Why we're investing in the business of travel

August 28, 2019 Richard Schmidt

           

Like most Canadians, my thoughts turn to travel in winter, especially to warmer places where I can escape the bitter cold. I'm in good company: a recent report from Expedia on the most searched destinations by Canadians during the winter months turned up a list topped by Punta Cana, Cozumel, and Los Cabos among other sunspots.

As a traveler, I've been to over 30 countries—and my goal is to keep the number of countries I visit above my age. My desire to go places and see the world is something I share with millions of people around the world—so much so that travel has become big business and a massive driver of the global economy. It's also a part of MD's portfolios as we look to capture the growth.

The volume of travel is impressive

You need not travel far to realize just how powerful a force tourism has become in today's economy—simply look at the data. According to the World Travel and Tourism Council the worldwide travel and tourism sector outpaced the growth of global GDP in 2018 for the 8th year in a row, up 3.9% and contributing a record US$8.8 trillion and 319 million jobs to the world economy.

These days, people are traveling at such a high rate and in such great numbers that historic tourist destinations like Venice have been forced to limit entrance in order to preserve its beautiful canals and buildings. Here in North America, the third-largest travel and tourism market in the world, the sector contributed US$1.9 trillion in total economic activity in 2018. In Canada alone, tourism spending totaled $80.8 billion between January and September of 2018 and tourism activities directly accounted for $33.9 billion of Canada's GDP.

Travel is more attractive than ever

So what's driving the growth? The Organization for Economic Cooperation and Development points to several megatrends, including demographics and technology, that are giving rise to greater numbers of people wanting to travel as well as new platforms that make planning easier than ever before.

Here are just a few of the trends we at MD see driving growth in tourism:

An aging population focused on leisure activities like tourism and accessible travel opportunities, such as cruises run by household names like Carnival.

An expanding middle class that is growing by an estimated 150 million people a year, primarily based in Asia (OECD).

Enabling technologies in the form of digital platforms like Bookings.com and TripAdvisor that allow people to plan and book travel and participate in a growing sharing economy that makes world destinations cheaper and more accessible than ever.

Mobile apps like Google Maps and Google Translate which also help make new countries and languages easier to navigate.

Social media that allows people to share their travel experiences, sparking the desire in others to see their own smiling faces in those spaces and places.

Investing in high-quality businesses set to benefit from trends shaping the marketplace

The reality today is that anyone can travel just about anywhere in the world—we can see this all around us whether it's English language signs in Beijing or Chinese signs in New York City. A big part of prudent investment management is to identify the trends shaping all the industries we invest in, including travel. We are always looking for excellent businesses that are well positioned to grab hold of these trends and build on them.

For example, we recently purchased Booking Holdings, a company that is riding the technology megatrend in travel and tourism. With holdings in Bookings.com, Rentalcars.com, OpenTable, and Cheapflights this company supports travelers looking to plan and book travel anywhere in the world easily and cheaply through its platforms. The company is also "asset-light" meaning it isn't weighed down by money intensive assets, which results in a high-return structure and significant excess free cash flow.

We also recognize the rising middle class, especially in China where people are using their growing wealth to see the world in greater numbers than ever before. We own shares in Ctrip, the dominant player in China's online travel booking space. As Alibaba and other players pull back from the business, the space is wide-open for Ctrip to build on its successes and increase its market share, offering new products and capitalizing on its already high brand awareness to keep the cost of acquiring new customers low. Despite a downturn in the macroeconomic environment, Ctrip delivered 40% growth in its year-over-year operating income in the first quarter of 2019.

Bottom line—people everywhere want to get out and see the world. They want to experience new places and people—and we invest in businesses that are dedicated to helping them get there. For more information about this story, your portfolio or any other major trends shaping how we invest, please don't hesitate to contact your MD Advisor.

 

About the Author

Richard Schmidt

RICHARD SCHMIDT, CFA, is a Quantitative Investment Analyst with the Investment Management team at MD Financial Management. He provides research and analysis for all fixed income and equity mandates.

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