Travel sector flying high on vaccines optimism

Previously unloved travel stocks are on a tear as investors hunt for value amid surging bond yields and expectations of stronger economic growth.

Previously unloved travel stocks are on a tear as investors hunt for value amid surging bond yields and expectations of stronger economic growth

Previously unloved travel stocks are on a tear as investors hunt for value amid surging bond yields and expectations of stronger economic growth amid unprecedented fiscal and monetary policy stimulus and as COVID-19 cases and deaths plunge in the US and vaccines are rolled out ­globally.

Corporate Travel shares were approaching their highest price in 18 months after surging 10 per cent on Tuesday. Sydney Airport rose 6.5 per cent after lagging other travel stocks in recent months, Qantas climbed 4.4 per cent to a two-month high of $5.02, Flight Centre soared 6.2 per cent and Webjet gained 2.8 per cent.

The economic reopening theme rubbed off on shopping mall owners with Unibail-­Rodamco-Westfield up 7.3 per cent, Vicinity Centres up 5.2 per cent and Dexus up 4.8 per cent.

Banks were back in favour, with Bank of Queensland up 13 per cent after its capital raising and agreement to buy ME Bank, while Westpac surged 1.9 per cent and CBA gained 1.7 per cent.

Australia’s 10-year bond yield jumped as much as five basis points to a fresh 11-month high of 1.653 per cent early on Tuesday after similar moves in US and ­European benchmark bond yields following the release of stronger than expected economic data in both markets last week.

The 10-year bond yield closed down four basis points at 1.56 per cent, amid expectations of aggressive action by the Reserve Bank to prevent a disorderly rise in yields via its quantitative easing program.

However, the surge in bond yields weighed on high PE growth stocks, as investors questioned their valuations. Afterpay fell 7.2 per cent, Seek dived 7.1 per cent despite strong earnings and guidance, and Domino’s Pizza and Wesfarmers lost a hefty 8.9 per and 3.2 per cent respectively, ex-dividend.

For now, the money is flowing to value stocks as bond yields remain very low relative to the earnings yields available in the sharemarket, particularly among “COVID losers” such as travel stocks, according to Bell Potter’s head of institutional sales and trading, Richard Coppleson.

“What we are seeing across the globe is a switch or rotation out of the tech stocks and work-from- home winners — home, car, renovation stocks — into the ‘reopening stocks’ or the ‘vaccine trade’,” Mr Coppleson said.

“We have seen the peak [of the coronavirus pandemic] across the globe and with the vaccines now being administered, talk about international travel is being whispered by medical experts — not in 2021, but sometime in 2022.”

“So [the travel sector] is strongly on the bid and the shopping centres are also doing well.”

The broader market also got a boost from news of further policy support for the economy, with the government confirming it would increase its JobSeeker dole payment by $50 a fortnight.

There were also encouraging gains in US index futures after surging US bond yields sparked a worrisome 2.5 per cent drop in the Nasdaq on Monday, while also pushing the S&P 500 index down for a fifth day — marking its first such fall in the past 12 months.

Results this week from value stocks like Scentre, Sydney Airport, Viva Energy, Flight Centre and Qantas are not likely to shoot the lights out, after the pandemic crimped travel-related demand last year. But a cautious restart of earnings guidance may be enough to spark a further rally for some.

Cyclical stocks including “vaccine winners” and “housing winners”, along with value stocks and small companies, were among three trades recommended by UBS at the start of the year.

“If bond yields rise to unsustainable levels and growth stocks sell off, then this thematic will become attractive again,” said UBS quantitative analyst Pieter Stoltz.

“For now, we think the defensive growth thematic is likely to underperform.”

In his view, steadily rising real yields should reflect better growth prospects for equities, but if they rise suddenly — pushed higher by investor inflows from “rapid repositioning” — the impact of a higher “discount rate” would pull equities lower.

“Furthermore, if central banks are forced to tighten policy, or even taper quantitative easing, too rapidly because of a booming economy, then we could see a negative equity market reaction despite strong economic growth,” Mr Stoltz said.

He said policymakers might signal a plan to incrementally stop or reduce the rate of easing, calming market concerns about overheating and avoiding the need to act too rapidly later on.

His list of stocks that should benefit from vaccinations, and which UBS analysts rate as buys, include Qantas, Super Retail, Aristocrat, G8 Education, Crown Resorts, Transurban, Webjet, Corporate Travel, Southern Cross Media, Seven West Media and HT&A.

Similarly, AMP Capital’s head of investment strategy and chief economist, Shane Oliver, warned that shares were “at risk of a short-term correction” and “rising bond yields could be the trigger”.

The S&P/ASX 200 hit a 12-month high of 6917.3 points last week, having risen 58 per cent since March. That followed a 39 per cent fall from a record high of 7197.2 to a 6½-year low of 4402.5 over a few weeks in February and March last year that marked the fastest ever bear market.

“Bond yields could still go a lot higher in the short term before they settle down again and this could cause the long overdue correction in equities,” Dr Oliver said. “But the cyclical backdrop of still low underlying inflation and spare capacity in jobs markets, combined with economic and profit recovery and low interest rates, is a positive one for growth assets, particularly shares.”