overseas, which for them has meant a year of monitoring market moves in the early hours of the morning.
First there was the COVID-19 meltdown for equities in March. Then there was the surprisingly swift recovery – led largely by “stay at home” technology stocks and online retailers. After that, there was the US election to navigate. And now there is new and uncertain dynamic to contend with: better-than-expected progress on a coronavirus vaccine.
“It makes for long nights watching markets. Last Tuesday I didn’t get much sleep at all, just watching it all play out – both the vaccine news and what was happening in the market and the rotation that was going on,” says Catriona Burns, a portfolio manager at Wilson Asset Management.
News of faster-than-expected progress on two vaccine candidates over the past fortnight lit a flame under global sharemarkets and lifted Wall Street’s benchmark indices to fresh highs. But what really caught investors’ attention was the way the money was flowing.
“It was stark in terms of previous winners: the ‘stay at home stocks’ were getting dramatically sold off, whereas stocks that had previously been completely unloved, like in the travel sector, shot up,” says Burns. “For example, we own Amadeus [a travel technology business] out of Spain, which at one point was up 30 per cent.”
It was a similar story in Australia, with local tech market darlings falling and beaten-down stocks in the travel sector such as Qantas and Flight Centre soaring, and some of the pandemic’s stronger performers such as JB Hi-Fi and Afterpay taking a hit.
Making the market moves even harder to decipher was the fresh and ferocious new wave of coronavirus infections in the US and Europe, forcing a new round of lockdowns and inflicting more damage on major northern hemisphere economies.
Nevertheless, the market shift of the past fortnight has led many global investors to ask the same questions: will this herald the long-awaited return to value investing after a golden era for growth stocks? Is the ‘great rotation’ in markets finally here?
Recovery question marks ‘kicked into long grass’
There has been plenty of upbeat news about vaccine candidates over the past fortnight. US biotech Moderna upped the stakes with its interim trial results this week, which showed a 94.5 per cent efficacy figure.
Drug giant Pfizer followed up with another update this past Thursday on its candidate, confirming it had rounded out its phase 3 trials on the product, with data now showing its vaccine was 95 per cent effective. It plans to apply to US authorities for emergency use authorisation for the vaccine before month’s end.
Australia now has four supply deals for vaccines: 10 million doses from Pfizer and its partner BioNTech, 40 million from Novavax, 30 million from AstraZeneca/Oxford and 51 million from the University of Queensland’s project when it is completed. The data dumps over the past two weeks put some of these biotech giants in the box seat for delivering products by early next year.
Investors agree that’s great news for society, but how it might affect the markets is still open to debate.
“My view is it is too early to call this an inflection point. Many of the themes that people have said are [the reason] why growth has had such a good run are still in place,” says cross-asset specialist at Fidelity International, Anthony Doyle.
There is good news about vaccines at the moment but it all feels very speculative to me.
Pengana fund manager Ed Prendergast.
The reality is that while a vaccine is on the way, many economies are likely to bear COVID scars for years. And some of the structural shifts – for example in the greater use of technologies at home – appear to be permanent.
“There’s a lot of good news around, and I think people want to make hay while the sun shines,” Doyle says. “But US COVID rates are still at record highs. I talk to friends in London, they are obviously in lockdown… The technology adoption we’ve seen this year will continue and it’s too early to call this [the] age of value over growth.”
Burns says global markets continue to seem confused about where to place their focus.
“I think things will swing back and forth, depending on the news. One night it [the market] is focused on vaccine news, the next night it’s the coronavirus case growth in Europe and the US.”
Doyle says investors should also be questioning whether a stock can survive against a tough economic backdrop once global economic stimulus measures wears off.
“The question marks over the recovery have been kicked into the long grass,” he says.
Randal Jenneke, the head of Australian equities at T. Rowe Price, says the challenges with the rollout of the COVID vaccine have made his firm “cautious about the sustainability of the market’s rotation into lower-quality cyclicals, or heavily-impacted sectors such as travel”.
“Prior to the release of vaccine data, we have been repositioning in favour of quality cyclical growth (James Hardie) and recovery names (IDP) albeit still holding a healthy exposure to defensive growth (Healthcare) and some extreme growth (Xero),” Jenneke wrote in an email.
Mind the structural shifts
Embattled shopping centre landlords have also shared in the vaccine rush, seeing rare good news over the past fortnight including $2 billion pumped into local property stocks after Pfizer’s encouraging update.
Listed property operators breathed a sigh of relief at the prospect of foot traffic returning to CBD locations. Pengana Capital portfolio manager Amy Pham warned retail investors must keep in mind many property investments, like trusts exposed to shopping centres, were under pressure prior to the pandemic and may never trade back at their net tangible asset backings even with a COVID recovery.
“Even before COVID hit, the discretionary malls were trading at a discount to NTA [the net value of their assets]. I think mums and dads that look and this and think, ‘we’re gonna have a vaccine, it’s going to go back to normal’, well they have to keep that in mind,” she says.
Pham believes property-exposed investments will be an attractive option during the recovery as investors struggle to find strong yields elsewhere. However, discretion must be taken and investors must think about the structural societal shifts they are seeing, whether that is more people working from home or a greater demand for childcare and social housing, she said.
A rising tide will not lift all boats, and differences between winners and losers will be more pronounced.
T. Rowe Price’s global asset management team
“We think that even through COVID, sectors like the data centres, logistics, affordable housing, all of that is going to be driven higher. No matter whether you’re going through COVID or not, and no matter whether the economy is going through a recession,” she said.
Pham’s high conviction property securities fund had seniors communities operator Ingenia and logistics facilities firm Goodman Group among its top five holdings in October.
Uncertainties over vaccine rollout remain
Investors and governments have thrown tens of billions of dollars at the development of vaccines, and healthcare stocks have been thrust firmly into the limelight as an investment opportunity for the next decade.
Sentiment was further buoyed this week when company filings for Warren Buffett’s Berkshire Hathaway revealed the legendary fund had recently taken stakes in biotechs including Merck & Co., Bristol Myers Squibb Co and Pfizer.
When it comes to the actual rollout of the vaccine, however, many remain sceptical.
“We try to avoid risky situations… and there is good news about vaccines at the moment but it all feels very speculative to me,” said Pengana emerging companies fund manager, Ed Prendergast.
“In markets, there has been a massive switch away from those companies that have benefited [from pandemic conditions],” he says.
Despite this, it’s still not known how effective a vaccine will be and whether the mammoth task of distribution will go smoothly, he added. “The second level of uncertainty is what if one, two or three vaccines [launch] and then cases still continue? What do governments then do?”
In this environment, Prendergast says his team are avoiding any stocks that “rely heavily on one outcome”.
In the travel industry, there are some businesses with valuations that look cheap even without a vaccine, he says. New Zealand motorhome and tourist business Tourism Holdings is one example. Meanwhile, his emerging companies fund has backed the recently merged telcos Uniti and OptiComm.
“It doesn’t matter what happens with the virus, you have to have data. People have to do a lot more than lose their jobs to stop using the internet,” Prendergast said.
T. Rowe Price’s global equities team told investors in a briefing this week its managers were “closely monitoring the potential for a great rotation from growth to value”. “We believe investors should remain diversified between growth and value,” the firm said.
With central banks looking unlikely to raise interest rates for several years, however, the search for yield will continue to be the priority. Not all companies will be winners in that equation, its global asset management team, led by Sébastien Page, warned.
“Investors must lower their expectations with regard to stocks and bond returns for the next 10 years. A rising tide will not lift all boats, and differences between winners and losers will be more pronounced.”