One my favoured investment megatrends this decade has been the boom in outbound Chinese tourists and its implications for Australian and New Zealand companies.
I have written on the trend several times for The Bull, nominating Sydney Airport, Sea Link Travel Group and The Star Entertainment Group as beneficiaries. These and other stocks leveraged to Chinese tourism have delivered good returns over five years.
But my enthusiasm for this trend is fading, at least for 2019, meaning early investors in tourism-related stocks should consider taking profits.
Some warnings first. When presenting negative ideas, I always urge readers to seek independent financial advice or do further research of their own. Every investor is different and selling stocks that have rallied creates Capital Gains Tax (CGT) considerations.
Also, investors have different needs and risk profiles. A long-term investor who owns an airport stock for its yield might be willing to tolerate short-term capital losses. An active investor who has held tourism stocks to ride the Chinese megatrend might seek quick profits.
Either way, ensure the decision to sell tourism-related stocks is right for you.
Caveats aside, I have become more concerned over the past few months about future growth in Chinese tourism to Australia. It began when Tiffany & Co reported in November quarterly sales that missed market expectations. The iconic jewellery retailer, a drawcard for cashed-up Asian tourists, said declining spending from Chinese tourists hurt its sales.
The United States’ escalating trade war with China will further weigh on outbound Chinese tourism and spending. Some Chinese tourists might be reluctant to visit the US and others might be unable to if the trade war continues to hurt China’s economy. Trade-war uncertainty will encourage more Chinese tourists to stay home or holiday in the region.
Other tourism markets are getting caught in the trade-war crossfire. Canadian tour operators specialising in Chinese tourists this month said the trade stoush is scaring tourists away. As in other developed markets, Chinese tourists have been a boon for Canada.
China this week reported annual economic growth that was the lowest in 30 years. Most countries would love to grow at 6.6 per cent, as China did in 2018. But China’s growth is slowing faster than global financial markets expected and adding to fears of slowing global growth.
The risk is that China’s growth is weaker than official figures suggest. The trade war is encouraging Chinese exporters to delay investment and hiring. China’s unemployment rate ticked slightly higher in November, which is unusual for the Communist country. And the government is increasing infrastructure spending to support the economy.
A depreciating Yuan is another concern for offshore tourism operators. A falling Yuan relative to the Greenback gives Chinese tourists less purchasing power in the US – and another reason to downsize, delay or abandon overseas holiday plans.
So how will this play into our tourism market? There’s no sign of a downturn yet: inbound Chinese arrivals here rose 6.2 per cent to 1.42 million in the year to November 2018, Australian Bureau of Statistics data shows. That’s excellent growth given it’s off a high base.
But investors cannot wait until bad news is obvious. By then, the market has reacted and repriced assets accordingly. The danger is investors extrapolating soaring gains in Chinese arrivals to Australia too far into the future and believing the trend is unstoppable. And falling prey to tourism hype and overpaying for assets.
To be clear, I am bullish on the long-term prospects (three to five years) for Chinese tourism in Australia. With another 2 billion Asians expected to join the global middle class by 2030 on OECD numbers, growth in outbound tourism from China is assured. The Asian middle-class consumption boom, a defining trend in human history, will last for decades.
Australia has terrific location and time-zone advantages over other developed markets in the fight for Chinese tourists. Our tourism industry is well regarded in Asia and our country’s safety, reputation and natural and man-made attractions are drawcards.
But I do expect a tempering of growth in Chinese tourists to Australia in the next few years as China’s slowing economy and the trade war play out. There’ll still be growth, just not as much and not enough to spark a rally in ASX tourism-related stocks.
A significant downturn in Chinese tourism to Australia would hurt several sectors. Airports would have fewer arrivals and less spending at their terminals; there’s already talk that Chinese tourists are spending less at duty-free shops. Hotel chains would suffer and tourism operators would have fewer Chinese visitors at their attractions.
Retail would be another casualty. Witness the growth in Australian and internationally owned fashion chains that target wealthy Chinese tourists. Or the number of premium fashion stores in large shopping centres, such as Melbourne’s Chadstone, catering to this market.
Slower sales at Tiffany & Co, partly because of fewer Chinese tourists, bode poorly for other upmarket retailers that need the tailwind from Chinese tourism to offset patchy local demand. Retail property trusts that own prestige “fortress malls” would also be affected because many lease a growing amount of space to retailers that cater for wealthy Asian tourists.
The conclusion: China’s outbound tourism boom is poised to slow, possibly faster than markets expect. That’s a problem for ASX-listed tourism stocks in 2019 that already face weakening local demand as consumers struggle with debt, stagnant wages and falling property prices.
Chart 1: Sydney AirportSource: The Bull
• Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at January 23, 2019.