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Stock of the week: Transurban (TCL)

With the vaccine on the horizon, I was thinking about an industry that should indirectly benefit from an increase in worldwide economic activity. For example, we can safely assume that airline equities will rally on the back of confirmation of a working vaccine. However, ancillary services to airlines should follow through with the airline rally, for example, companies who make the food for the airlines or airports.
I want to think even deeper. What company would benefit from the ancillary services starting up? My logic is that the deeper we go, the more likely the stock will not be followed. Therefore come earnings season, the stock does well, and the market realizes, "oh of course!"
I believe it's best you look in the pockets of the market that you're personally interested in for these types of things. For example, I have been a massive fan of FarFetch as it merges the luxury consumer, which is mostly unaffected by the pandemic, with a similar business model to that of Amazon. FarFetch benefited from the Coronavirus, as people wanted to stay home. Therefore, the checklists for the stock of the week is
I am a massive fan of cars. I believe once a vaccine is released, there will be a boost in travel, and consumers who initially took public transport will start looking into purchasing a vehicle themselves due to heightened Coronavirus fears. I thought maybe there would be an increase in tyre sales - Investments in Goodyear? Too obvious and quite competitive. What's similar to a brokerage service, in which there is indifference to what type of customer they serve?
Toll roads.
TCL has rebounded nicely over the past year - However there may still be some value left due to future catalyst

Transurban's Business

Transurban operates CityLink, a massive Toll road network in Melbourne, Australia.
Transurban's business is relatively simple. They operate 17 toll road networks across Sydney, the United States, and Canada. 

Transurban - Catalysts:

The primary catalyst for Transurban is the recovery in travel once the Coronavirus subsides, and a vaccine is distributed all around the world. However, further tailwinds include the individuals who purchase vehicles due to Coronavirus concerns lingering long after it has subsided. 
Transurban also operates in a freely regulated market. Having a monopoly on crucial routes may see an increase in prices for their Toll roads. 
Transurban is currently trading at around 17 times earnings, which is around average for all the ASX stocks. 

Transurban - Risks:

The work from home trend may see fewer individuals make trips back to the office as consistently as they did pre-Coronavirus. Considering that the bulk of traffic comes from commuters going to work and back, this is a prominent risk for the toll road operator. 

Transurban - Conclusion:

A stock that is not closely followed like Apple's and Microsoft's of the world is likely to benefit from the Coronavirus worldwide economy. I believe the company is slightly undervalued if we take into account more a higher than expected demand for in-vehicle travel.

Trans-Tasman bubble a dream?

There have been talks for a Trans-Tasman bubble since the Coronavirus lockdowns in March. However, different approaches from New Zealand and Australia have made this reality more a far fetched dream.

Trans-Tasman bubble would greatly help both economies

Although both countries would benefit from the trans-Tasman bubble, New Zealand would arguably benefit greater due to 5.8% of GDP being attributable to Tourism. Over 180,000 individuals are employed due to tourism and make up about 7.5% of the workforce in New Zealand.

However, as much as a trans-Tasman bubble is encouraged, the difference in approaches has made it challenging to implement. With New Zealand digging their heels and imposing one of the strictest lockdowns in the world, while Australia gave their citizens relative freedom, only imposing social distancing guidelines. The contrasting methods have become evident – with Australia still making records in daily Coronavirus cases, while New Zealand consistently records single-digit case numbers. Victoria, Australia, reported 428 new Coronavirus cases on Friday, making it the state's largest daily increase since the pandemic.

This is on the back of the Prime Ministers' Scott Morison and Jacinda ADern opening up travel between the two countries. Scott Morison stated that "she [Jacinda Adern] raised the very issue [the bubble] with me, and we're progressing those discussions." However, he also stated that it is "going to be a little be moderated for what's happening in Victoria," insinuating a possible exclusion for citizens that live in Victoria. Melbourne, a major city in Victoria, recently hit 5000 Coronavirus cases as the city re-enters a second lockdown.

Trans-Tasman may move the needle in the markets

The AUD/NZD depreciated to parity in the middle of March as risk currencies dived – with the NZD showing some strength due to New Zealand's efficient suppression of the Coronavirus. However, the Australia dollar has since rebounded, trading at the 1.067 level. There may be an argument for the Australian dollar is slightly overvalued compared to the New Zealand dollar as New Zealand's economy has been restarting without any relative setbacks. However, as demand for commodities such as oil and iron rises across the world of which Australia is a major exporter, demand for the Australian dollar may increase, strengthening relative to the NZD.

