Our Opinion: 2017

Tourism is proving an exciting investment opportunity

I’m currently in Marrakech – a relatively provincial city (the fourth biggest in Morocco) but one that is teeming with visitors from all over the World. Many are from emerging markets, with a far more diverse reach than I am used to seeing in London, for instance. Visa policies in emerging markets, like Morocco, are more open than developed markets, with 60% of emerging countries requiring entry visas compared to 71% elsewhere.

Despite its small size, and a population of less than a million, the city has a busy international airport, handling almost four million passengers a year. This helps demonstrate the growth of tourism in emerging markets, and how investors can take advantage of the opportunity.

Urbanization, income growth and aging demographics in emerging markets (EMs) are profoundly changing consumer spending and behaviour generally. A key beneficiary of these trends is the tourism industry. International travel is a predominantly urban phenomenon in emerging markets because access to aviation infrastructure is in big cities where incomes are higher. The rise of low-cost carriers (LCCs) has also vastly improved affordability over the last decade.

The fact that over two-thirds of inbound visitors to emerging markets are from other emerging countries clearly reflects the boom in EM outbound travel. Government policy is playing a key role here. Many emerging economies are seeking to diversify over-dependence on commodity and energy exports and openly promoting tourism growth as part of this strategy. Support comes in the form of public investment in airports, new bilateral flight agreements, visa relaxation, and cuts in consumer tax for visitors, among others.

Airbus forecasts that two-thirds of new plane orders will come from emerging countries over the next 20 years.

The number of inbound tourists into emerging markets has more than tripled in three decades, from 100m in1995 to more than 375m in 2015.

The slump in energy and commodity prices since 2014 has had a pronounced effect on EM economic growth but not on tourism growth. Asia and EMEA (Europe, Middle East and Africa) have attracted the bulk of tourist flows, making up 80% of total inbound tourism from emerging markets. According to the United Nations World Travel Organization (UNWTO), international tourist arrivals in emerging markets will grow at double the pace (4.4% a year) of developed markets (2.2% a year). Thus, by 2030, emerging markets will be the destination for 67% of international tourists versus 30% in 1980 and 47% in 2010.

Overseas travel is often an aspirational purchase, particularly among emerging urban middle classes. Asia Pacific emerging markets are witnessing a rapid rise in the number of megacities (cities with populations above 10 million inhabitants) driven particularly by urban migration. This is driving demand growth for aviation infrastructure, which is especially evident in China’s second-tier cities. International airports of most capital cities in emerging Asia are planning new terminals or runways. The key reasons are rising tourist passenger traffic congestion and aggressive fleet expansion by regional and domestic carriers.

Malaysia, Mexico, South Africa and Thailand, are actively promoting tourism as part of a government policy of diversification. For some of these economies, inbound tourism has become an important source of foreign exchange, a trend that has become more pronounced with falling dollar revenues from commodity exports. Direct tourist receipts accounted for around 36% of Turkey’s foreign exchange reserves in 2014, while they accounted for 17% for Thailand, 16% for South Africa and 15% for Malaysia.

In Mexico, receipts from inbound tourism have matched those of agricultural exports since 2008.

Aviation and hotel sectors have clear exposure to the EM tourism boom. However, many other publicly listed service sectors in both emerging and developed countries can help investors benefit from travel and tourist market growth. It is becoming a key opportunity in global portfolios.

15th November 2017