The holidays are here, and it's the best news the travel and hospitality industry has seen in two years. Read what it means for investors.

The revival of snaking queues in the flight check-in lanes at Singapore Changi Airport has become a sight for sore eyes as travellers take to the skies after two years of being grounded.

The easing of the travel restrictions worldwide has not only translated into a sharp increase in passenger traffic at the airport, but also a growing flow of business for travel and hospitality-related services. As a result, aviation and travel-related counters have been on the rise since early this year after having taken a brutal beating for much of the pandemic, although they have come down in recent weeks amid a broader sell-off globally.

As pent-up demand for travel drives up air fares and hotel prices, prospects for growth in the tourism industry remain highly optimistic. Is it time for investors to look at travel and hospitality stocks again?

Ready for lift-off

The accelerated recovery of the travel industry has opened up several pockets of investment opportunities, starting with the aviation sector. For one thing, the International Air Transport Association (IATA) is expecting the airline industry to make a full recovery next year.

In Singapore, passenger volume is set to normalise towards pre-pandemic levels in 2023, presenting growth opportunities across the travel industry, said Mr Eddy Loh, Chief Investment Officer at Maybank Group Wealth Management. “Transport-related stocks should continue to benefit from recovering demand, be it air, sea or land,” he noted. 

Mr Loh added that the outlook on the hospitality sector should continue to improve as well, in line with the reopening of businesses and travel.

He pointed to engineering companies and business services affiliated with Changi Airport Group as firms with "enormous growth potential" due to the higher travel demand, while telecommunication operators stand to gain from tourists using their services.

At the same time, healthcare providers could also do well as Singapore’s famed medical tourism industry is likely to see a boom. Increased footfall in popular tourist destinations could also reinvent the scene in gaming, leisure, retail and Food & Beverage (F&B), pumping profits for retail-related real estate investment trusts (REITs).

 

Tread with caution

But caution remains the watchword. Mr Loh believes the positives may have been priced in for a number of the travel and hospitality stocks, which is why investors should be more selective to look out for “laggard plays that are still trading on reasonable valuation”.

More importantly, if there is anything COVID-19 has taught us, it is that nothing is for certain. “We cannot rule out the possibility of a resurgence of COVID cases and new variants, which could dampen the recovery of travel demand,” he said.

As such, portfolio diversification should remain a core tenet of investment, especially in managing risks during such uncertain times.

Maybank Group Wealth Management anticipates a slowing economy but not an imminent recession this year.

As opportunities emerge from normalising travel demand, Mr Loh added, investors should also not lose sight of long-term structural growth opportunities while protecting themselves from persistent inflation in an uncertain economic environment.

Mr Loh remarked, “Investors may want to have some exposure to real assets such as commodities and real estate as well as companies with pricing power. In addition, it would be good to generate steady income through stable dividend plays or high quality bonds. More importantly, it is critical to improve the quality of our portfolio as we move into a late-cycle environment.  Hence, we would focus on investments that are better positioned to navigate any potential downturns and benefit from an eventual market recovery.”

the bottom line:

While the surge in stock prices may look promising, it is best to scrutinise your portfolio and understand the market before making your entrance into the bullish market.

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