How to Trade Europe’s Incoming ‘Revenge Spend’, According to BlackRock

People sit in a rooftop restaurant at Selfridges department store on Oxford Street, as coronavirus disease (COVID-19) restrictions ease, in London, Britain April 12, 2021. REUTERS / Henry Nicholls

Henri Nicholls | Reuters

LONDON – As the European economy reopens, consumers have already started a frenzy of ‘revenge spending’ in some areas, according to BlackRock, who suggested that a strong rebound in economic activity would lead to a deluge of consumer spending for meals, drinks, travel and entertainment. .

“We call it ‘revenge spending’ – people are thrilled to taste freedom, and therefore splurge on social occasions and discretionary items,” BlackRock Fundamental Equities Co-CIO Nigel Bolton and Sophie Steel, head of the consumer industry group, said in the report released Tuesday.

Pandemic lockdowns and unprecedented monetary and fiscal stimulus by central banks and governments have led to huge amounts of consumer savings, with Moody’s Analytics estimating US personal savings to be $ 2.6 trillion higher. dollars than it would have been without the pandemic. This equates to around 12% of GDP. Meanwhile, the increased deployment of vaccines in the developed world has allowed major economies to reopen cautiously and consumers to start spending again.

UBS head of European equities strategy Nick Nelson told CNBC on Wednesday that around 700 billion euros ($ 852.8 billion) in excess savings were waiting to be rolled out in Europe and the UK. United.

Still, Bolton and Steel have suggested that consumers won’t fully revert to their pre-pandemic spending habits, and many reopening games have already performed well in the stock markets.

This means that investors will need to be actively selective and aim to buy companies with strong earnings potential through 2022 and 2023, targeting sectors where “pandemic trends may have inspired new behaviors and preferences,” they said. declared, rather than just pushing forward the request.

Not all revenge spending will stay true

Stock valuations have already turned high in many sectors aligned with the reopening, but BlackRock believes there are some areas that may exceed consensus.

Due to slower vaccine rollouts and longer lockdowns, Europe’s “reopening sectors” have lagged behind their U.S. counterparts, but BlackRock data scientists believe these sectors will catch up during the rest of the year.

“The latest data shows that Europe is now vaccinating at the same rate as the US and UK, implying that the payback period should stay set at two or three months, rather than grow longer,” they said, adding that European airlines would likely be at or close to 2019 spending levels in two to three months, where Allegiant and American Airlines are currently located.

A similar lag was seen in high-end dining, with U.S. high-end restaurants exceeding 2019 spending levels in some cases, according to analysis of credit card data, a trend analysts expect. expand as economies open up to the world.

The world’s largest asset manager also noted that demand for luxury goods, such as handbags and champagne, had already increased in the first quarter of 2021. Social spending has also increased, sales in pubs Britons being 12% above pre-pandemic levels in the first week of reopening, although it only offers outdoor seating during predominantly poor weather conditions.

However, Bolton and Steel said consumer behavior has definitely changed in two areas: pandemic pets and mobile food orders.

“Dog ownership has skyrocketed during the pandemic and people are spending more on their pets. This means that high-end pet food companies could be well positioned to profit,” he said. they stated.

Food delivery companies have surged amid door-to-door orders, but BlackRock said there is evidence the take-out app trend is here to stay, with sales of food delivery apps actually strengthening. in parts of the United States despite the reopening.

Based on a survey of around 5,000 consumers in Europe and the UK, UBS’s Nelson confirmed travel and hospitality as a priority, but added that mobility sectors such that the automobile and fuel can also be expected to be mad.

Pricing power and sustainability

Along with new spending themes, BlackRock also encouraged investors to examine the unique pricing environment created by supply disruptions and surging post-pandemic demand.

“The prices of commodities such as steel, wheat and corn have skyrocketed over the past year, and there are early signs of wage inflation,” the report said.

“In this environment, active managers seek pricing power – those companies that can pass higher material costs and wages on to the end consumer.”

At the same time, the asset manager said consumers are increasingly balancing stock price decisions against sustainability criteria, suggesting that companies with strong social, environmental and environmental governance are fast becoming a “must-have” in investment portfolios.

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