As Covid-19 continues to devastate the global economy, DBS Research analyst Yeo Kee Yan and his team have placed their hopes for economic recovery on the successful development of a viable vaccine. With 38 candidates now undergoing clinical evaluations, one or more positive outcomes will be the spark that will fuel ailing economies, they write in a report dated Oct 6.
“Nine months after the first Covid-19 cluster surfaced in China, the world is no closer to containing the pandemic. There are now more than 32 million confirmed cases globally and the figure is rising at a rate of 200,000 to 350,000 new cases per day,” says the team. Six months on from the “great Covid-19 pandemic panic”, how countries manage the virus continues to be a key driver for stock performances today.
See also: Seeking truth from facts in Covid-19
North Asian markets, led by a resurgent China, have powered ahead having brought the pandemic under tight control within their borders. This has seen domestic demand holding strong as life takes on some semblance of normalcy. South Korea and Taiwan, moreover, have enjoyed a boost following strong performances from technology stocks.
See also: China moves boldly into the post-Covid era
In Southeast Asia on the other hand, the significant exposure of markets to more traditional cyclical underperformers (e.g. Singapore) and higher reliance on external tourism (e.g. Thailand) have seen stocks perform less successfully. Indonesia and the Philippines are struggling to control the virus at home. Developed markets are struggling too, with the top 15 global economies accounting for 69% of daily new infections, resulting in renewed lockdowns.
The team is especially worried about Indonesia. “What’s most worrisome about Indonesia is its relatively low 11,214 tests per million population even as daily new cases have accelerated to more than 4,500,” they worry.
Singapore is fortunately coping relatively well, with the team believing that the worst is over for the city-state. Despite contraction bottoming out in 2Q2020 as the economy contracted 13.2% y-o-y, manufacturing has returned led by electronics, while the Purchasing Manager Index (PMI) and industrial production have returned to expansion in July. Phase 3 of Circuit Breaker measures is seen to take place in 4Q2020, with “limited size” business events resuming.
But domestic demand is already on the upswing, with June retail jumping 50% y-o-y after Phase 1 was lifted and gained a further 27% in July, followed by a rebound in community mobility. “With the transition to Phase 2 and 3, we expect the figure to sustain its improvement. Our picks are retail REITs - CapitaLand Mall Trust, Lendlease Global - and public transport operator ComfortDelgro,” the team writes.
Phase 3 is likely to remain until a viable vaccine is developed, which the DBS team believes is around the corner. Ten of the candidates are now in Phase 3 trials, with outcomes coming out as soon as October led by the vaccine jointly developed by BioNTech, Pfizer and Fosun Pharma. Several more could release their results by the end of 2020, with the team hopeful of at least one positive outcome followed by mass adoption.
“Pfizer and Johnson & Johnson have targeted to produce 1.3 billion and 1billion doses by end-2021 if their vaccine candidates receive regulatory approval. All these are a big “if” now, but it does shed some light into production speed,” the team remarks. The White House coronavirus advisor expects the US to have 700 million doses - sufficient for every American - by April 2021. China-based CanSino Biologics says its vaccine is effective against all existing mutations and is preparing for mass vaccination.
Should the vaccine come through, the team sees no structural impact on travel and aviation, with these industries likely to see a quick “V-shaped” rebound in a matter of months once the vaccines are made available. Airport operators, hospitality, leisure, MICE and public transport are likely to see a strong resurgence once the vaccine has been introduced.
But China is already enjoying a head start. According to global travel data firm ForwardKeys, Chinese airports have already regained 86% of last year’s domestic arrival numbers while flight bookings reached 98% in the second week of August. Their data predicts that China’s domestic aviation market will have fully recovered by the start of September.
Tourism and travel to Singapore are making small steps to recovery as the city-state progressively reopens its borders. Singapore has lifted restrictions on travel to Japan, New Zealand, Australia and Brunei and inked more limited ‘green lane’ agreements for essential business travel with China, Malaysia and South Korea. A $320 million SingapoRediscovers vouchers scheme will likely see more staycations going forward.
“Our picks are SATS, Far East Hospitality Trust and Ascott Residence Trust. We are also positive on China Aviation Oil that has benefited from the recovery in China’s domestic air passenger traffic to near pre-COVID-19 level,” say the team. A broad range of S-REITS - which underpin a distribution per unit recovery of c.13% in FY2021 - with Frasers Logistics and Commercial Trust, Keppel REIT and Mapletree Commercial Trust among their top picks.
In the meantime, investors should maintain their technology stock exposure with Alibaba and Venture Corp, who will benefit from powerful structural demand shifts for IT infrastructure, 5G, e-commerce and data centres following increased remote working. Yield stocks like CMT and Link REIT are also useful hedges against low interest rates. The team advises, however, against supermarkets and glove makers, since these could see higher volatility as lockdown measures and the development of a Covid-19 vaccine results in uncertain prospects.
