Sectors to invest if covid vaccine research disappoints

What happens if a COVID-19 vaccine is not found or takes longer to develop than investors expect?

Judging by recent gains, the overwhelming consensus in equity markets is that a vaccine will be found, approved and developed within 6-12 months. 

The optimistic view has much support: the United States’ top infectious disease expert, Dr Anthony Fauci, told a US Senate hearing he is “cautiously optimistic” that a “safe and effective” Coronavirus vaccine will be available publicly by December.

The World Health Organisation (WHO) is tracking more than 140 candidate vaccines, of which five are in phase-3, large-scale efficacy trials and racing towards approval.

Sharemarket bulls argue the odds on a vaccine are shortening by the day, given the number of candidates; promising results of key candidates from earlier testing phases; and the incredible worldwide research effort and investment to find a vaccine.

The bears counter that a successful vaccine for a Coronavirus has never been made before. Even if a vaccine is found, the virus could mutate, reducing the drug’s effectiveness. Also, it normally takes years to develop a vaccine and longer to produce billions of doses. Much can go wrong.

I favour the bulls on this one. Historical comparisons are less relevant because the global effort to find a vaccine is unique and technology is far more advanced than for earlier pandemics such as SARS in 2003. I expect a vaccine – and advances in COVID-19 antiviral treatments – sooner rather than later.

That said, it pays to challenge the consensus market view and one’s thinking on an issue. If I am wrong, the gap between COVID-19 winners and losers will magnify.

The key is narrowing the impact to a smaller group of industries, some of which are already benefiting from economic or social change due to the pandemic.

Make no mistake: few sectors will win if a vaccine is not found. The impact on the global economy and equity markets could be catastrophic if more countries are forced into lockdown for months or years, many more people die, and a swathe of businesses go bust.

Look at Victoria, where I live. That stage-four lockdown threatens to cripple the State’s economy for years and weigh on national economic recovery. And the lockdown is just for six weeks, assuming case numbers shrink – far from certain at this point.

Here are seven sectors/trends to watch if COVID-19 vaccine news disappoints.

 

1. Information technology

Tech was my go-to sector when COVID-19 erupted in February, principally because top tech companies have recurring income, high switching costs, strong balance sheets and exceptional cash flow. Also, because tech outperformed after the SARS crisis.

The surprise has been the rate of e-commerce growth during COVID-19. Years of online gains have been condensed into months due to the boom in online transactions. No COVID-19 vaccine would cause even faster digitisation of the economy as more people do business online. That is an exceptional tailwind for big tech.

Best ideas: Star tech stocks in the US (the FANGs) and Australia (the WAAAX stocks) look fully priced after recent gains. Focus on broader tech exposure through an Exchange Traded Fund over the Nasdaq 100, such as the BetaShares Nasdaq 100 ETF (ASX: NDQ).

 

BetaShares Nasdaq 100 ETF (ASX: NDQ)

Source: ASX

 

2. Infrastructure

The big miners came into the crisis in a strong financial position and iron-ore prices are resilient.

Those ideas still hold. No COVID-19 vaccine would mean governments worldwide spending more to stimulate activity. Higher infrastructure investment will boost demand for iron ore and other key commodities in the next few years.

Best idea: BHP Group.

 

BHP

Source: ASX

 

3. Gold

I have previously warned that gold had run too far, too fast. I suggested investors resist buying gold for now given the risk of its price overshooting in the next few weeks/months. Instead, I nominated laboratory services provider ALS, a winner from a higher gold price and exploration activity, and it has since rallied sharply.

All gold bets are off if a COVID-19 vaccine disappoints. News of multiple failed Phase-3 trials for the vaccine would spark higher volatility in equities and rising demand for safe-haven gold. A falling US dollar and fears of an eventual inflation outbreak would also drive gold higher.

Best idea: Gold ETFs provide pure exposure to the metal, eliminating equity market and companies risk. Choose a hedged gold ETF to avoid currency risk.

 

BetaShares Gold Bullion hedged ETF (ASX: QAU)

Source: ASX

 

 

4. “Cocoon” stocks

That is my term for companies that benefit from more people spending more time at home, for work or leisure. No COVID-19 vaccine would quicken remote-working trends and encourage people to stay at home longer, by choice or government decree.

One of my earliest pandemic stock ideas, JB Hi-Fi, shows the potential. More people working at home is boosting demand for home-office equipment and electronic gadgets.

Other beneficiaries include online homeware group Temple & Webster and e-commerce platform Kogan.com.  Adairs is also well placed to increase online sales.

Watch consumers who still have jobs divert money reserved for overseas holidays to homeware, gadgets, clothes and other items that make “cocooning” at home pleasurable.

Best idea: JB Hi-Fi. The star retailer is due for a share-price pullback after recent gains but remains a standout as people stock up on home and personal gadgets.

 

JB Hi-Fi (ASX: JBH)

Source: ASX

 

5. Food

COVID-19 initially drove consumers out of restaurants to takeaway/home-delivered gourmet food and supermarkets. If a COVID-19 vaccine disappoints, watch a downgrading of that trend to cheaper fast food and even higher supermarket demand as more people cook at home.

My early preference during COVID-19 was Woolworths Group. (WOW)

Positive write-ups of KFC owner Collins Food (CKF) and Domino’s Pizza Enterprises (DMP) soon followed because of my view that more people would favour cheaper fast-food and drive-through/home-delivery outlets during the pandemic.

Best idea: After rallying since March, Collins and Domino’s are approaching fair value. Conservative investors should stick with Woolworths. It has years of growth ahead as more consumers prepare a higher proportion of meals at home, boosting grocery demand. Victoria’s stage-four lockdown has, predictably, sparked panic buying at supermarkets.

 

Woolworths (ASX: WOW)

Source: ASX

 

6. Hardship stocks

Sadly, no COVID-19 vaccine will exacerbate a spike in consumer and business bad debts.

As an aside, my favourable long-term view on bank stocks would be downgraded if a vaccine is not forthcoming, because of extended lockdowns and sharply higher bad debts.

Companies that buy distressed debt from telcos and utilities – heaven knows there will be plenty of that in coming months – will benefit as bad debts spike.

The risk is that rising competition to buy distressed debt increases its price and high unemployment means less of that debt is recovered.

Best idea: I nominated Credit Corp and maintain that positive view. Credit Corp has rallied from $15.43 in May to $18.25 and rallied after announcing its FY20 full-year result.

The company, performing solidly before the pandemic, looks better funded than its rivals to buy distressed debt after its capital raising.   

 

Credit Corp Group (ASX: CCP)

Source: ASX  

 

7. Death

Sorry for finishing this column on a morbid note, but a higher death rate is an unfortunate reality if a COVID-19 vaccine is never found and the virus spirals out of control.

Best ideas: I hope I am wrong on this one. If not, funeral operators Invocare and Propel Funeral Partners could have a busier few years ahead, assuming funeral restrictions are eventually relaxed or lifted in more states. With or without a vaccine, both companies have steady long-term prospects and look interesting after recent share-price falls.

 

Invocare (ASX:IVC)

Source: ASX