The S&P/ASX 200 index has climbed more than 10 per cent so far this month, on track for a record four-week stretch, with the gains extending a remarkable run made since the COVID-19 lows of March.
But within the rally, there are new forces at work. Renewed optimism about a vaccine-driven economic reopening has triggered a sharp rotation in the market. High-flying tech companies that soared through the pandemic market chaos have made way for beaten-down stocks that could outperform in an economic rebound.
And some stocks were more damaged in the COVID-19 downdraft than others. In some cases, selling was indiscriminate as whole sectors were punished. In other cases, the selling was more company-specific. But now, the companies that lost the most could also be those with the most to gain as a recovery takes hold, fund managers say.
Alumina has been one of the major casualties of COVID-19 but a sharp rally this month has highlighted its close connection to the broader reopening trade.
Even with the November gains, the company's shares are 20 per cent below where they traded before COVID-19 and the alumina refinery operator appears poised for a further significant rebound as the broader economy opens up.
"Alumina is the main commodity required to make aluminium, and the price of alumina has been hit in the short term because of weakness in demand caused by COVID-related shutdowns," says Investors Mutual portfolio manager Daniel Moore.
“Alumina’s current share price is capitalising current low margins, which are 30 per cent below our view of sustainable long-term margins."
"As economic activity recovers, demand from the building and construction and car manufacturing sectors will be supportive of demand for Alumina’s products, and lead to higher prices and earnings," says Moore.
AP Eagers hasn't experienced the pain of many other companies on the local sharemarket, but investors still see it as a strong way to play the domestic recovery.
A spike in spending on vehicles has driven a strong rebound in the company's profits and some investors have the view it could come out of COVID in better shape than when it went in.
"They’re domestic auto retailers. Demand for cars has improved and they’re a large player in the total market," says Celeste Funds Management portfolio manager Paul Biddle.
"AP Eagers are continuing to consolidate the auto industry and they will have bigger market share coming out of the COVID-induced cycle that they had going into it."
ARB has already benefited from domestic vehicle spending and, with international tourism still some way off, Biddle says ongoing demand for local travel could continue to buoy the shares.
"People aren’t travelling overseas. They are camping, fishing and spending time on driving holidays. Making your four by four look and feel better means ARB have been a beneficiary of COVID domestic spending," he says.
"ARB are also winning new contracts to supply accessories to the new Ford Rodeo in the US, which is supportive of earnings in the future.
"These stocks will generate revenue as people seek to holiday at home and buy a second car because they don’t want to use the crowded bus."
"If you just take the domestic business as is, we’re getting close to borders opening and the corporate market will show signs of improving," says Leo Barry, Fairview Equity Partners portfolio manager.
"They’ve been able to strip a lot of costs out of the business and it has allowed them to operate despite a significant reduction in the corporate travel market."
In New Zealand, Corporate Travel's total transaction value is higher than the prior corresponding period, which the fund manager says demonstrates the potential for an improvement in the Australian corporate travel market.
"More recently they’ve just acquired one of their major competitors with significant synergy opportunities," says Barry. "We re-established a position prior to this transaction."
Event Hospitality and Entertainment
As a company heavily exposed to hospitality and tourism, Event Hospitality and Entertainment has been at the centre of COVID-19 selling.
"While all these businesses were affected to varying degrees by COVID-19, we expect them all to bounce back strongly as the economy re-opens and budgets get reallocated from retail goods to travel and experiences," says Investors Mutual's Moore.
"After no new major movie releases since February, for instance, there’s a backlog of blockbuster movies, giving us further confidence for Event’s prospects for 2021. The company also has very little debt and an asset-rich balance sheet, with substantial property holdings in the Sydney CBD."
Celeste Funds Management's Paul Biddle also tips the stock will rebound, saying it could be a key beneficiary from a domestic travel boom while international borders remain locked.
"We’re thinking domestic-orientated earners is the way to play the COVID travel and entertainment recovery. That’s what’s attracted us to Event Hospitality and Entertainment." he says.
"They did some interesting things, like removing the cheap season pass for ski season and replaced it with a day charge and as a consequence yields ended up performing well even though occupancy was down.
"If you were going to take your mountain bike down to Thredbo before, you’re probably still going to do that. If you were going to ski in Japan, then you probably won’t for at least the next 12 to 18 months."
Lifestyle Communities is poised to bounce back from a COVID-19 hit says Barry.
"This is a classic domestic reopening trade," says Barry.
"They’re a leading accommodation provider of semi and retirement villages based in Victoria," he says. "Victoria’s been the hardest hit in Australia but despite that, their settlements are running slightly ahead of market forecasts."
Lifestyle Communities is trading well above where it started the year, having survived the COVID-19 market downturn but Barry believes there's more upside ahead.
"They’ve got a great pipeline of assets in Victoria and are a destination of choice for retirees downsizing," he says. "Yes, they’ve been impacted [by COVID-19] but it's only a slightly delay [and] the pent-up demand could be pretty material."
The closure of courts has had a major impact on Omni Bridgeway, taking away the litigation funder's main source of revenue. But the cases it was due to fund haven't gone away and are merely sitting on the sidelines, waiting for courts to reopen, says Barry.
"Only 1 per cent of jury trials in the US are operating at the moment highlighting that once we see some normalisation in conditions Omni will be a big beneficiary," says Barry.
"Omni operate on global scale so when you talk about reopening trade, the Australian division will be the first to come out of the lockdown."
After surviving the initial COVID-19 sell-down, the company's shares have sold off heavily since the middle of the year, but Barry believes that has made the valuation very attractive.
"The stock has sold off recently based on these delay concerns but the stock's trading on five times price-to-earnings, we think the risks are more than priced in," he says.