Name a global sector that grew to US$1.4 trillion in 2013. Think of beach towels and parasols and you will be on the right track; yes it is travel and tourism. But as a massive growth area you may be even more surprised to hear that South America is giving the sector a massive boost and may provide some interesting opportunities for investors.
With countries like Ecuador reporting a 14% growth in visitors last year it is no surprise that Expedia is spending $346 million (US$270 million) to acquire a stake in decol.com, the biggest online travel booking service in Latin America. In fact, the United Nations World Tourism Organisation (UNWTO) believes that there will be a 4.4% growth in international arrivals in Latin America, double that of the more established markets.
The UNWTO states that 80 per cent of travel in Latin America starts and finishes in the same continent, which naturally dictates that the growth is a direct consequence of the regions own increased tourism. In just a decade, one third of the Latin American middle class has surged with a daily per capita income (in purchasing power parity) between $13-64 (US$10-50) a day, a shift from the historic figure of one fifth.
There have been, and will continue to be, showcase events such as the 2014 Brazil World Cup and the 2016 Rio Olympics, and just as Brazil has had to improve infrastructure for these global events, countries like Ecuador has put substantial investment into transport, reducing journey times and further unlocking the country.
The new Pacific Alliance has reduced visa requirements amongst neighbours and the largest neighbour of all, the USA, is not only set to massively boost tourism to Cuba with the easing of past embargoes and travel restrictions, but targeting with large advertising campaigns, such as Ecuador paying $4.9 million (US$3.8 million) to be the first Sovereign nation to have a 30 second advertising slot during the US Super Bowl.
Is this a warning worth heeding?
So it’s looking good in the South of the continent, but what about the US? The Quicksilver Markets report issued by the US Treasury’s Office of Financial Research on 17 March is presenting a little more bearish front. The author, Ted Berg, defines a Quicksilver Market as being when stable markets do an about turn and “change rapidly and unpredictably.”
The report concludes that the S&P 500 is close to two standard deviations above the historical mean, the two-sigma threshold (similar to 1999, 2000 and 2007), a view shared by Jeremy Grantham, chief investment strategist of Grantham Mayo van Otterloo, who believes that a market bubble will occur when valuations go above two standard deviations from the historic average leading to a "reversion to the mean”, that is that markets will revert to mean historical levels from highs and lows. The report states that “valuations approached or surpassed two-sigma in each major stock market bubble of the past century.”
But based on the measures used in the report (CAPE ratio, the Q-ratio, and the Buffett Indicator), it would be hard to give a short-term view as to when, with such high valuations, the market may implode, and even if the market does appear overvalued, with interest rates at such low levels it is no surprise. The report states that it would be difficult to predict “the timing of inflection points,” and the markets could remain overvalued for a long period. Stay alert, with prices as they are you don’t want to be the last investor holding the baby.