The Stock market recovery – should we buy it?

The S&P 500 hit 3,000 on Wednesday, European stocks are also on their way to recovery. What is interesting, is that the recovery was not led by the tech titans or the defensive sectors, but rather the travel, retail and leisure sectors. There has been a rotation towards “risk on”, which has been beneficial for companies that have been ravaged by the pandemic. Falling volatility and rising activity in global stock markets could lead to a broader-based rally in the short to medium term, and at this stage it looks like the market is willing to look through geopolitical risks (US and China) and the fact that there is still no vaccine in sight to give wide-spread immunity to the coronavirus. So, is now really the time to be buying Carnival, the cruise operator, British Airways parent IAG or TUI, the package holiday specialists? 

The case for the travel and tourism sector 

These companies were some of the top performers in the FTSE 100 on Wednesday. The markets are willing to look through China’s advances on Hong Kong, and instead focus on the loosening of lockdowns around the world and the slowing in the coronavirus death and infection rates in the US and UK, in particular. While economies start to open up, with schools in the UK opening their doors next week and non-essential shops opening back up in mid-June, along with rising levels of commuting and traffic, the UK is starting to return to some form of economic normality. Stock markets are notoriously forward-looking, so the fact that TUI, AIG and Carnival are rallying before tourism has recovered and at the same time as the UK is imposing quarantine restrictions on people coming into the country, might be disturbing to some, however, some savvy investors will be thinking in a different light. After months of lockdowns, one of the first things that some people will be doing is looking for a holiday – a chance to get out of their homes and out of England the minute the government allows. Even though the unemployment rate has surged in the UK and is expected to rise further after the furlough scheme ends later this year, there are still a significant number of people who have kept their jobs and may have seen their savings grow during the lockdown as they have not been able to spend their money. This means that there could be a surge in demand for travel, hotels and holidays in the coming months, once people think that there is a decent chance that their holiday will go ahead without quarantine restrictions. 

Looking for value 

The other reason why investors are attracted to the tourism, travel and leisure sectors is that they currently look cheap. IAG, British Airways’ parent company, is trading on a price to earnings ratio of 3.5, while the FTSE 100 average is around 16. TUI has a dividend yield of over 8%, which is strong in the current market, and a price to earnings ratio of 6. Cineworld, which has a p/e ratio of 9, has surged in recent sessions and was the highest rising stock on the FTSE all share index on Wednesday, even though the government has yet to announce the date that cinemas will be allowed to reopen. 

To conclude… 

Is this a case of value trumping common sense, or is it a savvy move to buy when the market is low? A second wave of infections and another lockdown would likely derail these stocks, however, right now the market is betting that there is only a low risk of this happening. Overall, at this stage it looks like governments around the world are willing to open up their economies before a vaccine has been found. This is stoking optimism and causing volatility to fall across global financial markets. Although European markets have picked up approximately 30-40% from their March lows, there is still value to be had. The next stage of the stock market recovery will be in the unloved sectors, including airlines and tourism, and we expect this trend to continue for the medium term.