The City view Economic outlook set to brighten


currently. Quite the reverse. So maybe it’s time to stop dancing and sit this one out.” To hammer the point home, Edwards


quoted a letter in the Financial Times from a Matt Long of Seilh in France who observed: “The next financial apocalypse is imminent. I know this to be true because the [FT’s] House and Home section is now assuming the epic proportions last seen before the great crash. Twenty-four pages chock full of adverts for mansions and wicker tea trays for $1,000. You’re all mad. Sell everything and run for your lives.” If these cynics are right, 2015 could


prove to be the mother of all financial crises, dragging the travel sector into a pit of despair. By contrast, I’m of the view that we are midway through what investors call a growth scare: a nasty few months that regularly pop up in the middle of a business cycle where everyone has a brief panic as they pick on some nasty trends that eventually prove to be temporary or not at all threatening. As evidence I would cite just a couple of recent notes by well-known


Airline profits up


A string of airline trading updates ahead of this report’s publication suggested a faster pace of profit growth. Ryanair’s results were hugely impressive; third-quarter numbers from British Airways parent IAG were also impressive; easyJet posted a £581 million profit for the year to September; and good news was expected from Flybe as the regional airline made progress in taming costs. IAG reported net profit in the quarter up


3% year on year to €580 million, with profits before exceptional items up 30%. Full-year profits are now likely to hit €1.3 billion, a big improvement on last year’s €770 million. Many investors reacted positively to news Iberia had turned a corner, but BA and its


routes to North America were the standouts. Comparing BA with Lufthansa and Air


France-KLM, it’s clear which airline is best positioned. But I would be a bit cautious. BA is riding high on its lucrative North American routes, reflecting the resurgent US economy. But the US will struggle to grow at its current clip over the next 18 months – a resurgent dollar and the US Federal Reserve moderating its monetary intervention could cause the pace of growth to moderate. A resurgent Ryanair will also have IAG’s


low-cost airline Vueling in its sights. One other thought: Latin America is looking weak – with Brazil especially vulnerable – and that will have an impact on any rebound at Iberia.


The eurozone economy is at its worst and a rebound in sentiment will be great for business


-1.6% ALL SHARE year on year FTSE


investors here in the UK and the US, filed days before this report went to press.


Brighter prospects In the first of these, Ben Gutteridge, head of fund research at UK investment firm Brewin Dolphin, summed up the current state of affairs in his weekly note to investors, suggesting: “[Whether] stuttering global growth concerns start to impinge on US progress remains to be seen but, for now, the market seems to be giving the region the benefit of the doubt; such an occurrence isn’t unprecedented, after all. “In the second half of the 1990s, US


growth proceeded (broadly) uninterrupted as wobbles/crises elsewhere in the world exported deflation to American shores. The absence of any inflationary pressures, however, allowed the US central bank to remain accommodative and supportive of economic growth. With Europe and emerging markets both underperforming their potential, we might just be seeing history repeating.” The European team at Morgan Stanley


also recently put out a summary based on the observation that current levels of investor pessimism are usually a positive sign. The Morgan Stanley analysts reminded clients that back in February 2012 they published a report that investor optimism based on financial options data at the time showed bullish positions in most markets even though economic indicators were peaking. They observed: “Today the opposite is true, with net short positioning across major asset classes, European macro data is arguably troughing and risk appetite is extremely low. This backdrop should create a positive environment for European equities.” Crucially, they argued there are signs of


an improvement in European data: “The euro area economic surprise index has bounced off its lows in the last two weeks, and our economists expect the macro


30 | Travel Weekly Insight Annual Report 2014


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