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Best UK shares for trading a Covid vaccine-led reopening story in 2021
D’ya like dags? Or indeed goats. The market rally in November was led by the dogs of the markets: energy, financials and Value were among the best shares to buy. Here are a few big-name stocks to watch in December and into 2021 on a ‘back to normal’ trade.
- Vaccines to support a return to near-normal by year-end 2021
- Economic recovery will not be instantaneous but steady improvements are expected
- Earnings per share should increase as corporates benefit from pro-cyclical growth
- Inflation to rise as output gap closes and enormous savings glut is spent
Effective vaccines will be rolled out in 2021 in the developed world, supporting a return to normal economic and social activity by the year end. Whilst there are risks associated with the delivery of vaccination programmes globally, overall, it looks like countries will be able to support a ‘return to near-normal’ by the end of next year.
Return to normal ought to support European and UK equity markets with their strong weighting towards more cyclical stocks and sectors vs the US which has led the way with big tech and growth. A powerful value rotational trade was the dominant market trend in November 2020, leaving financials, energy and travel stocks among the top shares to buy, and while it will not move in a straight line upward, this pivot ought to continue through the earlier part of 2021 as markets adjust to economic and social activity returning to normal. December has begun very much like November was.
Britain has been hobbled by Brexit uncertainty for 4 years and UK equities have underperformed peers. Even allowing for the November recovery which was the best month for the FTSE 100 in 31 years, UK stocks have not had a good time of it in recent years. However, with Brexit risks likely to disappear and the UK in possession of the means to deliver a comprehensive vaccination programme, the outlook for the economy – and UK equities – may be about to improve. The FTSE 100 has an expected 2021 dividend yield of 4%, making it the most attractive among developed market stock indices. Is the dog of all dogs to finally ready to bark?
Two major caveats to this thesis – a Brexit deal and effective vaccination rollout are both essential, and not a slam dunk certainty.
GOAT: Get Out And Travel picks
IAG (LON: IAG) – Return of lucrative transatlantic routes will be big fillip for IAG shares. In the 11 months to December the stock was down by around 60%, making it the worst performer on the FTSE 100. Nevertheless, the stock rallied over 80% in the month of November as vaccine optimism drove the rotation trade. Whilst this may effectively have priced reopening in 2021, there could be further upside driven by on-the-ground improvements to travel. In addition to the roll-out of vaccines, efforts by airlines like BA and airports like Heathrow to find creative solutions to ending quarantine requirements for travellers such as digital health passes will progress and make it easier for travel to take place. Shares are not expected to get back to pre-pandemic levels next year – passenger travel levels are not seen returning to 2019 numbers for some years. But a steady reopening of the economy and pent-up demand among holidaymakers to get out and travel ought to support earnings recovery in 2021.
Cineworld (LON: CINE) – A GOAT favourite but huge debts are a factor. Shares have been very volatile, with the price collapsing when the company announced closure of UK and US screens due to pandemic and then surging on news of Pfizer’s vaccine in November. YTD, the stock was the worst performer on the FTSE 350 to the end of November. Cineworld was bloated before the pandemic – net debt is over $8bn thanks mainly to two large leveraged acquisitions in recent years. The fear is that there have been permanent behavioural shifts in consumers that will mean the market is forever smaller, however the stock is probably already reflective of these risks. It is hard to gauge right now what permanent damage is done to cinemas, but the advance of over-the-top streaming services, especially Netflix with its vast Hollywood budgets and ability to make feature films, has dealt another big blow.
Cineworld shares have recovered a further portion of the losses after the company secured a new debt facility of $450m and issued equity warrants representing over 11% of share capital. It also managed to get banks to waive debt covenants until June 2022 and further reduced costs. This new facility should act as a bridge to get to a point where it can reopen screens in the UK and US and get the cash flow moving in the right direction again. However, the company is working on the assumption that can reopen in May. Under this base case scenario, Cineworld has sufficient headroom for 2021 and beyond. But in the event of a further delay to cinema reopening, whilst it has sufficient liquidity ‘for a number of additional months’, it ‘may require lender support in order to deploy that liquidity’, management said today. Bums on seats by May is dependent entirely on a vaccine – if there is a stock trading on this vaccine roll-out it’s Cineworld. Warner Bros decision to stream all new releases as soon as they they hit the big screen is a blow and sent shares lower by 14% on Dec 4th.
