These FTSE 100 shares both look pretty cheap at current prices. But I think their low valuations reflect the massive risk they continue to pose for investors.
Here’s why I think they could be horror shows for investors next year.
International Consolidated Airlines
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British Airways owner International Consolidated Airlines (LSE:IAG) has been boosted by a steady recovery in civil aviation traffic since the end of Covid-19 lockdowns.
And, encouragingly for the company, news from the commercial airline sector continues to impress. Air France-KLM this week announced its own passenger numbers rose 7.6% during the third quarter. Meanwhile, the flyer’s load factor also kept rising and almost touched 90% between July and September.
This follows IAG’s own forecast-beating trading statement in recent weeks. Revenues leapt 33.3% between July and September as passenger numbers grew 26% year on year. This resulted in record third-quarter profit before tax of €2.6bn.
But I’m still not tempted to add the company’s shares to my portfolio. High inflation and economic turbulence across Europe and North America, and a spluttering economic recovery in China, all cast a shadow over air travel in 2024.
This landscape is especially worrying given the huge amount of debt IAG has on its balance sheet. It had €17.2bn worth of borrowings as of September.
As if this wasn’t danger enough, IAG also faces a possible explosion in fuel costs as the conflict in the Middle East escalates. In recent days the World Bank warned that crude values could soar above $150 a barrel (from around $90 today) as the Israel-Hamas war intensifies.
These factors have caused IAG’s share price to sharply decline since the summer. There’s a good chance, in my opinion, that it will continue to slide in 2024 too. I’m happy to avoid it despite the company’s low forward price-to-earnings (P/E) ratio of 5.1 times.
The Berkeley Group Holdings
A number of housebuilders like The Berkeley Group (LSE:BKG) also seem to offer attractive value for money. This FTSE 100 operator trades on a P/E ratio of 11.3 times, just below the index average. And it offers a healthy 5% dividend yield. But, like IAG, I think this UK share could be another potential value trap.
Residential construction companies like this face significant turbulence as homebuyer activity weakens. High interest rates are sapping buyer affordability, and alarmingly are tipped by the Bank of England to persist above normal levels for an “extended” period.
A steady slowdown in economic growth and rising unemployment also casts a pall over newbuild home demand.
Worryingly for Berkeley, house purchases are especially weak in its heartlands of London and the South-East. This goes some way to explaining why the value of its own underlying private sales reservations slumped 35% year on year between July and August.
I believe the long-term outlook for builders like this remains hopeful. As Britain’s population rises so should demand for new houses, worsening an already-large property shortage. But the threat of melting profits in the interim means I plan to avoid this UK share like the plague.
