Reopening: Investors will be questioning the sustainability of stay-at-home trends as the economy re-opens. However, re-opening trends are uneven due to renewed efforts to curb the spread of COVID-19 in states where cases have surged. This makes the longevity of stay-at-home trends difficult to predict. Offshore experience clearly indicates stay-at-home demand will decelerate as pent-up demand fades and supply issues are ironed out as re-opening kicks in.
Sectors struggling to recover: Challenges continue to confront transport, tourism and media stocks as regional resurgences of COVID-19 keep demand trends uncertain. Any share price re-rating for these sectors will depend on the length of hibernation affecting operating outlooks and, in the case of toll roads and airports, the prospect of dividends resumption.
Management adaptability: Companies such as Alliance Aviation, City Chic and Perpetual have taken the opportunity to improve their market positions through acquisitions. This trend will continue to feature prominently as the management of a number of Australian companies turn opportunistic. In other cases, we expect companies to lean on self-help strategies through cost-containment plans to help them through a softer demand environment.
The August reporting season will not offer a silver bullet to the question of market direction. Let’s be clear: it’s a challenge to conceive a six- to 12-month outlook in the middle of a global pandemic when part of the answer will depend on evolving public and health policies.
As a base-case scenario, we expect the nascent economic recovery to continue in the second half of 2020. The recovery will be slow and pace uneven but will be assisted by additional fiscal and monetary support. However, views can shift meaningfully and quickly around a variety of factors affecting the macro environment – in particular, a meaningful change in the health outlook for COVID-19 that leads to a return to the normalisation of consumer behaviour offers the greatest upside to markets.
In such a volatile market, and where liquidity may be amplified both up and down, it’s important to be disciplined about what you want to own, the price you want to pay for it and what you think it’s going to be worth in two or three years.