The stock market likes certainty and that is what we have seen lately. The US election is now over and markets have now been moving strongly to the upside. The opening of domestic borders and many days of zero COVID cases has also provided optimism to share investors. In this article we discuss some of the sectors which will benefit from an increase in confidence in the economy and the share market.
Banks have been performing well lately. These are cyclical stocks that usually perform well when the economy is stronger. Data has been showing that the economy is recovering faster than expected. We have seen renewed confidence in the housing markets with auction clearance rates increasing. Home buyers are looking to get into the market as banks have seen increased loan applications. Some of the bank stocks which have been doing well of late are CBA (CBA:ASX) and Macquarie (MQG: ASX). However, the big 4 banks have a number of issues which means that the sustainability of this run can be questionable.
During COVID-19, share prices in the consumer discretionary sector plummeted as the uncertainty of the economy drove investors out this sector. However we are now seeing a rotation back in as COVID cases have been decreasing and border restrictions have lifted. Some of the stocks in the consumer discretionary sector which have been performing well are travel and entertainment. These are the sectors that Fairmont Equities has been bullish on since April.
Queensland borders were recently lifted and travel stocks have continued to rally from the news. Stocks such as Webjet (WEB:ASX) and QANTAS (QAN:ASX) are seeing investors flocking to these stocks as the economy looks to recover quickly.
With restrictions easing, entertainment stocks are seeing a revived interest from investors. Stocks such as Ardent Leisure (ALG:ASX) who own the Dreamworld theme park and Aristocrat (ALL:ASX) the gambling machine manufacturer, have seen their share prices recover from the lows of March 2020 as investors see a more positive sentiment to the economy. Consumers will be more likely to spend money on leisure if they have positive view of the economy.
When the economy starts to get stronger again, so does the demand for raw materials. These prices will increase as building and construction picks up. We saw resource stocks falling sharply during March this year as lockdown measures were implemented and the future of the economy was uncertain. Now that we have been strong economic data, projects look to start up again and this has increased the demand for resources. Some resource companies which have seen share price appreciation lately is BHP (BHP:ASX) and Fortescue Metals (FMG:ASX)
Similarly to materials, when the economy looks to rebound, then the industrial sector also benefits from this as building and construction recommences.
Energy stocks have also surged on the back of COVID-19 vaccine news. A successful vaccine could get the economy back to pre-COVID levels. This means that demand for energy will increase as transportation and manufacturing move back to normal levels. Some energy stocks doing well include Santos (STO:ASX) and Woodside Petroleum (WPL:ASX).
Lauren Hua is a private client adviser at Fairmont Equities.
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