Susannah: Hello, and welcome to Switch your Money On from Hargreaves Lansdown. I’m Susannah Streeter,
I’m the senior investment and markets analyst at Hargreaves Lansdown. And I’m here with Sarah Coles,
our senior personal finance analyst.
Susannah: So, we’re back from half term break – I know Rishi Sunak disrupted your travel plans with
his unfortunately timed Budget – so I imagine it was a staycation – if anything that you went on
last week
Sarah: Yes, of all the people I worried might wreck my half term holiday plans, it turned out to be
the Chancellor. The most exciting thing we managed was to go pumpkin picking in a muddy field. But
everyone I talk to seems to be in the same boat – we’re all a bit desperate for a proper holiday
now.
Susannah: Yes, a holiday is definitely top of the list at the moment – but at every turn – plans seem
to be thwarted - if it wasn’t the onerous testing regime in place over the summer – then it’s the
surge of covid cases - that’s led to plenty of cancelled holidays – and holiday homes put back on
the listing sites after last minute cancellations
Sarah: And that’s what we are going to be focusing on today – the much hoped for recovery in the
travel industry – in an episode we’re calling – are we there yet? We’ll be talking to Brian Young on
what it’s been like trying to run a travel business throughout all this uncertainty.
Brian, have we caught you on dry land?
Brian: I’d like to say so, but I’ve managed to get away for 3 days to Corfu in the last 20 months!
Susannah: our senior equity analyst Sophie Lund Yates will be reading what the temperature is like
for some of the most traded shares among our clients – like British Airways owner IAG - and why some
shares offer diversification as we wait for turbulence to subside -
Sophie: Hi Susannah, looking forward to looking at some of the travel stocks. It’s definitely not a
one-size-fits-all recovery here.
Sarah: And when we return from our deep dive into the travel business, we’re going to look a little
closer to home – and focus in on the prospects for the UK – following the announcements made on
Budget day. Our head of Investment Research Emma Wall will be having a chat to HL Select Fund
manager - Steve Clayton,
But first let’s fasten our seatbelts for a look at the travel industry. The past 18 months has been a
rough ride hasn’t it?
Susannah: Yes, and hopes that a smooth recovery would be underway for the sector – haven’t quite yet
materialised…So if you look at passenger numbers in July there were just under one and a half
million air passengers arriving in the UK, and although it’s higher than a year earlier, it’s only
around one eighth of the number of people arriving in UK airports in July 2019, before the pandemic.
But there is a lot more optimism around than this time last year – when airline after airline was
rocked by extreme turbulence – before those vaccine breakthroughs provided a glimmer of hope.
Sarah: Yes, and there has been some good news more recently, so the end of the controversial traffic
light system came as a huge relief for airlines and travellers last month. The red, amber and green
levels of restrictions had been incredibly difficult to work with.
In fact, the ONS asks returning holidaymakers how easy they found it to get hold of information about
overseas restrictions while they were away, and in August almost four in five people said either
said it was difficult or very difficult. The ONS didn’t exactly blame the traffic light system for
the confusion but said that traffic light changes over the summer need to be kept in mind when you
consider these figures.
Susannah: Yes, the end of the traffic lights has been widely welcomed. There was also the change to
the expensive testing regime, which had added too much to the price of travel – the cost of those
PCR tests really added up especially for families and now only cheaper antigen tests are required
for people returning on day 2 – certainly cuts the cost of a holiday – But
Sarah: I can sense this is going to be a significant but…
Susannah: There is another potential spanner in the works – particularly for travellers with children
– because of the way our vaccine rollout has progressed – inoculation of teenagers has been slow –
while some EU countries began vaccinating teens in the summer.
Sarah: Yes, and from personal experience I know that’s not been rolled out everywhere. In my local
area, there’s no sign of vaccinations for teenagers.
