Covid-19 pandemic

Attractive investment opportunities The IT services sector is characterised by recurring business models and high levels of growth in recent years, both of which make it an appealing area for investment. After an initial dip in revenues, the Covid-19 pandemic accelerated the adoption of digital products and services. While these effects do appear to be fading, the sector is still reaping the benefits as the demand for the outsourcing of IT services, IT infrastructure and software subscriptions remains high. The move to the cloud, data centres, and the development of new IT services such as data and cyber security have also led to extra demand for Dutch IT. As a result, the sector has shown sustained revenue growth, totalling 9% YoY in 2022. The recent contraction we've seen was mainly driven by a decline in investment in IT equipment, and therefore shouldn't deal too much of a blow to the bigger picture.   The IT services sector displays sustained revenue growth after the pandemic     Private equity contributions Given its attractiveness to investors, it's no surprise that the sector is one in which private equity is very active. So much so that from 2020 to 2022, 52% of deals were backed by a private equity fund. Private equity-backed companies tend to follow one of two M&A strategies: integration and buy-and-build. The strategy followed partially depends on the investment horizon of the private equity fund in question.   In an integration strategy, not only are the back-end systems of the acquiring and target companies combined, but their processes and operations are also incorporated into one company following one strategic direction and brand. This strategy is followed by Arcus IT, Hallo and Rapid Circle. In the short term, integration takes more time and effort and consumes more resources from companies involved in the deal. However, in the long term, it makes it easier for companies to maximise their service proposition towards clients using cross and upselling.   In a buy-and-build strategy, only the back-end systems tend to be integrated while the different brands and company names are kept, bundling the knowledge and expertise from various companies under a business group. This is the case for Interstellar Group, Total Specific Hosting and Broad Horizon. Through this strategy, firms take advantage of the market tendency of assigning higher valuations to larger companies and benefit from multiple arbitrage*, without making many material changes.   *Multiple arbitrage means that multiples are higher for larger companies than for smaller ones when acquired. For instance, larger company A can acquire smaller company B at 5x EBITDA, but when A is then acquired by even larger company C, it is sold for 7x EBITDA. The EBITDA gained by A from the acquisition of B is an additional profit.

The global tourism industry has faced unprecedented challenges during the COVID-19 pandemic and companies in the sector have suffered significant losses. However, as the world recovers and travel restrictions finally come to an end, the industry is now poised for a resurgence. A successful summer season on the horizon brings new hope to the afflicted industry. As travel resumes, equity prices in the tourism and travel sector are expected to show positive momentum. The market reaction to the reopening of borders and the resumption of international travel is likely to be reflected in the share prices of companies in the industry.   While the industry is on track to recover, it is important to note that reaching pre-pandemic levels may not happen immediately for all companies. The losses incurred during the pandemic have had a significant impact on the financial position of many tourism enterprises. Some companies are still striving to recover losses and restore financial stability, but here’s a look at the prospects for individual sectors of the tourism industry:   Airlines: Companies such as Lufthansa and other major airlines have been hit hard by the pandemic. As demand for travel increases, airline shares are expected to rise. However, the recovery of airline inventories will depend on various factors, including vaccination rates, travel regulations and consumer confidence in air travel.   Online booking platforms: Platforms such as Airbnb and Booking.com are likely are likely to benefit from the resurgence of the travel industry. As travelers start planning their trips, the demand for online booking services is expected to increase. Hence, these platforms may see their stock prices rise as they gain momentum.    Hotels: The hospitality sector has faced major challenges during the pandemic. As travel resumes, hotels are expected to reopen. However, the pace of recovery may vary depending on factors such as location, travel restrictions and the ability to meet changing consumer preferences, such as an increased focus on hygiene.    In terms of the impact of inflation on the travel industry, rising prices have the potential to affect both the market and share prices. Higher prices may lead to higher spending on travel-related services, which may affect consumer behavior and demand. Companies operating in the travel industry will need to carefully manage their pricing strategy to balance profitability and affordability for customers.   When it comes to investment opportunities, it is extremely important to do a thorough research and consider various factors before making an investment decision. While the share prices of some travel companies may have risen significantly, there may still be room for growth. Further development of stock prices in the near future will depend on factors such as the pace of the global recovery, travel trends, company performance and market dynamics against the backdrop of Fed policy.

