As we look towards the new year, a year that is hopefully not defined by further pandemic related tumult, the question now becomes, “which stocks on the ASX should I have on my radar for a post-pandemic market?” At Maqro we’re excited to see where markets go in 2022, and as such have compiled a short list of domestic players who we think could prove most intriguing over the next calendar year.
The COVID-19 era has brought about a degree of volatility and unprecedented market conditions over the last year and a half, making for a domestic market which has been hard to navigate. Despite this, there is light at the end of the tunnel, as much of Australia has already or is about to come out of regional lockdowns. Numerous travel, retail and consumer businesses are once again opening their doors to the Australian public.
According to NAB transaction data (adjusted to represent total market), total consumer spending on restaurants, pubs and bars was up from A$1m to almost A$13m following NSW hitting the 70% vaccination milestone. Compounding this, retail spending was estimated to lift from $35m to $100m in the same period. So, we can see that there should be strong uptake in business demand as the underlying pent-up demand that snowballed during lockdowns is materialised.
BlueScope is a steel manufacturing company, offering metal-coated and painted steel building products. BSL also provide engineered building solutions to both industrial and commercial markets. We think BSL is in an interesting space at the moment, given the current climate for steel and iron ore markets. This has been given rise predominantly through China curbing their steel and iron ore demand, driven largely by Winter Olympics related changes. China, and namely their largest steel hub Tangshan, which accounts for 8% of global output, have noted they plan to maintain curbed steel output until at least March 13 of next year. This is in an effort to reduce air pollution for the games. We’ve seen this before, with a similar plan dubbed “Olympic Blue” utilised pre-2008 Olympics, which was a resounding success.
Overall, BSL has diversified its operations well over the last decade.
This all comes at a time in the commodities market, which is defined by incredibly volatile iron ore prices. These further demand cuts from China are driving the raw input prices even lower but iron ore has seen some rebounds in recent times despite the price cuts. However, Bank of America have since slashed their price forecasts by a further 45% to an estimated price of US$91/tonne in early 2022.
The silver lining here is that China is expected to as they did post-Beijing Olympics, see strong upshot in steel production after the 2022 winter games have concluded. Moreover, the production cuts in China have squeezed overall supply, which has in turn boosted steel prices domestically, where demand has slightly faltered. This positions BSL nicely, where they are expected to enjoy margins which are higher than previously thought, both in the Chinese markets but also in other markets as well.
Overall, BSL has diversified its operations well over the last decade. They have decreased their steel-production domestically in favour of increased capacity in the North America and Asia regions. Whilst this decision originally incurred notable losses of ~A$2.2b the change has ultimately proved beneficial, with marked increases to footprint in global markets which are set to enjoy post-pandemic recovery.
This all comes at a time in the commodities market, which is defined by incredibly volatile iron ore prices.(Source: Maqro Internal)
Sealink Travel is a small-cap multi-modal transport operator of ferries, buses and trams in both Australia and international markets. Their principal business activities include public transport operations, tourism cruises and travel agency services and packaged holidays. For us, Sealink represents more of a ‘reopening play’ as we see lockdowns being lifted globally and vaccination rates improving. This may drive a notable uptake in tourism, commuting and travel spending globally.
In 2020, SLK pivoted their business model towards public bus services by acquiring Transit Systems, one of the largest bus operators domestically. This decision was made to offset headwinds engendered by declines to tourism spending throughout the pandemic. These public bus services now represent over 81% of SLK’s group revenues, which will become increasingly important as Australian state governments are relinquishing control over public transport operations. This is in accordance with overarching shifts towards electrification of public bus fleets, which has driven this privatisation. Extending this, SLK also holds the top spot as Australia’s largest ferry provider, winning a 15-year contract last year to operate the iconic Brisbane River CityCat and Cross River Ferries. Due to SLK’s increased diversification of business operations, they are situated well to maintain operations during lockdowns as well has capture the release of pent-up demand in the tourism space in a post-pandemic world.
Electric vehicle sales are projected to demonstrate a notably strong upswing in the near term.
SLK recently put forward a bid for a Greater Sydney Bus contract, which covers roughly 22% of all public bus patronage in this region. If SLK manage to win this yet another contract, SLK’s market share would be expected to increase by 50%. Building upon this, the NSW government has aimed to electrify its 8,000 public buses by 2030, with operators’ operational records and delivery timelines playing a key role in the decision-making process for the state government.
SLK could potentially take advantage of this, especially as they placed the largest order for electric buses in 2021 in NSW. It is important to remember however, that as with any company, SLK is not without its risks. While general service volumes are expected to increase as lockdowns are lifted, they are also expected to remain below pre-pandemic levels. This is because some areas of the workforce are shifting to permanently adapt work-from-home and work-from-anywhere models. This is evidenced in London where Transport for London has initiated cost-cutting measures in the public bus space due to weak recovery in usage, post-lockdowns. However, as the cost of real-estate keeps rising domestically, there is an expectation that individuals will buy property and live further away from cities, thereby increasing the total fare revenue for SLK in this regard.
Acting as an ETF pick, IFRA provides investors with exposure to a diversified portfolio of global infrastructure companies. Infrastructure can often be considered an attractive asset class to invest into due to the long asset life, relatively inelastic demand services and CPI indexed revenue. One of the more central reasons we like global infrastructure exposure at the moment is due to the appeal driven by US President Joe Biden’s US$1.2tn bill. This bill will see US infrastructure supported across a breadth of sub-sectors. Infrastructure assets, particularly in developed countries can also often benefit from regulatory advantages that can enable a shielding of returns from the effects of inflation and interest rates.
Exchange-traded funds are diversified, liquid, cheap and transparent, says VanEck Australia’s deputy head of investments and capital markets, Jamie Hannah, making them a “highly efficient” vehicle for accessing income.
The fund aims to track the performance of its benchmark index (FTSE Developed Core Infrastructure 50/50 Hedged). With a passive management strategy, the fund currently holds roughly 30% in electric utilities, 20% in transportation, 15% in multi-utilities and 10% in oil, gas and consumable fuels. Whilst economic recovery in many developed countries has already begun, it seems as though there is still quite a bit of room to grow, evidenced from most of these economies still maintaining unemployment rates below the full employment targets.
Within IFRA key countries, vaccination rates are expected to hit 80% within the next 12 months, at which point we could see some reopening growth which may prove fundamentally beneficial. As people go back to work, and international borders reopen we should see more demand for utilities, airports and roads which can drive infrastructure growth during this period. Looking a bit further, as global recovery teeters out, and interest rate environments begin to rise again, IFRA could still be well-positioned. This is given by infrastructures typically monopolistic pricing power and inelastic demand of its assets. Hence, IFRA proves a potentially interesting longer-term steady-state option. Infrastructure is definitely an area to watch in the coming 12 months as the true results and speed of recovery become more apparent.
It is likely that over the coming 12 months, much of the market’s outcome will be determined by the magnitude and effectiveness of recovery, coupled with any changes to the macroeconomic climate. It could prove fruitful to consider how stocks on the ASX now will change over the next year as we come out of a historically unprecedented period for global markets.
BlueScope’s outcomes are quite dependent on Chinese iron and steel operations, which could potentially normalise following the conclusion of the winter games, although iron ore prices are expected to maintain somewhat of a lag in any kind of price rebound for some time thereafter, it is lucky then that BlueScope is somewhat hedged against this. SLK is a fascinating small-cap reopening option, especially as we will see the electric vehicles theme permeate towards public transport. Lastly, IFRA seems to be in a good spot to benefit from large infrastructure spending and is, to a degree, less exposed to a potential sudden reversal in post-pandemic recovery.
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