Inevitable gains for index heavyweights Shell (AS:) and BP (LON:) were insufficient to stem an opening decline in the , where a broad-based markdown across almost all sectors reflected a strongly risk-off approach.
The mining sector was at the eye of the storm, while International Consolidated Airlines fell on the oil price rise despite two broker upgrades. The moves were symptomatic of investor concern despite the defensive appeal of the premier index, whose gains were further shaved, although it stood higher by 6.5% in the year to date.
Meanwhile, the waves of doubt from Asia washed onto US shores, where Samsung Electronics shares had fallen by 7% despite a blockbuster set of numbers. Not only does this bring into question AI valuations alongside an increasingly high bar of expectation, but the imminent second quarter earnings season in the US is now primed for the most severe of tests and thus the possibility of widespread disappointment to all but the strongest of profit reports.
The calls are becoming increasingly loud that the levels of capital investment could struggle to produce the productivity gains and profits to justify a decent rate of return, if at all. As such, US markets struggled to make headway as investors sought solace in sectors such as healthcare and financials as the rotation continued, and in the likes of Walmart which announced product price cuts to maintain its domestic dominance.
Sentiment was also negatively affected on what is becoming a ceasefire in the Middle East in name only. Reports of an Iranian attack on a liquefied tanker in the Strait of Hormuz was followed by retaliatory US strikes in the region, leading to a spike of more than 3% in oil prices. The US also reimposed sales sanctions on Iran, all of which casts real doubts on the longer-term outlook for peace in the Middle East. While the Federal Reserve’s later today will not include this latest development, the central bank’s clear focus on inflation will need to be reassessed, putting the possibility of a rate hike this year back on the table.
Even so, losses in US markets were relatively contained, with the main indices comfortably ahead in the year so far overall. Gains of 10.1% for the , 9.6% for the and 11.1% for the have been achieved despite a cocktail of concerns over recent months, although these pressures are beginning to show some ominous signs that the volatility is here to stay.
Jet2 FY
Jet2 (LON:) has reset expectations lower through the year, due largely to a fast-moving late booking environment which was then compounded by the Middle East conflict. Operating profit of £439.6 million represented a fall of 2% on the previous year, in line with the range guidance in April of £435 to £440 million, but well below the previous £453 million at the half-year numbers. Gatwick start-up costs of £11 million, from where the group began flying in March and increased industry costs of £50 million were additional headwinds.
Even so, there were a number of more positive statements within the results, such as revenues which grew by 4% to £7.48 billion, a record for the group. Passenger numbers also flew to new highs, up by 5% to 20.83 million, while a healthy net cash balance of £2.01 billion enabled the announcement of a fresh £250 million share buyback programme, which is a clear statement of confidence in prospects. In terms of the immediate outlook, there has been strong booking momentum in recent weeks, while the 7.7% increase in on-sale capacity for the summer also positions the group well.
Of course, the macro environment remains cloudy and the propensity of customers to book late will continue to provide challenges. More broadly, investing in airline shares generally has never been for the faint hearted. The ferocity of competition and economic pressure remain as potential headwinds, as do some of the other issues which have historically blighted the sector, such as virus outbreaks, industrial action, volcanic dust clouds and higher fuel costs. The current macroeconomic and geopolitical concerns add to a potentially dangerous mix, underlying some of the potential hazards of investing in the airline sector.
However, and contrary to popular belief, Jet2 is no minnow. It is the third largest airline in the UK behind British Airways and easyJet, ahead of TUI and Virgin Atlantic. The company has opted to remain on AIM rather than seeking a full listing, and its £2.6 billion market cap makes it the second largest company on its chosen index. If it were to switch to a full listing, it would comfortably enter the upper end of the index.
The share price reached its peak in June last year, since when a profit warning in September has led to a decline of 24.5% over the last 12 months, as compared to a loss of 4.7% for the wider . Some of that fall has been softened by a 21% bounce in the price over the last three months, much of which was a read across from the takeover bid for easyJet and the possibility of further M&A activity in the sector. However, it remains to be seen whether Jet2 can break out of the current holding pattern, with the shares still 20% shy of pre-pandemic levels, although with a robust balance sheet and clear expansionary plans the intention is evident. Indeed, the market consensus of the shares as a cautious buy and a strongly positive reaction to the update reflect guarded optimism that Jet2 will deliver on its ambitions.