Most stock market enthusiasts might have come across “Margin Call”, a 2011 film that follows the key people at an investment bank, over a 24-hour period, during the early stages of the global financial crisis. Margin Call tells a story about the volatility of trading prices and how a fire sale (when a firm sells everything at discounted prices when they are faced with large risks) works. In the fast-paced film, John Tuld, the head of the firm, claims that there are three ways to make a living in the wall street or trading business: be first, be smarter, or cheat.
In the context of investing or trading, “being first” implies leading in terms of acting upon new information as opposed to a herd-behavior approach where you tend to follow the crowd. One dynamic that has played as a result of the outbreak of Covid-19 is that tourism and hospitality companies will have little in the way of revenue or cash flows for the foreseeable future. Piggy thinks that the coming months are going to prove ruthless. Billions of people around the world are still under orders to stay at home as governments grapple with the global pandemic. The travel and tourism industries have essentially disappeared while bookings have fallen off a cliff.
No doubt that Covid-19 has proved to be a black-swan event! No one knew what was coming. Early this year, Piggy was recommending investors to BUY into tourism and hospitality stocks on the back of the sector’s forex generating capabilities (Tourism in Zimbabwe contributed USD62m in the first half of 2019). Tourism is indeed recognised as one of the pillars anchoring Zimbabwe’s economic growth and job creation strategies. In addition, Zimbabwe had also witnessed an increase in tourist arrivals from 1.8 million in 2013 to 2.5 million in 2018. According to the World Travel & Tourism Council, the Travel and Tourism sector in Zimbabwe accounted for 7.1% of GDP and 69,000 jobs, or 4.4% of total employment as illustrated in the graph;
Source: World Travel & Tourism Council
The outbreak and exponential increase of Covid-19 cases has tainted the investment thesis in the tourism and hospitality sector. The main risk that has emerged is that we are still some months away from the day hotel chains or resorts re-open on a large-scale basis. In addition, air travel is likely to remain massively below prior levels for at least the remainder of 2020. There are still no proven medical treatments for the highly contagious Covid-19 pandemic, and it is hard to see travel and resorts being opened up in the near future.
Social-distancing has also made it difficult to hospitality groups to earn revenues from events (conferencing and work-shops). While both African Sun and Rainbow Tourism Group have done well in terms restructuring, reducing finance costs and adding value through refurbishments, occupancy levels will be abnormally low in 2020. Piggy thinks there is a huge opportunity cost in holding on tourism and hospitality stocks at this stage. In economics, opportunity cost represents the benefits an investor misses out on or foregoes when choosing one alternative over another. Piggy is of the opinion that pure defensive food stocks such as Innscor Africa, National Foods, Dairibord, SeedCo or SeedCo international will yield better returns for investors. Further, as also revealed in the Margin Call movie, “If you’re the first out of the door, that’s not called panicking!”
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