Winners, losers and the year for value

What’s become clear from this global pandemic is that the global economy has been reset. That presents an opportunity for value stocks to rebound, as they typically bounce back well from out of a recession. For the final week of reporting season, I share my views and explain why I believe 2021 will be a year for value.

The standouts from the final week of reporting season

It was a surprise to see so many companies reporting in the final week. The impact of the results has tended to be obscured by some of the large global thematics that have occurred during the month. A noted theme that we've seen emerge was the sale of COVID-19 winners, despite reasonable to good results, and the reciprocal purchase of COVID-19 losers. For example, consumer discretionary, consumer staples and technology companies have been stark underperformers during the month.

Lend Lease reported a small beat and modest outlook. However, we've seen the tail risk on the sold construction business reduce and their exposure to the underperforming retirement business has been reduced to 50%. Looking forward, the thesis around the long duration, urban renewal projects globally remains intact and the simplification of the business should result in an ongoing rerating after a difficult couple of years.

Our take on IOOF

IOOF has had a tough few years. More recently the acquisition and subsequent equity raising during COVID-19 for the MLC transaction was unfortunate given they’d only recently completed the ANZ transaction. However, these types of assets rarely present themselves.

In terms of the result, the special dividend, together with the 79% payout ratio for the normal dividend, has provided confidence to the market that IOOF is comfortable with the upcoming remediation program stemming from the Royal Commission. Importantly, IOOF has reconfirmed both the ANZ and MLC synergy targets and timelines, which the market likes. Revenue margin pressure remains; however, this is more than mitigated through the successful cost-out programs that have been outlined.

Travel heavyweights push through the pain

Travel stocks have obviously reported very weak results. However, as a general observation, they’ve reacted very positively as the market is ignoring last year and looking forward to the more positive future as international borders eventually open post this unprecedented vaccine rollout.

So, Mr Market, as I've said previously, is essentially buying the COVID-19 losers and selling the COVID-19 winners. 

The travel stocks are obviously viewed as the COVID-19 losers and so are being bought quite strongly.

2021 could be the year for value

COVID-19 has essentially reset the global economy. Value tends to outperform coming out of a recession, as economic growth picks up from very low levels. We really see no reason why this thematic won’t continue.

EPS growth now will be much greater for the stocks sitting in the value cohort, such as cyclicals and financials. Against this backdrop, we have this huge dispersion between the growth and high momentum names and value. The premium for growth is likely to reduce over time as there is less growth scarcity going forward. One of the big drivers for the growth out-performance over the last few years has been this multi-year decline in bond yields. More recently, the steepening yield curve is signaling the economic expansion globally will continue, which we believe will result in the low-cost, economically sensitive stocks to rerate higher. So, 2021 should be one of the years for value.

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