Leading shares are edging higher after positive news from the likes of BT and GKN.
But housebuilders, which have been falling sharply on fears that the Brexit vote will hit the UK economy (and thus the housing market) hard, are under pressure again. Part of the reason is that analysts at Deutsche Bank have slashed their price targets albeit they are still positive on the sector. They say:
Reflecting Brexit uncertainty we have reduced our forecasts for the UK Housebuilders to reflect a possible moderate downside scenario (-10% in volumes and pricing), in a bid to prove that even with these assumptions the sector offers strong investment opportunities. Our new assumptions have driven around 50% reduction in our EBIT estimates, and a near 60% reduction in profit befor tax in 2017. However despite this we forecast the sector to achieve an average return on capital employed of 15%, well above the comparable near 10% cost of capital pre tax.
Government policy remains pivotal. Since 2007 new house building has been a key policy for the UK government, identifying it as a driver of economic growth, with government targeting (and reiterating since Brexit) 1m new homes 2015-2020. This target has been reiterated by government since the Brexit vote. With this in mind we see government policy as the key upside risk in our sector. The key policy which could provide upside we believe is Help to Buy equity loan where we believe a temporary increase in the equity stake taken by government to 30% (still remaining short of the 40% in the London Help to Buy product) could provide meaningful support to volumes, as could a short term stamp duty holiday at the lower end of the house price scale.
But Deutsche’s price target cuts, along with new figures showing mortgage approvals in June at their lowest level since March 2015, have helped push Barratt Developments 7.4p lower to 411.6p, Taylor Wimpey down 2.5p at 146.6p, Berkeley Group down 33p to £25.94 and Persimmon 19p lower to £16.09.
BP is the biggest faller, down 12.2p at 428.15p as the company missed second quarter profit expectations amid weak refining margins and the tumbling oil price.
But BT is 19p better at 406.5p on relief that regulator Ofcom had not said the company should split off its Openreach network business as a separate company.
Meanwhile GKN has climbed 7.8p to 297.7p as the engineer said it was confident of its 2016 results and planned to cut costs by £30m to help lift next year’s figures. In a buy note Sandy Morris at Jefferies said:
Staying on course and delivering on guidance (before foreign exchange) strikes us as pretty good going given the number of ebbs and flows across each division, although it is precisely what GKN has done for at least the last three years. We believe 2016 will not – as GKN guided - be a vintage year in terms of organic growth, but the things that need to happen to position GKN for good organic growth from 2017 appear to be slotting into place.
Overall the FTSE 100 is currently 16.33 points higher at 6726.46, ahead of a busy week of central bank news, with the US Federal Reserve starting a two day meeting and the Bank of Japan making its latest announcement on Friday.
The weak pound is providing support following renewed expectations of a UK rate cut next month. Tony Cross, market analyst at Trustnet Direct, said:
London’s FTSE-100 is bouncing higher in early trade although much of the support seems to be coming through from the pound taking another beating overnight, in the wake of news that Monetary Policy Committee members are becoming increasingly keen for fresh stimulus measures to be deployed. Although the Bank of England meet again to discuss rates next week, it had initially been thought that meaningful action would have to wait until we had a full quarter’s worth of post-Brexit data on the table, but opinions here may now be shifting.
