It may be time to take some profits on European tourism companies, despite -- or, precisely, because of -- the bumper first half of the year for the sector.
International arrivals rebounded in January through April this year by 6% after mixed results last year, data from the United Nations' World Tourism Organization (UNWTO) showed. The areas with the strongest growth were the Southern Mediterranean, where international arrivals increased by 9%, and Northern Europe, with 9% growth.
Western Europe saw international arrivals increasing by 4% compared with a flat pace of growth last year, while international arrivals in Central and Eastern Europe increased 4%, the same as last year.
France in particular enjoyed a strong rebound in tourism. Hotels in the Paris region saw a 14.9% jump in international clients in the first half of 2017 compared with the first half of last year, according to the regional tourism industry body.
Japanese tourists led the rise, with their numbers surging by 40.5%, followed by the Chinese with a 29.8% increase, the Americans (up 20.5%) and the Germans (up 20.4%). British tourists bucked the trend, with their numbers declining 1.7% -- understandable, as the pound tanked to an eight-year low versus the euro because of uncertainties over Brexit.
With the UNTWO forecasting a rise by 2030 of almost 57% in international tourist arrivals to Europe, to 744 million, tourism is still a good investment over the long term, analysts at Societe Generale wrote in research on the issue on Thursday, Aug. 24.
However, they advised taking some profits on their tourism basket because of short-term headwinds hitting the sector. "Expectations are high and thus already priced in the stock market," the analysts said, noting that the Panel of Tourism Experts confidence index is at a level not seen in a decade.
"Also, a stronger euro could represent a headwind for the attractiveness of the euro area for tourists in the coming months," they said. The analysts noted that the euro has appreciated around 12% against the U.S. dollar since the beginning of the year and by around 7% versus the Japanese yen.
It is too early to tell whether the latest terrorist attack that killed 14 people in Barcelona and the one in Turku, Finland, where two people died, have affected tourists' confidence.
A basket of the shares of 14 eurozone companies that offer investors exposure to the European tourism sector created by the Societe Generale analysts in March 2015 has returned 27% year to date. In their research report, the analyst said they were turning short-term neutral on the basket.
The basket contains stocks in the construction, consumer, hotels and transportation sectors. In the construction sector, the components are Italy's Atlantia (ATASY) , Spain's Abertis (ABRTY) and France's Vinci (VCISF) . Luxury goods retailers LVMH (LVMHF) and Hermes, as well as Italian shoes and sportswear maker Tod's, are the consumer sector components.
Finally, the transportation sector has the most stocks represented in the basket. It includes Spain's Amadeus (AMADY) , Aena (ANNSF) , International Consolidated Airlines Group, French-Dutch airline Air France-KLM (AFLYY) , Irish budget airline Ryanair (RYAAY) and the operator of the Channel Tunnel, France's Groupe Eurotunnel (GRPTY) .