Three themes for April

The first quarter of 2021 is nearly over, and it’s time to start thinking about themes for the second quarter of the year. After a choppy start, most of the major indices have posted a profit in Q1, including a near record high for the S&P 500 and a decent performance by the Dow Jones. Even the Nasdaq, which has suffered more than the broader US indices in this quarter, managed to have a strong finish to the last full week of trading for Q1. Benchmark US 10-year Treasury yields have surged during this quarter, however, they pulled back from their recent highs and are currently around 1.68%. European indices had a strong quarter, with fears of a third wave of Covid and a sharp decline in growth across the currency bloc not stopping a decent performance by the Dax, the Cac and the FTSE MIB, which have all benefitted from lower bond yields and continued support from the ECB. 

The FTSE 100 index has also posted a gain for this quarter of approximately 300 points however, it has proven once again to be more volatile and less easy to predict compared to other indices. It appears that the UK index is suffering from the following: 1, although growth has held up well in the face of the winter lockdown, and growth has been revised higher for the rest of this year, this has raised fears about rising bond yields and the potential for the BOE to slow its support for the market. 2, the UK stock market doesn’t have enough tech to make it a play on the new digitalised era that is emerging post the Covid pandemic. While the UK is ahead digitally compared to other parts of Europe, until the UK allows more spacs to operate, it is hard to see how the UK will be a major global tech play any time soon. The upcoming Deliveroo IPO will be interesting, it is a high-profile tech IPO for London, yet some big institutional investors are shunning the food delivery service because of its treatment of employees. This will be a key feature of Q2, can the UK market support the Deliveroo IPO so that it attracts other tech companies to list and thus build the London index as a destination for tech players, potentially from China, in the future? 

While the UK index is still undervalued in our view, we continue to think that there are issues around rising UK bond yields and concerns with post Brexit trade with Europe, that could act as a ceiling for the FTSE 100’s price gains this quarter. Thus, we prefer to look at three individual UK stocks for Q2: Greggs, Royal Mail and IWG. 

IWG: flexi office space will come back into vogue

IWG, the owner of the Regus chain of serviced offices and ClubHouse, could see demand for its offices surge in the coming months. This week, we heard that WeWork was floating its shares via a US-listed SPAC, called BowX Aquistions. WeWork is valued at a fraction of the price it was valued at before it’s doomed IPO attempt in 2019, however, it is still valued at a decent $9bn. IWG’s share price sold off slightly at the end of the current quarter, however, with the focus likely to shift to people returning to their offices in Q2, we think that more companies than ever will re-think their office footprints, and ultimately decide that a serviced office option is the most cost effective way to cater for a hybrid work force that works in the office and from home. We also think that the large number of start-ups that have come into being during the pandemic could also find flexible office space the best option. Thus, with the recent decline in IWG’s share price, combined with a decent pipeline of demand, this stock could have a strong Q2. 

Greggs: everyone’s favourite lunch spot 

This is true, but only when people are in the office, working in cities or town centres. The FTSE 250 sausage roll maker’s share price recovered strongly in the second half of 2020, and it is now close to its 2019 highs, even though Greggs revealed a loss of more than £13mn for the 6 months to January, its first loss since it has been a listed company. However, Greggs’ could be the ultimate Covid recovery stock for a few reasons. 1, It is pushing ahead with new shop openings, probably on decent rental terms, 2, it is launching an app to help boost online sales, 3, it will offer made to order sandwiches and more vegan options this year, lastly, rather than appoint a new CEO off the bat, current CEO Roger Whiteside will stay on until a suitable successor is found to ensure continuity. This is a well thought out plan for the rest of the year, and we believe that its stock price could reach fresh record highs in the new quarter. 

 Royal Mail: taking advantage of the online shopping boom 

News that Royal Mail is dealing with a record number of parcels and that it will soon start deliveries on a Sunday, after agreeing a deal with its workers’ unions, should help to give the Royal Mail’s stock price another leg higher in the coming weeks and months. Added to this, Royal Mail is adding to its structural overhaul with its automated parcel service in the Midlands, which should also boost the attractiveness of this stock in time. But, after a sharp gain for most of the last 9 months, this stock is one to watch for us. We would not jump on the RM bandwagon right now, since the stock price may get sticky as we approach its all-time high above 600p. It is currently trading at approx. 518p per share. If it manages to clear the 600p hurdle, we believe that this technical breakthrough could trigger another wave of interest in RM’s stock, and its stock price could surge to fresh record highs.