Susannah: And even where teens have had the jab, Government policy is also to only offer teenagers
one jab for now, with the date for their second to be confirmed later. This makes a difference,
because other countries like France, Austria, Italy and Switzerland have made two vaccinations for
teenagers a requirement to get a Covid pass – and it’s essential they have this before they can go
into ski lifts, swimming pools, or even bars or restaurants. If they aren’t – and they won’t be in
the UK for the foreseeable future, it seems – they’ll have to keep taking tests every few days – if
they do want to do pretty much anything other than staying in their hotel rooms.
Meanwhile, 12 – 15 year olds also won’t be allowed into countries like Canada – without quarantining
– if they haven’t been double vaccinated - even if their parents have had two jabs.
Sarah; So travelling with teenagers is still going to be difficult – and not just because doing
anything with teenagers is always slightly stressful. And even solo travel means getting to grips
with specific rules for each country. You have to complete the right tests and fill in the right
forms, and when any part of the process doesn’t run smoothly, there’s the risk you could end up
missing flights or not being allowed to travel. It all adds to the stress and the time it takes to
plan a holiday and given the faff of it all – there’s the risk people just won’t bother, and we’ll
miss another summer of international travel.
Susannah: So it’s a headache for travellers – but it’s probably a migraine for tour operators –
trying to work out the new rules of engagement. Let’s bring in Brian Young who a Managing Director
of G Adventures, a tour company.
Brian – just how have you managed to survive during the pandemic – I imagine bookings plummeted like
a stone.
Brian: Yes, it’s been a rollercoaster over the last 20 months, from the very start of the pandemic
we’re obviously a global travel organisation with travellers on all seven continents. So, we could
very quickly that the pandemic was here for a longer period than I think initially everyone thought.
So, we had at the very start of it, repatriation of all of our customers as we could see borders
closing in different destinations, in some cases a race against time to get people back. Then the
second part of that it to understand ow long the pandemic is to last for and what we need to do, and
we will get travelling when the world opens up.
Susannah: To what extent did you get an uplift in bookings among international travellers when the
restrictions were lifted – did they snap back or are people still cautious?
Brian: We have seen a shift in the bookings, most definitely. And more so, as lots of those
destinations came off the red list. We had 54 destinations on a red list that came down to 7 which
is now down to 0. Customers can now travel further afield, certainly the testing regime that’s been
required from a PCR test and such, those changes have made a big difference and that’s shifting
consumer sentiment. So there’s no doubt beforehand lots of confusions from a consumers perspective,
but as that’s started to become clearer, and the less requirement of certain tests, definitely
consumer confidence is coming back.
Sarah: How much extra complexity are all the current rules causing?
Brian: It has, the customer just wants more information and more hand holding now. It’s not just
about ‘OK, the government in the UK say these are the requirements’ but there’s obviously the border
requirements of going into a difference destination. What we’ve found is our call centres have gone
up the amount of time people are on a call because they’re trying to get more information to
understand exactly what’s required to travel to a destination. So, we now need to understand
everything across a spectrum of destinations. From that perspective it’s quite complex., but
certainly what we’ve seen is an increase in call volumes and bookings, so things are on the up.
Sarah: When the red list gets to 0, does that makes things easy for your planning as well?
Brian: It does, as it opens-up more destinations. We’re very lucky as we’re a global company, we’ve
operated trips throughout the whole of the pandemic. And what we’ve seen is that as North America
has been able to travel and we’ve been able to open up destinations. And in the UK one of the things
we’ve been clear about is if there’s a traffic light system then where do we think the first places
are that are going to open up for UK travellers. And for us we knew Europe was going to be a big
part of that before long-haul, and we knew customers wanted to travel closer to home, coming out of
the pandemic. So we actually created a suite of new trips in our DNA – we’re an adventure travel
company, so active, hiking, trekking tours are important to us, so we built out a suite of tours to
places you probably wouldn’t know us for, like Ibiza, Corfu, Tenerife, etc. And then as we’ve seen
places open and we’ve been able to operate globally, we actually operate over 1,000 trips in this
period. So we’re lowly but surely coming back up now there’s confidence and restrictions are coming
down.
