In Venice, the “Inchino” is a misnomer. In French, this maritime “curtsy”, which consists of cruise ships approaching within 150 metres of the coast, is less of a tribute than an affront to the Serenissima. After years of fighting against the damage caused by these murderous bows, Luigi Brugnaro, the city’s mayor, obtained a ban on the navigation of large tonnage around Saint Mark’s Square, the gardens of the Biennale and the Giudecca Canal.
On the same day, before the European Commission, the “climate package” of the Green Deal or “Fit for 55” proposed to apply a new tax on fuel oil to the maritime industry, to introduce ships of 5,000 gross tonnage into the CO2 quota trading system (ETS) and to force liners to use external green electrical energy when they are in port. Airlines, another essential vector for tourism, are not spared either: the EU plans to phase out emission permits and impose the use of synthetic or biofuels. Although essential to tourism, which accounts for up to 15% of the GDP of certain European countries, these sectors could swell the ranks of stranded assets or deep value companies such as the oil majors and banks, which are considered by some investors to be victims of programmed obsolescence due to changes in use, the emergence of disruptive substitutes or, more often, regulations that are so strict as to structurally restrict the return on capital invested. Despite their robust cash flows, the increase in renewables in their asset portfolio and the downsizing of their exploration investments, oil stocks remain cursed. Stigmatised as the most obvious culprits of global warming, they have not benefited at all from the return of oil to near $80 a barrel: the global energy sector is now trading at a 33% discount to the rest of the market on the basis of projected earnings over the next twelve months. The European banking sector is also 30% short of being valued at the book value of its tangible equity. After a 26% rise in the first half of the year, European banks are back to their January 2020 level… (when the Stoxx 600 Europe and the FTSE All World are respectively 10% and 25% higher…) but are now down 10% from their March highs. In the current market context, it is not so much the positive fundamentals (control of the cost of risk, lower provisions, return of dividends and share buybacks, open door to cross-border mergers by the ECB) as their role as “steepener” that determines the performance of banks: the sector is in fact the counterparty on the equity market of a curve-buying position on European rates, a positioning that suffers by capillarity from its flattening in the United States.
In fact, across the Atlantic, yields continue to fall despite better than expected inflation figures in June, to the point where real rates (the difference between yields and inflation) are back to their lowest level since February. Like Mary Daly at the San Francisco Fed, the bond markets seem to think for the moment that the June inflation spike is just a “pop in anticipation”, a blip without a tomorrow… It is true that once adjusted for car rentals and services affected by the pandemic, the pace of price increases slows down compared to May… But, with the holidays approaching, the consumer is not likely to listen to these subtle considerations: Between rising petrol prices, the cost of the transition to electric cars, used and rental car prices driven by the semiconductor shortage (which could continue until the end of 2022 according to TSMC), the cost of land transport should represent a significant part of the summer and back-to-school budget…
As for air travel, while ticket prices are already on the rise, the question of passing on the bill for biofuels or synthetic paraffin will inevitably arise one day: these hydrocarbons pollute less but are currently three to eight times more expensive…
At this rate, the health pass may unfortunately no longer be a guarantee of a successful holiday, which in France is often synonymous with a hectic back-to-school period…
Thomas Planell, Portfolio manager – analyst at DNCA. This article was finalised in July 17th, 2021.
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