Today has been a very important day for stock markets around the world. We’ve seen a huge shift in risk dynamics, thanks to uncertainty being removed, along with other good news. The confirmed victory in the US election of Joe Biden allows markets to finally move on. Added to this is the news that the Pfizer vaccine is reportedly 90% effective. So far, the two largest benefactors in the FTSE 100 have been Rolls-Royce (LSE:RR) and International Consolidated Airlines Group (LSE:IAG): as I write, the Rolls-Royce share price is up around 45%. The IAG share price is up 35%.
These are some serious moves, especially when you consider the FTSE 100 is up around 5.7%. The outperformance from these two shares is large, and merits some deeper digging.
IAG share price
The rally today from IAG can really be seen to be driven from the vaccine news. The headline broke just before lunch that the Pfizer and BioNTech vaccine could have as high as a 90% effectiveness rate. The trial data is monitored by an independent data board, which adds more credibility to this. Investors were quick to think about the sector and firms that stand to gain the most from a vaccine. Quite rightly, the airline sector is definitely up there.
The IAG share price soared higher as the possibility of a higher passenger numbers would boost profitability quicker than currently expected. Recently, former CEO Willie Walsh commented that it could take until 2023 for air travel demand to return to pre-COVID levels. Other comments along the same line is what has seen the depression in the IAG share price. Earlier this summer, the share price traded around 65p, levels not seen since 2012.
So if this vaccine comes out soon, and is genuinely effective, the air travel demand should pick up quicker than mentioned above. This should lead to a recalculation in the value of IAG, a recalculation higher in my opinion!
Rolls-Royce moving higher
I’ve written at length before about how Rolls-Royce is very sensitive to the fate of the aviation industry. Despite other troubles this year, the fall off in demand for the engines it produces for aeroplanes has been the catalyst for a large share price slump. The c.45% rally so far today still means the Rolls-Royce share price is down over 50% from the start of the year, highlighting the size of the fall.
Again the vaccine news was the key driver for the move higher in the share price. In a similar way to IAG, Rolls-Royce will benefit hugely from a vaccine given the correlation it should have to air travel demand rebounding. This should knock on to higher orders for both maintenance of existing engines and producing new engines too.
You can also argue that the “Biden Bounce” from the US election is helping the stock. President-elect Biden had good UK relations when he served in the Obama administration. This may lead to favourable trading terms for UK firms going forward. Rolls-Royce is heavily connected to the UK Government, so it’s logical to think that Rolls-Royce could do well out of any contracts made over the next four years.
jonathansmith1 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.