5 key themes, bellwether stocks for February

When the French rugby team took on the All Blacks in the 1999 world cup semi-final at Twickenham, all eyes were already on a trans-Tasman clash the following Sunday. These certitudes only intensified at half-time, with the erratic French, clearly intimidated by the fearless and powerful running of Jonah Lomu, trailing 36-22. The second-half is written in rugby folklore, arguably the greatest comeback in sporting history, setting up the French against the mighty Wallabies for the final.

Comebacks of this nature are rare in sport and also in financial markets. In many ways, 2020 was the year of the comeback in equities, a breathtaking sell off in Q1 followed by a breathtaking rally. Now that asset prices have approximately recovered their pre-COVID levels, they face a key test in this interim reporting season, one that will determine the winners and losers over much of the next six months.

In this note, we reveal where we see winners emerging this reporting season, detailing the sectors and stocks we believe are primed to benefit.

Key themes and associated bellwether stocks

In summary we see a few key positive themes starting to emerge in 2021 that will drive reporting season outcomes in particular:

1. Mining: Iron Ore and broader commodities higher for longer
2. Property: Domestic property and construction
3. Recovery: Broad global and domestic economic recovery
4. Retail: Substitution of other forms of consumer spending, especially travel & tourism, with retail
5. Cloud: Cloud software and its impact on common business practices

The following schematic identifies key bellwether stocks associated with each theme, and companies we are expecting to report earnings above consensus over the next fortnight.

What next? Twin the unloved with an emerging theme

This isn’t the only input in our investment portfolio.

Valuation is of increasing importance as the recovery comes through, and is ignored at your peril. We have seen the full force of brutal reversing markets in recent weeks of hedge funds that completely ignore valuation.

We suspect that a continued unwinding of shorts, a hangover from January’s returns, will permeate markets over the next few weeks. In our view the greatest upside will come from stocks with the tailwinds from one of identified themes, particularly if they are confirmed by solid outlook and commentary from one of our bellwethers, and solid valuation support, demonstrating a sufficient amount of neglect to warrant significant share price support.

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