MoneyTalks: Here’s an expert’s take on which ASX sectors might win and lose post-COVID
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MoneyTalks is Stockhead’s regular recap of the ASX stocks, sectors and trends that fund managers and analysts are looking at right now.
Today we hear from Ed Prendergast, fund manager at Pengana.
Prendergast notes one of the more peculiar and unexpected winners was (certain) retailers. Companies such as Harvey Norman (ASX:HVN) saw their sales rise by 20%.
“It’s mainly because last year people were working at home home, bored, cashed up, not particularly worried about their jobs. The mentality last year is we get through this year and we’ll be fine this year,” he said.
“The question from here is – is it sustainable at all?”
“If you look at the share prices of a lot of these retails stocks, they are trading at or around the highs. So the share prices are telling you not only is the growth sustainable but there is a sense this level can last for a while and I think it’s an enormously risky proposition to take.”
This year retailers don’t have the same rush for workers to set up “work from home” settings nor the comfort of JobKeeper, rent deferrals from landlords or finance repayments to the banks.
Prendergast says if sales retreat to 2019 levels it will be bad for retail stocks – although not all.
“City Chic’s online presence has grown strongly, offsetting store closures. Lovisa on the other hand has seen store closures, however a return to normal social activity should see sales recover strongly in future,” he said.
“We rather not invest in things that’ve had a free kick, we prefer to take the view that if you suffer you’re more likely to return to a normal situation which is good for them,” he said.
“So City Chic might’ve had a bit of a boost where some women might’ve spent more time at home and or [were] a bit bored or wearing active wear than work wear.
“But it’s not something that’s completely enjoying a free kick that it otherwise would have.
“Other than that, retailers aren’t something that excites us; we see more risk than opportunity.”
Prendergast was more bullish on other sectors.
“Our biggest holdings are in things like Uniti (ASX:UWL), a telco which makes its money from wholesale fibre-based services for residential data usage. Put in plain English it’s home internet and these guys provide the infrastructure similar to the NBN,” he said.
“That’s not an area that’s over-earning or under-earning, it’s a very stable operation and they’re growing very well.
“And then things like John Lyng (ASX:JLG) which is an insurance claims management business. They send tradies around to fix your leaky roof when you have a storm or a tree fall on it.
“Again that’s not a business that had any interruptions to its earnings last year, it grew very strongly because it’s a well-run business that is not particularly cyclical.”
Some ASX sectors and stocks may have had temporary interruptions but Prendergast noted this was different to a long-term structural impact on their industry and post-COVID such companies would be well-to placed bounce back.
“Lifestyle Communities (ASX:LIC) is another one – it’s a retirement village developer and operator and they operate in the lowest priced areas of the property market in Victoria,” he said.
“It had a bit of problem last year in that stay at home orders meant people weren’t visiting and making decisions about moving, so had a blip in settlements. But it was not deterioration in the long-term proposition, it was a shorter term thing.
“It’s well-managed, it’s not a boom time stock, not like those retail businesses that have had a free kick, if you like on, effects that no one would’ve assumed would happen.
“Integral Diagnostics (ASX:IDX) is another one, it’s an imaging company, so X-rays and MRIs.
“Yes, it had an earnings problem last year where elective surgery was banned and associated imaging on elective surgery fell away, but we always knew it was a short-term issue.
“It changes the earnings in the very short-term and we’re not as fussed by that because it’s not the true driver of value.”
One other COVID-19 trend is record low interest rates, which has stuck despite many economies showing signs of recovery and other assets rising.
Prendergast said the maintenance of record low interest rates was just as much about keeping certain asset prices (such as equities) from collapsing than the broader economy and most likely here to stay.
In that context, Pengana has a stake in property fund manager Charter Hall (ASX:CHC).
“We think at this stage interest rates are likely to stay low and there’s a genuine global shortage of income that Australian property can position itself as ‘That’s the home for dollars that needs marginal income’,” he said.
“[It’s] one of the biggest fund managers in property and is growing well.
“The biggest caveat is if interest rates rally quickly. If they do, that’s the biggest problem for most stocks on the planet and property in general. But at this stage we’re happy to say that’s a stock we own for the right reasons.”
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewee and do not represent the views of Stockhead.
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