For the brave, airlines a better vaccine play than drugmakers, says UOBAM's Soejanto

Yet, Dharmo Soejanto, chief investment strategist at UOBAM Invest, the robo-advisory service of UOB Asset Management, believes the airline sector, which has been brutalised by the pandemic, could be a better “vaccine play” instead of healthcare companies.

“When a vaccine is found and people are allowed to travel again, airlines will recover. This is going to be a better vaccine play than healthcare,” explains Soejanto in an interview with The Edge Singapore.

Since the start of the pandemic, airline stocks have been bashed down to as low as half their book values. The way Soejanto sees it, even if the share prices recover to just 0.7 times or even 0.8 times the book value, that can be considered “very handsome returns” in this current market environment where the conventional assumption of steady returns is under risk.

However, this contrarian pick comes with plenty of caveats and is certainly not suited for investors without a strong stomach. “As fund managers, we don’t encourage these sort of trades. We are not stockbrokers,” he stresses.

Nevertheless, if investors are brave enough, they could invest in airlines with their extra CPF money which they cannot take out over the next five years anyways, he reasons. “That is if you buy the idea that the vaccine is coming next year and expect too see some rebound probably one or two years down the road the lives when we will return to the lives we lead before Covid struck, or at least can travel via air. Airlines will survive, but unfortunately, shareholders might not,” Soejantao warns.

In contrast, Soejanto calls the healthcare industry a “bad” vaccine play. “Many of the healthcare companies won’t actually benefit from a vaccine, if any. Hospitals have to postpone non-critical surgeries and procedures, and turn away patients because of Covid. If you are a drug company and you have non-Covid vaccines, the drug trials are being pushed back because the FDA wants to focus on approving Covid vaccines. So, there are very few actual beneficiaries among vaccine manufacturers,” he explains.

That said, Soejanto maintains UOBAM still recommends the healthcare sector as a long-term structural story. “But if you are trying to play the vaccine, then it is not the biggest beneficiary. Instead, the biggest beneficiary is air travel,” he says.

Suspended animation

Meanwhile, due to the pandemic, several broad sectors of the economy face structural shifts as normal patterns of behaviours are disrupted. As always, there are also winners and losers. For example, much has been said about how e-commerce is enjoying a boom because of the pandemic. Even when a vaccine is found, it is unlikely online shoppers will revert back to offline shopping. Having food delivered to homes has also become a way of life. On the other hand, F&B outlets are being forced to operate at reduced capacities. Even when things go back to normal, the volume they used to enjoy might not recover. If that is the case, is F&B still a sustainable business?

“A lot of investors ask: Why do I want to touch those stocks? I might as well continue with businesses that work along with the new structural trends. Those are the questions we are facing now,” says Soejanto.

By extension, investors have good reasons to take a hard look at landlords who own physical malls, retail outlets and offices, and their financiers, the banks.

“We are in sort of an animated suspension. The government says you can’t kick out tenants and you should give them a moratorium but when that is over, what is the fate of the landlords? There’s quite a bit of uncertainty,” warns Soejanto.

Therefore, there is a need to relook REIT investment, which has rewarded investors with stable yields for years. “Are retail REITs safe? Are office REITs safe? Will their rental be defensible in the medium term? These are uncertainties that you may have to take into account. The logistics and data centre REITs are no-brainers, but, because of their resilience, they are now more expensive and giving lower yields versus office REITs,” he adds.

As for the banking sector which is the bedrock of any economy, there are uncertainties too. “What’s the true extent of the non-performing loan numbers? That’s why banks continue to get derated because nobody knows what the books look like. It’s going to be a bit challenging unless you hold a very long-term view and say, ‘We buy simply because it is cheap and given the uncertainty and we want to play contrarian’. There’s room for that, but not for the faint-hearted,” he says.

Unsurprisingly, given how strongly property developers and banks figure as component stocks of the Straits Times Index, the Singapore market benchmark has not seen a sharper recovery from the lows of late March. This is unlike stock markets in the US where high-tech companies occupy a heavier weightage of around 20% compared to 10% or less in other markets. Although the composition of the STI is being reviewed regularly, perhaps the criteria should also undergo a review.

“The issue with the Singapore market is basically what the index constituents are. There’s no surprise that the US markets have outperformed the rest simply because those sectors are the ones performing well and people are flocking there. The constituents of the index really make the difference,” says Soejanto.

“For the STI, it is still largely banks, property companies and a large telco (Singtel), that’s why you see the index going nowhere and is listless. That’s an issue that needs to be addressed. Do we want to be a market of property companies, REITs and banks, or should we have more things like healthcare companies and biotech?” he adds.

Rethinking allocation

Equities aside, investors around the world are forced to deal with the low-interest rate environment, which is likely to remain so in the foreseeable future, if the US Federal Reserve keeps its guidance.

The way Soejanto sees it, this is a “huge issue” especially for savers and conservative investors. “You can’t get yield anymore and there’s very little return in risk-free assets. You end up being pushed to take either more credit risk or more duration risk. And both sides are not giving that much more, but yet you end up taking more risk than what you are comfortable with. That’s probably a fact of life now and that’s a huge challenge.”

For example, investors in risk-free assets such as government bonds now have to invest in corporate bonds to get the same returns. And those investing in corporate bonds have to buy riskier high-yield bonds for the same returns. Unfortunately, that is the new normal, says Soejanto.

Given the low returns, the asset management industry is wondering if the conventional mainstay portfolio of 60/40 split between bonds/ equities for multi-asset investors, is still valid.

The 60% allocation to bonds acts as the ballast for a 3% return while the 40% equities is a bet for a 9% upside, giving a total portfolio return of between 5% and 6% returns within an acceptable level of volatility. But now, by investing 60% of their money in bonds, investors stand the risk of actually losing money.

Alternative ‘ballast’

Part of the catalyst for this deep hard look at staying invested in bonds was caused by the stomach-churning volatility markets went through in March when almost all asset classes were sold off.

“For that short period of time, what we used to think of as ballast for portfolios, didn’t seem to be very valid. There was a bit of concern so that’s why we advocated a bit of gold in a diversified portfolio as safe haven,” he says.

Naysayers of gold investing tend to complain about how the precious metal is but a pure capital appreciation play with no yield to speak of. But the way Soejanto sees it, there are two things going for gold.

“One, interest rates are so low, perhaps even going into negative territory. So, the opportunity cost of holding gold is very very low, almost zero. For example, relative to German Bunds, holding gold is a positive carry,” he says.

“Two, if are we concerned that there might be inflation down the road because so much money is printed today, then gold is an insurance policy for that environment,” adds Soejanto.