Why “the catastrophists were wrong” and what this fundie did next

A couple of beaten up travel firms and a promising labour hire outfit are part of the unmissable opportunity of this “most hated bull market,” says Monash Investors’ Simon Shields.

In a recent Livewire interview with Patrick Poke, the portfolio manager reflected on the most catastrophic predictions of the early stages of the pandemic versus the reality, to explain his own bullish outlook. He notes the period immediately after the mid-March sell-off saw a pronounced pull-back in expectations. This was underpinned by a belief among many market watchers that it was too soon to buy back in.

“But you don’t need to see the worst behind you, you just need to have an idea about how bad the worst will be,” says Shields.

“Straight out, I was saying that the catastrophists were wrong.”

And he believes his assessment will be correct, pointing to several reasons that mostly revolve around structurally low inflation and interest rates. These reasons include the low-growth future for markets everywhere, and the way technology is increasing flexibility and removing bottlenecks. These trends have played out over a couple of decades – where inflation and interest rates have moved in lock-step – but have been accelerated during the pandemic.

“Now that central banks have blown their balance sheets out of the water, and they have to be mindful of that and will be very supportive of that, they’re going to have to keep interest rates low,” Shields says.

“To me it was pretty clear that you don’t get too many opportunities like the one we saw during the COVID crisis, it really was a once-in-a-cycle opportunity and it wasn’t to be missed.”

An absence of excitement among investors is another of Shields’ poignant observations about the current state of the market.

“There’s no euphoria, this has got to be the most hated bull market I’ve ever seen, in a situation where there’s so much cash sitting on the sidelines and so many people telling us to be cautious as investors,” he says.

But this is a key driver of the opportunities that remain for investors, as the lack of optimism means share price valuations remain below where they should be.

Persistent uncertainty is also part of this, creating discounts as the clouded future depresses analyst forecasts. As a couple of prominent examples of this, Shields highlights two travel stocks in which his fund has boosted exposure during the pandemic. Australia’s flagship airline Qantas (ASX: QAN) and online travel agent Webjet (ASX: WEB) are Monash’s top picks in the sector.

Share prices for Qantas and Webjet are currently down 36% and 59% from pre-COVID levels as both international and domestic travel remain closed into 2021. But Shields expects stock prices will begin to recover once airways open up again and the companies begin to disclose returning travel volume.

“In previous downturns like this, where we’ve seen a big drop in travel, you also saw a very large rebound because of the pent-up demand from people who haven’t been travelling, and I don’t think this will be any different,” he says.

Another stock he likes is EML Payments (ASX: EML), a global payments technology firm that draws a big chunk of its revenue from gift cards. Shopping malls comprise around 30% of this, mostly in Europe.

“And in Germany and France, malls are starting to get back to normal,” says Shields.

He also likes the rest of the company, seeing good traction in its lotteries, wagering and sports betting operations in the US. “It’s getting into the transaction system and payments, making it easier for companies to interact with their customers and with each other, and that’s really the driver of its earnings over the next five to eight years.”

Shields also nominates a stock that he expects will have an outstanding 2021, singling out labour hire company People Infrastructure (ASX: PPE). He notes the company has been expanding market share of late, “and like every company that’s expanding at the moment, it has an element of technology to it, with a growing platform.”

The company is also strong within the home care market, which also holds appeal given the demographic mix in Australia and the increasing trend toward outsourcing of labour within the healthcare sector.

“Some of these statistics led us to increase our exposure ahead of its last update, and that worked very well, the share price has already started to respond well off the lows of COVID,” Shields says.

“But we think there’s a long way to go, because this outsourcing trend is really driving EPS through time, and we expect some significant upgrades over the next year or two.”

The above wire is based on Simon’s recent appearance on Livewire’s Rules of Investing podcast. You can listen to the full episode here.