2 shares with recovery potential after big falls

2 mins. to read
2 shares with recovery potential after big falls

Fears surrounding the global growth outlook have led to significant falls in a number of FTSE 100 share prices. The decline in their valuations may, of course, not yet be over. Given the potential for additional tariffs being placed on imports by the US, China and other major economies, the current market ‘correction’ may not have reached its close.

The threat of a global trade war or a higher US interest rate may provide buying opportunities for global stocks such as BAE Systems (LON:BA.) and Burberry (LSE:BRBY). While the two companies have seen their share prices come under severe pressure in recent months, they may have the potential to deliver successful turnarounds.

Global growth threat

It could be argued that the world is already experiencing a trade war. The US, China and various other major economies have already placed tariffs on a wide range of imports. They are expected to slow the rate of GDP growth over the next few years. Further tariffs could cause the rate of growth to decrease yet further, which may lead to financial challenges across the world economy.

Even if further tariffs are not placed on imported goods, investors are also concerned about the threat of a rising US interest rate. The US economy grew at an annualised rate of 3.5% in the third quarter, with unemployment being at a 40-year low and wage growth improving. This should lead to an increasingly hawkish stance from the Federal Reserve, as it seeks to reduce the threat of higher inflation in a rapidly-growing economy. Given that debt levels across the world remain high, rising interest costs could suppress growth over the medium term.

Recovery potential

Given the global exposure of BAE and Burberry, it is perhaps unsurprising that fears surrounding the world economy’s outlook have caused their share prices to fall by 16% and 12% respectively in the last month.

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BAE has also faced a threat from geopolitical risk in Saudi Arabia. Since the country has the third biggest defence budget in the world, it accounts for around one-sixth of the company’s revenue. The threat of sanctions against Saudi Arabia could cause further volatility for the company’s share price in the near term. However, given the potential increase in military expenditure in the US and across its NATO allies in the coming years, the stock’s financial performance could improve significantly.

Burberry is also facing a period of uncertainty, with its strategy change set to take time to be successfully implemented. Its half-year results are due out next week, but its most recent update suggested that it has delivered a solid performance in a transitional period. With an increasing focus on the luxury segment, as well as on cost reductions, the profitability of the business could improve over the medium term. With a strong brand and exposure to fast-growing emerging markets, it appears to have the foundations to enable improving financial performance.

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