Active investment commentary & analysis

Neil Veitch on UK Growth

When asked whether he was worried about challenger Tyrell Biggs’ plans to defeat him in the ring, Mike Tyson said “everybody has plans…. until they get hit”. After a couple of bruising months, equity investors will know exactly what he meant. A brutal combination in the form of slowing Chinese growth, trade war fears, Brexit and tightening central bank liquidity left many needing a standing eight count.

But, it is too early to throw in the towel. The US economy continues to grow strongly, with corporate and consumer readings at or near historic highs. In the UK, wage and employment data remains robust. The Chinese government continues to have tools at its disposal to boost growth if required. The significant imbalances in the real economy or financial sector that typically emerge at the end of the cycle are not apparent. The indiscriminate nature of the recent market sell-off can afford opportunities to buy stocks at a significant discount to their intrinsic value.

The airline sector was particularly bruised, with each of the UK-listed low-cost airlines declining by more than 30% from their summer peaks. As macroeconomic concerns aligned with industry and company-specific headwinds, the sector fell out of favour in a spectacular fashion. Under this barrage of blows, however, it is important to try and keep a clear head. The sector in Europe is quite different to how it was even ten years ago. In 2008, the top five airline groups accounted for 43% of intraEuropean capacity; in 2018, it is 63%. Although rising fuel prices bring additional costs, they can also accelerate the demise of weaker airlines who are unable to hedge their requirements. In the past few months Cobalt Air and Primera have ceased operations while questions remain about Norwegian Airlines’ longer-term viability. The two lowest-cost operators, Ryanair and Wizz Air, have shown discipline in moderating their growth ambitions for the winter season, while demand remains robust, with total passenger spend per seat showing improving trends across most listed airlines.

Other sectors seem to be factoring in similarly gloomy outlooks. Many industrial stocks, particularly those with auto exposure, appear priced for a severe downturn. If this does not occur, expect these stocks to rally. Investors may have been backed onto the ropes, but this fight still has a few rounds left to go.

A version of this article was published in Investment Week on 03/12/2018.