Bull or bear? 3 fundies on how they’re positioned for the (next) recovery

The “reopening trade” was a dominant topic among investors as recently as just a few months ago, as we lifted our heads and began to imagine a life without lockdowns, strict social distancing and other measures that have become commonplace since last March.

But COVID’s super-spreading Delta variant, which has caused renewed waves of infections and subsequent mitigation measures in response, has thrown a spanner in the works. In the case of Australia, the negative effects – rising infections, hospital admissions and deaths, alongside the inevitable economic hit – were magnified by the nation’s vaccine shortage, especially back in June.

As contact tracers race the clock and vaccine rollouts gradually ramp up, fears of a second, more pronounced economic crunch are building. In part one of this three-part series, I asked three portfolio managers from a mix of Australian and global equity funds whether they’re bullish, bearish – or something else entirely – and to explain why they hold these views. I spoke to:

• Bruce Williams, executive director and portfolio manager, Elston Asset Management
• Chris Demasi, co-founder portfolio manager, Montaka Global Investments
• Emanuel Datt, founder and principal, Datt Capital

It's tough to be a bull right now

Bruce Williams, Elston Asset Management

From an absolute valuation perspective, we are struggling to be outright bullish. Earnings have broadly been aided by fiscal support, while monetary support has increased the multiples that investors are willing to pay, particularly for ‘structural growth’ companies.

Though COVID is far from predictable, assuming both “normalise” where fiscal and monetary support are gradually withdrawn over time, tailwinds essentially become headwinds.

In terms of positioning the portfolio, our bias is towards companies that benefit from economies gradually reopening. This recognises that reopening will not be linear and that patience may well be required – the emergence of the Delta variant has increased the uncertainty, particularly with regards to timing.

A couple of examples of sectors where we believe there are opportunities include travel-related companies like Flight Centre (ASX: FLT), when consumers can travel again, or healthcare companies like Ramsay (ASX: RHC), which will eventually benefit from an increasing backlog of elective surgeries.

The energy sector is also interesting, given CAPEX budgets have been slashed. This has affected growth investment and forward supply at a time when economies open up and growth rebounds, increasing demand for oil and gas. A company poised to take advantage of the transition away from fossil fuels, and the role technology will play, is Worley Limited (ASX: WOR).

Despite our valuation concerns, we selectively hold a “structural growth” company like Wisetech (ASX: WTC), which continues to display a strong market position and is reinvesting to maintain competitive advantages. The company’s execution of its growth opportunity is absolutely critical, as its current share price leaves very little room for error.

"Why would I do any of that?"

Chris Demasi, Montaka Global Investments

We don't view it that way. What the opportunity set looks like for the new few years or even a decade or more matters so much more to us than whether we’re bullish or bearish at this moment. We're bullish because of those multi-year, multi-decade compounding opportunities, having seen many take hold and accelerate over the last 12 to 18 months.

We don’t trade stocks – we're investing in businesses. Think of it this way: you wouldn’t ask a business owner if he or she is either selling or buying more of their business. They’d turn around and say "Why would I do any of that?” – just because US President Biden might have passed an infrastructure bill, or because the earnings season was good last week?

Longer-term trends are much more predictable and durable in nature and are the sorts of things that are going to play out over a decade.

For example, we’ve got e-commerce expanding and accelerating in most markets around the world. China's one of the most advanced markets, but it's still only less than 30% penetrated.

It's a predictable trend that is going to play out and produce a lot of growth and value creation for a long period of time. If we're seeing these massive markets being transformed, and continuing to grow, there continues to be an opportunity. On top of that, you can find a limited set of companies that are going to be using those spaces, that are going to own those spaces, which is exciting. And that's how we position our portfolio and why we’re fully invested.

No more "COVID zero" bodes well

Emanuel Datt, Datt Capital

We’re skewed slightly bullish, and the reasoning behind that is the major economies in Australia – NSW and Victoria. As everyone’s aware both states, these two main engines of the Australian economy have been in lockdown for a number of months. I believe that, technically, we are in a recession now.

But also given the situation with COVID, with the government having decided to move away from chasing “COVID zero”, this bodes well for the reopening trade. In particular, I’d expect industries that have suffered the most over the last few months – for example, retail – to emerge very strongly over these next few months.

I still expect there will be supply disruptions among all sectors over the next few months, as the world begins to normalise a bit more, but I’m broadly optimistic beyond that period.

The wrap-up

Since Sydney pulled down the shutters again back in June, I've reflected on the different reactions (broadly speaking) this time around. At a human level, the effect of Delta in Australia has been far worse than the initial strain.

But for all the problems of the slipshod local rollout, the fact the vaccines now exist brought some measure of reassurance, as did the better (though still imperfect) knowledge of what we’re dealing with this time versus 18-plus months ago. And based on the above responses, this same positivity appears to dominate within Australia’s financial sector – even the RBA Governor would agree, it seems.

Stay up to date with this series

Make sure you "FOLLOW" my profile to be notified of the upcoming entries of this series. In part two, we get the three fundies' views on stock valuations for the next 12 months. And in part three, they each detail a short watch-list of stocks they plan to buy if the market sells off again.