It did not take long for big businesses to call on governments to ease Coronavirus restrictions. After two weeks of encouraging COVID-19 data, some industry leaders and commentators claim the Federal Government has dramatically over-reacted to the threat.

Even countries at the epicentre of the crisis – Italy, France and the United States – are talking about easing some restrictions. French President Emmanuel Macron announced his country will start gradually returning to normal life from May 11, if certain conditions are met.

Australia, sensibly, appears to have a more conservative approach to relaxing restrictions. Prime Minister Scott Morrison said this week that the country was “many weeks away” from a phase where some travel and gathering restrictions could start to ease. Nobody knows for sure when or how restrictions will be eased because any change is data dependent. The government has repeatedly emphasised the dangers of relaxing restrictions too early, highlighting Singapore and Japan as case studies on second-wave infections.

What is clear, however, is that COVID-19 is so far not as damaging in Australia as first expected. That’s encouraging for the economy and the share market.

Rather than speculate on when life will return to normal, investors should consider the likely order of restrictions easing. The Federal government has suggested that different parts of the economy – and geographies less affected by COVID-19 – will be put back to work first.

I hope State governments start by requiring a return to face-to-face-learning at schools, when it is safe to do so. Data worldwide has repeatedly shown children are less affected by COVID-19 and kids learning at school rather than at home frees up parents to go back to work.

The next step should be encouraging companies to return workers to offices and factories, again when it is safe and assuming social-distancing rules remain in place. The government’s priority for easing restrictions should be to get industry moving again, hopefully by late May.

Cafes, restaurants and non-essential retail could re-open in modified form. Pubs, clubs, gyms, cinemas and other mass gatherings can wait. So can domestic and international leisure travel, at least until there is enough data on the health effect of easing industry restrictions.

Yes, any timetable on how restrictions will be eased is speculation. But I’d rather invest in companies at the start of the queue to benefit from a relaxation of restrictions than those at the end. The longer it takes, the greater the damage to corporate earnings and balance sheets, increasing the risk of emergency capital raisings and insolvency.

On sectors, government action to get industry moving will boost road-traffic volumes, possibly sooner than the market expects. That’s good for toll-road operators such as Transurban Group (TCL) and Atlas Arteria (ALX), which explains why I am adding both to the ideas list. More on them soon.

As I wrote last week, Sydney Airport (SYD) and Auckland International Airport (AIA) also look interesting at current prices.

I’m sure in 3-5 years, we’ll look back at today’s price for Sydney Airport and Auckland International Airport as a bargain. But with travel restrictions likely to last for some time, I can’t see any rush to buy the airports. That could change quickly, depending on market movements.

Ideas so far

To recap, my earlier preference when COVID-19 began was to add high-quality technology companies that had been slaughtered in the sell off. Early gains in Xero, WiseTech, Altium and JB Hi-Fi (a tech-product retailer) from their March lows are encouraging.

I then added five high-quality industrial companies, most of which have defensive business models: Woolworths (WOW), Telstra Corporation (TLS), Australian Securities Exchange (ASX), APA Group (APA) and ANZ Banking Group (ANZ).

In late March, I nominated three key mining and energy stocks: BHP Group (BHP), Fortescue Metals Group (FMG) and Woodside Petroleum (WPL). I’m doing more work on the energy sector and expect to add some key names to this ideas list in coming weeks.

Last week, I added fast-food stocks Domino’s Pizza Enterprises (DMP) and Collins Food (CKF) to the list as a play on home-delivery trends and rising demand for cheaper food. Collins, owner of KFC stores in Australia and Europe, has rallied since that story.

I suggested in late March that readers should have put at least 50% of any available cash for equity investments to work in the market and to keep “averaging in” on down days in the share market. Ideally, that figure should be 75% by now.

My aim is to leave some cash aside to buy during inevitable sell offs in the next few weeks and participate in deeply discounted capital raisings in quality companies. It’s still too soon to go “all-in” but I wouldn’t have most of my cash on the sidelines for too long. The share market will have recovered, at least partially, well before a public-health and economic recovery.

Transport infrastructure

Transurban and Atlas Arteria appeal at current prices. Both were pummelled during the global equities crash as travel restrictions brought road traffic, particularly from light vehicles, to a fraction of previous peak volumes.

Traffic volumes on some US roads have fallen 70-80% due to COVID-19. Australian traffic volumes could be down 30-50% in April year-on-year, depending on the highway. It is obvious that our toll roads and suburban streets have far less of their usual traffic during off-peak hours, as millions of people work and study from home.

The other risk is that COVID-19 outbreaks delay work on major road-infrastructure projects or pressures build on road operators to defer or cancel contracted toll-road fee increases. If COVID-19 restrictions remain in place longer than the market expects, toll-road operators, which mostly have high debt, would have to raise equity capital to repair balance sheets, diluting their share price.

The market is well aware of these risks. Transurban has fallen from a 52-week high of $16.44 to $12.28. Atlas Arteria is down from a high of $8.54 to $5.56. Both stocks have bounced off their mid-March lows and have scope for further solid gains in the next 12-18 months.

Chart 1: Transurban

Source: ASX 

Chart 2: Atlas Arteria

Source: ASX

On April 1, Transurban withdrew its distribution guidance for second half FY20 and said it expects to pay that distribution in line with free cash. Importantly, Transurban said it can meet capital requirements and debt-financing obligations to the end of FY21 without further refinancing activity.

Atlas Arteria, owner of toll roads in France, Germany and the US, has assets at the epicentre of the COVID-19 crisis and less investment attraction than Transurban, in my view. I prefer Australian transport-infrastructure assets given our country’s relative outperformance in managing the health crisis and the capacity for our economy to recover faster. Atlas Arteria has postponed its H2 2019 distribution and withdrawn dividend guidance, as it uses distributions to repay debt. Some brokers believe there is a remote risk that Atlas Arteria will need to raise equity capital, presumably at a decent discount to the share price.

Macquarie Wealth Management has a 12-month target of $8.14 for Atlas Arteria. Its 12-month target for Transurban is $14.48.

Both companies look well placed to weather the COVID-19 storm and their sector should be among the first to benefit as industry restrictions are relaxed and traffic volumes rebound. Kids returning to school and workers to offices would put a lot of light-vehicle traffic back on toll roads.

China’s experience is instructive. Transurban notes that Chinese traffic volumes remain below normal but are improving as lockdown restrictions are removed and as industries re-commence operations.

Highway traffic has rebounded faster than public-transport volumes in China, suggesting that social distancing is encouraging more people to commute by car. It will be interesting to watch how this trend plays out and if COVID-19 turns more people off public transport and back to their cars and paying highway tolls.

It could be well into 2021 before highway traffic volumes return to normal. But the market has priced a more severe and longer traffic downturn into Transurban and Atlas Arteria. That’s an opportunity for long-term portfolio investors who understand the benefits of owning infrastructure assets, particularly in a low interest-rate environment.