Susannah: Do you think the travel big that we have has changed dramatically and for the long term
because of Covid? You mentioned switch in destinations maybe closer to home, do you think that’s
going to last?
Brian: I think everybody wants to travel, and as more destinations open up, using Thailand as an
example. As of today, people can travel to Thailand. Peru coming off the red list. As the world
opens-up, I think what you’ll see is more people wanting to get further afield and will want to get
off the beaten track. A lot of what we do is based around giving back to local communities, so for
us it’s really important to get people travelling around the world, impacting in a positive way to
all of these local communities who have been starved of tourism for the last 20 months.
Sarah: Are you getting the sense that some people are keen to treat themselves and now they can
finally get to travel, want to do something really special?
Brian: Yes. What we’ve seen over the course of the pandemic, when we’ve looked at all of the search
results and what people are looking for. People are looking for bucket list-type tours, so climbing
Kilimanjaro, or base camp Everest, or a safari. These are the sort of things people may have had on
a list of ‘I’d like to do or get to do at some point’. So, we saw through the pandemic, huge
increases in those searches, which has translated into bookings. People have realised that travel is
special. It got taken away from them over the pandemic, people have been out and about and being
more active as well through the lockdown as the only form of getting out and doing any exercise was
the one hour we were allowed to do at he time. So, I think people will have definitely got a desire
to get travelling.
Susannah: Thank you so much Brian, it’s been fascinating to get all of your perspective on just what
it’s been like running an adventure tour company during the pandemic and the way ahead. Let’s bring
in Sophie Lund-Yates about this –. Let’s start with the flight paths of the airline companies – they
are certainly have taken different routes - and aren’t in the same competitive position are they as
we emerge from hopefully the worst of the crisis?
Sophie: A really interesting one for me is Wizz Air. Not just because I love the name of the stock –
that’s not a reason to invest! But the reason that they’re interesting is that they’re focussed on
eastern European routes, including native Hungary. And because of that area being slightly less
popular or niche, it has a near monopoly on those routes which is a rare thing in the sector and has
obvious benefits from a competitive position. It keeps costs incredibly low, as a carrier. One way
it does this is by flying into smaller airports a bit further away from central hubs. Bit like
flying into Luton instead of Heathrow. When your unique selling point is being as cheap as possible,
customers don’t tend to mind this – it also means there’s less competition for your slots at the
airport. That then feeds in to the super low prices it can charge and that also means there’s more
scope for ancillary revenue – upselling to you and me. The group made more money from these services
(think extra baggage allowance, seat booking fees and food), than it did on ticket revenue last
year. At €413.3m, these were almost 27% higher in fact than its ticket revenue last year. Being a
low-cost carrier should help hold the group up if the economy worsens. As alternative European
holiday spots gather popularity, Wizz should stand to benefit too. And the really exciting stat is
that it’s expected to fly 90-100% capacity over the summer, which is very impressive. I should point
out, that the results are due out in the next few days, so we should soon know if they’ve hit that
target. And finally, something that’s really important for me to mention, with all airlines really,
is that they’re very cyclical, and by that I mean it’s fortunes track the wider economy quite
closely. So, if the economy hits a rough patch, even better placed airlines will feel the crunch.
Susannah: Yes, it could really hit people’s disposable income if there’s a downturn so people won’t
be splashing the cash so much on holidays. But let’s talk about the difference in companies like
Wizz Air and the long-haul carriers.
