A Brexit would bring even tougher negotiations with EU

If the UK leaves the EU, it would lead to some tough decisions and negotiations on trade, says Stephen Lewis of ADM Investor Services.

British Prime Minister David Cameron is locked in tough negotiations about changing some of the terms of the UK membership with the EU, but a so-called Brexit would kick off a whole new round of potentially more difficult talks with bloc.

The key economic decisions to be taken if the UK electorate does vote to leave the EU in a referendum centre around trade, although there is much more at stake than just this issue, writes Stephen Lewis, chief economist at ADM Investor Services.

If Britain decides to leave the EU, it then has to decide whether or not to stay in the European Economic Area or leave that as well. “This is not a question that will be presented to voters in the referendum but it might very well be crucial to how Brexit would work out in practice,” writes Lewis.

READ: Major bank warns of serious impact in UK votes for Brexit

If the UK stays in the EEA with non-EU members Norway, Iceland and Liechtenstein, it would still have access to the EU’s internal market, but wouldn’t be able to vote on internal market rules. Under the EEA agreement, the EU would still have to negotiate with the non-EU members if it wanted to change those rules, according to Lewis.

“A government that expected usually to be in a small minority in EU decision-making, under the ‘qualified majority voting’ regime, might see no practical difference, as far as trading relations with the EU were concerned, between participating in the EU and shifting to EEA status,” he writes.

The advantage of staying in the EEA would be taking control of its own policies on a huge range of thinks, including agriculture, fisheries, international trade, foreign relations, security, police and judicial matters. However, there are drawbacks, including having to make substantial payments to help reduce social and economic disparities within Europe.

Leaving both the EU and EEA would throw up more fundamental problems for UK negotiators, according to Lewis, as it would void trade agreements with other countries. This could be solved by negotiating an inter-governmental deal with the EU that allows existing EU trade treaties with other countries to apply to the UK too. But this would depend on the goodwill of the EU.

The UK might need to negotiate a new set of treaties with the EU itself, although it could continue current arrangements within a new treaty, the economist writes. It would be protected from any discrimination by World Trade Organisation rules that prevent trade restrictions.

The key sector for the UK is its dominant services sector, and it is going to have to work hard to secure its interests from outside the EU, negotiating when new proposals emerge in Brussels or in Germany.

Lewis’ analysis of the trade implications of a Brexit come as government ministers stepped up their own rhetoric surrounding the debate.

READ: UK Brexit uncertainty will sink the pound

Chancellor of the Exchequer George Osborne predicted that the EU referendum would end the UK debate about its relationship with the EU for “at least a generation”.

Meanwhile, Commons Leader and Conservative euro skeptic Chris Grayling described the EU as “disastrous” for Britain.

“The crisis in the eurozone and the migration challenge have led to calls for still more integration and a move towards much greater political union. It is a path that the UK will not and should not follow,” Grayling wrote in an article for The Daily Telegraph.

This post was originally published here: https://news.markets/forex/a-brexit-would-mean-even-tougher-negotiations-with-the-eu-8692/

Analysts see no reason to panic about emerging markets

Emerging market (EM) stocks have fallen by almost a quarter over the past year amidst the general malaise prompted by China’s problems, which have reduced demand for their goods, and the slump in the prices of the commodities many of them produce. Emerging market currencies have weakened too.

However, analysts see no reason to panic.

“EM credit growth remains weak by its usual standards but there is no evidence (yet) of a widespread ‘credit crunch’ that could be the precursor to a more serious downturn in economic activity,” writes Neil Shearing, chief emerging markets economist at Capital Economics.

“Of the many reasons that have been cited over the past few weeks to be bearish on EMs, the one that we have most sympathy with is the notion that the rapid build-up of private-sector debt over the past decade could create financial-sector vulnerabilities that in turn could spur problems in the real economy,” he adds.

“Yet while we are concerned about the risks posed by a rapid build-up of debt in a handful of emerging markets, there is nothing in the latest data to support claims we’ve seen in recent days that EMs are already in the midst of a credit crunch that will prove the precursor to sharp falls in economic activity,” Shearing continues.

Emerging market stocks have fallen sharply in recent months

Source: Investing.com

Alberto Aides, an economist at Bank of America Merrill Lynch, is even mildly optimistic – albeit with many caveats. “We expect EM to recover modestly in 2016 if US and Chinese growth hold up, and commodity prices recover,” he writes.

There are two big “ifs” in that sentence, as Aides acknowledges. “The recent increase in financial volatility, mainly due to China growth concerns, lower oil prices and uncertainty about US growth, adds risks to our call. Greater financial globalisation, and a weaker fiscal stance and balance sheet limit the room for countercyclical monetary and fiscal policy in EM,” he writes.

Still, he reckons the Mexican peso is undervalued, noting that it is less exposed to commodities than other Latin American currencies. And with a more short-term focus, he notes that a BAML forecasting model is signalling long positions in the Chinese, Indian, South Korean, Philippine and Peruvian currencies.

Elsewhere, Shearing notes that credit continues to contract in a handful of EMs in Europe, including Hungary, Bulgaria and Croatia.