UK wage growth surprise could spell repeat 50bp rate hike A few months ago it looked like UK wage growth had peaked. Now it is running at its fastest pace yet, and, depending on next week's inflation figures, it could push the Bank of England into another 50bp rate hike in August.   The latest UK wage data is a blow for the Bank of England in its battle against high inflation. Private sector regular pay is now growing at more than 9% on a three-month annualised basis, which as the chart below suggests, is the highest it has been since the depths of the Covid-19 pandemic (when the figures were highly skewed due to the furlough scheme). Some of this can be explained by backward revisions, but it nevertheless bolsters the chances of a repeat 50 basis point rate hike in August – although this will depend heavily on whether next week’s services inflation comes in higher than expected too.   UK wage growth has picked up again    

Spanish tourist season on track to beat pre-Covid levels for the first time 10.1 million foreign tourists visited Spain in July, surpassing the levels seen before the Covid-19 pandemic in July 2019. With such strong figures, it's very likely that more foreign tourists will visit Spain this year than in 2019 – but global warming could soon begin to cloud the possibility of further growth.   Number of foreign visitors above pre-covid levels in July Spain is well on its way to matching or even surpassing its 2019 tourist season. According to figures released this morning by Spain's statistical services, 10.1 million foreign tourists visited Spain in July compared to 9.9 million in 2019, the last year before the Covid-19 pandemic. After two years of travel restrictions, Europeans are hungry to travel abroad again and for many, Spain is still an attractive destination. The UK is still the main source country for Spain, accounting for one in five international visitors. Still, the number of UK visitors is lagging behind slightly, standing at 94% of its 2019 level in July. The weak lira may have convinced many British tourists to change their travel destination to Turkey. The number of German tourists is also still a lot lower than in 2019, but this is more than offset by an increase from other countries.   International tourists arriving in Spain   Spain welcomed 71.7 million international visitors in 2022, which was still 14% less than the number of tourists received in 2019. Spain seems on track to shake off the effects of the pandemic and match the number of foreign visitors in 2019. With the tourism industry holding a significant pace in Spain's economy, it is also currently boosting the country's growth. A surge in international tourist arrivals often leads to increased consumption, ranging from accommodation and transportation to dining and shopping. It also stimulates job creation. As a result, we expect decent growth of 0.3% quarter-on-quarter again in the third quarter of this year. Thanks in part to resurgent tourism, Spain remains one of the leaders in the eurozone after the Netherlands plunged into recession and Germany continues to flirt with one.   Global warming could hit Spanish tourism sector For now, Spanish tourism seems little affected by the country's drought and extreme weather conditions, but this could change in the coming years. A recent report by the European Commission estimates that global warming could lead to a shift in European tourist flows away from the southern coastal regions to more northern shores. They estimate that in the most pessimistic scenario, a rise in temperature of either 3°C or 4°C could reduce the number of tourists during the summer season by 10% in southern coastal cities, while more northern coastal cities would see their numbers grow by 5%. Southern Spain in particular would be hardest hit in such a scenario.

This is the real reason why the eurozone is suffering from labour shortages The drop in average hours worked in the eurozone is one of the biggest and somewhat overlooked shocks caused by the Covid-19 pandemic. We think this is the main reason for current labour shortages. This drives down potential output and causes inflationary pressure, which begs the question: can this trend be reversed?   Eurozone labour market: at a glance Average hours worked per employed person are still 2.2% lower than they were in the pre-pandemic years. This has a very large impact on the labour market. We argue that labour shortages are in large part not cyclical or ageing-related, but mostly stem from lower average hours worked per person employed. Because of this, 3.8 million people are now in work which would not have been necessary if people worked the same hours they did in the years before the pandemic, and the eurozone would likely not experience meaningful wage pressures. This trend in lower average hours worked is observed in most sectors and for both men and women and across all age groups. It is hard to fully account for the reasons, but increased sick leave, labour hoarding and some compositional effects, such as the increased entry of women and younger workers into the labour market, seem to be playing a role. If there is a rise in the average hours worked, this could mean that labour shortages ease and wage pressures moderate more quickly than expected. If average hours worked remain as they are, this lowers growth potential and makes labour shortages and wage pressures more structural. Policymakers would benefit from a better understanding of this phenomenon as any further developments in the average hours worked trend will have significant implications for monetary policy, unemployment and economic activity moving forward.