Sophie: So the obvious one to talk about here is British Airways owner, IAG. So as an operation, it
couldn’t be much further removed from the likes of Wizz, as it’s much more exposed to long haul and
business travel, so unsurprisingly Covid is still weighing massively on demand. Whereas you have
Wizz saying they expect to have flown close to full capacity over the summer, IAG definitely haven’t
had that commentary. In the six months to 30 June, IAG flew 20.8% of 2019 capacity, and demand isn’t
expected to recover fully until 2023. Again, I should point out we’re expecting some results in the
next few days so there may be some kind of upgrade to that guidance but personally, I don’t think
we’re going to see a massive amount of positivity coming out. The good news where IAG is concerned
really is that immediate liquidity concerns have been put to rest. They’ve managed to take on a
multitude of loans, deferred pension payments and shifted costs of the Air Europa merger further
into the future. So they’ve actually got access to €10.2bn. There was a moment when things first
kicked off and you’re looking at it thinking ‘oh my goodness, this could be an actual crisis crunch
point’ and that is absolutely no longer the case, which is great. All the fat that’s been trimmed
means it will emerge from the crisis as a much smaller but potentially more efficient company, and I
should also add that it’s in a good place to capitalise on the shift as business travel resumes,
thanks to its leading brand and strong reputation – but it’s likely to be a bumpy ride.
Susannah: So still a lot of turbulence out there, and of course, it’s not just airlines that have
been affected by the fall in tourist numbers. You’ve been looking at one interesting company with
its fingers in lots of pies, that is also exposed to changes in how we’ve been travelling.
Sophie: Any opportunities to talk about this business as I’m a fan of their products, is Disney.
Obviously, it’s not just airlines that are reliant on tourism. Disney’s profits took a hammering
when it was forced to close its theme parks and shut down its cruises during the pandemic. When you
think about the fixed costs that go into running a cruise liner and those enormous theme parks, you
know it’s not surprising what we’ve seen. But it’s turning a corner with third quarter revenues of
$17.0bn, up 45% year-on-year and ahead of analyst forecasts. That reflects a very strong recovery in
the group's theme parks as gates have started to reopen and profits came along for the ride.
But Disney’s not just about rollercoasters and parades anymore – the streaming business has been
phenomenally successful and was buoyed by lockdowns. Whilst confined to our sofas it meant lots of
people signed up to a Disney+ subscription. Disney+ now has a little over half the number of
Netflix's subscribers. Throw in ESPN+ and Hulu, and Disney has surpassed 80% of Netflix's current
total. This newer venture doesn’t contribute much to profit yet, but it’s a really exciting area to
watch as it builds scale. As ever, it’s not always a picture perfect situation, and the one bug bear
where Disney’s concerned really is its debt levels. As much as they’re heading in the right
direction, the $71bn dollar acquisition of 21st Century Fox a couple of years ago means
the balance sheet is carrying a bit more debt than is ideal – not looking at a fundamental crisis,
but something to keep in mind.
Susannah: Thanks Sophie – now let’s pull focus back to the UK now – because of course Chancellor
Rishi Sunak unveiled the budget at the end of October - and there are worries that the level of
taxation facing the UK could drag on the very fragile recovery – let’s see what Steve Clayton, HL
Select Fund manager makes of it all – and the other announcements in the budget – he’s been talking
to our head of investment research Emma Wall.
Emma: Hi Steve
Steve: Hi Emma
Emma: So when the budget was announced from the chancellor, the market did very little at all, didn’t
it?
Steve: On the day itself the market dropped by all of 0.1%, and even within the market there wasn’t
an awful lot of reaction. Yes some individual companies reacted, pub companies took the news of duty
cuts and business rate relief very well. But overall industries barely shifted, there was nothing
moving by more than 2% on the day, so from the stock markets perspective it’s almost as if Mr Sunak
could have taken a duvet day.
Emma: I always think for budgets, it’s much more about individual consumers and households that feel
the impacts, not the markets. And as an investor, that’s how you can digest and be impacted by the
budget, if there’s a change to pension policy or there’s a change to tax rates. And in fact the only
budget I’ve ever covered where I’ve seen a sizeable move in the market is when we had pension
freedoms, because that did very much affect people’s access to investments and the way people were
going to invest and so the stock market reacted. Other than that, as you say, it’s a bit of a damp
squib often for the stock market, isn’t it?
