Smart ways to play reopening trade

To many Australians right now, the re-opening of the economy must seem like a mirage.  Investors should consider the opportunities that come from depressed share prices in sectors hit hard by lockdowns, otherwise known as the re-opening trade.

The re-opening trade seeks to invest in businesses that have been negatively impacted by COVID-19 and are trading well below their valuation based on a normal operating environment.  Obvious candidates include travel, shopping centres, airports and even private hospitals which have suffered due to cancellation of elective surgery.

Investors must ask themselves whether the current state of lockdowns and border closures is a permanent feature or not.

Nathan Bell (Head of research, Intelligent Investor) says that reopening the economy will be as bumpy as it is inevitable, as the cost to taxpayers and businesses is already stratospheric and Australia can't afford to be left behind the rest of the world.

So far, the number of hospitalisations and deaths in countries with highly vaccinated populations that are reopening, such as the UK, are low for those who've been vaccinated. Provided this continues, international borders between similarly vaccinated countries will be opened according to Bell.

The vaccination rates in the US, UK, China and Europe are high, evidenced by the graph below.


In Europe the average number of departing passengers hit 2.1 million per day in the last week of June, up 39% on the 1.5 million recorded just three weeks before.  

Hotel occupancy in the US has doubled from 35% to 70% in the first six months of the year and US airlines expect passenger numbers to be close to normal within a matter of months.  Dan Moore (Portfolio Manager, Investors Mutual) says that US consumer spending is actually ahead of pre-COVID levels.

In China, 99% of pre-COVID aircraft are flying again.  The International Air Travel Association recently forecast that global passenger numbers recover to pre-COVID levels by 2023.

These statistics indicate that Australia could head toward a speedy recovery in the travel sector once the vaccine program becomes well advanced.

Moore is looking at countries who are ahead of the curve with vaccinations and analysing data such as mobility, employment activity, consumer spending, housing and industrial production as a way of developing a lead indicator for Australia.

Moore’s advice to investors seeking to profit from the reopening trade is firstly to look for depressed share prices, but checking this is not due to a large dilutive equity raising.  He then suggests investors ask themselves whether the company’s future prospects are permanently impaired.  Moore favours focussing on companies with a strong balance sheet so they can weather short term set backs, and are industry leaders.  He cites United Malt, one of the largest global suppliers of malt to the beer and whiskey industry as a good example.

Moore likes Virgin Money, a UK bank that is priced at a fraction of its Australian counterparts when measured using a price to book basis.  The reopening of the UK economy has seen an increase in consumer spending, resulting in growth in credit card lending and mortgages for Virgin Money.

Moore is wary of some travel companies that do not have strong balance sheets.

Bell’s advice about the best ways of playing the reopening trade is “carefully”.  He says that  many stocks impacted heavily by COVID have already had a full recovery baked into their stock prices, while others have vulnerable balance sheets that could disintegrate if the economy doesn't get back to 'normal' relatively soon.

Bell adds that Stocks such as Star Entertainment, Auckland Airport and skydiving company Experience Co will be direct beneficiaries of the great reopening with solid balance sheets and plenty of room for their valuations to increase as profits and dividends recover.

Another sector that has been hard hit by the pandemic is the energy sector whose share prices are not yet reflecting the recovery in the oil price.

The key risk facing investors choosing to invest in the re-opening theme is a return to lockdowns in countries with high vaccination rates such as the UK, US, the Nordic countries and Israel.  

Investors will learn a great deal about this in the coming months.


Every month Mark Draper (GEM Capital) writes for the Australian Financial Review - this article was published on Wednesday 11th August 2021.