JUNO Summer 2021

The last 12 months will go down in the history books for many reasons, but none more so than the COVID-19 pandemic – and the immense impact it’s had on the way we live, work, play, and do business.

For years to come, economists will study and debate the recession the pandemic created, and the impressive V-shaped equity market recovery – proving once again the stock market is always focused on businesses’ future earnings potential or forced to look for returns in the face of central bank actions.

New trends always emerge from crises, and COVID-19 is no exception.

We’ve seen advances in digital speed and transformation; the rise of mobile, remote workforces; a leap in streaming and gaming in a lockdown world, and a jolt to e-commerce across all manner of online businesses.

Here are three hot investing themes to consider.

The legalisation of online sports betting

COVID-19 saw many professional sporting competitions and events cancelled or postponed.

We saw the shortening of the US Major League Baseball (MLB) and National Basketball Association (NBA) seasons, and delays to major events such as March Madness, the Olympics, and European Football Championships.

This disruption was a huge risk to the industry.

Still, with the world crying out for entertainment during lockdown, as sports slowly resumed, consumers looked offshore to bet on games taking place around the world – leading to an explosion in sports betting and online gaming.

The global sports betting market has benefited massively from advances in mobile and digital technology. A report from Zio Market Research, predicts sports betting will reach nearly USD$155 billion globally by 2024.

Share market investors should consider:

• Leading names such as DraftKings, Penn National Gaming, Rush Street and FanDuel.
• Traditional bricks and mortar casinos like MGM, Las Vegas Sands and Wynn Casino, which are also betting on future growth online as COVID-19 continues to have an impact on their businesses.
• Other ways for keen investors to gain exposure is via the popular gaming ETF, BETZ that has a combination holding of the entire sector.

Leading fund manager and founder of ARK Invest, Cathie Wood, predicts massive growth in the e-sports, fantasy sports, and online sports betting industries, with up to 31 per cent compound growth a year.

ARK analyst Nicholas Grous says: “Augmenting fantasy sports and e-sports, legalised online sports betting is giving companies – and the leagues themselves – an opportunity to offer exciting interactive experiences and generate new sources of revenues.”

Sports betting is relatively common in New Zealand and Australia, but overseas markets are rather more complicated – particularly in the US, where each state manages its own rules.

Sports teams across the NFL and NBA have campaigned to legalise sports betting, because of the huge revenue it could generate.

The US market is currently in its infancy. Analysts predict that the American sports betting industry could be worth anywhere between US$15 – US$40 billion in the next few years, as more states legalise sports betting.

New Jersey is currently the largest online sports betting market in the US. There, industry revenue for January to October grew 35 per cent year-on-year between 2019 and 2020, and broke the US$50 million threshold for the first time in October 2020, up 43 per cent from October 2019.

The next year will present exciting opportunities for growth in the US online sports betting industry.

Legislation will likely open new markets and we’re hearing chatter around potential regulation in New York, Texas and (hopefully) California in the next few years.

Vaccine and Reopening

We hope the year ahead will see a number of heavily impacted business sectors recovering, due to the planned widespread roll-out of the COVID-19 vaccine.

Vaccine distribution continues to accelerate in major economies of US and UK, and the current trend of acceleration in daily doses is consistent with full immunisation of the over-65 population by the end of March, and herd immunity by the end of summer.

Should the pharmaceutical industry manage to get COVID-19 under control during 2021, it will be an absolute triumph for the sector.

Public companies involved in the effort are set to be handsomely rewarded, and there are a number of potential investment opportunities within the healthcare sector.

Some obvious potential winners will be:

• Vaccine makers like Pfizer (PFE) or Moderna (MRNA), and Johnson & Johnson.
• And companies developing therapeutic drugs like Regeneron (REGN) will benefit too, along with pharmacy networks such as CVS and Walmart.

Distributing the vaccine will require an enormous logistics effort, with firms such as Amazon, Fedex and UPS set to become critical to global rollouts.

Savvy investors will be considering these sectors which play a critical role at various stages of the distribution effort:

• Airlines.
• Storage facilities.
• Tracking technology companies. Data collection software firms such as Palantir, Microsoft, Apple and Google will all benefit by supporting the healthcare systems with tracking and logistics on a speed and scale never seen before.

Consumer spending has already rebounded significantly from its pandemic lows, but if vaccine rollout speeds up and we start to achieve herd immunity, it could pay to look at these sectors:

• Casinos.
• Airlines.
• Cruise liners.
• Dining and entertainment companies. Many have incurred debt to survive, but also cost bases have been improved if pent-up demand emerges.

SPACs

‘SPAC’ is a new financial term you’ve likely heard mentioned on financial websites and media recently. It’s the new speculative craze taking the US markets by storm.

SPAC stands for Special Purpose Acquisition Company and can be defined as a ‘blank check’ shell corporation designed to take companies public without going through the traditional IPO rigorous due-diligence process.

SPACs that have announced acquisition targets are up 125 per cent over the past 12 months as a group.

There are numerous steps to a SPAC transaction:

The pre-target stage – where a group of experienced investors have raised capital but don’t know what business they will target for a merger agreement.

The merger agreement stage – where the investment firm has found a firm which agrees to merge and them to list on the share market in a mutually beneficial agreement, versus staying private or as a traditional initial public offering (IPO) process, usually known as listing on the stock exchange.

The final stage is the ‘merger completed’ date – when the ticker symbol on the exchange changes and life as public company begins for the business, with the expert backing of the SPAC team usually joining the board.

In 2013, just USD$1 billion was raised via SPAC IPOs, but fast-forward to 2020 and we saw USD$83 billion raised via hundreds of different listed SPAC companies.

The opportunities are huge, and retail traders have completely embraced it with almost daily big moves in EV sector stocks to sports betting, financial technology (fintech) and software as a service (SaaS).

There’s plenty of negative press about the rise of SPAC investing, saying it’s speculative, but there are some incredibly successful investors involved with some SPACs, such as Chamath Palihapitiya, Bill Foley, and Bill Ackman.

Retail investors have embraced these more than other investors. They’re betting on the investment managers’ skill at finding a solid business to merge with that has a big growth opportunity already in place.

This process gives retail investors ground-floor access to IPOs that they otherwise wouldn’t have.

DraftKings (mentioned previously) listed via a SPAC investment company, with shares since growing more than 400 per cent. This built on their previous success as a private firm by giving them access to public markets to grow.

There are more than 500 SPACs in process now and many exciting businesses being brought to the public markets – particularly within the fintech space.

Certainly, I see it as a theme likely to stay through 2021 and beyond. Note that there are likely to be some bad outcomes, as there always are with IPOs.

Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction, or investment strategy is suitable for any specific person.