Yesterday, the FTSE 100 took a large tumble lower. After closing on Friday below 7,000 points, it hit a low around 6,850 on Monday before gaining ground back so far today. Despite this, there are a few stand out performers already emerging to start the week. Of note were both Rolls-Royce (LSE:RR) and International Consolidated Airlines Group (LSE:IAG). In fact, IAG shares jumped 11% yesterday, and Rolls-Royce shares are also up over 4%. What’s going on here?
A strong move higher
The main theme behind both stocks rising has to do with the link to the aviation sector. IAG owns several airlines, including British Airways and Aer Lingus. For Rolls-Royce, a major revenue line comes from the manufacture and servicing of engines for planes. So any positive news relating to travel restrictions or Covid-19 has an impact on both shares.
Positive news has come out over the past few days in this regard. For example, the US is going to be lifting the travel ban on UK visitors, albeit still needing proof of vaccination and other measures. Several travel agents have already reported a surge in booking demand following this announcement.
Added into this is the news from the UK side that the travel light system for international travel will be scrapped in early October. This will be replaced with a much simpler red list of countries.
The above pieces of recent news are good for Rolls-Royce and IAG shares. They indicate higher flying hours and flight capacity going forward. This will be great for IAG in terms of revenue generated. For Rolls-Royce, higher usage of engines will indirectly benefit the company in terms of the contracts it has for ongoing servicing.
Still cautious with Rolls-Royce and IAG shares
It may come as a surprise that despite the above news, I’m not rushing to buy shares in either company right now. The fact is there is still a large amount of uncertainty in the market.
The broader market fell significantly over the past few trading days due to concern over a Chinese economic slowdown. Higher inflation fears out of the UK are also on investors’ minds. Even though these two points don’t directly impact either company, broad market sentiment could drag them lower.
For example, if enough investors decide to run to safety, I would expect both stocks to fall in value. Neither are what I would call a defensive stock, like a utility company. So even though Rolls-Royce and IAG shares may be sound, they could see downward pressure simply because the market is selling off. For the moment, the good news is keeping selling at bay, but this might not last forever.
Further, travel restrictions and Covid-19 developments can change very quickly. So as we go into the winter, I wouldn’t be surprised if we see restrictions imposed again if case numbers rise. I can’t predict this, but I would prefer to be holding defensive stocks right now instead of Rolls-Royce or IAG shares.
Therefore, even though the news is positive at the moment for both companies, I personally think the risk is too high to buy these shares for my portfolio at the moment.
