Beware being caught in the junk rally – there isn’t a vaccine for that

Warning: Beware the vaccine-related stock market rally that has turned the previously unloved stocks into the new market darlings. A pig with lipstick is still a pig.

The vaccine rotation from growth stocks to the more clapped out value stocks has the hallmarks of a classic junk rally, according to State Street Global Advisors’ head of portfolio management in Australia Bruce Apted.

“We have seen a significant jump in some of the most beaten-up stocks within the market,” he says.

The vaccine rotation that might make might leave investors lightheaded and their wallets lighter
The vaccine rotation that might make might leave investors lightheaded and their wallets lighterCredit:Peter Braig

Sure there are a number of very good companies whose financials and share prices were devastated by COVID and deserve a re-rating on the prospect of their sales returning when the pandemic is under control. But there are some more fundamentally poor quality shares that are being swept up by enthusiastic investors attempting to play the COVID trade.


The vaccine trade has recently demonstrated such momentum that it risks creating a bubble containing overvalued stocks – and one that is likely unstainable.

That’s not to say the rotation from COVID winners to COVID losers won’t continue while the news of vaccines and treatments dominate the headlines.

“The recent outperformance of the lower quality, more distressed securities with higher volatility is atypical. Historically we find these bouts of outperformance are often short-lived and hence we caution against over-extrapolating this recent development,” Apted says.

State Street is one of the world’s leading fund managers with more than $US3 trillion in assets under management.

It is true that the equity markets around the world including Australia have been more extreme than they have been traditionally.

Those considered to be winners from COVID have rocketed ahead and pandemic victim stocks have been decimated. Energy, real estate investment trusts (REITS) and transport have outperformed during the recent vaccine rotation, while some of the earlier best performing sectors such as information technology, healthcare, gold and consumer discretionary have underperformed the most.

Apted notes that iron ore and some of the metals and miners have managed to buck this trend, outperforming both during the positive vaccine developments and through the year.

Since the recent bout of positive news on the likelihood of a vaccine being approved over the coming months the yawning gap between the performance of the two categories has narrowed significantly.

The extreme outperformance of the COVID winners has, within a matter of weeks, pivoted to extreme outperformance by the COVID losers.

But Apted argues that if you look under the hood at many of the stocks or sectors that have outperformed over the past month, the mechanics are concerning. Based on the recent pivot around share price movements, the only typical characteristic of stock price movement was that cheaper companies outperformed.

Beyond that the market has left the reservation when it comes to conventional investment decisions.

‘If you look under the hood at many of the stocks or sectors that have outperformed over the past month, the mechanics are concerning.’

Bruce Apted, State Street Global Advisors

Firstly, companies that outperformed year to date have significantly underperformed in the vaccine trade.

The riskier companies, as measured by volatility (or Beta as it’s referred to in finance), have performed better as have those with more debt.

Additionally the companies with the worst year to date earnings revisions have outperformed and the share prices of companies with the lowest levels of profitability have surpassed those reporting higher profits.

The recent rise in banks stocks around the world has provided the largest struts supporting the rally in COVID losers.

Locally, Commonwealth Bank is only 10 per cent shy of its pre-COVID high in February after being down 40 per cent during the peak of the pandemic. Westpac has climbed near 27 per cent since early October. (Incidentally, State Street says it didn’t hold the four major banks in October, which negatively impacted its performance.)

ANZ and NAB have also experienced a surge in popularity – in large part because the Australian banks are a proxy for the economy.

There is an expectation that bank earnings will remain under pressure next year and to the extent profits improve it will be the result of lower credit provisions.

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