Reopening basket stocks have underperformed the S&P 500 by a wide margin: strategist

Anastasia Amoroso, iCapital Network’s chief investment strategist, discusses which sectors are poised to benefit from the reopening trade, and the disconnect between the stock and bond markets.

Video transcript

MYLES UDLAND: We've certainly seen a change in character within the markets over the last handful of weeks. Big tech doing a lot of the leading. Our next guest noting that reopening stocks down almost 20% from their mid-March highs with the fundamentals there still outperforming what we're seeing across the S&P 500 at large. Joining us now to discuss is Anastasia Amoroso, managing director and chief investment strategist at iCapital Network. Anastasia, great to see you this morning.

So let's talk a little bit about how you are seeing the leisure and hospitality recovery. We get a strong quarter out of Marriott this morning. Is that in your view a sign of where this industry is at? And why do you think investors haven't maybe favored these stocks of late quite as much as they did maybe six or nine months ago?

ANASTASIA AMOROSO: Yeah, good morning, Myles. And we've definitely seen a very strong recovery. And I think the Marriott earnings report certainly solidifies that.

And I mean, overall, if you look at the hospitality industry, the revenues this quarter are supposed to grow 108%. So this is why I was saying this is over and above the S&P 500 where revenue growth is expected to come in at 23%.

Now, it's interesting because if you look at the performance of the reopening basket, a lot of hotels and airlines and cruise lines, they have underperformed the S&P by the very wide margin of about 32% since the middle of March. I think this is due to a couple of reasons.

First of all, there's this peak everything and peak rebound and maybe this is peak leisure and peak vacation week as we speak. So that's one thing that's dragged the stocks down. But the other one is, of course, the Delta variant and the concerns of what that may do to the recovery.

So that's what's playing out the markets. That's what's being reflected in the valuations. But what I say is that I think this is a pause. This is a reset and what is still going to be a multi-year recovery in leisure and hospitality industry.

You saw this in the Marriott results by the way. You saw that the domestic leisure industry is very strong. International has a lot of room to catch up and so does the business travel.

But that's exactly why I like some of these reopening stocks right now after the pullback because I think there's a lot of scope for the international leisure industry to come back. And we'll probably talk about vaccination rates, which is why the Delta concern is I think manageable in the United States. But internationally, 28% of the world is vaccinated, at least received one dose. But as that 28% goes higher, let's say to where it's 50% by the end of the year as we expect, that's going to be a big boost to some of these leisure and hospitality names from the International side of the business.

MYLES UDLAND: Well, how exactly should you play this? Is it through recovery trades like Uber and Lyft? Do you do you buy them into their earnings? Is it through a rental car company like an Avis? Or are you just concentrated on the hotels?

ANASTASIA AMOROSO: Well, there's a couple of ways to play it. I'll give you one in the public space and one in the private space. And in the public space, I think you'll look at perhaps a reopening basket. Maybe we don't want to bet on a single name.

But I think hotel category, airlines, maybe even cruise lines, a lot of them are going to be beneficiaries of this international reopening. So I think you look at a basket that's related to travel, mobility, transportation, and maybe a little of those transportation stocks in there as well.

So that's what I would do in the public markets. I think what's really interesting in the private markets is the private real estate. And we'll probably talk about inflation.

But inflation in our view is not decelerating just yet and certainly not going to fall to pre-pandemic levels below 2%. I think it's going to stay elevated 2 and 1/2 plus for the next 12 to 18 months. So in the private markets, what I want to do is make sure that I invest in assets that give me market rent growth over and above inflation.

So first of all, when I look at the real estate sector broadly, and you were talking about malls, they are expected to have market rent growth of roughly 2%. But if you look to the right of that chart, the hotels are expected to have market rent growth of about 8% or more on average for the next four years. So I think that is a real opportunity set there for private real estate investors.

MYLES UDLAND: Now, speaking of vaccinations, you note that certainly we have one side of the story here in the US. But globally, we're looking at less than 30% of the global population having received any sort of COVID vaccine at this point. Are you looking at reopening a further reopening trade as more of a '22 or a '23 story even? How are we to think about it given the 2021 tourism season? I mean, it's sad to say. It's August 3. It's kind of over, right?

ANASTASIA AMOROSO: Well, I hope it's not a 2023 story. I think it is at least a 2021 and 2022 recovery story international. So if you look at some of the key emerging market countries like Brazil and Russia and China and India, so first of all, they have the level of natural immunity already embedded, given the caseload that they have seen. But then on top of that globally, we're expecting that over 11 billion vaccines will be made available through the rest of the year.

A lot of them will go towards those emerging market countries. So I suspect that by the end of the year, we'll get close to 50% vaccination rates. And then you add on top of that natural immunity. And you're looking to 65% to 80% overall immunity rates for some of these emerging market countries. So I think in lockstep with the increase in vaccinations, you will likely see an increase in obviously pent up demand that's going to be unleashed. And that will result in actual travel activity.

And Myles, you bring up a good point that we are peak vacation, peak leisure season as we speak. But first of all, people have not traveled for the last 15 months. So I think some of that still carries into the fall. But the other big catalyst I'm looking for is the return of business travel. And I think a lot of conferences, a lot of business travel is starting to be penciled in for the fall.

- Well, Anastasia, I'm in the no-leisure category. I haven't gone anywhere in about 15 years. But I--

ANASTASIA AMOROSO: You're overdue.

- Yeah, seriously, join the long line of folks telling me that. But I do want to ask you more broadly about this move in the 10 year we have seen, hovering around a little under 1.2%. Are you concerned that that is saying something about the broader stock market's next move?

ANASTASIA AMOROSO: Yeah, I think there's clearly a disconnect between where the stock market is and where the 10 year is. What the 10 years really signaling-- well, actually two things. First of all is that inflation expectations are really not falling down that much. If you look at the inflation breakevens, they're not really falling. They started to rise a little bit.

But the reason why we've seen the nominal 10 year yield fall is because of the fall in real expectations, in real rates, rather, which translate to growth expectations. So what the 10 year is telling you is that it's not sure how sustainable this recovery is, whether the Delta variant is going to derail it or not. And we're not really seeing some of those read-throughs on the broader macro markets level.

So I do think that this is something to acknowledge. And this is something to keep in mind. It's been a stellar year for US stocks.

And you've had investor positions reflect that as well, whether it's retail investors going into mutual funds and ETFs over $500 billion going into US equities, whether it's hedge funds that are pretty net long. The stock market. So I do think there we have to acknowledge the disconnect and acknowledge the positioning and say, if the right catalyst comes along, I would not be surprised to see a 5% or 10% pullback.

Maybe it's the next four weeks of ramping up cases of the Delta variant. Maybe it's something else. But this is why our overall view of the equity market is pretty subdued, probably 3% to 5% between now and the end of the year. And I do think we'll have a few pullbacks along the way.

MYLES UDLAND: All right, we'll leave it there and be on the lookout for those. Anastasia Amoroso Managing Director and Chief Investment Strategist at iCapital Network. Anastasia, great to have you on this morning. Thanks for jumping on.

ANASTASIA AMOROSO: Thank you both.