Covid-19 vaccine hopes inject life back into share prices

Last week’s revelation that a coronavirus vaccine could be on its way gave stock markets their best week since April.

Iced blue soda with colorful syringes

London gained 6.9%, Wall Street put on 6.5% while the Europe-wide Stoxx 600 index rose by 5.3% in just five trading days as investors raised their hopes that global trade would soon return to a form of normality.

Some £48 billion was poured into London stocks alone as the mood shifted from defensive to positive investment.

Among the biggest beneficiaries were leisure and travel firms such as the parent group of British Airways, IAG. The drinks sector also enjoyed a tonic with many of the major players seeing their shares bounce to their highest levels since the pandemic struck.

Diageo and Pernod Ricard gained 10% and 8% respectively, pushing them both to post pandemic highs. But both continue to trade well below their 12-months highs.

Drinks shares suffered much less severely than many other consumer sectors in the bloodbath of spring 2020, notably because of their perceived defensive qualities. The theory is that as people continue to enjoy a drink during times of crises, so the companies’ profits will continue to flow, albeit at reduced levels.

When a market turns upward, however, investors try to spot high-flyers to make up some of their losses, so the gains in the solid, but comparatively unexciting grouping into which drinks companies largely fall are more pedestrian.

As the biggest players, especially in the devastated travel retail sector, Diageo and Pernod had been hit hard by the global lockdown. Analysts do not expect travel to return to pre-pandemic levels until 2022 at the earliest. And despite both groups benefiting from the more muted downturn in the crucial North American market as consumers switched in larger numbers than predicted to drinking at home, their profits are unlikely to return to 2019 levels for some while.

A key indicator will come later this month when Pernod Ricard holds its virtual annual meeting. Recently the French group released better-than-expected figures for the July to September quarter with organic sales only 6% below the level achieved in the same period last year.

Investors will scrutinise chairman and CEO Alexandre Ricard’s comments for guidance on how the company is faring during the second-wave European lockdowns and especially the level of dividend to be paid for the January to June half year. Maintaining last year’s payout would be a sign of confidence.

Like Diageo, Pernod Ricard has suspended its share buyback programme until the pattern of global trade becomes clearer so any hint of a resumption would be seen as positive.

Across Paris, Bernard Arnault has cause to celebrate because LVMH’s shares have climbed to within a whisker of their 12-month high.

That means he has rejoined the five-member centi-billionaires’ club, those whose personal wealth is reckoned by Forbes to top $100 billion. He has jumped back into second place with $137 billion, lagging only Amazon’s Jeff Besos, whose fortune rose by $13 billion last week alone! The other members are Bill Gates, Mark Zuckerberg and Elon Musk.

LVMH shareholders (especially Arnault) are also benefiting from the £135 million saving he made through renegotiating the deal to buy US jeweller Tiffany. He argued that the original $16.2 billion agreed purchase price had been overtaken by the US group’s poor performance since coronavirus struck. The LVMH empire itself, however, continues to produce impressive results at the extreme end of the luxury goods market.

Last week, Davide Campari Milano saw its shares teeter just below their annual high despite some shareholders, customers and suppliers worrying about data security. The Italian company admitted that it’s servers had been hacked and was being held to ransom for $15 million to protect its data. The outcome is as yet unknown.

Remy Cointreau also performed well, the shares settling at €150, almost double their 12-month low when China shutdown in the early days of 2020 Remy is by far the market leader in cognac but Chinese economy has been recovering robustly and demand for luxury end spirits is robust.

Shares of both Brown Forman and Constellation Brands had suffered less than their European competitors’ this year because the American consumer adapted with alacrity to the shutdown of bars and restaurants.

Home consumption soared by about 30%, and although that did not fully compensate for the on-premise closures it went some way to cushion the blow to profitability despite a consequent erosion of margins and some packaging supply problems.

For instance, Constellation’s Corona hard seltzer suffered from a shortage of cans in June and July, so strong was consumer demand for the new line, while Brown Forman’s overall sales were 3% ahead of last year’s level in the third quarter of 2020
Their shares are both nearing their 12-month highs.

However, the worldwide upsurge in sentiment last week failed to boost Australia’s beleaguered Treasury Wine Estates. Despite the consensus among analysts that fears of the effects of China imposing punitive tariffs on Australian wines are overdone, investors remained wary and the shares remain at half the $A13 they achieved last year.

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