Leisure seekers: the case for a neglected sector

Difficult as it may be when faced with worrying news about COVID-19 trends and new restrictions, investors need to be forward looking. If markets are indeed relatively efficient pricing mechanisms, we shouldn’t focus too much on what’s happening today; instead we need to think about what could happen tomorrow and beyond.

This mindset often leads us to contrarian positions. Early in the pandemic, for example, it became clear that the companies most directly affected by the lockdown would see their share prices hit hardest. But, if and when, consumer behaviour normalised, we expected these stocks to benefit disproportionately.

In the spring and summer, such a recovery felt too distant for the travel and leisure sector, so we preferred other laggards like autos and small-caps. The near-term outlook remains challenging with the weather cooling and the virus spreading in Europe. But we now expect generally positive news on how to beat the pandemic over the coming quarters (with potentially encouraging developments on any or all of vaccines, rapid testing and regulatory decisions) to start becoming a tailwind for hospitality names.

We have no specific insight into the timelines for any of these potential catalysts, but we can take some comfort in market expectations that do not look excessive. Sentiment is still bearish on the sector, for instance, and its performance has remained underwhelming and stuck in the middle of the post-pandemic range.

Progress towards a vaccine should furthermore help these stocks in two ways: through de-risking the future path of their earnings, and through upgrades to earnings estimates if consumers resume their past behaviours faster than expected. This has already happened for other sectors, perhaps helped by some pent-up demand after the lockdown.

Cruising after a bruising few months

In travel and leisure, we can also see some encouraging signs in other countries. In China, consumer travel is back to pre-crisis levels, albeit only domestically so far. The strong response to the UK’s ‘eat out to help out’ scheme also implies a healthy appetite for leisure activities.

Even some cruises are now operating again. In Germany, the MSC Grandiosa has completed multiple cruises with no infections on board so far, although some customers were not allowed to embark. Costa has restarted cruises in Italy, while operators are expected to resume in China and Australia soon. In the US, a decision by the Centers for Disease Control is expected in October and cruises could recommence there before year-end if approval is granted.

Moreover, industry figures suggest that cruise bookings for 2021 have been within historical ranges despite the lack of any marketing. 60% of cruise bookings between May and July this year were reportedly new purchases rather than rescheduled cancellations, and recent cruise passengers have in aggregate left positive feedback.

Flight risks

That’s not to say there are no risks to this trade. A greater-than-expected second wave could further delay the reopening of the economy, customers could reject the changes made to the travel and leisure experience, or outbreaks on cruises could set back the wider sector. We should also be aware that the sector relies on both disposable income, so could be hurt if the labour market weakens, and older customers who may prefer to shield themselves for longer.

We nevertheless believe that being closer to a potential turning point in the newsflow, without having seen any meaningful outperformance for the sector, makes the risk/reward dynamics attractive enough for a first step.

The short-term prospects for the travel and leisure industry may well remain volatile, driven by the ebb and flow between virus fears and vaccine hopes, but over time we expect the rising tide of normality to buoy the sector.