“However, as things stand, these EMs are the exception rather than the rule,” he writes. “This doesn’t mean that emerging markets won’t experience a credit crunch in the future – and we will continue to monitor those we have previously identified as ‘at risk’ carefully over the coming months. But the most recent data seem to point to a soft landing for credit growth in the emerging world, not an abrupt crunch,” he writes.

This post was taken from news.markets: https://news.markets/shares/analysts-see-no-reason-to-panic-about-emerging-markets-8593/

Why the prickly pear is ripe for investment

There’s a host of global consumer trends that smart investors should take note of this year, says market researcher Mintel.

 Uber, Airbnb, prickly pears, bottled water – all things smart investors should watch in 2016, says market research firm Mintel.

Space and time are at a premium, it says in its latest survey of consumer trends, a fact which is creating new marketplaces as consumers wait less, own less and rent and share more.
Firms that switch on to this trend will capitalise.

“We are going to see a slew of new businesses seeking to hire out homes, parking and storage spaces, as well as deliver to us within the hour,” says Mintel. Young people in particular – the millennials – are keen to explore “solutions that seek to maximise the usage and availability of temporary, transient space for storage, parking, working and sleeping.”

Take the international accommodation bookings website Airbnb. Fresh from investing $1 billion in China in 2015, the firm “is expanding into storage, mindful of start-ups like Roost that are trying to develop this market.”

Uber is also shaking up the taxi sector. “The spread of Uber is sparking protest and competition. Regardless of whether or not legislators clip its wings, the model is here to stay,” says Mintel. In its wake have come apps like Maaxi in London – that allows consumers to reserve individual seats in black cabs – and sharing systems like Scooterino in Rome.

“Savvy automotive brands are embracing the model, with Ford launching its own peer-to-peer car sharing scheme in a number of cities,” says Mintel.

Also expect more initiatives like France’s Parkego and Spain’s LetMeSpace start-ups, which help people to make a profit from their unused parking spaces.

This demand for space is hitting a host of sectors. Mintel reckons 38% of Chinese consumers say they prefer tubeless toilet roll to toilet roll with a tube since it saves space.

“In the beauty sector, we’ve seen businesses that rent out nail polishes and we’ll see more people signing up for unlimited visits to gyms, spas and salons for a monthly or annual fee.”

Low-hanging fruit

What else should investors take note of? For one, an extreme period of global drought is set to hit a number of agriculture commodities, warns Mintel.

In the US, California – which produces 80% of the world’s almonds – is suffering its worst drought in 1,200 years. Brazil – from where 35% of the world’s coffee beans originate, and also the world’s largest soybean producer – has been suffering its worst drought in 80 years.

Prolonged drought in Alberta, Canada could cause also grain production to drop by 25-30% in 2015, while drought in Thailand has left 960,000 hectares of land reserved for paddy fields barren, threatening global rice shortages.

We’re “likely to see shortages – and higher prices – in wine, beef and rice,” says Mintel. “Shortages will demand alternatives, so we may see more examples of foods like prickly pear pitched not just towards livestock, but to humans as well.”

It says we’ve already seen examples of this in the US, such as Open Nature’s Prickly Pear Sorbet and Spoetzl Brewery’s Shiner Prickly Pear Summer Seasonal Beer.

Water, water, but not everywhere

There are also massive implications for water.

Shortages will make clean water, as well as waterless alternatives, increasingly precious commodities, with potential politically charged implications.

“In 2016, as food and water shortages hit, prices will rise and water will become a major issue for retailers, manufacturers and consumers,” says Mintel.

“Consumers are alive to the need to conserve water for their own means and will warm to brands that can help achieve this at a personal and public level,” writes Mintel.

Again, we’re talking about a host of sectors.

In the household sector, consumers are keen to conserve water, with Mintel research finding that as many as 33% of UK consumers say they’d pay more for fittings that save on water or energy bills.
Bottled water, meanwhile, has the potential to become a “political hand grenade for brands”.

52% of Italian and 49% of French consumers are concerned about the environmental impact of drinking bottled water. While in the UK, 28% of consumers hold the same concerns, says Mintel.

It adds that more than three quarters of Spanish, Italian, French and German consumers are willing to pay more for washing up liquid that requires less water for rinsing.

Consumers are also open to less water-dependent and waterless products in beauty and personal care, with 28% of UK consumers and 33% of Italians saying that they would be interested in double concentrated bath or shower products.

Mintel estimates some 13% of UK consumers and 15% of French consumers say that they would be interested in dry soap, bath and shower products. Some 24% of UK 16-24 year olds and 28% of French 16-24 year olds say that they would be interested in dry use soap, bath and shower products.

Originally published here: https://news.markets/shares/why-the-prickly-pear-is-ripe-for-investment-8470/

UPDATE: RBS advises clients to ‘sell everything’ except haven debt

The Royal Bank of Scotland’s credit team has advised clients to brace for a “cataclysmic year” and a deflationary crisis, warning that major stock markets could fall by a fifth and that the crude oil price may nearly halve, again, to $16 per barrel.

