As I write, some of the stocks most battered by the stock market crash are gaining ground. These include the likes of easyJet, IAG, CCL, TUI, and the InterContinental Hotels Group. This isn’t a coincidence. I think there are two reasons these cheap UK shares are rising. One, economic recovery is on the cards. Two, their share prices had seen some of the sharpest plunges in the market crash, so some improvement was to be expected.
In the past month alone, many of these stocks have shown increases even though the FTSE 100 index has been flat. But I think the question still remains: Should I buy them now or is it still too risky to invest in them? I would divide them into three categories, based on descending order of risk before deciding.
Lower risk cheap UK shares: Hospitality
I think FTSE 100 hospitality stocks like the InterContinental Hotels Group and Whitbread are the best placed to participate in the recovery. Indeed, they already are. Their share prices have seen the sharpest recoveries from the lowest FTSE 100 level seen on 23 March compared to other Covid-19 sensitive stocks. Despite this, some analysts expect more upside to the stocks over the next 12 months as well, especially Whitbread. I’d consider buying this cheap UK share today.
Medium risk: Aviation
The going is less good for aviation stocks like easyJet and the International Consolidated Airlines Group. Both of them have also gained ground since last month but comparatively less. They are still quite sensitive to incoming news. Fresh quarantines, travel avoidance, and still muted economic activity continue to impact their share price performance. However, they are still better placed than during the lockdown. I would keep an eye out for their updates for signs of improvement in health. I think these cheap UK shares have the potential to improve share price performance over time, even if there’s some risk to investing in them.
Higher risk: Leisure travel
But the highest risk, in my view, is reserved for leisure travel operators like Carnival and TUI. Their share price performance has been erratic and largely weak, given the uncertain situation. Even with the economic recovery in place, the fact is that cruises come under the head of discretionary spending.
When consumer confidence is relatively low, like at present, people are less likely to splurge. Also, travel is still a bit risky and leisure travel may seem particularly unnecessary. Further, if the recession makes a comeback, these companies will be hit even more. It could happen that the situation improves sharply from here, and the UK economy does not look back, but the probability of that happening is limited. So, if these cheap UK shares are tempting, think through your risk appetite.
Which cheap UK shares to buy?
I’d buy cheap UK shares only if I had a large appetite for risk, in which case I’d consider hospitality first. Or, even better, I’d buy safe stocks.
Manika Premsingh owns shares of easyJet. The Motley Fool UK has recommended Carnival and InterContinental Hotels Group. 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.