Sifting through the rubble

It should come as no surprise that 2020’s word of the year is “lockdown”¹ according to Collins Dictionary. As COVID-19 swept the world, cities locked their doors to the outside world and so too did investor psychology. Markets receded to the “here and now”, rewarding “stay-at-home” stocks and punishing businesses that require mobility and social interaction to operate effectively.

As the chart below indicates, “Stay-at-home” stocks have outperformed “Out-and-about” stocks by 21% since the market peak back in February. The former (which comprises a basket of companies including Afterpay, NEXTDC and Woolworths) have risen 16%. Conversely, the latter (with companies like Qantas, Scentre Group and Transurban) have fallen 6%.

Making bold and long term predictions in this environment is a fool’s errand, but we will try anyway: ‘lockdown’ won’t be the word of 2021! With vaccines on the horizon (and appearing to be highly effective) and COVID treatment protocols improving dramatically, mobility will pick up and confidence should rebound accordingly.

The fact that ‘Out-and-about’ stocks have only clawed back half their underperformance³ suggests:

1. a lack of confidence in a sustained recovery;
2. investor inertia; and
3. a view that consumer/businesses preferences have significantly and permanently changed.

We wouldn’t advocate blindly buying the COVID losers, but sifting through the rubble unearths some really interesting opportunities. We have sought exposure to high quality businesses which have de-rated to more appealing valuations in the sell-off, and will emerge from the crisis with improved earnings power and competitive positions.

We recently established a position in Lendlease, which has underperformed over concerns about customer and investor demand for property assets in a post-COVID world. In the medium term we are more optimistic than consensus about its $114bn development pipeline and how fast it can progress development. Moreover, its earnings stream will be more consistent going forward as it shifts its earnings composition to be more heavily weighted to investment income and funds management.

Elsewhere, we have increased our positioning in Aristocrat Leisure and are overweight infrastructure stocks Atlas Arteria, Transurban and Sydney Airport. Conversely, we have reduced or exited holdings in a number of ‘COVID winners’ which were at risk as activity levels start to normalise.

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