MARKET THEMES25/06/2021
Tourism investment opportunities: beyond Covid



As the sector reopens after the latest Covid-19 lockdown, there are opportunities to invest in tourism and travel. However, this is a sector to be approached with caution as it remains subject to risks ranging from new variants to changed habits.
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4 min reading
Travel and leisure have been in the eye of the storm. Hard hit by lockdown restrictions, businesses have been forced to close for months on end and the sector now faces a tough rebuilding process. Are there tourism investment opportunities as the sector recovers?
Severe crises can prove regenerative for a market
Crises as severe as the Covid outbreak often prove regenerative. Underperforming companies fall away, while stronger companies build market share, develop new technologies and pivot towards faster growing areas. There can be little doubt that Covid-19 has prompted much soul-searching for companies across the travel and leisure sector and it may emerge healthier than before.
At the same time, share prices have become very depressed. The share price of travel group Tui, for example, fell from 615p to 153p at the height of the crisis. It has since recovered to some extent but remains well below its highs. The price to earnings ratio is just over 5x. (link for compliance evidence TUIFY Stock Price & Charts | TUI (ycharts.com) No follow. Price data at 11/2/20 and 15/5/20) A similar pattern is replicated across the sector and suggests a lot of the bad news and uncertainty is already in the price of shares.
Another argument in favour of tourism investment opportunities is the amount of pent-up demand. While they have been confined to their homes, people who have been lucky enough to keep their jobs have built up considerable cash savings. Having been forced to remain in their own small corner of the UK for most of the past year, it seems likely that a considerable amount of these savings will be spent on holidays.
Significant investment risks remain across travel and leisure
Travelling across borders is still extremely difficult. Even fully vaccinated adults need to take several expensive tests and isolate on return when visiting the majority of tourist destinations. Many may consider this too high a price for a one- or two-week holiday. The return of mass travel, on which many tourism companies rely, appears to be some way off.
Equally, there is the constant jeopardy of another Covid variant emerging. We have seen with the Indian variant how quickly this can happen and how devastating the effects. While governments stick to the logic that variants could appear anywhere in the world at any time, holidaymakers live with the threat that they could be called home at a moment’s notice. Again, many will consider the prospect of prolonged and expensive isolation in a hotel too high a price. Renewed lockdowns are a constant threat to gyms, pubs and restaurants.
There are concerns that the economic recovery may be relatively short-term. There is still a danger that unemployment spikes once government furlough schemes are removed. This is likely to put incremental pressure on the sector.
There is a final, more existential threat: during the pandemic, people have found different ways of doing things. Whether it’s a run in the park rather than expensive gym membership, or a staycation rather than a week in Spain, people have been forced into new habits and may not return to their old ones.
Opportunities to invest in travel and tourism
For those that believe the sector is in the ascendancy, there are different ways to invest in tourism and travel. There are the high-profile travel companies, each offering a different risk/return profile. The airlines, for example, are a pure play on the resumption of cross-border travel, while some of the booking companies may do just as well from people holidaying in the UK this summer. Restaurants are likely to see a bounce from re-opening, but possibly not as strong as for the travel companies.
The FTSE 350 travel and leisure index can be a good place to start for UK-based travel and leisure companies. This will go from the very large travel companies to the minnows. Its constituents include Carnival, Easyjet, Domino’s Pizza and Whitbread.
For those who want more diversified global exposure, there are individual ETFs on the travel and leisure sector. The iShares STOXX Europe 600 Travel & Leisure UCITS ETF, for example, holds 17 travel and leisure companies, with its largest stocks Flutter Entertainment, Evolution Gaming group, Entain plc and Intercontinental Hotels. The ETFMG Travel Tech ETF has around half its assets in bookings and reservations companies and the rest split between ride sharing, price comparison, and travel advice businesses. For more concentrated exposure, the U.S. Global Jets ETF is specifically focused on airlines.
While there are travel and leisure companies that can thrive whatever the outcome of the next few months, many of the companies are dependent on recovery progressing and the vaccine opening borders once again. If it goes the right way, depressed share prices mean that the rewards could be significant for investors. However, it’s an area best approached with caution.
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