Positioning your portfolio for a global economic rebound in 2021 seems premature with the United States and Europe battling new waves of COVID-19. But buying shares during market sell offs is the key to supercharged returns when the virus subsides.

The US S&P 500 Index has fallen about 8% from its September high. I expect the index to test support around 3,230 points as COVID-19 cases escalate and election uncertainty peaks.

If that happens, the S&P would near a technical correction and weigh on the Australian share market.

The good news: market weakness over the new few weeks will present a better entry point to buy shares, in anticipation of a first-quarter rally in 2021. By then, the market will look to improving COVID-19 data and the discovery and distribution of an effective vaccine.

Amid the gloom, four data points stand out:

1. The spot copper price is near a one-year high and its best level since mid-2018. Copper prices often reflect the global economy’s health, although “Dr Copper” (a moniker for the metal’s supposed PhD in economics!) has been wrong before.
2. China in October had its highest year-on-year change in monthly electricity demand, said the International Energy Agency. Critics say the Chinese government has overstated its economy’s V-shaped recovery during the pandemic, but rising electricity use is a good sign. Experienced China watchers study the country’s electricity use for clues on the economy’s true strength.
3. The Baltic Exchange Dry Index hit its highest point this year in early October. The Index is a closely watched measure of shipping costs for raw materials and thus international trade.
4. The OECD Leading Indicator for September 2020 showed the US business cycle progressing to “expansion” status. I wrote earlier this month in this column that the Composite Leading for the US in September was almost back to its February 2020 level.

Of course, these and other economic indicators could turn lower as second or third waves of COVID-19 escalate in the US, Europe, South America, India and Africa. The copper price and especially the Baltic index are well down from their monthly high as COVID-19 jitters grow.

Still, the data shows that the global recovery has solid foundations and is underway. Granted, the recovery is off a low base and much can go wrong if COVID-19 is not contained. But I still believe that talk of a prolonged recession – globally and in Australia – is overstated.

The Reserve Bank on Tuesday said it believes Australia’s recession is technically over, though few investors seemed to believe it, judging by the market’s fall.

If I’m right, the combination of rising COVID-19 cases overseas and the US presidential election will drive international share markets lower in the next few days/weeks. Global economic data will weaken and doomsayers will be in full voice. That will be time to buy.

Throughout the pandemic, I’ve identified several appealing sectors and stocks for readers to consider buying. They include large tech stocks, the big-four banks and diversified miners, such as BHP.

This week I add BlueScope Steel to the list as a play on an improving global economy. In coming weeks, I’ll include other undervalued Australian manufacturing stocks that are leveraged to a global recovery next year.

BlueScope Steel

BlueScope halved to $8.14 during the first-quarter share market sell off.  COVID-19 uncertainty and fears of a global depression were a terrible backdrop for manufacturing. BlueScope recovered to $14.30 in early October and spiked to $16 after an excellent earnings upgrade this month (albeit against vastly lowered market expectations).

However, gains were short-lived.  BlueScope has eased to $15.01 during the market fall. From a charting perspective, I expect BlueScope to test support at $14.30 in coming weeks as global economic data weakens.

BlueScope, undervalued now, would be even more appealing closer to $14.

Chart 1: BlueScope Steel

Source: ASX

BlueScope this month said it expected underlying earnings before interest and tax (EBIT) of around $340 million in the first half of FY21 – a 30% rise on the second half of FY20. That was ahead of the consensus analyst forecast for the company’s earnings.

BlueScope is benefiting from improving steel demand in most of its markets and higher benchmark steel spreads. At the peak of the share market crash in March, few investors thought steel demand would improve during a pandemic and a savage global recession. Management said the guidance upgrade was due to strength in steel alterations and additives, demand for detached housing, growth in e-commerce and logistics, and a recovery in US car manufacturing. Rising steel demand is a good sign for a global economy slowly finding its feet.

BlueScope’s guidance upgrade coincided with World Steel Association data on Friday that showed a 2.19% increase in crude steel production in September, compared to a year ago.

After improving each month since March, world steel production plateaued in September (for the Rest of the World index, excluding China). It’s too soon to know if that is the start of weaker steel production as COVID-19 cases climb, or a temporary slowdown. I favour the latter.

In its earnings upgrade, BlueScope warned of the damage that second and third waves of COVID-19 overseas could do to steel demand and the global economy. However, higher steel prices in October suggest the steel recovery is still unfolding, albeit at slower pace. There was much to like about BlueScope’s upgrade. The company reported improved steel demand across all its operating regions and divisions.

The Australian Steel Products division, maker of building and construction materials such as Colourbond, is expected to deliver a slightly better result in the second half of FY20, driven by better domestic construction activity and higher East Asian spot steel prices.

BlueScope’s fully owned North Star business in the US, a key producer of hot rolled coil in that market, is benefiting from rising US auto production, resilient non-residential construction and stabilising US steel spreads (which bottomed in early September). The company’s Building Products Asia & North America division expects a better performance this half. BlueScope says the outlook for its ASEAN and Indian markets has “improved significantly”, while the North American and Chinese operations should deliver a similar performance on a year ago, assuming COVID-19 does not further disrupt supply chains.

BlueScope’s Buildings North America business, which targets low-rise, non-residential construction markets, is performing better than expected. And the New Zealand and Pacific Islands operation is improving compared to the second half of FY20.

Taken together, the update shows a broad recovery for BlueScope – and a management team doing an excellent job in a volatile, uncertain market.

BlueScope will have several tailwinds in 2021 as the global economy strengthens. They include higher spending on infrastructure, rising construction and improving US auto production. Firmer steel-price spreads – a key market concern – will boost BlueScope’s margins and profits.

On Macquarie’s numbers BlueScope trades on an Enterprise Value/EBIT multiple of 8.1 times in FY21 and 5.9 times in FY22 (at $15.92 a share), against a 10-year average of 9.8 times. The stock looks under-priced against historical valuation averages.

Macquarie’s 12-month target of $19.05 for BlueScope implies a total shareholder return (including dividends) of more than 20%.

Prospective investors will need patience and at least a three-year view. Lingering share-price volatility for BlueScope and other manufacturers is likely as COVID-19 cases overseas climb and pandemic uncertainty persists.

Amid this gloom is a strong company with an excellent market position, in an improving global economy in 2021. The market is yet to fully price in BlueScope’s upside.

Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 27 October 2020.

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