The conundrum currently gripping investors

Valuation indicators for the airline industry remain tricky for investors to gauge, writes our head of markets.

In normal circumstances, a positive end to the previous week’s trading and a coordinated central bank effort over the weekend including, but not limited to, a substantial $700 billion stimulus plan from the US, would be enough to provide some solace for investors.

But these are not normal circumstances.

The airlines are a prime example of the malaise which is currently prevalent.

At the best of times, the airline industry is cyclical and, at the worst of times, it is squarely in the firing line. Whether that manifests as a financial crisis (decimating business and personal travel), the previous SARS virus, or even volcanic ash clouds, revenues can swiftly be reduced while fixed costs remain.

Such is the case now, with British Airways owner International Consolidated Airlines (LSE:IAG) predicting a 75% reduction in capacity for April and May and the additional necessity for severe costs cuts. A similar announcement from Ryanair (LSE:RYA) and easyJet (LSE:EZJ) opined that European aviation faces a “precarious future”, with the likelihood of needing to ground most of its fleet.

Indeed, enforced staycations may become a feature of 2020. In the meantime, the airlines can give little or no guidance and so valuations, by necessity, become almost worthless, making it impossible to gauge correct share price levels.

While not perhaps as severe within other sectors, this is the conundrum which is currently gripping investors.

Kingfisher (LSE:KGF), for example, has announced that its Castorama and Brico Depot stores in France as well as those in Spain, will be closed.

Associated British Foods (LSE:ABF) has warned that similar measures will hit its Primark operations in Europe. Flutter Entertainments, meanwhile, has bemoaned the suspension of sporting events which will have a “material impact” on revenues for the foreseeable future.

This is not so much a financial crisis (although there will be a substantial economic impact), as a social and health crisis on a global scale. 

For the most part, domestic banks remain robust, having shored up their defences after the financial crisis and are additionally being spoon-fed liquidity by the central banks. Further contributions are still being considered by governments on a fiscal and perhaps coordinated basis.

These moves will undoubtedly help as this crisis unfolds further.

From an investment perspective, however, the economic impacts of the coronavirus are yet to be accurately quantified, the oil price trade war remains a concern and the prospect of a global recession is increasingly likely.

As such, the stabilisation in markets which is becoming a more pressing requirement is not yet on the obvious horizon.