How to position your portfolio for the delta variant

Since late 2020, we’ve pivoted our portfolios to businesses likely to benefit from the economy’s reopening – and generated excellent returns. But the emergence of the highly infectious delta variant makes the future far less certain. My take is that higher quality and structural growth businesses should again be on your radar.

Allocating equity portfolios to companies growing structurally or to those recovering from earlier lockdowns and restrictions has benefited from optimism surrounding vaccine developments and rollouts.

By way of example, the pent-up demand for travel has hitherto provided enthusiasm for tourism companies with strong or repaired balance sheets.

Indeed, only last week the cruise ship company, Regent Seven Seas, broke all previous opening day records with all berths booked in less than three hours, despite prices ranging from $93,000 to a quarter of a million dollars. This echoes Carnival Cruises’ experience last year when more than 90 per cent of cancelled travelers chose a US$200 on-board voucher for a future cruise in preference to a refund.

In the US, leisure travel has bounced back strongly. LAX (Los Angeles Airport) is reported to be packed and struggling with the volumes. Robust demand for travel amongst employees and clients has resulted in corporate travel returning. Twenty per cent week-on-week growth has been reported over the last six weeks, reflecting the preference for face-to-face meetings over Zoom. According to one analyst, travel by Amazon staff has fully recovered to pre-COVID-19 levels. Consequently, airlines are said to be hiring like crazy, and unable to recruit enough staff.

Anecdotally, rising delta cases globally aren’t currently expected to halt the reopening. By way of example, Seattle’s population is 74 per cent vaccinated and that city’s Governor has said it won’t shut down. Notably, 99 per cent of all hospitalisations are unvaccinated.

In Australia, however, a very different picture exists

A relatively low level (10 per cent of the population) of vaccinated individuals, lockdowns and border closures mean the return to normality is less clear. The delta variant is materially more infectious than the original COVID-19 strain and is now the dominant strain in Australia.

And, importantly, with half of winter remaining, the lack of a broadly vaccinated population presents the virus with an opportunity to mutate, potentially undermining the efficacy of current vaccines. This has investors on tenterhooks.

Victorian and New South Wales lockdowns, and the spread of the virus through other states, has resulted in less enthusiasm for forward booking travel. While leading indicators from Similarweb and Google trends remained strong into May, both trended lower into June, and are likely to have fallen further in July following the lockdowns of Australia’s two most populous states.

Travel companies aren’t the only businesses impacted

Lockdowns must necessarily shift spending from services and experiences (that were available in open cities) to online spending on goods. Online shopping spiked during the last 12-18 months, and as consumers returned to in-store shopping, online eased. This could rapidly reverse with only essential stores permitted to open.

Of particular interest is the outlook for the beneficiaries of the boom in home renovations and home improvement. Harvey Norman, JB Hi-Fi, Nick Scali, Adairs were huge beneficiaries during last year’s lockdowns. And amid the recent easing of restrictions, they continued to win. But durable goods tend to have long useful lives, meaning replacement cycles are also long. As the current renovation and building boom matures, so must the rate of growth in the sales of fridges, ovens and air-conditioners.

Elsewhere, hospitals that might have seen a bounce in elective surgeries on the back of pent-up demand suffer from deferments and rescheduling. Further lockdowns and border closures would also necessarily slow the pace of economic recovery and, consequently, demand for raw materials and energy.

Meanwhile, the boom for building materials companies, including Adelaide Brighton Cement, Boral and CSR, amid persistently low interest rates, declining unemployment and consequent strong demand for housing/home improvement, could also be derailed.

And keep in mind the stricter Sydney lockdown is accompanied by smaller support and welfare payments in the absence of Job Keeper.

It should not be surprising, in such circumstances, to see at least some capital reallocated from profitable reopeners to lockdown winners.

The key question for investors to now consider, however, is whether a reopening is undermined by a new strain of the virus that evades vaccines.

Indeed, not everyone in the UK is excited about the country’s reopening. England’s Chief Medical Officer Chris Whitty admitted hospital admissions could hit “scary numbers” if removing all restrictions leads to out of control infections and the opportunity for COVID-19 to mutate again.

In just the last month, the Netherlands, with more than three-quarters of the population vaccinated, suffered the devastating effects of reopening too quickly. Infections rose more than 500 per cent in just one week. Shortly after the Dutch caretaker Prime Minister, Mark Rutte, announced that face masks would no longer be required, the Dutch government started backtracking on restrictions.

New infections had doubled to 8,000 in the week ending 6 July. By 9 July, 7,000 cases were recorded in 24 hours and almost three-quarters of the new cases were in young people, half of whom were infected with the delta variant.

A possible silver lining to the prospect of a longer road to reopening is a flatter yield curve (reflecting lower growth/inflation expectations) and dovish central bank frameworks.

And when it comes to the markets, higher quality and structural growth stocks may yet again be on investors’ radars.

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