The Chinese are coming. I’m sure that’s the thought going through many a traveler’s mind when walking around in European capital cities nowadays. Indeed, first came the Americans, then the Japanese, then the Chinese. And it’s not like the Europeans are sitting still and not casually booking trips to New York and Bali rather than the Provence, nowadays. Global tourism is thriving, something which should of course be seen as part of the greater ongoing trend of globalisation.
Predictably there is some backlash in places like Amsterdam, Barcelona and Venice, old European cities that were not designed to cope with the enormous amount of travelers touching down on their streets every day. Yet travel and tourism will apparently rise by 4% each year for years to come, while by 2030 there should be 1.8 billion international tourists around. And of course it should be noted that not all traveling involves tourism; just think about the increasing amounts of expats/immigrants living abroad and frequently returning home to see their family. The airline industry has a bright future ahead of it, in all cost segments.
Travel and tourism already form more than 10% of global GDP. In order to cope with the ongoing growth there will need to be massive investments in infrastructure (whether airports, airplanes, hotels and the like) and new and ambitious ways to maintain positive travel experiences in global hotspots. Clearly this is a trend to keep a close eye on and potentially expose some of your assets to – it’s one of those undeniable and unstoppable global trend that cannot but benefit your portfolio in the long run.
Travel trends to keep an eye on for the next few years
- Going off the beaten track: While a city like New York may have a long way to before it would be considered overcrowded due to tourists (the place is overcrowded as it is, but not necessarily due to tourists!), smaller towns in Europe or even China may not be able to cope as well. Increasingly expect other alternative locations to attract some visitors in their place
- Experiences: Tourists want authentic and genuine experiences. Not just flying in and out of France, but to experience the lavender fields of the Provence. To see the Northern lights. To take part in one of India’s colorful festivals
- Technology improvements: Recently I noticed that a hotel in Singapore was offering guests a mobile internet device with a travel guide on it to take along with them during the day. Similar gadgets and technology improvements will be forthcoming in everything from hotels to airplanes. Moreover, increasingly bookings will be done by mobile phone
- Societal: Baby boomers are retiring, have plenty of cash on hands and are full of energy. Countries like China and India are coming up and increasingly sending huge amounts of tourists abroad. That trend will continue to grow, and their preferences will evolve
- India, Africa and the Middle East: Relatively underexplored travel destinations will attract more and more visitors
- Glamping: Actual camping is not for everyone, but staying in hotels far away from anything green gets boring too. Glamping may be the in-between solution
- Immigration: An effect of globalisation is that more than 3% of the world population lives abroad. Many of these immigrants or expats will need to fly home to visit their families on a regular basis
What assets to invest in to benefit from this trend?
Surprisingly, there are currently no cheap global tourism and travel ETFs available, so I had to resort to putting together a diversified equity portfolio to address this theme myself. In order to benefit from the trend, the following companies look like obvious targets:
- Hotels. Companies like Intercontinental and Wyndham will face healthy prospects if the tourist industry keeps expanding. More tourists and money spent on tourism means more hotels, more overnight stays and more profits. Certain macro trends that play into that could be new regions attracting tourists and alleviating the stress in other popular places, winter becoming a more popular time and more focus on wellness and “experiences” than simply overnight stays
- Cruises. Meanwhile the cruise industry also faces a bright future and is focusing their attention on China, better connectivity and bigger ships
- Booking sites. When was the last time you called up a hotel and booked a room directly? Right, everyone nowadays uses booking apps, mostly on his or her mobile Phone, and spending $200 is easier than ever. Expect that trend to persist and the bigger players in western and Asian countries to benefits
- Airlines. And finally, someone has to bring all of those people from destination A to destination B. Expect further segmentation between (ultra) low-cost no-frills carriers like RyanAir and those choosing for luxury and preferring to fly Singapore Airlines. There is space in the market for both
Portfolio construction: hotels, airlines, cruise companies and booking sites
- The constructed portfolio consists of individual stocks as there are no relevant ETFs in the market at the moment. Each stock takes up Some 11.1%
- It diversifies your holdings across 9 companies that operate out of a handful of different markets (China, UK, US, Singapore and Japan) in different segments of the tourism and travel industry: hotels, airlines (one low-cost and one high-end), cruise companies and booking sites. You could replace any of these with similar companies that you may have a higher conviction in, bottom line is that you want to these sectors
- As this is an equity-only portfolio, volatility is high at 11.7%. However, the portfolio would have returned +192% since 2010, thus more than making up for that. I suggest to allocate a small bit to these companies and hold on to it for the longer term.
- Given that this does not quite reach ETF-like diversification, I am suggesting an allocation of 0%-5%.
|Hotels||Japan Hotel REIT||8985 JT||-||11.1%|
Risk, diversification and allocation
- Risk level: high
- Diversification: low
- For risk and total return since initiation see Portfolios
- Probability of this theme playing out in the next 3-10 years: 25%-75%
Portfolio characteristics (full look-through, from USD perspective)
- Dividend yield: 2.1%
- Ex-ante predicted volatility: 11.7%
- 1 year 95% Value-at-Risk: -18.2%
- Scenario 2008 Lehman Brothers default period: -29.1%
- Scenario Interest rates +100bps: +4.5%
- Scenario 2008-2009: -33.7%
- Scenario 2010 onwards: +192%