James Abate, manager of GAM American Star, believes the rally in the US hotel and leisure sector has...
James Abate, manager of GAM American Star, believes the rally in the US hotel and leisure sector has ground to a halt and short-term opportunities appear limited.
Company share prices in the sector bombed immediately after the 11 September attacks, with many people fearing a strong recession. However, US consumer confidence in the economy and in their ability to travel safely recovered swiftly afterwards as there were no further attacks on the US, says Abate.
'Many of these stocks are significantly off their lows,' he adds. 'One of the things that drove sentiment towards the sector and caused us to look favourably at it during that period was that we thought we would see a continued decline in oil prices and that this would be a strong positive for the travel and leisure market.'
In fact, the opposite has happened, with the Middle East crisis and Iraq's decision to stop pumping oil for a month, oil prices have been pushed up significantly, he says.
Airlines in particular have been badly affected and, despite having cut back on capacity recently, are finding times tough, with ticket prices beginning to rise again as airlines struggle to maintain profitability.
Abate says: 'Hotels and the tourist industry are also suffering because of the high oil price. People are finding that their gasoline is a lot more expensive than it used to be and are becoming increasingly reluctant to drive long distances to go on vacation. The high oil prices have also come at a time when unemployment has risen. The average person on the street is not feeling confident right now and is watching the cents.'
Looking forward, in the immediate future, Abate cannot see anything that would lead to a radical improvement in fundamentals for the sector. Ultimately, people are travelling less, which means lower demand for hotels and high end leisure facilities.
Schroder Investment Management US equity fund manager, Philip Chappell, says the company added to its holdings in SouthWest Airlines and Carnival Cruises when they bottomed after 11 September and has been gradually trimming positions in recent weeks.
He is also looking carefully at the major hotel companies as he believes a round of consolidation may not be far off.
One obvious move, he says, would be for Hilton UK and Hilton US to create a global brand again. A natural step for British company Six Continents (formerly Bass) would be to acquire a US hotel operator, with Starwood appearing to be a good fit. At the moment, Schroders, despite being relatively positive on hotels and leisure, is slightly underweight the sector, reflecting its desire to see whether the fundamentals for continued growth are in place before it makes any significant moves in the market.
Chappell says: 'The deciding factor in all of this is the mood of the consumer. All the signs point to demand being pretty steady at them moment. Real incomes are strong, unemployment isn't getting any worse and affordability is high as inflation is low. The trouble is all this could change very quickly, particularly if fuel prices continue to rise.'
Many stocks are off their lows.
Unemployment appears to have stabilised.
Consolidation in hotels a possibility.
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From 6 April 2019