Airlines could take ‘at least 3 years’ to fully recover from COVID-19: Portfolio Manager

Stocks are rising today as investors eye the distribution in the U.S. of the first COVID-19 vaccine. Western Asset Portfolio Manager Bonnie Wongtrakool joins Yahoo Finance Live to discuss.

Video Transcript

BRIAN SOZZI: I want to back up and see how this all plays out here and not just those hackings, of course cyber security names, as I said, have been one of the out performers. But where are the other opportunities there in the market right now? Joining us to discuss that is our next guest, Bonnie Wongtrakool here, Western Asset Portfolio Manager joins us now on the show. And Bonnie, appreciate you taking the time to chat. I mean, when we look at this, it's interesting because we've been discussing for weeks now this rotation away from some of the growth names. There are other opportunities you're looking at here, including in the retail space. So talk to me about what has your eye as we shape up for 2021.

BONNIE WONGTRAKOOL: Yeah, so we've been thinking about how this pandemic would evolve for quite some time, since the beginning of the year. And we actually had a group of people dedicated to tracking the scientific developments around the virus. They were actually reading the scientific journals and the vaccine trial results as they were coming out. So we've evolved our positioning as we've gotten more clarity around the virus. Retail, in particular, is one of those sectors where we were actually very well-positioned coming into the pandemic.

So our retail analyst had seen this e-commerce trend building already and seen the stresses on the sectors, so we were underweight that sector as a whole, but they were overweight the larger omnichannel retailers that have benefited from the pandemic as well as some of the niche retailers that were active in things like sporting goods, toys, beauties, arts and crafts, pets and all those things have benefited as well. And I think going forward, after the vaccines have been distributed, the retail analysts still believe that these trends are going to hold. And we really like our positioning within that sector.

ANJALEE KHEMLANI: Bonnie, one of the other sectors you've also been looking at are airlines, something that you were underweight going into the pandemic. We've had a number of guests on who say there is no case for the airlines largely because they don't think that even post-vaccine travel will return to pre-pandemic levels, at least in the medium term. What do you argue? What's the counterargument there? What is your case for investing at the levels airlines are trading at right now?

BONNIE WONGTRAKOOL: Sure, well our airline analyst would agree that there will be a longer road to recovery, and it could take at least three years to get back to pre-COVID levels. Although, we will see probably a bump in the second half of next year when the vaccines have kicked into effect. But from a bondholder perspective, since Western Asset is a bond specialist, we did something pretty early in the pandemic that made sense for us because of the structure and the pricing.

And what that was, was to take positions in short-dated airline bonds in airline carriers that we thought were better managed and had stronger balance sheets. Our airline analyst, Suzanne Trepp, went through and looked at the cash front of these companies and really stress tested them to see whether this would make sense. And that was a position that we felt very confident about early.

And then as the year went on and the airlines continued to raise cash, we continued to participate selectively in issues, again, that made sense from an issuer and from a structure standpoint. So although there are doubts about what the airlines will look like over the medium term, we think longer-term, it does make sense from bondholder perspective in the positions that we've chosen. And we also think that the airline industry will emerge a little bit leaner and a little bit stronger, which, from a bottom up perspective, is actually quite positive.

BRIAN SOZZI: And Bonnie, just to return to your points there on the retail front, it's interesting to see, I guess, some of the bets playing out here when we think about commercial real estate, mall operators, other things like that. We got the update from JBG Smith earlier, back in November, looking at the drop that they've seen in rent payments-- only about 1% on the residential and office side, but about a 35% jump in rent uncollected on the retail side. To talking about what that thesis looks like, is it just a quick kind of return to normal when things open up? Because, obviously, if you're betting on the e-commerce side, I imagine the drop in brick and mortar might still be there when we get out of all this.

BONNIE WONGTRAKOOL: I think there in the commercial real estate space, what you're looking at is very collateral-specific. And that's what our team does, they look really at the property. And it depends more about the property and the market. So for the positioning there, we're looking for higher-quality properties in markets where there is resilience and where we have seen foot traffic come back. It's still below, obviously, the pre-COVID levels, but we think the cash flows there are more attractive than in some of the lesser-quality markets where we do expect there to be further deterioration in-line with our retail analysts on the corporate side-- it's their belief that this e-commerce trend is here to stay.

ANJALEE KHEMLANI: And to the larger debate that's been playing out on the market and growth versus value, I mean, what are you looking at in terms of allocations? On the one hand, we've heard over and over that the value play is where investors should be positioning themselves right now in anticipation of the economy reopening three months, six months down the line. And yet, we've seen what we saw last week with some of these tech names, where there is huge money that's poured into that front. So how are you looking at this debate here? And what do you think the allocation should break down as?

BONNIE WONGTRAKOOL: Well, the way that we've been positioned previous to the vaccines coming out is that we had a heavier overweight to the higher-quality investment grade issuers, some of which were trading and really depressed levels earlier in the spring. And those have really tightened in. The spreads on those bonds have really tightened in. And so as that's happened, we have gone into the more COVID-sensitive sectors over time.

And where we see opportunities right now are really within that structured credit space-- so the mortgage-backed securities, both on the residential and the commercial side but also in emerging market debt, where we have seen a very strong response in certain countries, both on the fiscal and monetary side, which we think will be very supportive for those countries as well as, obviously, the vaccines, which will get to them in a later stage than the developed markets but should benefit them.

So we think that spreads there are actually very attractive as well, where you know, they're still trading 50 to 75 basis points wide of their investment grade counterparts. So those are really two areas that we're looking to increase our exposure to and, perhaps, trim some of the names in the more fully-valued investment grade issuers that we track.

BRIAN SOZZI: You know, when you look into those emerging market themes here, I guess, there are larger questions there considering the fact that we focused in on the US, the UK being better-positioned here when it comes to their vaccine purchases and what that looks like. It's a bit of a smaller question mark now when we consider those going well. But when you look at some emerging market countries here, which ones do you have the most confidence in on for investors to, I guess, maybe shift more of their portfolio there if there is an opportunity next year?

BONNIE WONGTRAKOOL: We are focused on the investment grade rated sovereign issuers. So that is an area that we're focused on generally. The lower-quality issuers, we think that there's still some pain. We have seen some defaults this year, which we've managed to avoid. Those countries were already weak in terms of their balance sheets and in terms of their governments coming into the pandemic.

And we think that there could be potential ripple effects even from there. But there's still a number of names that we like that are investment grade rated and that we think do have the strength to benefit from this recovery. Although, certainly our analysts are not looking at this and painting it with a broad brush. And we'll be tracking very closely inflation and other economic indicators, especially going into the second half of next year, where you could see some of these delayed effects from COVID playing in.

ANJALEE KHEMLANI: Certainly some important takeaways there. Bonnie Wongtrakool, the Western Asset Portfolio Manager. It's good to talk to you today. Thanks so much for your time.