Head of FX Strategy
Summary: Outbound tourism from China has been the biggest contributor to global tourism pre-pandemic. With border measures being eased after three years, pent-up demand and accumulated savings of Chinese consumers will likely mean a surge in outbound travel demand over the next few years. The big and early winners of that will potentially be in Asia as the number of flights to the West destinations still remain limited. We have identified a list of stocks that provide exposure to the Asian hospitality sectors that mostly serve Chinese tourists.
China’s outbound travelers have been the biggest contributor to global tourism before the pandemic. Before the pandemic, Chinese travelers made 155 million trips abroad in 2019 and spent almost $255 billion, amounting to 14% of global tourism revenue. After three years of pandemic restrictions, China has relaxed its Covid contained measures in a quicker-than-expected manner since November. We have been of the view that the biggest pivot for 2023 has been the faster-than-expected China reopening, and that will continue to be the key theme for traders and investors this and next year as the Chinese demand comes back online to drive local, regional and global markets. China Outbound Tourism Research Institute (Cotri) expects Chinese travelers to take 110 million international trips this year, which is about two-thirds of the 2019 level. This could mean an estimated spend of about $180 billion globally, which could be a source of revival for the hospitality industry that has seen a big void from the absence of Chinese tourists in the last three years.
Since the reopening of China and easing of border restrictions in January, travel pickup has been restrained with concerns around spread of the virus and risks of new variants. However, there has been no sharp rise in cases reported even after the Lunar New Year celebration at the end of January, and China saw an average of 410,000 exits and entries per day, up 120% over the Lunar New Year holiday last year, as per the National Immigration Administration. Further recovery should start to pick up now into the second quarter as the May 1 Labor Day holiday approaches and gather further pace in the second half of the year and into the national holidays in September and October. China has a five-day holiday for Labor Day and a week off in early October for National Day, and both these are considered to be the golden periods for travel.
While it is prudent to expect that full Chinese travel demand recovery will take a few years, there is no doubt that the floodgates are about to be open. The big and early winners of that will likely be some of the Asian travel operators as regional destinations remain the top choice for most Chinese travellers. These will include Hong Kong, Macau and Thailand, followed by Japan, South Korea, Australia and other Southeast Asian countries. Hong Kong received only 370,000 visitors from the mainland in 2022, down from around 50 million pre-pandemic. Expectations are for this to be revived to 60-70% this year, suggesting about 30-35 million tourists from China. Thailand expects to host 7-8 million Chinese tourists in 2023, also a 60-70% recovery from 2019 levels.
Travel to further destinations in Europe and North America could take about an year or more to recover as the limited number of commercial flights and visa backlogs restrain a pickup. A lack of flights keeps the prices higher, although that may be offset slightly by higher budgets driven by accumulated savings over the pandemic years. Chinese travellers are also likely to chose safer destinations as travel resumes, given the surge in anti-Asian sentiment globally since the emergence of the pandemic.
We have launched a new Asia Pacific Tourism equity theme basket to capture the expectations of an improvement in China’s outbound tourism. The list contains predominantly Asian stocks across booking platforms, airlines, airport services, hotels, casinos and restaurants in countries that will likely see the biggest inflow of tourists from China over the course of the year. We have also included the key Thailand index given its heavy dependence on Chinese tourism.
The basket represents a total market value of $476.6 billion with Booking Holdings leading the pack. Sales growth has returned to a positive territory over the last year after the Covid shock but earnings have remained under pressure. Analyst generally expect earnings rebound for these companies as Chinese travel rebounds, and this is reflected in median price targets being 12% above the current price currently.
A lack of international flights, as well as the shortages of pilots and crew, is keeping travel prices higher and remains the biggest risk for the Chinese outbound travel recovery. In January, the capacity of global carriers' flights traveling to and from China was only 11% of the level compared with 2019. In April, the number is expected to rise to 25%, according to travel data provider Cirium. Higher prices could force Chinese consumer to push their international holiday plans to late 2023 or 2024.
Other risks are seen from new Covid variants or mass spread of infections prompting another round of travel curbs around the region. Meanwhile, if economic growth across the region slows down enough to erode the purchasing power of consumers, that could mean a setback on demand for travel.
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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