Home / Opinion / Positioning your portfolio for the Delta Variant

The emergence of Covid-19 and the toll it took on the global economy forced investors to pivot their portfolios in ways that they believed were likely to benefit from the pandemic. Roger Montgomery, chief investment officer of Montgomery Investment Management, recently published an article that discusses how his team will look to position portfolios in response to the Delta variant, the highly infectious new strain of Covid-19.

He says “the emergence of the highly infectious delta variant makes the future far less certain. My take is that higher quality and structural growth businesses should again be on your radar.”

The Montgomery team suggests investors reposition portfolios to focus on companies that are growing structurally, or those that stand to recover from earlier lockdowns and restrictions. These stocks have done well having ridden the recovery wave and have benefited from optimism surrounding vaccine developments and distribution.

Montgomery highlights the travel industry as a good example. He says “the pent-up demand for travel has hitherto provided enthusiasm for tourism companies with strong or repaired balance sheets.”

Overseas companies

He picks out cruise ship company, Regent Seven Seas (owned by Norwegian Cruise Line Holdings [NYSE: NCLH]), saying the company ” broke all previous opening day records with all berths booked in less than three hours, despite prices ranging from $93,000 to a quarter of a million dollars. This echoes the experience of Carnival Corporation (NYSE: CCL) last year ,when more than 90 per cent of cancelled travellers chose a US$200 on-board voucher for a future cruise in preference to a refund.”

Airports is another sector that has bounced back on high demand for travel amongst employees and clients. Montgomery says that “Twenty per cent week-on-week growth has been reported over the last six weeks, reflecting the preference for face-to-face meetings over Zoom. According to one analyst, travel by Amazon (NASDAQ: AMZN) staff has fully recovered to pre-COVID-19 levels. Consequently, airlines are said to be hiring like crazy, and unable to recruit enough staff.”

Australian companies

Australia has a low level of vaccinated people which means lockdowns and border closures are the norm. This blurs the picture as the return to normality is less clear. Add-in the new delta variant which is a lot more infectious, and the picture is even fuzzier. The lack of vaccinated people presents us with some huge risks:

• The opportunity for the virus to mutate which can undermine the current vaccine.
• More lockdowns and more restrictions.

This kills travel plans for Australians who are less enthusiastic for forward booking travel. However, this isn’t the case overseas. Montgomery says, “indicators from Similarweb and Google trends remained strong into May, both trended lower into June, and are likely to have fallen further in July following the lockdowns of Australia’s two most populous states.”

Focus on these companies

Online stores – With lockdowns and restrictions becoming the norm, focus on online spending on goods. “Online shopping spiked during the last 12-18 months, and as consumers returned to in-store shopping, online eased. This could rapidly reverse with only essential stores permitted to open,” says Montgomery. Pay particular attention to home renovations and home improvement. Harvey Norman (ASX: HVN), JB Hi-Fi (ASX: JBH), Nick Scali (ASX: NCK) and Adairs (ASX: ADH) were huge beneficiaries during last year’s lockdowns.

Hospitals – There has been a big bounce in elective surgeries due to the build-up in demand. Montgomery says: “Further lockdowns and border closures would also necessarily slow the pace of economic recovery and, consequently, demand for raw materials and energy.”

Elsewhere, the boom for building materials companies, such as Adelaide Brighton (ASX: ABC), Boral (ASX: BLD) and CSR (ASX: CSR), due to low interest rates, declining unemployment and consequent strong demand for housing/home improvement, could also be derailed.

Montgomery finishes by saying: “It should not be surprising, in such circumstances, to see at least some capital reallocated from profitable reopeners to lockdown winners. The key question for investors to now consider, however, is whether a reopening is undermined by a new strain of the virus that evades vaccines.”

And when it comes to the markets, higher quality and structural growth stocks may yet again be on investors’ radars.