As Britain suffers downward market volatility following the Brexit vote, global travelers are scooping up bargains–all thanks to a declining pound. This holds particularly true for tourists from China–in aggregate, the largest consumer of global luxury goods and services.
Shortly after the Brexit vote, would-be Chinese travelers flocked to travel agencies’ websites to check out U.K. holiday booking options. Chinese visitors made ~270,000 trips to the U.K. in 2015; a +46% increase for the year, according to tourism website VisitBritain. It appears this figure may jump again.
According to CTrip.com, China’s largest travel agency, searches almost tripled on its booking app as U.K. summer vacation costs dropped by about one-third following the pound’s decline. This could lead to a surge in Chinese purchases of British goods and services as China ranks among the fastest-growing consumers of luxury brands. Additionally, Chinese consumers obtain almost 80% of its high-end purchases from outside the “Mainland” (as suggested by a 2015 study from Bain & Company).
This could bring relief for British brands like Burberry, for example, as 60% of its U.K. revenues come from tourists, per Citigroup estimates. In fact, a MainFirst Bank AG analyst suggests that a 10 percent decline in the sterling could raise Burberry’s pre-tax profits by as much as 90 million pounds.
Gains in Britain’s high-end market could impact retailer counterparts in Japan and Hong Kong, especially with the regions’ currency dynamics at present. A study reveals that shifting travel preferences from Japan to Europe and the U.K. could result in a 40% cost savings for Chinese shoppers (source – Bloomberg). The Brexit situation will likely spur investors to pour money into the yen—a “safe haven”—which, in turn, would make Japanese goods even pricier and British goods relatively more attractive to big spenders on luxuries, like the Chinese.
Bottom Line for Investors
The prospect of Chinese tourists cashing-in on the pound sterling’s decline could emerge as a salve on the wound inflicted by the Brexit vote. Though time is needed for evaluation, the drop in value of the pound appears it could help the U.K., at least marginally in the short term.
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