Vaccine rollout to boost underperforming stock in 2021

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March 04 2021
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The rollout of the COVID-19 vaccine is tipped to be a greater stimulus than the massive fiscal response, with shares that have underperformed during the pandemic set to soar in 2021, an industry expert has revealed.

During American Century’s media presentation, vice president and senior portfolio manager Brent Puff tipped cyclical stocks to outperform as the world opens up post-COVID.

“We think the rate of change in corporate earnings is likely to be most pronounced over the next 18 months to two years in sectors that have been most impacted by COVID,” he said.

Describing it like a natural disaster with a longer duration, Mr Puff said the virus was a hit to the demand side of the economy, which is now in the early stages of recovery.

“The best companies are going to manage through this difficult period and in certain instances exit in a stronger competitive position then pre-COVID, with more competitive cost structures and be very well positioned to benefit when demand snaps back,” Mr Puff explained.

“We are overweight consumer discretionary with one of the newer names added being booking.com. Their business has been very severely impacted by COVID and have not seen much of a recovery to date.”

“However, Booking entered COVID with a rock-solid balance sheet and a business model that affords them a very flexible cost basis. As we get to the other side of COVID, we think there’s pent-up demand to travel, with Booking’s business going to come back very quickly,” he said.

Vice president and senior portfolio manager Trevor Gurwich agreed that the global vaccination rate remains critical.

“We have multifactor models that scan the whole universe and look at companies by region, companies by sector, their relative growth rates, acceleration rates, earnings revision rates and the like.

“If we find a business that is inflecting positively and the improvement in fundamentals is sustainable, we’re benefiting from both that earnings growth – which could be driven by a new product launch or geographical expansion, for example – but also benefiting from that price-to-earnings re-rating opportunity. We believe the fact we’re global means we can be better small-cap investors,” he said.

Mr Puff said that while the newly elected US President Joe Biden’s corporate tax policy could unnerve growth investors, the pace of the COVID vaccine is of far greater concern.

“The likelihood of more taxes is by no means immaterial in our investment decision making, but the speed at which the global vaccination rollout continues will underpin markets for the remainder of this year.

“Tax changes will, however, play a role in how some particular sectors progress. President Biden has indicated he wants to make it more difficult for corporates to shelter profits in low tax jurisdictions. If tax rates go up, it will slow down the progression of corporate profits, and healthcare and tech are the most vulnerable. The market will have to adjust to that reality over time,” he said.

While remaining bullish on the global economic recovery, Mr Puff urged investors to balance risk to rewards.

“Clearly, stocks around the world are rich by historical standards. Maybe they look a little less rich relative to the interest rate, but there are pockets of the market that have gotten very expensive,” he concluded.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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