Travel Bubbles & Lockdowns | Sydney Airport

23 June 2021

Global markets were upbeat overnight, with the US S&P 500 index up +0.5%, edging closer to new all-time highs after Fed Chair Powell reiterated his views that inflation pressures will be transitory. He also indicated a level of confidence that prices will eventually come down, while also commenting that a 5% inflation environment won’t be acceptable. 

Most sectors were in the green with the technology sector performing well, Netflix climbed +2.3%, Facebook up +2%, and  Amazon shares jumped +1.5% following the second day of Prime Day sale after bringing in over US$5.6 billion in total online sales on the first day. Amazingly, the Nasdaq US technology index is back at all-time highs (and up +10% year to date) despite the move higher in bond yields and  looming threat of an increased tax burden on large, profitable US multinationals.

European stocks (Stoxx 600 index, +0.3%) were also higher as mining stocks rose on stablising metal prices while energy and financial continued to gain.

Closer to home, New Zealand has put a 72 hour pause on quarantine-free travel with the state of NSW – due to the recent surge in covid-19 cases in the community and at the same time eased restrictions for Victoria reopening the bubble with the state and allowing guarantee-free travel to recommence. Wellington is on high alert after an infected covid case from Australia visited numerous sites in the capital. These developments highlight the difficult situation parts of the economy exposed to the travel and tourism sector still face.

Australian Prime Minister Scott Morrison added that due to stubbornly high covid-19 cases being reported around the world still, it is still too difficult to commit that borders will be open "normally" for international travellers by Christmas 2022 – which we view as a worst case scenario and a low risk of eventuating. Our view on international travel is still conservative but slightly more optimistic than above, as we believe there should be some form of more relaxed travel next year – with quarantine-free travel from 'safer' countries or passengers with vaccine passports allowed to pass through borders more freely.

Sydney Airport (SYD:ASX)

Sydney Airport shares remain under pressure, as it struggles to recover even its domestic travel numbers given the state of Victoria just completing its fourth lockdown.
While the Trans-tasman bubble has been supportive it has not been as smooth running given recent travel restrictions between NSW and New Zealand and Sydney. There are concerns that international travel won't recover to anywhere near pre-covid levels. Our view is that 2022 could be a transitory period – with a partial recovery in international travel and full recovery still some time away. Taking into account the above comments there could be some more volatility over the near-term but domestic travel should be enough to support SYD over the interim to avoid cashburn or a further capital should the worst-case scenario occur (virtually no international travel at the end of 2022). We still prefer airports over airlines as they are better suited to wait out a delay in full recovery in international travel. 

Given Sydney Airports current valuation, we remain comfortable with our BUY rating for medium-term investors, but are now more wary that it could be prone to some near-term volatility depending on a number covid-19 related risks such as vaccine roll-outs across key travel partners. 

Australia & New Zealand Market Movers

The Australian market rebounded strongly yesterday (ASX 200 index +1.5%) clawing back most of its losses on Monday.
The Energy sector was the best performing after oil jumped by the most in a month, followed by Financials, Real Estate, and Materials all performing strongly. Healthcare was the only sector in the red.

Woolworth and Endeavour shares will trade as separate entities from tomorrow, as shareholders voted in favour of the de-merger.

The New Zealand market (NZX 50 index +0.2%) was up on Tuesday. Retirement village operator Arvida shares led the market higher  +4.1% on its plan to provide in-home care services for older people, with other retirement stocks ending the day stronger as well. 

Mercury shares were up +0.6% as investors continue to assess the benefits from its Trustpower retail business acquisition.
 

3 Things Markets will be Watching this Week

  1. Key events this week include Bank of England interest rate decision, US GDP numbers, and Fed Chair Powell testifying to Congress on the Covid-19 response and economy 
  2. In Australia there will be retail sales for the month of May and Westpac Consumer Confidence data.
  3. In NZ, Oceania Healthcare has scheduled its AGM for this week.
Global markets were upbeat overnight, with the US S&P 500 index up +0.5%, edging closer to new all-time highs after Fed Chair Powell reiterated his views that inflation pressures will be transitory.

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