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Market Commentary

Dow, S&P snap 4 day losing streak following Fed decision amid rumours of Evergrande restructure

• US stocks staged a comeback from their September rout after the Federal Reserve signalled that it could begin to reduce its bond purchases soon and raise interest rates as early as next year. Following the central bank’s statement, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all finished about 1% higher. The gains mark a sharp turnaround from earlier this week, when major stock indices tumbled due to fears that a default by highly indebted real-estate developer China Evergrande Group could ripple, causing a widespread pullback in riskier assets across markets.

• However, some of the fears started to subside as investors turned their attention to the Fed following the conclusion of its two-day September meeting. The Fed said that if economic progress continues broadly as expected, “the Committee judges that a moderation in the pace of asset purchases may soon be warranted.” The 10-year Treasury yield remained at 1.32%, where it had traded for much of the day. This suggests the bond market too expects a gradual taper, not a fast one.

• In Asia, the day began on an upbeat note after real estate giant China Evergrande said it would make some interest payments due soon. Chinese stocks ended the session mixed as the market resumed trading after a two-day holiday. The benchmark Shanghai Composite Index rose 0.4%. Both the Shenzhen Composite Index and the ChiNext Price Index however, dropped 0.2% and 0.9% respectively. The property sector was among the top risers, after a China Evergrande unit said it would pay coupon for a bond on time on Thursday, a sign that the developer is making progress to resolve its liquidity crisis.

• There are rumours that China Evergrande could be restructured into three separate entities in a turnaround plan being finalised by the Chinese Communist Party. The plan – which remains unconfirmed and cites an unnamed source close to the government – could be announced within days, if true. Thinly traded Evergrande’s stock surged 33% in Europe, implying a premium of 10% over the Hong Kong-traded stock. The company’s Hong Kong-listed shares weren’t trading on Wednesday because of a local holiday. The offshore yuan did touch an intraday high on the news but soon gave back those gains.

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• Elsewhere, the Straits Times Index slipped 0.49% to 3,048.05, following the previous night’s extended losses in Wall Street. Japanese stocks ended lower too, dragged by declines in trading companies on lingering concerns about troubles in the Chinese property sector. The Nikkei Stock Average fell 0.7%.

• Even as concerns that credit in China will stop flowing are abating, the situation remains muddy. As any large corporate crisis, this one too is surrounded by endless rumours and speculation. Evergrande is an extremely complicated corporate entity based in a country where the government is not inclined to dole out clarity at demand. Expect more Evergrande headlines today as two interest-rate payments come due.

Research Ideas

Global Aviation Sector Looking forward to borders reopening

• Shifting from “zero-Covid” to the “living with Covid-19” approach for some countries
• High vaccination rates likely to drive domestic and international border reopening
• Covid-19 has accelerated the technology improvements and digital transformation for airlines and airports

The resurgence of Covid-19 cases globally due to the virulent spread of Delta-variant weighed on the performance of airlines stocks with the Bloomberg World Airlines Index falling 9.7% and 5.2% in Jun and Jul 2021 respectively. However, there is growing optimism around the prospects of recovery as vaccination rates pick up, triggering countries to reopen domestic and international borders.

Following Singapore’s reopening moves, many regions in Asia Pacific such as Malaysia, Thailand, Japan and Australia have also announced plans to move from “zero-Covid” to the “living with Covid-19” approach. The latest announcement from the US on its plan to ease travel restrictions is another encouraging signal. While we believe a large scale and significant improvement in cross-border/international travel is unlikely to happen in 2021 and 1H 2022, this is a positive step forward which will help the recovery of the aviation and tourism sectors, barring the risks of a potential spike in Delta variant cases.

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We remain selectively positive on the aviation sector and favour Delta Air Lines [DAL US; BUY; FV: USD52.50] and Southwest Airlines [LUV US; BUY; FV: USD65] among the US airline names we cover. Delta Air Lines is a name to play the next phase of recovery in international and corporate travel. Europe made up 52% of Delta’s international available seat miles in 2019, compared to 43% for peers. With the US’ announcement to reopen borders to 33 countries, including the UK and Europe from November this year, Delta is poised to benefit from a recovery in international travel. On the other hand, Southwest is more of a domestic leisure play which is almost entirely focused on the domestic market. Within Asia, we like Air China [753 HK; BUY; FV: HKD6.50], SATS [SATS SP; BUY; FV: SGD4.80] and SIA Engineering [SIE SP; BUY; FV: SGD2.37]. (Research Team)