Energy has been a laggard but the likes of Shell (LON: RDSA) and BP (LON:BP) should stand to benefit from stronger average crude pricing in 2021. Both fell by around 40% in the 11 months to Dec YTD. Whilst the International Energy Agency (IEA) has been right to sound cautious over the demand pickup in the early part of 2021, oil markets will be trading largely on sentiment. There are clear near-term risks from rising inventories – a lockdown in the US would lead to demand destruction in Q1. Tertiary lockdowns in Europe cannot be ruled out in Q1 and even Q2 should the virus reappear in strength. OPEC and allies will continue to hold the fort, albeit not as comfortably as in the past. Towards the end of the year, oil markets may also benefit from an expected supply crunch. The spectacular collapse in oil markets due to the pandemic led to a massive wave of capex cuts – according to Rystad about $100bn cut – which threaten to flip the market from glut to crunch as vaccines start to take effect and boost the demand side. Risks remain for old world energy players though as ESG investing takes on added importance.
Reflation picks: Banks
Lloyds (LON: LLOY), Natwest Group (LON: NWG) both were among the largest decliners on the FTSE 350 YTD through to the end of November, down in the region of 30-40%. Both have a lot exposure to the UK economy, especially the housing market and consumer spending. Two factors could support gains. First, the reflationary environment in 2021 as vaccines encourage a return to normal ought to see a steepening yield curve and support net interest margins. Secondly, clarity over Brexit should be a positive for the UK economy. Other factors, like the remarkable resilience of the housing market and relative strength in consumer spending, are also supportive.
Share prices of both have fallen this year as 2020 has really been a story of UK plc risks – negative rates, deficits, pandemic-related GDP destruction and of course Brexit. 2021 should see a more encouraging outlook for the UK economy and the removal of tail risks like no deal Brexit. Near-term, rising unemployment will be a problem but ultimately a ‘return to normal’ in2021 will support financials. A resumption of dividend payments in February when results are announced would be a big help, too. In many ways banks have been unfairly swept up in the markets’ pandemic crossfire as investors followed the playbook of the last war: financials are in much better shape this time and well provisioned to weather the storm. As of the end of November, Lloyds traded at a price to book ratio of 0.55, whilst Natwest was at about 0.47.
Meanwhile Barclays (LON: BARC) price to book was a measly 0.36. Some may doubt the sustainability of handsome trading revenues from its investment bank, but the outlook is still overall positive. Third quarter results smashed expectations, with pre-tax profits of £1.2bn double what was expected. Loan loss provisions were 40% below expectations, albeit higher than last year.
Cineworld shares collapse: who is next?
Cineworld shares collapsed on Monday after the company closed its UK and US theatres after the latest James Bond picture was delayed. Shares dived around 44% to trade at 22p.
Lumbered with over $8bn in debt and with a $1.6bn loss in the first half, things were looking dicey for Cineworld well before today’s update. Short interest in the stock was exceptionally high as hedge funds circled a vulnerable member of the herd.
Looking at Shorttracker.co.uk we can see the following stocks are the top targets by short sellers.
|Company||% short||Funds short|
|PREMIER OIL PLC||8.10%||2|
|TULLOW OIL PLC||7.90%||5|
|METRO BANK PLC||7.80%||5|
|SAINSBURY (J) PLC||6.50%||4|
|INTL CONSOLIDATED AIRLINE-DI||5.90%||7|
|BABCOCK INTL GROUP PLC||5.80%||4|
|WEIR GROUP PLC/THE||5.40%||5|
|BLUE PRISM GROUP PLC||4.70%||5|
|VODAFONE GROUP PLC||4.40%||4|
|DOMINO’S PIZZA GROUP PLC||4.00%||6|
|WOOD GROUP (JOHN) PLC||4.00%||6|
|MICRO FOCUS INTERNATIONAL||3.80%||3|
|N. Brown Group||3.80%||3|
|WM MORRISON SUPERMARKETS||3.70%||3|
|ASHMORE GROUP PLC||3.50%||4|
It’s not always the best indicator but the Altman Z-Score is always worth looking at. Here’s the lowest scoring stocks on the FTSE 350. (source: Reuters)
|FTSE 350 Index||.FTLC||—|
|Vodafone Group PLC||VOD.L||-0.43|
|London Stock Exchange Group PLC||LSE.L||0.03|
|IntegraFin Holdings plc||IHPI.L||0.08|
|TP ICAP PLC||TCAPI.L||0.16|
|Ninety One PLC||N91.L||0.23|
|Rolls-Royce Holdings PLC||RR.L||0.62|
|Premier Foods PLC||PFD.L||0.62|
|Aston Martin Lagonda Global Holdings PLC||AML.L||0.65|
|Intermediate Capital Group PLC||ICP.L||0.73|
|Airtel Africa PLC||AAF.L||0.77|
|Severn Trent PLC||SVT.L||0.77|
|United Utilities Group PLC||UU.L||0.85|
|Cineworld Group PLC||CINE.L||1.08|
|Pennon Group PLC||PNN.L||1.09|
|National Grid PLC||NG.L||1.11|
|Diversified Gas & Oil PLC||DGOC.L||1.15|
|Mitchells & Butlers PLC||MAB.L||1.18|
|Talktalk Telecom Group PLC||TALK.L||1.18|
|British Land Company PLC||BLND.L||1.21|
|BT Group PLC||BT.L||1.23|
|National Express Group PLC||NEX.L||1.24|
|Signature Aviation PLC||SIGSI.L||1.25|
Traders can make up their own minds about which companies may require additional capital raising using the Reuters equity analysis tool in the platform.
