‘Asleep at the wheel’ is when policymakers think they are on the right track but the backdrop has started to change substantially. Put more nicely: policymakers are ‘on autopilot’. This is how the US Federal Reserve chair himself referred to the infamous policy mistake at the end of 2018, when the Fed pushed markets and the economy close to the edge of a liquidity-driven breakdown. The situation seems less dramatic now. In fact, investors have started to worry about the US debt ceiling again. This used to be a sign that life was almost back to normal.
Yet target rates are currently over 4 percentage points higher than back then, which puts a different twist to debt issues today. This may be one reason why the price of insurance against a US default has tripled over the past few days.
In addition, inflation rates are in free fall, as we have pointed out for weeks now. Hopefully, the Fed’s preferred measure, the personal consumption expenditure deflator, will confirm the trend this week. It is expected to go down to +4.4%, the lowest reading in 18 months. Let us hope that the masters of money finally acknowledge the territory, instead of staring at the map, when they update on their stance next week.
The impact of China
Over in China, the reopening in fact strengthens the case against current inflation-fighting. We expect the benefits of China’s assembly lines coming back to full capacity to heavily outweigh the potential inflationary pressure of additional commodity demand. Overall, however, we see plenty of immediate benefits priced into Chinese assets.
China’s tourism industry has been one of the most affected segments of the economy during the past two years, heavily impacting our ‘Asian Tourism’ investment theme. The easing of travelling restrictions is expected to release huge pent-up demand for both domestic business and leisure travellers in China.
Domestic travel is very likely to see a faster recovery than China inbound and outbound travel, as there are still other hurdles and obstacles to overcome, e.g. visas/passport approvals, Covid-19 testing requirements imposed by other countries on Chinese tourists, and the availability of international flights, etc.
For domestic travel, the upcoming Chinese New Year holidays should provide more colour regarding the pace of the recovery. Up until now, domestic media has reported solid momentum in domestic airline bookings and hotel reservations (especially in Macau). We estimate that domestic travel activities should at least recover to between 70% and 80% of pre-pandemic levels during the first half of this year. During the second half, we expect even higher volumes as herd immunity and logistics advance further.
What does this mean for investors?
Investors should move on to the domestic beneficiaries of further policy loosening or look at Asia excluding China and European equities. In combination with last week’s news that China’s population is shrinking, the reopening is a good moment to revisit the long-term prospects.
And, in terms of increased Chinese travel, the primary beneficiaries should be tourism-related industries, such as online travel agents, hotels, and airlines. These industries rely heavily on foot traffic, which has been disrupted from time to time since the pandemic due to the virus spreading and social mobility restrictions. Consumption should also receive a boost, thereby providing tailwinds to the sales of some well-recognised consumer brands, e.g. beer, sportswear, dining, cosmetics, jewellery, and electronics, among others.