European airlines have enjoyed a bounce over the last few weeks, according to Kevin McLardy, investm...
European airlines have enjoyed a bounce over the last few weeks, according to Kevin McLardy, investment manager on the European desk at Britannic Asset Management.
McLardy says the market has an appetite for cyclicals at the moment, as investors look for a recovery next year, and the airlines, by being cyclical in nature, are benefiting from this.
'With a lot of liquidity now coming into the market, investors are more prepared to look through the bad news,' he says.
'However, you still have to be selective when picking stocks ' the low-cost models such as easyJet and Ryanair are best suited for these industry conditions because people are looking for survivors and those which will perform well next year.'
McLardy holds Ryanair and Lufthansa, which, over the month to 19 November 2001, have bounced 20% and 30% respectively. Defensive transport stocks have been sold off because of the rally in cyclicals. McLardy has reduced his defensive positions throughout November in motorway operators in Italy and Spain, such as AutoStrada.
He says: 'Going forward, we expect the outperformance of the cyclicals to slow as the fundamentals catch up.
'Looking at earnings into next year is difficult because of the current level of uncertainty in the airline business, which got hit badly after 11 September.'
Tom Elliott, strategist at JP Morgan Fleming Asset Management, agrees that Europe's leading airlines suffered in October from declining passenger numbers following the events of 11 September.
'The first victim was Swissair, which was forced to seek court protection from its creditors after losses mounted at the beginning of the month,' he says. 'Although a rescue plan has been brokered by some of Switzerland's wealthiest individuals and largest companies, the airline's future remains in doubt.'
Alia Baig, head of European equities at Axa Investment Managers, says the valuations in transport do not look expensive but the fundamentals will not improve in the short term. He says most European transport companies have produced poor third-quarter earnings results, with only Lufthansa performing better than expected.
'Consumer confidence is the big issue,' she says. 'People have money but they are not comfortable travelling at the moment and, as such, are spending more on improving their homes and on cars. There is a parallel here with what happened in the Gulf War, during which airline stocks had bad news for six months and did not recover for about 12 months.'
Baig says the problems in the European airline industry might actually improve the excess capacity ' a positive for Europe, which she says has too many airlines. This excess capacity may be improved through further bankruptcies and mergers, which would benefit the larger airlines through less competition.
Following the airline accident in New York on 12 November, she says the airline industry was the worst-performing sector globally that afternoon. However, when it emerged the crash was an accident, stocks bounced sharply.
European airlines have bounced recently.
Investors prepared to look through bad news.
Transport valuations looking cheap.
No improvement in transport fundamentals.
Lack of consumer confidence in transport.
Possiblity of more bankrupcies.
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