Tourism: taking off in a big way

In many countries around the world, July is a month of temporary migration among the populace. On the one hand, offices are quieter, and the roads less congested. On the other hand, railway stations and airports are thronged with people. Yes, the holiday season has begun!

Globally, there is a background of political uncertainty. In many countries, individual’s incomes are being strained by higher oil prices, or, while overall unemployment is low, they may be experiencing job uncertainty as new technologies disrupt old industries. Yet despite these issues, or perhaps because of them, people still want to escape the office or the factory, whether that be on a ‘staycation’ close to home, a short-haul flight to a beach resort with the family, or a long-distance trip to explore a completely new part of the world.

Flying high

The numbers add up. According to the United Nations World Tourism Organisation (UNWTO),

“international tourist arrivals grew by a remarkable 7% in 2017 to reach a total of 1,322 million. This was the strongest growth in seven years. Momentum is expected to continue in 2018 at a rate of 4 to 5%.”

Certain regions are benefitting more than others. The UNWTO Barometer reported that, “led by Mediterranean destinations, Europe recorded extraordinary results for such a large and rather mature region, with 8% more international arrivals than in 2016. Africa consolidated its 2016 rebound with an 8% increase. Asia and the Pacific recorded 6% growth, the Middle East 5% and the Americas 3%.”

All of this makes sense from an economic point of view. For one thing, while the rise in the oil price has curtailed spending power in some parts of the world, real incomes have increased in many countries over the past two years. Meanwhile, unemployment has been falling steadily in most developed economies. Additionally, some of the larger emerging countries, such as Brazil and Russia, are benefitting from improved economic environments.

As tourism has grown, travel-related stocks have outperformed

MSCI World Hotels, Restaurants and Leisure vs MSCI World Index1 , total return in US dollars, rebased to 100. Source: Thomson Reuters DataStream, 25 July 2018

Which countries spend most on tourism?

China and the US immediately come to mind. On some measures, China splashed out around $250 billion on tourism in 2016, leapfrogging the US to take the number one spot. Last year, over 130 million outbound trips were made from China, up 7% from a year earlier. Thailand and Japan were the most popular destinations for Chinese travellers, but the rise in independent travelling (as opposed to tour groups) is very noticeable. This increase is significant for locations further from China, such as those in Europe, because shopping tends to take precedence in their travel budgets. Luxury brands, such as watchmaker Kering and LVMH (which owns the Louis Vuitton and Moët & Chandon labels), have been among the major beneficiaries of this trend. Nevertheless, the latter has recently warned that the effects of the global trade war, such as higher tariffs, could have negative consequences for global sales growth. And while the company’s profits for the first half of 2018 were very strong, the current strength of the euro may be encouraging more Chinese customers to buy LVMH products closer to home, rather than in Europe.

Chinese companies, like online travel agent Ctrip, CITS (China International Travel Services) and Huazhu (previously China Lodging) have profited from increases in both domestic and outbound travel. Such companies may offer accommodation reservations, air ticketing and tour bookings.

Currently, only around 10% of Chinese people have a passport, compared to about 40% in the US and more than 75% in the UK, so there is still considerable room for growth in international travel from the country.

The Chinese government is seeking to reduce borrowing in its financial system and the role of heavy industry in generating economic growth, while increasing personal consumption. As such, the travel and leisure sector remains important for both the country’s authorities and global investors.

Travelling further afield

For other countries, the advantages of an increase in worldwide tourism are very apparent. France has long been near the top of the list of tourists’ favourite destinations, with over 80 million exploring romantic Paris or the delights of the Dordogne each year. Its growth rate is rather slow, however; more ‘exotic’ destinations such as Mexico or Thailand have recently been increasing in popularity among global travellers. New destinations are also opening up. Japan, for example, welcomed 29 million foreign visitors last year, with growth rates suggesting the official target of 40 million by 2020 may not be too farfetched. Tourism is still a small part of overall consumer spending, but it really matters in certain areas: foreigners accounted for 17% of hotel revenues in Japan; they were also responsible for more than 7% of department store sales and over 6% of medical and cosmetic retail expenditure.

Mixing the old and the new

Tourism can also be an interesting mix of the old and the new. On the one hand, travellers’ needs have historically been relatively simple: a good hotel and interesting sights to see. The basics of the industry are changing rapidly, however. In the UK, for example, Thomas Cook, the travel agent and flight operator, has been shifting from retail stores to a digital platform. Meanwhile, On the Beach, an online disruptor, has invested in advertising such that its booking platform sells over 20% of short-haul beach holidays in the UK.

While change is under way in the industry, tourism is hardly a new concept. Individuals have long experienced wanderlust and are likely to do so for generations to come. The old saying is that travel broadens the mind, but for investors, it is certainly worth keeping an open one towards the tourism sector. 

Written by Andrew Milligan OBE, Head of Global Strategy, Standard Life Investments

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