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Adding British Airways owner IAG to our wealth preserver portfolio may appear to be a rather strange decision. After all, the UK economy flatlined in the third quarter of last year and faces a highly uncertain near-term outlook. This could negatively impact cyclical firms, such as those in the travel and leisure sector, to a relatively large extent and prompt downgrades to their short-term financial prospects.
However, Questor innately views the presence of uncertain economic prospects as an opportunity to buy high-quality businesses at attractive prices. After all, history shows that the economy has continually switched between boom and bust on a fairly regular basis. Investors who buy during the latter have typically been well placed to subsequently benefit from the gradual emergence of the former.
Furthermore, the unwinding of restrictive monetary policy has already commenced. While this will almost inevitably be a protracted and unstable process, given the delayed impact of interest rate changes due to the existence of time lags, it is highly likely to provide an improving economic outlook that benefits IAG and the wider travel and leisure industry.
Even though inflation has increased over recent months and is now above the Bank of England’s 2pc target, this rise was widely anticipated – and while the pace of price rises is now set to be higher than forecast prior to the Budget, due in part to the Government’s ambitious spending plans, inflation is nevertheless expected to gradually decline over the coming years. This should, in turn, provide scope for further interest rate cuts that act as a stimulus on the company’s operating environment.
Consumers, meanwhile, are enjoying a sustained period of real-terms wage growth. Their purchasing power has now risen uninterrupted since April last year, thereby providing scope for higher discretionary spending. With demand for holidays more resilient than many investors realise – consumers often view their annual trip abroad more akin to a staple than a discretionary item – IAG’s financial performance could prove to be relatively robust, even if the economic environment deteriorates.
Of course, the company is becoming increasingly well-placed to cope with a further downturn in the economy’s performance. Its net debt, for example, has declined by a third over the past year, while it has total liquidity in excess of €13bn. Moreover, with its multitude of brands occupying a wide range of price points and providing relative geographical diversity, it is in a strong position to outperform sector peers in a variety of economic circumstances.