Bold investors may want to go bargain hunting in areas left behind in this vaccine-driven market rally.
Thanks to a steady stream of good news from medical trials, several broad benchmarks of stock prices have jumped higher in recent weeks. Even the staid Dow Jones Industrial Average Dow Jones Industrials Average surged to a record on Tuesday, surpassing the 30,000 mark for the first time in the index’s 124-year history.
However, many individual sectors and companies are still trading well below their prepandemic levels. For adventurous investors, these neglected areas could hold potential deals.
Consider airline stocks, which languish well below their January highs. Or look at real estate investment trusts (REITs), especially those that specialize in office and retail properties. Most of them are also trading well below their January levels.
If vaccines can bring the pandemic under control by the end of 2021, these sectors have the potential to bounce back strongly on the back of continued fiscal stimulus and low interest rates.
At the moment, though, they are still shrouded in negativity.
“I find that, when speaking with clients, there is often such a downbeat mood rooted in the very near-term that the potential bigger developments are not getting the attention they deserve,” Derek Holt, head of capital markets economics at Bank of Nova Scotia, wrote in a note this week.
Three vaccines, from developers including Pfizer Inc. Pfizer, Moderna Inc. Moderna and AstraZeneca PLC Astrazeneca, have already demonstrated surprisingly positive results in trials, with effectiveness levels ranging between 62 per cent and 95 per cent. The vaccines could be produced in quantities large enough to vaccinate up to 3.1 billion people by the end of next year, Mr. Holt calculates.
Granted, there could be hurdles to rapid deployment if people refuse the shots out of fear of potential side effects or if the vaccines prove less effective in mass usage than they do in trials. Still, even allowing for some stumbles, progress over the next few months is likely to be impressive.
“Inside of a year, the COVID-19 virus could be well underway toward being licked by science,” Mr. Holt contends. “Pent up demand for consumption could return faster than anticipated.”
If so, “rumours of the death of whole industries like travel, movie theatres and restaurants have perhaps been greatly exaggerated.”
He is not the only one who thinks the market has yet to catch up to the full implications of a rapidly brightening economic outlook.
Alan Ruskin, chief international strategist at Deutsche Bank, argued in a note on Monday that there are five stages of celebration – skepticism, reconsideration, delight, exhilaration and, finally, a turn back to sobriety.
At the moment, markets are still in the delight stage, he says. Exhilaration is likely to emerge over the next few months “with the unwind of social distancing and a sharp rebound in downtrodden sectors.”
The exhilaration may not significantly boost broad stock-market indexes, given their already rambunctious valuations. However, there will be “enormous opportunities in the rotation back to those sectors most hindered by social distancing.”
To be sure, this rotation won’t be a happy development for everyone. Gold prices, for instance, are likely to keep on fading in coming months as a vaccine-driven recovery reduces the possibility of governments pursuing radical monetary policies, Mr. Ruskin says.
Where should investors look for opportunities? Neither Mr. Ruskin nor Mr. Holt name specific names but some candidates are obvious.
One is the airline industry. The U.S. Global Jets ETF, which tracks a basket of major U.S. airlines, has been surging on the vaccine news but is still more than 25 per cent below its prepandemic levels.
The REIT sector also holds appeal. In Canada, the Vanguard FTSE Canadian Capped REIT Index ETF, which holds a diversified basket of REITs, is trading 10 per cent below its level in January. It has been dragged down by REITs that hold office and retail properties. If vaccines can help send people back to offices and stores by next summer, it could prove to be good value.
Aggressive investors may also want to consider individual stocks that have suffered from lockdown restrictions, such as steakhouse operator Keg Royalty Income Fund or theatre operator Cineplex Inc.
The caveat: Anyone tempted to go this route should come equipped with patience and a tolerance for volatility.
The winter will be challenging given the high level of infections in the United States and, to a lesser degree, in Canada. It will take time for a vaccine to bring the numbers under control. Physical-distancing requirements will be with us for a while yet.
Over the year ahead, however, the picture is likely to brighten dramatically. A recent poll from Ipsos found that around 75 per cent of global respondents indicate they will get a vaccine when it becomes available. Eric Lascelles, chief economist at RBC Global Asset Management, says that figure is likely to rise even higher with time.
“Do not underestimate the effect that companies can have by requiring their workers to be inoculated, or by governments requiring (or incenting) their citizens to be inoculated,” he wrote in a report Tuesday. “Already, Hong Kong has announced it will provide a cash bonus to residents who are inoculated.”
Investors should start positioning themselves for a postpandemic world.
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