FTSE up despite more US selling overnight as Fed meeting looms, airline shares in demand, and Pets at Home pepped up after latest update

“The FTSE 100 bounced back sharply on Wednesday, bucking the negative trend set in the US last night and some mixed trading in Asia,” says AJ Bell Investment Director Russ Mould.

“With today’s US Federal Reserve meeting firmly in view the UK’s flagship stock index has become somewhat dislocated from other global benchmarks thanks to the absence of big technology companies in its ranks.

“For years this under-representation for tech held the FTSE 100 back, now the dominance of relatively cheap tobacco, resources and banking stocks is playing in its favour. For the year to date it is up slightly while the Nasdaq in the US is down double digits.

“How long this trend continues remains to be seen. The Fed’s update comes with the first US rate hike, perhaps of four or five this year, expected in March.

“It remains to be seen if its members will do anything to calm the recent volatility in the markets, particularly given the current tensions between Russia and the Ukraine.

“While its primary job is to keep a lid on inflation, the Fed has shown a willingness in the past to consider the market response when determining its policy.”

Wizz Air / Airline sector

“The aviation sector has had plenty of false dawns since Covid first struck. Endless moving goalposts on flying restrictions and testing requirements has made it hard for the industry to push forward.

“Thanks to the support of investors who stumped up cash on more than one occasion to keep airlines afloat, the main players are still in the market and are seeking to shift from survival mode back to some sense of normality.

“Wizz Air’s results for the last three months of calendar 2021 perfectly illustrate the sector’s predicament. Passenger numbers are picking up and there are more bums on seats per available plane. Unfortunately, the business is still loss-making, which is unsustainable in an industry that has high fixed costs.

“Nonetheless, Wizz Air remains ever the optimist, which it must be when you consider it has picked up more airports slots at Gatwick airport and ordered more aircraft. It has bet hard that recovery will pick up soon and that its investments will help it secure an even bigger slice of the aviation market.

“Fortune favours the brave and there are growing signs that Wizz Air, and other airlines, could be in a stronger position in the coming months.

“Many countries are taking the view that we need to learn to live with Covid and simply get on with our lives without onerous restrictions. The fact so many people have suffered from the Omicron variant and come out the other side feeling fine after a week or two could install confidence to want to get on a plane and enjoy holidays or travel for business again.

“Changes to UK testing rules have seen a spike in demand for half-term holidays next month, and airlines will be hoping this also leads to greater ticket sales across the year.

“A calmer period on the stock markets has encouraged some investors to look for stocks and sectors that have potentially been oversold, which might explain why many aviation stocks were in demand on Wednesday.

“British Airways owner International Consolidated Airlines flew 5.6% higher, Deutsche Lufthansa gained nearly 5%, EasyJet advanced 3.6% and Jet2 moved up 3.2%. Wizz Air was the laggard, albeit still rising 1.6% off the back of its latest results.

“The sector’s recovery won’t be easy, given oil prices are high which means equally high fuel costs. In the UK, the forthcoming changes to the energy cap will put a lot of pressure on family finances as energy bills shoot up again.

“Then there is the great unknown – will airlines go for all-out price war to fill planes in the important summer period, or will they argue that everything in life has got more expensive and pent-up demand means consumers might pay up if it gets them a long-missed fortnight away?”

Pets at Home

“Pets at Home is about to get a new master and they’re inheriting a stock market animal with a glossy coat, healthy teeth and plenty of pep.

“As the market leader in a nation of animal lovers its proposition looks compelling, particularly given many Britons added a furry or feathered friend to their household in lockdown.

“This larger pet population needs feeding, cleaning and caring for when sick, and Pets at Home has got all of those angles covered thanks to its retail, grooming and veterinary arms.

“The vet business is high margin and a recently launched partnership model, pairing with independent operators, helps reduce the capital required to expand.

“Recent growth in this part of the business was a little more prosaic than the retail division which had a particularly strong run-up to Christmas as people looked to treat their pets.

“Supermarkets and other non-specialists represent a competitive threat, but it is one that Pets at Home is facing down effectively with initiatives like its VIP Loyalty scheme, which saw a 13% increase in numbers in the 12 weeks to 30 December, supporting this fight.

“There was also substantial growth in its separate kitten and puppy clubs with all these schemes requiring relatively limited investment on Pets at Home’s part while still helping to make customers more sticky in terms of shopping with the business.

“Like most companies Pets at Home is not immune from supply chain issues but it is doing a decent job of managing these, benefiting from having a product range largely sourced in the UK which is neither perishable nor seasonal.

“Whoever takes over from incumbent Peter Pritchard will have a hard act to follow but his legacy at least means they have a fair chance of success.”

These articles are for information purposes only and are not a personal recommendation or advice.