More strong signals from IAG and Wall Street 

Investors had chosen to celebrate the election outcome with US markets posting strong gains, and the party continued as the expected interest rate cut from the Federal Reserve provided another boost for technology stocks in particular.

The prospects for a new era of growth under the new President are at present firmly in place, with likely tax cuts and deregulation being potential major drivers. The underlying strength of the US economy also lessens the pressure on the Fed to cut rates at pace, leaving it with plenty of firepower should the economy suddenly turn south.

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At some point the issues of a growing US deficit, a possible return to an inflationary environment and increasingly stretched valuations will need to be addressed, but for the moment the weight of increased buying pressure is lifting sentiment and share prices in equal measure.

The latest advances propelled the S&P500 and Nasdaq to new record highs, bringing their cumulative performances in the year to date to gains of 25% and 28% respectively, while the Dow Jones is ahead by 16%, after effectively finishing unchanged yesterday.

UK markets have struggled to hold on to the initial gains following the US election result, weighed in part by the prospects of tariffs from the new President which could crimp trade and potentially add to the inflationary mix at a time when the situation is increasingly under control. This has tended to offset the theoretical tailwinds of a weaker pound and the large exposure of many FTSE100 constituents to the fortunes of the US economy, although the primary index has managed a gain of 5.2% so far this year.

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There have been some concerning noises coming from the housebuilding sector of late, despite the promises of the new government to cut much of the red tape and boost new homes, and in early exchanges Vistry Group (LSE:VTY) became the latest builder to bear the brunt of investor caution. The shares dropped by up to 14% after a profit warning which pointed to the additional costs of an independent review which had found further issues, as well as the group guiding for higher inflation and pressure on its supply chains next year following the recent Budget.

Elsewhere, the Chinese headache continued to reverberate as details of a new stimulus plan from the authorities weighed on increasingly impatient investors, with the mining stocks, as well as the likes of Prudential (LSE:PRU) and Standard Chartered (LSE:STAN) coming under some pressure as a result.

International Consolidated Airlines Q3

British Airways owner International Consolidated Airlines Group SA (LSE:IAG) is now firmly in the ascendancy, and the surprise announcement of a €350 million share buyback programme alongside third-quarter results is a further reflection of a company on a strongly recovering flight path.

Significant cash generation has helped IAG in dealing with arguably the biggest thorn in its side, namely net debt, which represents an overhang from the days of the pandemic when the group was forced to ratchet up borrowings to survive. The latest level of €6.19 billion is a significant improvement from the previous year’s level of €9.25 billion as the group erodes the debt.

Revenues which grew by 7.9% to €9.3 billion in the quarter (and up 8.2% so far this year) led to an operating profit which jumped by 15.4% to €2.01 billion, with profit after tax rising by 17% to €1.44 billion. Revenues were boosted by improvements across the piece, with stronger contributions from higher passenger and cargo numbers, as well as from one of its alternative sources of income, Iberia’s third party maintenance, repair and overhaul business. Operating margin also rose to 21.6% from 20.2%, including an uplift of 5.4% at British Airways.

More broadly, 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 pandemic then added another level of issues, while current macroeconomic and geopolitical concerns add to a potentially dangerous mix, underlying some of the potential hazards of investing in the airline sector.

Even so, IAG’s combination of brands serve many different customer types to a multitude of destinations and across different price points, although business travel is recovering more slowly, particularly on short-haul destinations where perhaps the advent of virtual meetings lessens the viability of face-to-face meetings.

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The long and arduous reparation from the ravages of the pandemic will take some time yet to complete, but IAG is improving in leaps and bounds. The shares are 50% down from pre-pandemic levels, but investors who chose to buy in to the recovery while the shares were on the tarmac will have been handsomely rewarded. The price has risen by 71% over the last two years and by 46% in the last year alone, which compares to a gain of 10% for the wider FTSE100.

A previous return to the payment of a dividend, today’s pleasantly surprising share buyback announcement, and another strong reduction to net debt are all strong signals, and the group expects the financial performance to carry on for the rest of the year. While the recovery for IAG will itself be a long-haul journey, it is one which is being supported by investors for the longer term, with the market consensus of the shares coming in at a buy.