InterContinental joins the hotel sector blues, and London Stock Exchange shows why it was a target

Friday, October 18, 2019 - 10:35

“Yesterday’s sterling bounce didn’t last long with the UK currency falling 0.17% against the US dollar to $1.2869. The direction of sterling on Monday will depend on this weekend’s Brexit vote in the Commons where the currency could either sink or swim,” says Russ Mould, Investment Director at AJ Bell.

“For now, the big news for markets is China’s economy growing at a slower pace than expected in the third quarter amid the trade war with the US and softer domestic demand.

“Interestingly the mining sector didn’t respond in its usual fashion to weak Chinese data. Normally such a result would drag down shares in the sector as investors fear it represents a potential reduction in demand for commodities by the Asian superpower.

“This time round, commodities trader Glencore and miner Rio Tinto both slipped less than 1%, perhaps indicating that investors have some confidence in the Chinese government rolling out more stimulus measures to boost the economy such as increased spending on infrastructure."

InterContinental Hotels / EasyHotel / Elegant Hotels

“It seems only natural that one of the world’s biggest hotel groups has had a tough time of late, given the concerns about a slowdown in global economic growth.

InterContinental Hotels has been hit by more difficult trading conditions in the US and China, and unrest in Hong Kong.

“Weaker economic conditions are bad news for big hotels catering for business travellers. Corporates often look closely at their cost base when times get harder and travel is an easy place to make cuts.

“First you insist employees stay in cheaper rooms, then they don’t travel at all. The airline industry follows a similar pattern where companies make staff switch from business to economy class, and then encourage them to not to fly and do video conferences instead.

“The hotels industry has a ferocious appetite for growth and continues to expand at a fast rate. This is fine when demand is strong but if the world does go into a more difficult time economically then the hotel sector could face a situation where prices fall due to excess capacity.

“Hotels are operationally geared – they generally have a large amount of fixed costs so in good times profit can rise at a much faster rate than revenue. But in a downturn profits can fall much faster than sales.

“While we are certainly not at the stage where business travel has been scaled back on a large scale, the cracks are certainly showing. Consumer travel demand has also been patchy of late.

Whitbread issued a weak trading update in June, saying its UK operations were being negatively affected by macro uncertainty. EasyHotel today said that the UK regional market was weak and growth was slowing in parts of mainland Europe.

“Yesterday AccorHotels warned of uncertainties in Asia-Pacific. All this cast a cloud over next week’s third quarter earnings release from Hilton Worldwide which reports on 23 October.

“Against this fragile backdrop, it is interesting to see the sector continue with acquisitions. EasyHotel was recently subject to a takeover and Marriott has just bid for Elegant Hotels. Suitors will be taking a long-term view and also taking advantage of valuation weakness among UK stocks.”

London Stock Exchange

“Today’s update from the London Stock Exchange underlines just why it was receiving such amorous glances from its Hong Kong counterpart and potentially why it rejected a £32bn bid as being inadequate.

“Simply put there aren’t many assets like the London Stock Exchange around. It provides the whole eco-system around the UK stock market as well as delivering the FTSE indices which are widely used to benchmark the performance of funds and equities alike.

“The business benefits from a network effect whereby the more people using it, the more valuable its proposition becomes, particularly in the field of liquidity and indices.

“It also has intellectual property rights and post-trade efficiencies which act as barriers to rivals.

“Total income was up an impressive 12% in the third quarter with robust growth in both the capital markets business, information services and FTSE Russell arm.

“The departure from the scene of suitor Hong Kong Exchanges and Clearing also frees up the company to complete its blockbuster $27bn merger with financial data business Refinitiv.

“As its customers become increasingly reliant on sophisticated data and analytics, it makes sense to combine its own market infrastructure and index data business (FTSE Russell) with Refinitiv’s vast data and technology business and its trading venues business.

“Management believe the deal should go through by the middle of next year when the firm will also wave goodbye to chief financial officer David Warren who is set to retire.

“Warren, who has been with the firm since 2012, has presided over the purse strings for a successful period, reflected in a 676% advance for the share price. His successor has a tough act to follow.”

These articles are for information purposes only and are not a personal recommendation or advice.


The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.