Steve: It is, and perhaps thankfully there was nothing on pensions because there’s been far too much
tinkering on pension rules in recent years.
Emma: In terms of looking forward and what we can expect from the stock market over the next year,
one of things that was really interesting for me was the economic forecast. You know, we’ve had such
a torrid couple of years in terms of UK economic growth and actually there was some good news there,
wasn’t there?
Steve: Well that’s it, the Office for Budget Responsibility has revised up its expectations about how
well the economy is going to recover from the deep recession that Covid brought with it. And as the
OBR said, that extra economic growth is bringing in a lot of tax revenue, and this has created
headwind for Rishi Sunak to actually start spending significantly more that people thought he would
have had the capacity to. So far, he’s spreading it broadly across government departments, they’re
all going to get an increase in real terms. But if the economy keeps moving and as the OBR is
progressing, then potentially he could be building up a little bit of a war chest for tax cuts
towards the end of this parliament. And he wouldn’t be the first politician to set the budget with
the idea of having some fire power as he heads towards an election.
Emma: Good news for the economy then, and broadly some good news for households and for the public
sector, as you say in the budget. One of the things however that Is potentially less good news is
this spectre of inflation. All this spending and indeed everything that’s happened in these last
couple of years, with difficulties with trade, and energy prices, is building up inflations and that
does affect markets doesn’t it? And it affect stock picking and fund picking, and your job.
Steve: Exactly, at the moment what we’re seeing is inflation being boosted by rising energy prices.
Also when the world sort of shut down in response to the pandemic, it interrupted production
schedules and it interrupted the movement of ships around the oceans, and we’ve ended up in a
situation where there’s an awful lot of goods that were either not produced or have ended up in the
wrong location, compared to where they were expected at this time, which is leaving manufacturers
around the world struggling to get hold of all the components they need to produce finished goods.
They’re all scrambling to try and get hold of stuff and paying up whatever is necessary to keep
their own production moving, and this is all feeding through into inflation. We are seeing price
rises accelerating in nations around the world, not just at home. Whereas previously we were looking
at an economy that was flirting with deflation, now we’re seeing inflation rising well above the
target levels central banks have been operating with in recent years. In the UK, I think the OBR was
forecasting 4%+ inflation going forwards and we’ve already got inflation over 5% in the US. And this
does impact markets. Markets fret that if the inflation does not prove to be transitory, it seems
likely that interest rates will have to respond, and we’re expecting the first move in UK rates for
some time to take place in the next few months.
Emma: And rates have already started to rise across the world, we’ve seen in Brazil in the last week
that they’ve actually hiked rates in order to try and battle double-digit inflation. In New Zealand
they raised rates earlier this month for the first time in seven years and indeed are forecasting 5
or 6 rises in the next couple of years. As you say, the Bank of England governor here in the UK,
Andrew Bailey has signalled a potential rate rise, although the Monetary Policy Committee seems to
be a bit more divided on that because only 2 of them voted for a rate rise in the last meeting. But
let’s say that does play out and Andrew Bailey is correct, what impact do rising rates have on
equity prices?
Steve: It depends how much they rise. At the moment people are talking about maybe 2 or 3 interest
rate increases by the end of the next 12 months or so, and given the rates tend to move by about a
quarter of a percent a time, that’s going to leave interest rates still pretty close to 1% which is
very low in historic terms. And I think if that’s all that we get to see then equity markets will
brush that off. Where we’ll get to see significant market reactions will be if inflation continues
to rise and looks to be carrying ahead with steam because at that point, Central Banks could be
forced to go a lot further than the sort of relatively token rate increases that we’re talking about
so far. And that’s when companies will feel the pressure. When servicing debts could become harder
to achieve and at that point, markets will be looking to differentiate between the stronger players
and the weaker, and stock selection will be absolutely vital.