Recessions are periods when the economy goes on a diet," Economist Paul Samuelson. In normal economic cycles, central banks raise interest rates in response to high inflation, a tight labour market and easy financial conditions, essentially the reality we see all around us. The central banks' tightening of policy is meant to cool the economy and prevent an overheating that worsens the eventual recession. However, since the 2008 financial crisis, central banks have been reluctant to trigger a recession and have become very nervous about tightening policy and taking interest rates into truly activity-dampening territory. The market believes that the Fed has done enough with its 500 basis points of hikes, but the reality is that in most economic cycles, the Fed Funds rate needs to at least match the nominal GDP growth rate in order to slow down economic activity enough to take the pressure off both inflation and a tight labor market. As of Q1 data, US GDP was growing at a nominal rate of 720 basis points year-on-year, suggesting that Fed policy is not tight, but neutral at best. It seems that the dual mandate of price stability and full employment has been replaced with a number one priority of no recession ever, or in Samuelson's metaphor quoted at the head of this article, "No diet!"   After the COVID-19 pandemic, many people believe that the economy is returning to a normal path. They believe that low interest rates will continue to support growth and that a "soft landing" is possible. However, this view is naive. The economy is currently loaded with excess debt and asset valuations are at all-time highs. A "soft landing" is very unlikely in this environment and, as an economic concept, is extremely rare!   The global economy is currently more like a river that has been dammed up. The dam represents the various factors that have been holding back economic growth, such as the COVID-19 pandemic, supply chain disruptions and the war in Ukraine. As these factors start to dissipate, the dam will begin to break and the river will flow more freely. This will lead to an extension and resurgence of economic growth and inflation, contrary to the prevailing consensus of an imminent recession together with a credit crunch and housing crisis. The freeing of obstacles will allow the overall economy to steer clear of a deep recession and possibly a minor recession, even in real GDP terms.   This means that the Fed and the economy will have a run rate in nominal GDP terms that is higher than expected. There is ample pent-up demand at state levels, company levels, and from the IRA (the Inflation Reduction Act) and the CHIPS and Science Act to keep employment firm. An insufficiently restrictive policy backdrop has set up a potential bubble in the stock market. The valuation this year has been driven by three impulses: the Silicon Valley Bank and regional bank mini-crisis, the trouble lifting the debt ceiling, and the super-valuation of the sub-set of mega caps and large cap stocks most associated with the introduction of generative AI applications (OpenAI’s ChatGPT and Google's Bard). The first two created a liquidity injection of more than $1 billion. The third became the driver of super-exponential prices for the most directly AI-linked names. The hype surrounding AI is the chief driver of the latest stock market surge, with talks of this being a new iPhone moment or even akin to the introduction of the internet. This is not a knock on AI, as we are keenly aware of the potential for generative AI to increase productivity over time. But the market is getting ahead of itself in selecting winners, and current valuations are already discounting too much of the longer-term future gains to be had.   The surface of this economic sea may be calm, with volatility at extremely low levels. However, beneath the waterline, there are strong currents and countercurrents, which, to our minds, set up a difficult second half of 2023. We don't have the ability to time and project where the markets are going, but we do have the ability to recognise when a bubble is forming and where data doesn't support the narrative. This bubble, and all bubbles, are accelerating when the fundamentals don't support the narrative.   The good news is that a deep recession is unlikely to happen. The bad news is that interest rates will need to stay high for longer. We simply don’t think the “audio matches the video” looking at complacent market expectations versus the likely path from here.