Risk of more lockdowns and slow vaccine rollout to weigh on market confidence

The prospect of rolling Covid lockdowns for at least the rest of the year may result in some cautious outlook statements in the August reporting season.

Rough sleepers and homeless people are vaccinated at The Rev Bill Crews Foundation in Ashfield, in Sydney’s inner west. Picture: NCA NewsWire/Jeremy Piper

The prospect of rolling Covid lockdowns in Australia and developing nations for at least the rest of the year may result in some cautious outlook statements in the August reporting season.

UBS chief economist George Tharenou said that, based on NSW Premier Gladys Berejik­lian’s guidance that about 80 per cent of adults would need to be fully vaccinated for a “lockdown-free” economy, at the current trend in vaccination rates Australia could reach the “magic number” by the end of the year.

But under a bearish scenario of “hesitancy” seeing vaccinations slow to 100,000 a day, versus a recent high of 150,000, and a stricter requirement to vaccinate 80 per cent of the total population, “the threshold may not be reached until at least mid-2022”.

Notwithstanding the rollout of Covid vaccines and expectations of strong growth in earnings and dividends from the mining sector in particular, what will in many cases be strong earnings tied to economic reopening will in some cases be marred by a lack of confidence.

While NAB’s monthly business survey this week showed business confidence well above average at 10.7 points in June, it fell rapidly from a record high of 23.6 point in April.

Business confidence could well fall below the long-term average of 5.3 in July amid what is now set to be “at least” a five-week lockdown of Greater Sydney and a five-day lockdown of Victoria.

If the lockdowns are extended into August, business confidence will take a further hit.

That could see confidence fall well below average, even with business conditions supported by low interest rates, and consumer confidence potentially supported by reopening activity in other parts of Australia – provided they stay out of lockdown.

Then again, closed state borders in NSW and Victoria won’t help the recovery in other states and, while vaccination rates are rising, there’s doubt about whether Australia will be ready to reopen its international borders as planned in mid-2022.

Cyclicals that stand to benefit from economic reopening – rather than Covid themes such as work from home and online “retail therapy” – will have to address the elephant in the room, which is Covid uncertainty.

Woolworths and Coles rushed to limit toilet paper purchases as Victoria re-entered lockdown.

Even the banks may have to acknowledge some greater uncertainty about the property market from rolling lockdowns and closed borders, but they have a lot of moving parts, can write bad loan loss provisions and have sold a lot of assets that will help dividends and eventually allow share buybacks.

At the same time, the unexpected slump in bond yields in recent months (despite the highest US inflation in decades), while boosting the valuation of infrastructure companies such as Sydney Airport and Spark Infrastructure (now the subject of takeover battles), won’t be helping the margin outlook for banks and insurers, particularly giving the distinct flattening of the yield curve.

Australia’s 10-year bond yield hit a five-month low of 1.28 per cent on Thursday, down from a peak of 1.928 per cent in February, while the US Treasury curve was at its flattest since late January.

Cyclical companies should also address the potential impact of rapidly escalating input costs and the asset price implications of central bank tapering, although that seems to be offset for now by the remarkable fall in bond yields.

Going the other way is the uncertainty faced by companies that are benefiting from lockdowns.

ARB is a good case in point. Its shares surged 7.2 per cent on Thursday after the motor vehicle accessories retailer reported a preliminary pre-tax profit about 15 per cent above consensus.

Arguably it should have rallied more, but Macquarie Equities said there was “some risk that sales activity in key export markets decreases as travel restrictions are unwound” and that “could be a leading indicator for the Australian business when travel normalises”.

Analysts have their lists of stocks they are worried about.

Morgan Stanley is cautious on retail REITs in general, but has underweight ratings on Vicinity Centres and GPT due to their Victorian exposure.

“We are concerned that the extended lockdowns implemented in that state may have altered consumer shopping habits, or at least mean the recovery period will take longer than other states,” Morgan Stanley analysts Lauren Berry and Simon Chan said.

“In our survey, a higher proportion of Victorians say they intend to shop online ‘significantly more’, or ‘some more’, in a post-Covid world compared to other states; and this was across all categories,” they said.

“The NSW mobility restrictions pose further downside risks to all retail landlords.”

On a positive note, they suggested fears around suburban ­office space were “overdone”, with 28 per cent of respondents saying their employers have taken up more space since returning to work from Covid, versus 25 per cent who have taken less, suggesting “office pessimists may be too bearish”.

And people were still keen to buy residential property, so “unless operating/financing conditions change materially, we think the residential backdrop is positive for Stockland and Mirvac”.

Originally published as Risk of more lockdowns and slow vaccine rollout to weigh on market confidence