Can EU Travel Stocks Keep Their  Peak Amid Sky-High Inflation

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European shares have been headlining a seven-week high, as stocks in travel, leisure and technology helped close the benchmark STOXX 600 higher than expected on November 7, ahead of the U.S. midterm elections.

Against the backdrop of stubbornly high inflation across the European Union, which hit a record 10.7% in September, investors remain hawkish over the prospects of European shares as the continent battles an impending energy crisis on the back of a looming recession.

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Sentiment in the market has been perplexed, to say the least over the last few weeks, even as European shares have been able to make a steady recovery.

It’s been a boisterous start to November, but experts predict that the coming weeks will see European shares closing lower than expected on the back of U.S. inflation data, jobs report and Biden’s Inflation Reduction Act.

Stocks surged on November 10, after the U.S. consumer price index climbed by 0.4% for October, and 7.7% from a year ago. This marked the lowest annual increase since the start of the year.

Though the outcome of the results will guide the Fed’s expectations concerning its interest rate outlook, investors are still treading lightly despite seeing better-than-expected inflation data.

Looking past the politics, European investors are hopeful that with inflation deep diving into consumers' disposable income, the ongoing market growth will help drive the performance of travel and leisure stocks as it makes a steady rebound after more than two years of tumultuous performance due to the COVID-pandemic.

Will EU Travel Stocks Keep Their Current Trajectory

So far this year, EU lawmakers have been toiling with immense challenges, all of which have played down the continent's post-pandemic recovery.

Though these challenges are often more politically driven than they ought to be, some are seeking guidance on whether their illustrious travel stocks will keep their current trajectory despite the ongoing economic point of concern.

The best performers so far have been European-based airline groups including Ryanair (NASDAQ:RYAAY), France - KLM (EPA:AF), and Lufthansa (ETR:LHA). Other operators including British Airways holding company, International Consolidated Airlines Group (LON:IAG), and trans-European domestic airline EasyJet (LON:EZJ) have all posted above-average earnings throughout much of the year.

On the stock market, prices have been steadily climbing on the back of positive earnings. Ryanair, Air France - KLM, and Lufthansa climbed by 24.29%, 2.31%, and 20.50%, respectively.

Airliners have had a particularly above-average summer performance, as pent-up travel demand surged in the wake of countries lifting their border and quarantine restrictions.

Originally experts suggested that airlines will only see full recovery by late 2023, or early 2024. “Travel has never been more in demand than right now, despite higher prices and soaring travel costs. Even if consumers are making their trips shorter, and spending less abroad, they’re still eager to travel, regardless of the seasonality,” says David Stewart, CEO of the European-based travel platform, Guide to Europe.

Even with positive guidance, it’s been a hard ball to throw for investors who remain hawkish over the future of travel and leisure on the continent.

It’s not only the cost of travel that has consumers reaching deeper into their pockets, but also political tension between Russia and Ukraine, and higher-than-expected interest rate hikes by the European Central Bank (ECB).

A member of the ECB recently told CNBC that peak inflation could be within reach if the ECB continues with its monetary tightening. This could be a hard pill to swallow for investors, as the Governing Council raised its benchmark interest rates by 75 basis points in both September and October.

We could see investors keeping steady on travel and leisure and a potential safety net, but with so much volatility in the market, many could soon be parking their cash somewhere else.

Noting how European consumers have been making several inflationary adjustments, Stewart shares that although domestic tourism won’t experience a stratospheric boom over the coming months, consumers in other regions will continue to take advantage of the weaker euro.

“We’ve already seen it this past summer, where Americans took to the skies in droves, landing in Europe with their stronger forex, and hoping to get the best bang for their buck,” says Stewart.

Investors will need to factor in not only economic uncertainty, but also political upheaval that’s causing more damage than resolving some of the continent's post-pandemic problems. Despite the uptick performance of travel and leisure stocks in recent weeks, the coming months might show a different picture, and it could leave Europeans right in the middle of the crossfire.