Emma: Steve, thank you very much.
Susannah: That was Steve Clayton, HL Select Fund manager with our head of investment research Emma
Wall . You’re listening to Switch Your Money On from Hargreaves Lansdown.
Sarah: And finally, it’s time for the quiz
Susannah: Yes, this time to reflect our travel theme, I’ve been looking at some of the more unusual
trips and tours you can book, and as ever it’s up to you to guess which ones are actually bookable,
and which ones I’ve invented,
So, Sarah, is there a wrestling themed cruise?
Sarah: I know wrestling is massive in the US, so I suppose, why not stick it on a boat too? It
wouldn’t be my first choice of holiday, but I’m going to say this is real.
Susannah, You’re right, there is. Wrestler Chris Jericho took the Rock ‘N’ Wrestling Rager at Sea:
Triple Whammy from Miami to the Bahamas at the end of October with wrestling shows, live music, and
even… rather oddly a wrestling themed game of family fortunes.
Right, how about a cruise for bikers?
Sarah: Now that’s just daft. Surely bikers want to spend their holidays on their bikes, and this is
the one place you can’t take them. So this is definitely not real.
Susannah: I’m afraid, you’re wrong. The High Seas rally has just returned to port in Florida after a
trip round the Bahamas. It was wall-to-wall rock and roll, parties in every port, and the chance for
bikers to hang out with other bikers.
How about a survival break on a desert island?
Sarah: Now that sounds like a brilliant way to turn a sunny beach holiday into hard work. I’d like to
think it doesn’t exist, so I’ll say no.
Susannah: I’m afraid it does. You get one night in a luxury hotel in Panama, a couple of days
learning how to do things like use a machete and weave palm leaves, and then you’re cast away on a
desert Island for three days. It does sound like hard work.
And finally, can you go on a wine tasting tour of Lanzarote without leaving your home?
Sarah: That doesn’t sound like it’s a patch on an actual wine tour of Lanzarote, but it does sound
like the kind of thing people started doing during lockdowns.
Susannah: Yes, it’s a Zoom tour a company set up after so much travel stopped in 2020. You take a
tour online, and they send you a selection of virtual wines to taste during the tour, so you don’t
get a holiday, but you do get something nice to drink.
Sarah: I think that although it involves being stuck at home it actually sounds much like more my
kind of holiday than the others.
Susannah: I don’t know. One of those cruises sounds quite fun. But before I go and start packing my
bags- we need to remind you that Emma and Steve recorded their interview on the 28th October 2021
and the rest of this podcast was recorded on the 1st November 2021, and all information was true at
the time of recording.
Sarah: nothing in this podcast is personal advice – you should seek advice if you’re not sure what’s
right for you. Investments rise and fall in value, so you could get back less than you invest. As
you’ve heard – tax rules can change, and any benefits depend on individual circumstances.
Susannah: yes this is not advice or a recommendation to buy, sell or hold any investment. No view is
given on the present or future value or price of any investment, and investors should form their own
view on any proposed investment.
Sarah: And this hasn’t been prepared in accordance with legal requirements designed to promote the
independence of investment research and is considered a marketing communication.
Susannah: Non-independent research is not subject to FCA rules prohibiting dealing ahead of research,
however HL has put controls in place (including dealing restrictions, physical and information
barriers) to manage potential conflicts of interest presented by such dealing.
Sarah: You can see our full non-independent research disclosure on our website for more information.
So all that’s left is for me to thank our guests, Steve, Brian, Sophie, Emma and our producer
Elizabeth Hotson.
Susannah: Thank you so much for listening. We’ll be back again soon - so if you enjoyed this podcast
please do let us know what you think, and do subscribe wherever you get your podcasts so you get a
fresh new episode in your inbox as soon as it’s ready. Goodbye.