Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Lockdown 2.0 – How the second wave will hit markets
Victoria is back in lockdown, and has enforced mandatory mask-wearing together with social distancing in a bid to further control the spread of the virus. In this piece, we analyse three themes that will resurface during Lockdown 2.0, and two stocks in each theme.
Unexpected unemployment
SEEK (ASX: SEK) & Qantas (ASX: QAN)
The unemployment rate rose from 7.1 per cent in May to 7.4 per cent in June but the “real” jobless rate is around the 13.3 per cent mark, because it doesn’t include those on JobSeeker who have stopped looking for employment during COVID-19. Crunching the numbers, predictions were that about 700,000 Australians would have been in poverty if income payments returned to pre-COVID-19 levels. If we factor-in a labour under-utilisation rate of 20 per cent, this figure blows out to 2 million people. What this is all pointing to is a possible mass explosion of hundreds of thousands of unemployed and under-employed people hitting Centrelink dole queues once the scheme ends. The hardest-hit will be the underemployed, i.e. ex Qantas employees kept afloat by JobSeeker.
With Victoria already in lockdown and the rest of Australia likely to follow, the federal government extended JobKeeper and JobSeeker until 28 March 2021, albeit at a reduced rate, with tougher eligibility criteria after 28 September 2020. In its place will be a new two-tiered payment system to reflect the income of employees who previously worked fewer hours.
Seek.com (ASX:SEK) – The July employment report saw SEEK job ads up a staggering 41.5% month-on-month with the largest contributions coming from Hospitality & Tourism (+80%), Trades and Services (+51%) and Healthcare and Medical (+34%). No surprises there. Hospitality and tourism were the hardest-hit sectors, so an easing of restrictions and reopening of industries saw the beginning of what started off as a rapid recovery. Expect it to be short-lived, as Lockdown 2.0 takes hold. As Seek’s share price is a reflection of both the Australian and Chinese jobs markets, which are both under stress, a great deal of uncertainty remains.
Qantas (ASX:QAN) – During the first lockdown the airline stood down two-thirds of its 30,000-strong workforce without pay and grounded virtually its entire aircraft fleet to ensure its survival. As a result, shares tumbled by almost 70% from a high of $6.67 to a low of $2.14. With international flights to remain grounded well into next year, it looks like Qantas has bunkered down and will ride it out. On the other hand, the airline could come out of Lockdown 2.0, a leaner and a lot more cost-efficient machine.
Isolation and the ‘Buy now pay later’ (BNPL) phenomenon
Afterpay (APT) and Unibail Rodamco-Westfield (URW)
Cash is no longer king. According to a report by AlphaBeta, Australians withdrew one-third less than usual from cash ATMs during Coronavirus, preferring other payment methods. Obviously, the reason being that digital methods do not require human contact i.e. online purchases, cards, smartphones and BNPL. Some argue this transition was already happening. One thing is for sure, lockdown laws accelerated this trend. Home isolation, together with government stimulus packages saw people ditch polymer cash in preference for BNPL, to buy both staples and discretionary items.
Afterpay (APT)
This spawned a new era of BNPL start-ups, all vying for a piece of the pie. Afterpay (ASX:APT) is the clear market leader with 55.8% stake and the valuation to match it. Zip (ASX : Z1P) is second, and has a 35.2% stake. A handful of start-ups such as Sezzle (AWX : SZL) and Splitit (ASX : SPT) joined the space not long after.
Naturally, there was a cost for this transition. While the online retailers and e-commerce platforms captured the coronavirus upside, the bricks-and-mortar stores together with their shopping centre landlords were thrown into a world of pain. Some have shut up shop and others won’t survive another Lockdown. Without customer foot traffic, physical stores just don’t work. Either way, BNPL is here to stay. Even if Coronavirus went away tomorrow, this transition would still happen.
Unibail Rodamco Westfield (URW)
The global shopping centre landlord has been crippled by the first coronavirus outbreak. The company closed all its shopping centres in France, Spain, Poland, Austria, the Czech Republic and Slovakia. All 32 Westfield malls across the US were shut, all but for “essential” retail outlets due to the coronavirus pandemic.
With almost all its malls closed or empty, you can imagine the damage. By late April, the company announced its rent collection had fallen by 80% and it was dumping earnings guidance. Shares fell from $10.52 to $4.08 at the time of writing. That is a 60% fall and the world is no closer to a vaccine or treatment.
But fear not, there is light at the end of the tunnel. Humans are social creatures. Once the fear and panic blows over, and lockdown laws relaxed, people will line outside shops and pack out shopping centres and restaurants once again.
Collapse in the oil price
Santos (STO)
An unexpected casualty from the first Coronavirus lockdown was the dramatic collapse in the oil price (although an oil price war between Russia and Saudi Arabia, which broke out in March, certainly didn’t help.) Flick back to February 2020 and you can see the West Texas Intermediate (WTI) oil price tumble from US$53.81 a barrel to about $23.50. Travel bans, isolation and panic put a stop to all modes of transportation. In April, oil (in futures contract terms) fell all the way back to -US$37.63. The pandemic created a world-wide oil glut with nowhere to store the excess. With so much oil available, no demand and a global economy in lockdown, oil producers and energy retailers took a big hit. Following on from the collapse, crude oil staged a dramatic comeback, rising more than 80% during the three months through to the end of June. Oil sits at around $US40 a barrel.
Santos (STO) – Shares fell 70% from $9 to $$2.75 on the back of the Coronavirus oil collapse. As a result, the gas producer took a $1.1 billion write-down on the value of its assets and was forced to lower its oil price assumptions. Should Lockdown 2.0 cause a similar collapse in the oil price again, there could be the opportunity to buy Santos on the cheap and hold it short-term for a trade. What concerns us is the fact that the coronavirus-driven oil fall was already happening but at a slower rate i.e. climate change and the move to renewable energy. The drop in demand may accelerate the world’s shift away from fossil fuels and towards renewables. This may mean demand may never fully recover, and the oil price may stay depressed for quite some time.
Carsales (CAR) – Shares in Carsales are trading at around pre-Coronavirus levels, give or take a few cents. The reason for this is due to outside factors that are working both for and against the company. As expected, the pandemic brought about a sharp reduction in new car sales due to the downturn in the economy and consumers delaying decisions: new car sales fell 48.5% in April. Then on the flip side, hygiene concerns have Australians rethinking their previous everyday transport options such as public transport. A survey found that 58.8% non-car owners said they are likely to consider buying a car. Carsales is not a cheap stock. During the pandemic, the stock dropped by 50%. There is a good chance this will play out again as Australia hits Lockdown 2.0.
