Share prices in the UK house-building sector have been outperforming in the past month on the back o...
Share prices in the UK house-building sector have been outperforming in the past month on the back of an expected decrease in interest rates in 2001. From the end of September through to 3 November the FTSE construction and building material index rose by 8.27% compared to a 1.43% rise in the FTSE All Share.
Chris White, fund manager, UK income trust LeggMason Investors, says: "The performance of housebuilders on the stock market is almost perfectly correlated to interest rates; when interest rates go down, housebuilders are expected to do well."
According to White, Beazer, Barratt Development, Crest Nicholson and Bryants have all performed strongly. Housebuilding stocks have been trading on P/E ratios of four to seven times earnings, he says. Many have been experiencing double digit earnings growth in the last four to five years and dividend yields are well above the market average
"There is a realisation that the downturn in the housing market will not be as bad as people feared," he adds. "The independence of the Bank of England should mean a smoother economic cycle.
"This creates a more stable environment for cyclical stocks such as housebuilders. Interest rates are expected to go down next year and I think the market is having a run in advance of that."
White observes that a number of housebuilders are being taken over or, like Fairview Homes, going private. He thinks housebuilders are not a long-term growth sector but are undervalued investments.
He feels it is unlikely that profits will grow at a rate in excess of the market over the medium term but will continue to go up in the short term.
Trevor Green, UK fund manager at Credit Suisse Asset Management says: "The sector is performing well at the moment because UK interest rates have peaked and we are looking for domestic plays on that."
Historically, the sector usually performs better in November to March but Green says share prices have already moved dramatically. The share price for Barratt Developments rose from £2.20 on 1 August to £2.85 on 1 November.
Green explains why the sector has turned now: "Decreasing interest rates and attractive valuations." But, he adds, "the sector needed a catalyst: the positive results reported in September."
Green also believes the trend will not last. "The good performance will probably be concentrated into a short time period," he says. "While Barratt's share price has increased by about 20%, nothing fundamental has happened to the company. The market will probably quieten down in the next few weeks."
Credit Suisse is very overweight in the sector. Its core holdings are in Persimmon, which Green thinks has a good long-term track record. The company has good regional exposure, playing a broad spectrum of the market and wants exposure to the whole UK market.
Green says: "The market is ahead of itself believing interest rates will come down sooner than they will. We went into the shares when they were good value but now have moved dramatically and are not so attractive. They will be significantly reduced by the end of the year."
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