Silver lining to the volcanic ash cloud?

The cost to businesses of the Eyjafjallajokull volcanic eruption has gathered much attention over the past week.

With an estimated 95,000 flights cancelled across Europe and passengers stranded around the world, the share prices of companies affected by this event fell sharply as the news broke.

According to Leigh Himsworth, Head of UK Equities at Gartmore, markets reacted very swiftly to the news and may actually have overreacted in the face of uncertainty.

"We could see that the market moved quickly to discount prices, sometimes beyond what seemed necessary for the situation. It seemed to us that they priced in the impact of serious long-term consequences, rather than as if it were a temporary event."

Indeed, share prices began to recover even before flight schedules did, which Leigh believes shows that the initial reaction of markets may have been excessive. Events such as this can provide great opportunities according to Leigh:

"Falling prices don't just benefit managers who have short positions in the affected companies. They can also provide the opportunity to buy stocks at discounted prices, or add to existing holdings cheaply where the reasons for investment in the long-term haven't changed."

Aside  from the obvious examples of affected companies like airlines (such as British Airways and Easyjet) and travel operators like TUI Travel, knock-on effects weighed on businesses that rely on air travel and transport to some degree in their operations. Two such companies that were affected were Restaurant Group and WH Smith, which both operate parts of their business within airports. Although reduced passenger numbers would be expected to slow sales, in reality this only impacts on one part of their businesses. Additionally, airport rental charges are often linked to turnover, so the impact on profits is partially mitigated when sales are lower.

"It may be some time before the dust settles and we can see the full impact of this unique event on bottom lines. It's a great example of how short-term irrationality can provide opportunities for active managers."