We may have put the stock market crash behind us, but some stocks are still seeing hard times. Shares of travel companies like TUI and Carnival, and aviation stocks like IAG and easyJet are falling fast today. As I write, EZJ is the hardest hit, with a 12.3% share price fall. It’s followed by TUI with a 12% decline. IAG (-8%) and Carnival (-6%) follow suit.
Risk aversion on the rise
Why is this happening? The UK has imposed quarantine measures for Spain, which is causing fresh panic. But I think that rising risk aversion was evident even earlier. After two months of solid gains, the FTSE 100 index has slipped in July. It isn’t a big fall – less than 1% on average compared to June – but it is a decline nevertheless. Risk aversion is also visible in gold prices, which have reached all time highs. In fact, according to one fund manager, in the next few years, they could double from their current levels. If there’s one investment that’s a hedge against riskier financial assets like equities, it’s gold. This suggests that while we might have overcome the stock market crash, there’s still a heightened sense among investors that we aren’t out of the woods yet.
Safe bets in a stock market crash
When risk aversion rises, investors lean towards safer stocks or those with clear prospects. For instance, FTSE 100 utilities like National Grid and Severn Trent are actually gaining in today’s trading. So are accounting software provider Relx, pest control and hygiene services company Rentokil Initial, and consumer goods manufacturer Unilever.
With their relatively stable financials, all these companies, save Rentokil Initial, are also dividend payers. It’s not that their dividend yields are sky high, but at a time when many have stopped paying dividends altogether, they stand out. Moreover, their trading updates aren’t disasters; some are actually encouraging. Consider Unilever, which has shown an increase in earnings per share recently.
The fallers
Compare this to companies like Carnival, TUI, easyJet, and IAG. All of them have been hit pretty badly by the lockdowns. All of them had to avail of the government’s Covid-19 financing facility as their operations came to a standstill. With the lockdowns coming to an end, they can breathe a sigh of relief, but only just. The economy is still in recession, which will continue to impact travel and tourism. As a result, as risk aversion rises, I reckon these are the first stocks that investors would like to avoid, stock market crash or not.
I’m not entirely averse to these stocks however. I think they do hold long-term value, but they also require patience and conviction. If I have to invest £1,000 today in these stocks, I’d buy them and forget about it for at least the remainder of 2020. If I can’t do that, I’d look at safer stocks to hedge myself in case there’s another stock market crash.