Global stock markets have surged this month, but what are investors to do now?
The double dose of vaccine news behind this month's 15% rally for the FTSE 100 index has left bargain-hunting investors wondering if any cheap cyclical stocks still remain.
British Airways owner International Consolidated Airlines Group (LSE:IAG), Cineworld (LSE:CINE) and railway station catering company SSP Group (LSE:SSPG) are examples of companies whose valuations have risen by 50% or more in the six trading days up to yesterday. Several others in the pandemic-hit leisure sector have added more than 30%, including Whitbread (LSE:WTB), TUI (LSE:TUI) and Carnival (LSE:CCL).
The FTSE 100 index closed at 6,421 last night — its best finish since early June — and has risen from the 5,525 seen towards the end of October, driven by vaccine updates on successive Mondays from Pfizer (NYSE:PFE)/BioNTech (NASDAQ:BNTX) and Moderna (NASDAQ:MRNA), which raised hopes for an end to the Covid-19 disruption.
After adding 1.7% yesterday, sentiment cooled in the top flight today as IAG, Rolls-Royce (LSE:RR.) and BT Group (LSE:BT.A) were among stocks lower. There was also a note of caution from Morgan Stanley after its travel and leisure research team attached a few caveats to the better-than-expected vaccine results.
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They said it was still too early to know whether the jabs would stop the spread of Covid-19 or how long immunity will last. And with some scientists saying things may not return to normal for another year, they suggested cash burn could continue for some companies.
In terms of travel and leisure stocks, Morgan Stanley said even fewer shares were looking good value after yesterday's Moderna update showed that its vaccine is 95% effective.
The note said:
“We think many stocks have run too far too fast, and the only cheap cyclicals left seem to be those with stretched balance sheets, where investors might find they are investing more cash than they expected if the share price rally triggers an equity raise.”
Looking to 2022 as the first year of normal trading following the pandemic, the bank's forecasts show Compass (LSE:CPG), Cineworld and Playtech (LSE:PTEC) trading at multiples below their historical average.
But in terms of price targets, it sees only a 20% or more upside for four European leisure stocks — caterer Sodexo (EURONEXT:SW), gambling firms GVC Holdings (LSE:GVC) and Evolution (OMX:EVO) and pubs company Mitchells & Butlers (LSE:MAB), which may yet need to raise equity.
The performance of markets in recent days has focused on the so-called “value rotation”, with cyclical sectors outperforming defensives by a gap of more than 1% last week. Banks, energy and insurance were the best performers globally, up 16.7%, 16% and 12.1% respectively, with retail, transport and tech hardware the worst performers, according to UBS.
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Morgan Stanley's London-based strategist Joao Toniato noted that the growth sector of beverages was the fourth-best performer at 11.2%, highlighting that rather than a straightforward value rotation the market is pricing in mobility restrictions and yield expectations.
“While the narrative over the past week has focused on a value rotation, we believe looking at the market this way misses important points.”
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