AUS200 in Blue, NZX 50 in Red

However, the significant indices for Australia and New Zealand may show outperformance, rewarding New Zealand in their Coronavirus suppression. Since their March lows, the NZX 50 has outperformed the Australian 200 Index by 4%. If New Zealand continues to outperform with regards to the Coronavirus relative to Australia, we may see a good opportunity to shorten the ASX and go long the NZX.

If both countries took the same approach, I believe there would have been a trans-Tasman bubble sooner. Australian Tourism Industry Council Executive Director Simon Westway stated that "Australia needs to get back on its feet before Trans-Tasman bubble," and that Australia needs to open its domestic borders between states before opening up to New Zealand. Jacinda Adern took a stab at Australia's Coronavirus response, stating on video that "If Australia wants a whole country trans-Tasman bubble, we'll be waiting."

Melbourne, Australia re-enters a six-week lock down

Melbourne, a major city in Victoria, Australia, has forced residents to re enter a six-week lockdown. This is after the major city reported 191 new cases of the novel Coronavirus, with double-digit case growth in the past couple of days.

Melbourne's cases have reached "unacceptable" levels, prompting lockdown

Daniel Andrews, Premier for Victoria, stated that the new restrictions were due to the “unacceptably” high number of cases. Furthermore, he also stated that “it is simply impossible, with case rates at these levels to have enough contract tracing staff to have enough physical resources to suppress and contain the virus without taking significant steps” Furthermore, Chief Health Officer Brett Sutton stated that there was a “unanimous view” on the increase in restrictions in Melbourne. Victoria has also imposed to close off the NSW-Victoria border, with over 1,000 soldiers and police officers making their way to reinforce the border.

It is stated that a partial reason to why there has been a resurgence of cases in the state of Victoria and Melbourne in particular, is due to their opting of contracting security firms to regulate the quarantine. In comparison, this is opposed to enlisting the police force like many states in Australia and countries around the world. There have allegedly been security lapses with security guards sleeping with guests hotel guests who were staying due to a mandatory quarantine after arrival into the country.

Melbourne's second lockdown may be detrimental to Australia's recovery

Melbourne and its second lockdown comes back to bite critics who saw New Zealand’s lockdown overly strict in comparison to Australia, touting that Australia has been achieving similar results with fewer restrictions on their citizens. ACT party leader, David Seymour in April that Australians are being “treated like adults” by their Government and are achieving “better results.” Furthermore, he stated that “Australia appears to have its cake and eating it too, as it achieves better COVID-19 health outcomes than New Zealand with fewer restrictions on economic activity.”

Coronavirus Cases in Australia and New Zealand. Australia in red on the right axis, New Zealand in blue on the left axis.

However, as time has shown, New Zealand’s stricter approach has paid better dividends even with the higher initial economic cost. IBISWorld has stated that “the overall recovery of the Australian economy is expected to be significantly hindered by the second lockdown.” The state of Victoria contributed 24% of Australia’s GDP in 2019. The ASX and AUD are down 0.89% and 0.14% on the lockdown news, respectively.

ASX and AUD down in the past two days

We can see that the Coronavirus continues to grapple the world economically and politically. Brazilian President Jair Bolsonaro saw the Coronavirus as the “little flu” and frowned upon social distancing measures, stating, “we’ll all die one day.” He has now tested positive for the Coronavirus. He would be the second head of Government to test positive for the novel Coronavirus, with Prime Minister Boris Johnson having contracted Coronavirus earlier this year. Furthermore, with no formal Coronavirus plan, President Donald Trump administration grappled with re-opening the US economy amongst an election in September. Jacdina Adern has faced major criticism over lapses in security regarding mandatory quarantine and increases in taxes amongst significant government borrowings.

A vaccine for the Coronavirus would be required to provide stability in the economy, as countries with relatively successful Coronavirus plans are still struggling with the effects and aftermath of the virus.

Invest in the macro-environment, or the business?

The AUS 200 and the NZX 50 are down 12.62% and 3.16% year to date. This is in comparison to the NASDAQ, which is currently up 10.08% for the year. A stark contrast is considering that Australia and New Zealand have had a better Coronavirus response than the United States.

AUS 200 In Blue, NZX 50 in Red, NASDAQ in Orange

New Zealand has been touted as having one of the best initial reactions to the Coronavirus. However, critics in the early stages of the loosening of lockdown compared New Zealand to Australia as having similar results but with fewer restrictions. But as citizens started experiencing freedom, it became evident which country had the upper hand.

