If vacationers are interested in travel and leisure, then so are investors

Given the widespread chaos in airports these days, does the travel and leisure industry offer an opportunity?

My hairdresser recently explained to me how his strategy of buying Apple shares this year worked for him. “Everyone wants an iPhone for Christmas, it’s easy,” she exclaimed.

It turns out that investing is much easier when all assets are up, at least when you take long positions. Or maybe just a combination of observation and common sense is enough to understand how people spend their money. Here could be the investment opportunity. But is it really that simple?

Given the widespread chaos in airports these days, does the travel and leisure industry offer an opportunity?

Consumers are clearly traveling again

After two years of lockdown and holidays at home, consumers now appear ready to fly. Airport passenger numbers have recovered as expected, but remain below pre-pandemic levels (see Chart 1 below).

Passenger numbers have recovered sharply this year / Monthly number of passengers at London Heathrow Airport

Source: heathrow.com, as of June 23, 2022.

Where are all these passengers going? In May, passengers flying to and from Europe accounted for around 44% of total traffic at London’s Heathrow Airport1. This figure corresponds to the historical average, which means that travel destinations in general have not changed. However, as absolute numbers continue to rise and eventually return to trend levels, European travel numbers will continue to rise.

When consumers travel, they also stay in hotels

It seems that consumers are not only flying, but also booking hotel rooms. The monthly occupancy rate of Spanish hotels by foreign tourists has also risen sharply (see chart 2 below).

Hotel reservations by foreign tourists have risen sharply this year / Hotel occupancy rate by foreign tourists in Spain

Source: Bloomberg, data as of 06/23/22.

Of course, increasing bookings are accompanied by higher income and ultimately profits in the hotel industry. According to Statista forecasts, European travel and tourism sales are expected to return to pre-pandemic levels somewhere between 2023 and 2024, meaning it’s a sector that’s still fully recovering.

Important considerations for investors

The European travel and leisure sector consists of three main business categories: 1) airlines, 2) hotels, resorts, cruises and restaurants, and 3) online gambling and gambling companies Paris. Given the general risk aversion to equities, the sector may not have performed particularly well this year. Of the 20 industry groups in the Stoxx Europe 600 Index, energy is the only one to post positive performance year-to-date2. The travel and leisure sector is down this year but has ranked somewhere in the middle of the chart in terms of performance among the 20 categories since early 2022.

These results mean that the macroeconomic environment is currently driving market developments and that the improving outlook for the travel and leisure sector may be underestimated. If macro headwinds ease, the sector could take off in line with its strong fundamentals.

However, as always, there is a downside. If the risks of a recession increase in Europe, travel and leisure numbers could fall again before they even return to trend levels. Indeed, travel is a “voluntary” expense that can be reduced as individuals and businesses run out of money.

Finally, it’s difficult to predict changes in the markets, but it can be easier to track consumer behavior by looking at airport passenger traffic and hotel occupancy rates. Will prices move in line with fundamentals? Nothing is more uncertain, even if my hairdresser is convinced of it.

1 Source: Heathrow.com, as of 23 June 2022.
2 Source: Bloomberg as of 06/23/2022.

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