The UK is a ‘buy’ is fast becoming the consensus view. As per Goldman Sachs yesterday, chiming views expressed by brokers like Markets.com in recent weeks, UK equities are due to catch up.
Analysts at ‘vampire squid’ expect a free trade deal with the EU and “substantial room” for a strong economic rebound in 2021, as activity remains depressed and the UK is well positioned for vaccine distribution.
Both should support GBP and UK domestic stocks, whilst they do not see a move up in sterling on a Brexit breakthrough as a signiﬁcant barrier to FTSE 100 performance. Back to the strong pound = strong UK equities correlation of old. Meanwhile, the FTSE 100 has an expected 2021 dividend yield of 4%, making it the most attractive among developed market stock indices.
Will positive sentiment rub off on IAG shares?
There seems to be a lot of positive sentiment sloshing around UK stocks at the moment, and expectation that the UK economy will slowly climb out of the morass in 2021. Investors are paying attention to some of the stocks which have been heavily sold off during the pandemic.
Among these is the airline sector, and especially IAG [LON:IAG]. One contact of The Armchair Trader in the IT sector admitted this week that he has been able to procure first class blankets from British Airways for his dogs. This may be apocryphal, as we think the face of business travel may be about to change.
“Return of lucrative transatlantic routes will be a big fillip for IAG shares,” says Neil Wilson, Chief Research Analyst at CFD broker Markets.com “In the 11 months to December the stock was down by around 60%, making it the worst performer on the FTSE 100. Nevertheless, the stock rallied over 80% in the month of November as vaccine optimism drove the rotation trade. Whilst this may effectively have priced reopening in 2021, there could be further upside driven by on-the-ground improvements to travel.”
Wilson says that in addition to the roll-out of vaccines, efforts by airlines like BA and airports like Heathrow to find creative solutions to ending quarantine requirements for travellers, such as digital health passes, will progress and make it easier for travel to take place.
Passenger numbers a long way off 2019 levels
IAG shares are not expected to get back to pre-pandemic levels next year – passenger travel levels are not seen returning to 2019 numbers for some years. But a steady reopening of the economy and pent-up demand among holidaymakers to get out and travel ought to support earnings recovery in 2021.
Data from artificial intelligence specialist Irithmics sees institutional investors in IAG stock very positive in terms of news sentiment coming out from the company, at least in the short term. Investors are more cautious about the airline group’s longer term prospects. This may be because the 2021 travel picture still looks a little murky, and as Wilson says, some of the traditional revenue streams for IAG simply won’t return next year.
IAG shares are still a long way off their levels in January 2020: the recent share price hikes may look impressive, but the stock has a long way to go before it gets back to where it was. But, buyer beware, the IATA (International Air Transport Association) has warned that the airline industry is going to take a $118.5bn hit this year, and nearly $40bn next year.
“This crisis is devastating and unrelenting,” said Alexandre de Juniac, Director General of the IATA. “Airlines have cut costs by 45.8%, but revenues are down 60.9%. The result is that airlines will lose $66 for every passenger carried this year for a total net loss of $118.5 billion. This loss will be reduced sharply by $80 billion in 2021. But the prospect of losing $38.7 billion next year is nothing to celebrate.”
2021 is by no means going to be a bumper year for IAG, but the stock still looks heavily oversold and with much less downside risk than has already been shouldered by shareholders. A 12-month chart illustrates this quite well. We expect all sorts of appalling numbers from IAG in its next set of results, but guess what? So does the rest of the market.
The big risk for smaller airlines is that they will go bust before the coronavirus is securely in the rear view mirror. With IAG, we think the company is simply too big to fail and is the sort of entity governments will want to bail out. This takes a significant slice of risk out of the IAG stock equation.