Travel & Leisure Europe (TRV) : A significant potential

The ETX Lyxor TRV (Travel & Leisure Europe), created in 08/2006 is listed in Euro on Euronext, and seeks to replicate the STOXX600 Leisure & Transport Europe index.

It consists of 22 European stocks, 65% of which are English, which induce a currency risk as the  Pound may prove quite volatile during the Brexit period.

The expenses of this ETF are 0.3% and the AUM of approximately € 13m. Replication is indirect (via Swap) and dividends are capitalized.

Alternative ETFs: EXV9 ( iShares in Euro)

 

Index & components

The ETF Lyxor TRV allows the investor to access a basket of 22 stocks that belong to sectors as different as catering and airlines. First of all, this index is characterized by the very high weighting of Compass, which accounts for more than 20% of the capitalization; it is in fact a factor of stability because this qualitative English stock benefits from a very defensive business model based on large recurring contracts, with a high exposure in North America (about 50% of turnover). The other major weightings are Sodexo, the French competitor of Compass, and then by more cyclical but highly qualitative hotel companies with a well-established growth profile such as Accor, IHG or TUI, as well as growth companies such as Ryanair (airline) or Paddy Power (online games).

In summary, the index appears to be well balanced between defensive stocks, which account for about 1/3 of capitalization, and on the other hand many growth companies with a varied profile (cyclical or non-cyclical characteristics).

The TRV tracker can be very volatile in times of economic crisis, as tourism is cyclical and may suffer counter-shocks in the event of a sharp recession, but it is a sector that tends to outperform in times of growth and rising markets as it is based on heavy trends (structural growth in tourism and air traffic).

The other main characteristic of the index, which is tight enough around a dozen securities representing nearly 75% of the capitalization, is to have a high exposure in the United Kingdom (52%) and especially to the Pound (65%), what in Brexit period is not without potential consequences. The sharp decline in the pound against the Euro has so far been offset by higher equity prices, which resulted in a zero-sum game. For the past few months, the price of the pound has stabilized at low levels against Euro and Dollar, but volatility is expected to persist on the British currency as long as the visibility of an overall agreement with the EU and its involvement in the British economy will be a minimum assured, while the maturity of 2019 is approaching.

At the same time, companies in the sector are exposed to geopolitical disturbances in varying proportions according to their business portfolio and, of course, to the terrorism that weighs on tour operators and airlines when certain regions close to tourism, as it recently happened in Egypt or Tunisia.

 

Latest developments

After a 10.1% decline in 2016, a marked underperformance compared to the Stoxx600 (+ 1.7%), TRV is up by 11% in 2017 (like the Stoxx600) and is therefore back  at the level of end of 2015.

The sector has been weakened by the wave of terrorist attacks in Europe and the Middle East and of course by the Brexit, but Mrs May's government now seems to be moving towards a more pragmatic approach as she seeks an extension of the negotiations of two years.

The sector continues to benefit from a moderate energy price with oil that remains in the $ 50 zone while the European economic recovery is accelerating according to the latest PMI indicators, which favors traffic and bookings. Compass's good performance (+ 14.4% since the beginning of the year), which weighs 20% of the index, is an additional stabilizing factor.

We believe that TRV retains a significant potential for appreciation as the sector should benefit from a favorable base effect and a recovery in consumption in Europe as a result of the fall in unemployment. Low-cost airlines such as Easyjet or Ryanair have recently suffered from the prospect of higher costs linked to a European set-up made necessary by the Brexit, but very good traffic figures and good business prospects (and bankruptcy of Air Berlin) should allow these companies to bounce back soon.