Last Friday was a pretty unpleasant day for investors, as the UK stock market took quite a hit. The FTSE 100 index fell over 3.5% in less than 24 hours, pushing it back under pre-pandemic levels. That’s hardly a crash, yet the same cannot be said for travel stocks experiencing double-digit declines. Despite this tumble, the index’s 12-month performance is still a respectable 11%. But should I be worried? And what’s behind this sudden change of momentum? Let’s explore.
Why did travel stocks crash last week?
Last Friday, news broke out of a new variant of Covid-19 being detected in the UK, originating from southern Africa. Consequently, the government has re-introduced the requirement of wearing a face mask in stores and on public transport in England, and taking a PCR test if travelling outside of the country. With that in mind, it’s not shocking to see five of the top 10 stocks that crashed last week operate within the travel industry.
Carnival, Wizz Air, IAG, easyJet, and TUI were down anywhere between 10%-16% by market close. That’s not too surprising, given these businesses are struggling to attract customers back to their services. And this new variant might be throwing a spanner in the works. I say might be, because there’s currently very limited information about this strain.
As it stands, the transmissibility, health severity, and effect on the immune system are all unknown factors that scientists are still investigating. It’s possible that this strain won’t be the disaster that investors currently think it is. After all, earlier this year, there was a Beta variant that ultimately faded away. And the same thing could happen again. Does that mean the share price crash of travel stocks presents a buying opportunity? Or is this a precursor to a UK stock market crash?
An impending stock market crash?
Suppose the data reveals that this variant isn’t the calamity it’s currently believed to be. In that case, I think it’s likely the recent stock market tumble will reverse itself relatively quickly. However, assuming this will be the case is akin to speculation, which as an investor, I tend to avoid. The UK stock market will eventually crash again in the future. However, I don’t think this new variant will be responsible. Even if it does prove to be a dangerous strain, the world is far more prepared to handle it compared to the start of the pandemic.
For travel stocks, the re-introduction of restrictions has always been a risk. And one I’ve highlighted multiple times in the past. The return of PCR testing is a speed bump in enticing travellers, but it’s not a roadblock. A closed border, or a popular travel destination becoming red-listed is one, and could lead to many booked trips being postponed or outright cancelled. That would obviously be bad news for any business. But for these five, in particular, it could be a disaster due to the relatively massive pile of debt accumulated over the last 20 months. Even more so now that interest rates are predicted to go up soon due to inflationary pressures.
All things considered, I don’t think I’ll be adding any travel stocks to my portfolio any time soon. There remains a lot of uncertainty surrounding this sector. And that’s not something I’m interested in adding to my portfolio.
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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