You’ve got to love an Aussie summer.
I spent last week in Melbourne packing the house up and getting it ready for the removalists. It was hot and dry. On Sunday and Monday, the temperatures were in the low to mid-30s.
On Tuesday I drove back to Wollongong. Up here, we’re catching the tail end of the weather system that has battered south-east Queensland and northern New South Wales. It’s wet, hot and incredibly humid.
And the cicadas are in full song. You even hear them at night. During the day they are loud. Very loud.
Yesterday afternoon I took my youngest daughter for a bushwalk. We’re five minutes from Mount Keira, which is a part of the escarpment that hems Wollongong to the coast.
The mountain has been shrouded in fog and mist for the past few days. There is that much moisture in the air.
We drove halfway up, parked, and started out on one of the tracks. The noise was deafening. The cicadas’ cries were ringing in our ears.
If you’ve grown up in Australia, you’ll know that noisy cicadas generally mean heat. At 6:00am this morning, they were going strong. Today is only meant to get to 27/28. But when you throw in 90% humidity, it becomes incredibly uncomfortable.
Well, I suppose we are approaching the summer solstice. That’s when the Earth’s tilt ensures the sun reaches its southernmost point for the year. It stays there for three days, then starts its slow move back.
These extremes also play havoc with the tides. We used to call them Christmas tides. It generally meant big surf, which was always fun as a kid.
So for you youngsters out there thinking the recent extreme weather on the east coast has more to do with climate change than the ebb and flow of nature, think again.
This is not new, despite what ‘they’ tell you.
Which brings me to another point that has important implications for markets and economies.
There’s a vaccine…
It’s about the vaccine.
A number of them have been rolled out in record time. We don’t know the long-term side effects, if any. But that doesn’t matter. Governments have indemnified the pharmaceutical companies if any show up. They just pay them billions and damn the consequences.
The vaccine is supposed to get us on a path back to ‘normal’. But wait, what’s this?
From today’s Australian:
‘Australians overseas who are vaccinated against COVID-19 cannot return home quarantine-free because some vaccines may not stop them from transmitting the disease to others, Acting Chief Medical Officer Paul Kelly has warned.
‘The AstraZeneca, Pfizer and Moderna vaccines, all of which the Morrison government has agreements for, had been effective in protecting the vaccinated person from getting any coronavirus symptoms but there were still question marks around transmission.
‘“The AstraZeneca vaccine has already looked at whether that vaccine protects against asymptomatic illness. At the moment from the interim analysis that was published in The Lancet journal last week, it demonstrates it probably doesn’t,” Professor Kelly said.
‘So it could be that people may have asymptomatic disease after having the vaccine and not know it. And that, as we know, can transmit to others.’
After taking the vaccine, you may still contract the virus and not know it, and then transmit it to others.
As far as the market is concerned, this is not really an issue at the moment.
With the torrent of government spending still flowing through the economy, and record low interest rates freeing up additional spending, all news is good news.
There’s more stimulus spending on its way in the US — good news.
There’s a vaccine — good news.
The vaccine might not be effective — good news, everyone knows that everyone knows the vaccine is good news.
And so on…
Now, rather than be a slave to the nightly news narrative, it’s far better to see what the market is saying about things.
When it comes to a vaccine and a potential return to some sort of normalcy, one stock I like to look at is Sydney Airport Holdings Pty Ltd [ASX:SYD]. It’s a play on travel volumes. Planes landing and taking off, and people moving through the airport and buying stuff.
As you can see in the chart below, the stock price surged in November on the first news of a successful vaccine trial.
But since then, the stock price has pulled back.
That’s not necessarily a bad thing. You often see a correction/consolidation after an initial surge. And from a charting perspective, the price action looks positive. Since bottoming in March, the price has made a series of ‘higher lows’, indicating that it’s starting to trend higher.
But it’s worth keeping an eye on to see which way things go from here.
As far as earnings forecasts go, analysts following the company expect a strong bounce back in FY21 (SYD runs on a December year-end).
Free cash flow (the best measure to assess performance) is expected to grow from $32 million in the year to December to $531 million in FY21. That’s still only around half of 2019’s record free cash flow year, but the market effectively pricing in a return to normal.
SYD trades on 33 times expected FY21 free cash flow, and nearly 25 times FY22 forecast free cash flow of $719 million.
As a monopoly asset, SYD should trade higher than the market average, but there are big question marks as to whether airline travel habits will return to normal for a long time.
I’ve flown to Melbourne twice since the borders opened in November. Each time, both airports were dead. Qantas cancelled my most recent flight and I had to get on another one. Even that flight wasn’t full.
I know it’s early days. Things will slowly return to normal. But flying habits may have structurally changed. And if you need a vaccine passport to fly internationally, well, that’s another impediment. Most people I talk to are not interested in taking a dubious vaccine when their risk is already miniscule.
Don’t take my word for it though. Keep an eye on the travel stocks. They will tell you what’s really happening.
Editor, The Rum Rebellion