This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.
With any luck you’re reading this blog somewhere sunny – whether that be the UK finally seeing some August rays or on a long-planned overseas break. Travel has bathed under the market spotlight extensively over the last few years, firstly as one of the early casualties of the COVID-19 pandemic and then as one of the most popular recovery trades as the early signs of societies reopening emerged.
In a cost of living crisis, confidence in the travel sector has naturally wavered to some degree. However, data from the last twelve months suggests that global travel has held up despite inflationary pressures. Indeed, this increase in tourist travel has been cited as a key factor in rising oil demand as pent-up desire for travel post-pandemic is exercised by the global population.
Combined with falling fuel costs, these strong demand dynamics mean that Europe’s major airline groups all reported rising profit forecasts earlier this year.
Given that airlines are an oft-beleaguered part of the market, this picture is an unusually positive one. However, from a long-term perspective, it is worth noting that the move towards net zero may well catch up with them at some point. We are all going to be encouraged to travel less, even if a summer is unexpectedly wet.
With that in mind, from an investment perspective, looking eastward could offer some intriguing prospects. The delayed reopening of the Chinese economy means that post-Covid demand dynamics have further road to run there. Domestic Chinese tourism has already risen above pre-pandemic levels, but international travel is still very much in the recovery phase. Most crucially, China’s government has a slower planned pathway to net zero than many other governments.
Some travel trends were already evident among Chinese tourists prior to Covid, which now look set to continue post-reopening. For example, Thailand was a growing market among the travelling Chinese prior to the pandemic and has been one of the first destinations to see numbers edging towards their pre-pandemic levels this year. JPMorgan Asia Growth & Income (JAGI) has seen an opportunity in this dynamic, investing in Airports of Thailand PLC, which manages all six of Thailand’s international airports.
Elsewhere, Mexico’s Caribbean coastal states, already 50% of the country’s total tourism industry, are forecasting a 4.4% rise in tourist numbers this year. Murray International (MYI) owns Grupo Aeroportuario del Sureste, better known as ASUR, which owns and operates almost all of the region’s airports, including the biggest, Cancun.
With tourism remaining a seemingly protected spend for many people and the cost of living pressure beginning to wane, the mid-term prospects for the sector remain strong, even as political pressure could dampen long-term demand.
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