CFDs are a leveraged product and can result in losses that exceed deposits. Please ensure you fully understand how CFDs work and what their risks are, and take care to manage your exposure. CFDs are a leveraged product and can result in losses that exceed deposits. Please ensure you fully understand how CFDs work and what their risks are, and take care to manage your exposure.

UK shares: vaccination push should boost domestically-focused stocks

UK vaccination efforts look likely to drive value stocks higher, yet it makes sense to focus on domestically-geared stocks for now​.

Vaccination programme makes UK stocks more attractive

The UK vaccination efforts have been well covered, with struggles on mainland Europe highlighting one of the benefits the UK has from greater independence from the European Union (EU). While there are standout countries like Israel taking the lead globally, the image below highlights the dramatic lead the UK has taken in comparison to most Western nations.

That vaccination push should help allow the UK to lift restrictions earlier than other nations, bringing heightened hope for a more timely economic bounceback. That has come to the benefit of the pound, with GBP/USD hitting the highest level since 2018.

From an equity front, the so-called ‘reflation trade’ will be unlikely to play out in a simplistic manner. Just because we are moving towards the economy reopening doesn’t mean that all stocks heavily hit by Covid-19 are on the cusp of a surge. Instead it makes sense to consider what activities are more or less likely to recover in the near term.

The emergence of the South African strain will be key in this, with the questionable protection provided by the heavily utilized AstraZeneca vaccine meaning that international travel is likely to be heavily controlled for some time yet. After all, there is speculation that it could be August by the time a booster is provided to specifically address that variant.

This will likely mean the government focuses on domestic consumption and economic activity over a move to lift restrictions on international travel. Heightened vaccine protection should allow a great reopening for the services sector in particular, which is currently contracting at its fastest rate in eight months.

The ‘eat out to help out’ scheme was widely panned as a source of infection in the middle of a pandemic. However, there is likely to be a big push towards raising domestic consumption once the vaccination efforts have reached a certain threshold.

The key here is that stocks relying on domestic consumption and activity are going to have less hurdles to overcome compared with those tied to international movement. After all, the importing of foreign Covid-19 strains are the greatest threat to the UK recovery right now.

A 'Great British summer'

While many of us long for beaches and sunshine, the fact is that people will be happy take what they can get right now. While tier four lockdowns limit many activities, the vaccine will allow people to act with greater confidence when seeking to engage in social activities.

Restaurants, cinemas, pubs, and domestic holidays are likely to see a sharp boost in demand. For that reason, it makes sense to look locally for the gainers from this vaccination programme. The chart below highlights some stocks which are still well off their pre-crisis levels and stand to benefit from the reopening. This covers a range of stocks, from domestic travel names (Stagecoach and Go-Ahead Group), Cinema stocks (Everyman and Cineworld), and pub/restaurant names (Whitbread and Restaurant Group).

These stocks form just a small sub-section of a wider group of companies, yet their domestic focus should stand them in good stead over the coming months.

US airlines attractive vs UK peers

Airlines have understandably been a major area of focus for investors seeking value as we return to normality. However, international travel will likely face a more unpredictable pathway, with the UK now implementing a three test system just to return to the country.

For those looking for airline stocks, the domestic-focus would mean that US carriers look more attractive. This chart below highlights how we have seen a mixed performance for airlines either side of the Atlantic. The risk posed by foreign strains could drive outperformance for US airlines with a minimal international footprint.

While the existence of foreign variants that could overcome existing vaccines do point towards a safer view for domestic stocks, it is worthwhile noting that a major surge in such cases could undermine any such domestic recovery. Thus it will be key to keep an eye on cases numbers associated with strains such as that currently seen in South Africa.

This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.

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