Both the Australian and US share markets have been a bit nervous in recent weeks about the Delta variant of COVID-19.
After first devastating India, this strain of the coronavirus has since impacted the entire globe. Even Australia, with its strict borders, could not keep it out — and now half the population is under lockdown.
This health crisis has put a nasty spanner in the post-pandemic economic recovery narrative.
Unfortunately, the market is "on tenterhooks" because of Australia's low vaccination rate, according to Montgomery Investment Management chief investment officer Roger Montgomery.
"The Delta variant is materially more infectious than the original COVID-19 strain and is now the dominant strain in Australia," he said on the company blog.
"And, importantly, with half of winter remaining, the lack of a broadly vaccinated population presents the virus with an opportunity to mutate, potentially undermining the efficacy of current vaccines."
So what to do now for share investors?
Back to lockdown-friendly ASX shares
This means that more lockdowns seem to be inevitable for the rest of the year. So Montgomery reckons it's time to flee back to the stocks that led the way in April last year.
"Lockdowns must necessarily shift spending from services and experiences (that were available in open cities) to online spending on goods," he said.
"Online shopping spiked during the last 12 to 18 months, and as consumers returned to in-store shopping, online eased. This could rapidly reverse with only essential stores permitted to open."
Montgomery added that retailers that sell homewares and appliances could do especially well.
"Harvey Norman Holdings Limited (ASX: HVN), JB Hi-Fi Limited (ASX: JBH), Nick Scali Limited (ASX: NCK), Adairs Ltd (ASX: ADH) were huge beneficiaries during last year's lockdowns. And amid the recent easing of restrictions they continued to win."
He did warn, though, that durable goods like large appliances have long lives. So the rate of sales growth might not be quite as spectacular as last year.
ASX shares related to hospitals, raw materials, energy and building materials all did well in the "re-opening" trade, but would now stumble.
"It should not be surprising, in such circumstances, to see at least some capital reallocated from profitable reopeners to lockdown winners," said Montgomery.
"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."
Even vaccinated populations are struggling
Montgomery pointed out that even countries with high rates of COVID vaccination still struggled with Delta.
"In just the last month, the Netherlands, with more than three quarters of the population vaccinated, suffered the devastating effects of reopening too quickly," he said.
"Infections rose more than 500% in just one week. Shortly after the Dutch caretaker prime minister, Mark Rutte, announced that face masks would no longer be required, the Dutch government started backtracking on restrictions."
A glass-half full view of the Delta strain slowing the share market is that inflation worries could subside.
This would result in more dovish central banks, keeping interest rates at near historic lows.
"The emergence of the highly infectious Delta variant makes the future far less certain," said Montgomery.
"My take is that higher quality and structural growth businesses should again be on your radar."
