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How to Trade Europe's Incoming ‘Revenge Spend,' According to BlackRock

Henry Nicholls | Reuters
  • The pandemic-induced lockdowns and unprecedented monetary and fiscal stimulus from central banks and governments have led to huge piles of consumer savings.
  • UBS' Head of European Equity Strategy Nick Nelson told CNBC on Wednesday that around 700 billion euros ($852.8 billion) of excess savings are waiting to be deployed across Europe and the U.K.
  • Stock market valuations have already become elevated in many sectors aligned with the reopening, but BlackRock believes there are some areas that may outpace consensus.

LONDON — As Europe's economy reopens, consumers have already begun a "revenge spending" spree in some areas, according to BlackRock, who suggested that a strong rebound in economic activity will lead to a deluge of consumer spending on dining, drinking, travel and leisure.

"We call this 'revenge spending' – people are thrilled to be gaining a taste of freedom, and so splurge on social occasions and discretionary items," BlackRock Fundamental Equities Co-CIO Nigel Bolton and Sophie Steel, head of the consumer industry group, said in the report published Tuesday.

The pandemic-induced lockdowns and unprecedented monetary and fiscal stimulus from central banks and governments have led to huge piles of consumer savings, with Moody's Analytics estimating that U.S. personal savings are $2.6 trillion greater than they would have been without the pandemic. This equates to around 12% of GDP. Meantime, the increased rollout of vaccines across the developed world has enabled major economies to cautiously reopen and consumers to begin spending again.

UBS' Head of European Equity Strategy Nick Nelson told CNBC on Wednesday that around 700 billion euros ($852.8 billion) of excess savings are waiting to be deployed across Europe and the U.K.

Yet Bolton and Steel suggested that consumers will not revert completely to their pre-pandemic spending habits, and many reopening plays have already been well exploited within equity markets.

This means investors will need to be actively selective and aim to buy companies with the potential for strong earnings through 2022 and 2023, targeting sectors where "pandemic trends may have inspired new behaviours and preferences," they said, rather than simply pulling forward demand.

Not all revenge spending will stick

Stock market valuations have already become elevated in many sectors aligned with the reopening, but BlackRock believes there are some areas that may outpace consensus.

Due to a slower vaccine rollout and longer lockdowns, European "reopening sectors" have lagged their U.S. counterparts, but BlackRock data scientists believe these sectors will catch up during the remainder of the year.

"The latest data show Europe is now vaccinating at the same pace as the U.S. and the UK, implying the recovery-lag should remain fixed at two to three months, rather than grow longer," they said, adding that Europe's airlines will likely be at or near 2019 spending levels in two to three months' time, where the likes of Allegiant and American Airlines currently are.

A similar lag was observed in premium dining, with U.S. high-end restaurants surpassing 2019 spending levels in some cases, according to analysis of credit card data, a trend analysts expect to expand as economies open globally.

The world's largest asset manager also noted that demand had already spiked for luxury goods, such as handbags and champagne, in the first quarter of 2021. Social spending has also surged, with sales at U.K. pubs 12% higher than pre-pandemic levels during the first week of reopening, despite only offering outdoor seating during predominantly poor weather conditions.

However, Bolton and Steel said consumer behavior had permanently changed in two areas: pandemic pets and mobile food orders.

"Dog ownership soared during the pandemic, and people are spending more on their pets. This means premium pet-food companies could be well placed to profit," they said.

Food delivery companies surged amid stay-at-home orders, but BlackRock said there is evidence that the takeout app trend is here to stay, with sales for food delivery apps actually strengthening in some areas of the U.S. despite the re-opening.

Based on a survey of around 5,000 consumers across Europe and the U.K., UBS' Nelson confirmed that travel and hospitality were high on the agenda, but added that mobility sectors such as autos and fuel can also expect a splurge.

Pricing power and sustainability

Alongside new spending themes, BlackRock also encouraged investors to look at the unique pricing environment created by supply disruptions and soaring post-pandemic demand.

"Prices of commodities such as steel, wheat and corn have surged in the past year, and there are early signs of wage inflation," the report said.

"In this environment, active managers look for pricing power – those companies that can pass the higher costs of materials and wages on to the end consumer."

Meanwhile, the asset manager said consumers are increasingly balancing share price decisions against criteria of sustainability, suggesting that companies with strong social, environmental and governance are rapidly becoming a "must-have" in investment portfolios.

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