COVID-19: Managing *great* expectations of a recovery

About the author:

Andrew Tang
Author name:
By Andrew Tang
Job title:
Analyst - Equity Strategy
Date posted:
22 June 2020, 9:45 AM
Sectors Covered:
Equity Strategy and Quant

We still believe the future looks positive for the equity market, but ‘great expectations’ of the successful reopening of the economy and the eventual development of a vaccine, may be what hampers the market’s near-term performance as we saw last week.

The weight of these expectations has caused us to enter a data-dependent phase, where both economic growth and earnings are going to have to meet, if not exceed, elevated estimates already priced into the market.

Any further disappointment regarding the strength or speed of the recovery could exacerbate interim periods of downside volatility. We believe a more cautious and targeted near-term portfolio tilt may be warranted. This week we look at some high-frequency data points to gauge the strength of the economic recovery and what it means for sector allocation.

Key observations

  • Work from home appears to be the new normal. Despite the easing of restrictions in recent weeks, there has been very little change to employees work-from-home behaviour. A positive for the stay-at-home economy (cloud, home improvement, online retail, telecommunications, staples)
  • Retail and Leisure activities improving but remain 15% below the January/February baseline. The improving trend is expected to continue in the near-term as restrictions ease. However, questions remain about the durability of the rebound once government support expires in September.
  • Despite bouncing off the bottom, commuters continue to shun public transport with a 40% decline in passenger activity.
  • Demand for staples (Grocery and Pharmacy) appears to be rising again. This suggests the March pull-forward of demand has cleared, and spending behaviour is normalising but with WOW (12mf PE 25.3x and 2.8% div. yield) and COL (12mf PE 25.7x, and 3.5% div. yield) is it more than in the price?
  • While the proportion of households under financial strain has decreased, it remains a challenging environment for many. Without an extension of government support, we can see this dynamic weighing on consumption in the second half of the year.
  • Overall the recovery appears to be taking a ‘swoosh’ shape not the V shape as implied by valuations in segments of the market.

Play it safe

In the near term, we prefer to play it safe. Not all industries and businesses will return to operations at the same pace and magnitude. Given the dichotomy in the rebound potential of companies across the economy, stock selection is key.

Pricing power in a subdued demand backdrop, strong balance sheets and areas that cater to spending on what we need, not what we want, in the looming period of belt-tightening.

These are the company characteristics that we believe investors should be screening for.

We updated our list of Best Ideas recently. They are our most preferred sector exposures over the next 12 months.

Year-on-year change in restaurant bookings on the Open Table network in Australia

Note: at a global level 58.5% of restaurants in the OpenTable network are now open

YOY change in restaurant bookings

Sources: OpenTable, Morgans. Data as at 19 June.

More COVID-19 insights

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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