Coronavirus impacts even the strictest of countries

When asked if he shared the same view of Qantas CEO Alan Joyce on low overseas travel for at least 12 months, Australian Prime Minister Scott Morison stated that it was "not unreasonable for Alan Joyce to form the view he has." The Australian government hinting that they will not reopen borders until the middle of 2021. This is on the back of Australia, posting the most significant one day rise in Coronavirus cases in two months. Australia has recently experienced a surge in Coronavirus cases as people resume their daily lives.

However, New Zealand has not had a perfect ride either. The government has been getting criticism for releasing quarantine patients without checking them for Coronavirus.

With both countries' shortfalls, they both have performed relatively well in the crisis, sacrificing the Economy for their citizens' health. Coronavirus fatality rates for Australia and New Zealand have been meager at 1.38% and 1.88%

If we compare this to the United States, the fatality rate is 5.1% and over 2.47 Million Coronavirus cases. With the White House having no clear plan with the Coronavirus and a President game theorizing his way to a successful election in a couple of months, this has put pressure on states to reopen. This is on the back of daily cases surging.

Company or Country?

However, the NASDAQ is outperforming both the ASX 200 and the NZX 50 despite these conditions. This begs the question, should we be investing in the macro picture, or should we be investing in companies? This is a tough call, as companies such as Facebook and Google have a non-cyclical business with a fortress-like balance sheet, while companies in A2 Milk and After pay in Australia have better macroeconomic conditions. There may be value in preparing for America's second wave and looking at equities and investment down under. The divergence may become evident in the possibility that America goes into lockdown again.

This also may be an opportunity to enter a long position in the New Zealand and the Australian dollar on higher demand for the currencies as investment rush into the NZ and Australian markets.

A Look at the Australian Economy

Australia Consumer Confidence has slid down to a 5-year low, dropping down to 91.9 from the previous month of 95.5. Officially called the Westpac-Melbourne Institute Index of Consumer Sentiment, it fell 3.8%, and in its March report Westpac cited the coronavirus and the effect that it has had on the financial markets as the cause of this 5-year low. It is also the second lowest level that the Index has been, since the recession of 2008 when it managed to hit 79 points. The report also stated that while consumers were rightfully worried about short term economic impacts, they were not as concerned about the longer-term economic prospects, evidence of the notion that the coronavirus epidemic would be “large but temporary”.

This low confidence has also been reflected in the Australian dollar and stocks, as the AUD dropped 1.03% from the previous trading day, down to a low of 0.6492 against the greenback. It’s no surprise that investors are continuing to avoid high risk currencies such as the AUD in this volatile market, and instead place their funds into safe havens instead.

The ASX, or Australian Securities Exchange, has also been on a nosedive since the 20th of February, dropping 11.5%, from above 7,000 points to 5,700, reversing all gains made in the past 2 years.

This low confidence has also been reflected amongst the Australian public in such events as the now infamous toilet paper brawls, viral videos of women fighting over toilet paper in Australian supermarkets. The mass stockpiling of toilet paper has in fact become so bad that Woolworths, Australia’s largest supermarket chain, announced that they would be rationing toilet paper, and limiting the amount that people could buy down to 2. Another supermarket chain, Coles, has limited toilet paper purchase down to one per person.

This certainly seems to be an overreaction given that Australia’s coronavirus crisis has been relatively contained so far compared to other countries, with only 137. But the country appears to be preparing for the worst, as the first two cases of community transmission have now been confirmed within the country, and doctors are now bracing themselves for a proper outbreak.

Both cases of transmission were in the state of New South Wales. The first case was from a woman who had contracted it from her brother who had come from Iran. However the second case was the concerning one, as it came from a 53 year old health worker who had not been in contact with anyone infected or travelled to any countries with heavy infections.

Australia has also now placed a ban on travellers from Italy, in addition to its existing bans for Iran, South Korea, and China. For Australian citizens or permanent residents arriving from those countries, they will have to place themselves in self-isolation for 14 days. This move comes as the situation in Italy has become drastically more dire, as the entire country is now in quarantine.

It is now undoubtable that the coronavirus will cause an economic recession. And Australia’s economy will suffer a heavy blow, due to its trade connections with China. Even after a 25 basis point rate cut by the Reserve Bank of Australia to a record low of 0.5% and acknowledgement that it would ease monetary policy further if needed, Australia looks to be in for a rough time ahead.

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