Unhealthy market fixations, Cineworld’s time to die?
There has been a lot of column inches written, and much ink spilled, over Donald Trump testing positive for the coronavirus. There were, I fear, a few too many quick to sound the alarm and say this would see stocks ‘tumble’, etc.
True, US stock markets fell on Friday, with the S&P 500 down 1%. But this was 25pts above the lows of the day and likely just as much about a tepid September jobs report from the US as anything else; the broad market finished the week up by 1.5% in the end. Hopes of stimulus persist and Nancy Pelosi said on Sunday that lawmakers are making progress.
Traders should still be on alert for updates on Trump’s status, but unless things go very bad it should just be a lot of noise. The President could be discharged from hospital today.
European markets rose in early trade but pared gains as PMIs crossed to show lacklustre recovery in the Eurozone. US stock futures indicated a bounce when Wall Street opens later. One market that has seemingly been brought back from the brink is the bond market, which looked to all intents and purposes like it had been completely killed by the Fed.
Treasury yields moved higher on hopes of stimulus with the US 10-year showing some vital signs at last and nudging up to 0.7%.
US labour market recovery slows
The US labour market is not in good health, with the economy creating 661k jobs in September vs the 800k expected. This was also a marked decline from the 1.371m created in August. The unemployment rate declined for a fifth straight month to 7.9%, but it remains at historically high levels.
The US economy has recovered about half the jobs lost at the peak of the pandemic. The problem remains the same as we have been saying for months now – the reopening rebound was the easy part. The hard slog lies ahead, and it could take years to fully recover all the lost jobs. The UK seems to be in a similar position.
Cineworld stock tumbles as chain shuts UK and US theatres
Time to die? Cineworld is closing all its cinemas in the UK and US amid a collapse in demand due to the pandemic. Shares plunged 50% on the news this morning. The delay to the next James Bond film was the straw that broke the camel’s back, but Cineworld was a little bloated before the pandemic struck.
Net debt of over $8bn – thanks mainly to two large leveraged acquisitions in recent years – and a market cap of $540m by the close on Friday left Cineworld in a difficult position to refinance if punters were not coming through the doors; without the Bond franchise to draw people in there was little option – closing its theatres at least gives it a chance to preserve cash and wait for things to improve. Refinancing by some sort of rights issue seems inevitable.
However, I fear there have been permanent behavioural shifts in consumers that will mean the market is forever smaller. It is hard to gauge right now what permanent damage is done to cinemas, but the closure of Cineworld, however temporary, is a plain indicator that it could be significant and lasting.
The advance of over-the-top streaming services, especially Netflix with its vast Hollywood budgets and ability to make feature films, has been a critical blow to the industry and Covid has vastly compounded the problem by keeping viewers away. In its interim results last month, the company warned that a worsening of the pandemic could leave it unable to survive; today’s announcement confirms that it is on the brink.
Demand uncertainty hits Tesla
Tesla shares fell 7% on Friday after the company failed to quell longer-term demand concerns despite delivering a record number of cars in the third quarter. The company delivered 139,300 vehicles, compared with expectations of 137,000 vehicles.
It looks to be a bit of an unusually bad reaction to very impressive numbers. As the Shanghai factory ramps production Tesla should be able to steadily increase volumes despite the pandemic, albeit Elon Musk’s target of 500k this year looks out of reach for now.
Monetary policy in focus this week
It’s going to be a busy week for central bank jawboning – the Fed’s Powell, Kaplan (the hawk), Harker, Williams, Kashkari, Barkin and Evans are all due on the wires in the coming days. Also watch for the FOMC minutes from the September meeting for more granular detail about how policymakers view the shift to average inflation targeting, and to what extent the consensus is strained.
The ECB latest meeting minutes are also due on Thursday and similarly there is a slew of speakers slated for the week, including Lagarde, Lane, Guindos and Mersch.
Meanwhile the Reserve Bank of Australia could cut rates to 0% when it meets this week. Futures markets have indicated odds of a rate cut at about 50%. However we could well see the RBA cut from 0.25% to 0.1%, or it could delay until November 3rd.
Deputy governor Guy Debelle recently outlined policy tools the RBA is considering to help it meet its twin mandates on employment and inflation, including foreign exchange intervention and negative interest rates.
Chart: Gold continues to slide down the channel – watch the 21-day SMA at the top and 100-day offering support underneath as potential pivots