The bank’s credit team said markets are flashing stress alerts akin to the turbulent months before the Lehman Brothers crisis in 2008.

“Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small,” it says in a client note.

Andrew Roberts, the bank’s credit chief, expects Wall Street and European stocks to fall by 10%-20%, with an even deeper slide for the FTSE 100 given its high weighting of energy and commodities companies.

RBS forecast that yields on 10-year German Bunds, or government bonds, would fall to an all-time low of 0.16% in a flight to safety, and may break zero as deflationary forces tighten their grip. The European Central Bank’s policy rate will fall to minus 0.7%.

Indeed such bonds, and a few of their developed-market counterparts are about the only things RBS would be long of. It says be long “10-year gilts, USTs, Bunds and BTPs [Italian government bonds]”.

READ: Time to buy baked beans and a shotgun? 

It also recommended being long of shorter paper “as deposit rate cuts remain on the table,” especially in the eurozone, but also perhaps in the UK , which looks cheap as the few remaining Bank of England hawks (ie those who want to see higher rates) “get bounced from the table”.

“And mostly, beware of the risk-on optimists,” the bank goes on.

“One lesson from 2Q 2015 and the Bund sell-off we got caught in, is that we need to always ask ourselves what the exit door is with any trade – as we said into the credit crunch in 2008, this will be as much about limiting losses as making gains.”

This post first appeared here: https://news.markets/bonds/rbs-client-note-makes-waves-sell-everything-advice-8243/

Don’t panic, Chinese inflation is in a good place -Capital

China’s economy is beset with problems but inflation isn’t one of them, despite persistent factory-gate price weakness, according to Capital Economics.

Consumer price inflation rose to 1.6% in December, the latest official data show, up from 1.5% in November but a whisker below market consensus.

For Capital’s chief China economist, Mark Williams, this leaves it in something of a sweet spot, with pricing power “high enough to keep concerns about deflation at bay” but low enough to give policymakers “plenty of room” to loosen further. He is more sanguine than most about weakness in producer prices, which have now posted a 46th successive month of declines, with a 5.9% year-on-year fall registered in December.

“The rate at which producer prices are declining (5.9% y/y again in December) can be almost entirely explained by falls in global commodity prices,” Williams writes.

“Weakness of Chinese demand relative to global supply has been a big factor in the slide in commodity prices, but this price shift nonetheless leaves the Chinese economy better off,” he continues.

“In any case, a year after the steepest commodity price declines, producer price inflation should be on the cusp of a rebound.”

However, if the latest inflation numbers are indeed good news, Chinese markets aren’t feeling it so far. Indices there are still feeling the fallout from last week’s twin market shutdowns and are all off by more than 1%.

This post originally appeared here: https://news.markets/bonds/dont-panic-chinese-inflation-is-in-a-good-place-capital-8141/

Rand weakness ‘inevitable’, says Commerzbank economist

The commodity price slump is hitting the South African rand more than most currencies

South Africa’s rand, or ZAR, is certain to fall according to Peter Kinsella, head of research on emerging market economies and currencies at Commerzbank.

“The combination of commodity price declines, a widening current account deficit and higher expected inflation implies that further ZAR weakness is inevitable,” he writes.

Kinsella argues that the ongoing commodity price slump affects the rand more than most currencies. “As a commodity exporter with strong links to the Chinese economy, ZAR depreciated by nearly 20% against the EUR over the last 12 months. With no end in sight for the commodity slump, this implies that ZAR will continue to lose ground in the short term,” he writes.

Moreover, South Africa persistently runs a sizeable current account deficit, which is expected to widen towards 4.5% of GDP over the coming quarters. “This makes South Africa and ZAR vulnerable to an increase in external financing costs, which is exactly what manifests at present with higher US interest rates,” he writes.

“In the event of materially higher US interest rates, this poses a key risk for ZAR. In addition to this, South African inflation is expected to increase markedly over the coming months as the inflationary pass through from the weakening exchange rate manifests,” he adds.

As for the country’s central bank, the South African Reserve Bank, it surprised the market with interest rate hikes, but the inflation trajectory implies that real interest rates will be barely positive, writes Kinsella.

South African real interest rates will remain among the lowest in all of the emerging markets. This will burden ZAR over the coming months. The only risk to the above scenario is if the Fed takes note of the current emerging market jitters and refrains from hiking rates over the coming months. This could lead to some brief respite for ZAR. We illustrate a strategy which will protect investors’ interests in both cases.”

Kinsella’s recommendation is a “forward plus” in the euro/rand currency cross. “ZAR buyers are hedged at current spot prices and benefit if EUR/ZAR appreciates towards 19.00,” he writes.

The cross rate was trading at 17.3890 at midday on Friday.

This post previously appeared on news.markets: https://news.markets/forex/rand-weakness-inevitable-says-commerzbank-economist-8092/

 

Bank of America names its top emerging picks for 2016

The year 2016 isn’t very old but it already looks as though prediction is a game for the very brave. Chinese shares have already chalked up two days of plunge and shutdown; there’s new froideur between Saudi Arabia and Iran; and it seems very possible that North Korea has a thermonuclear weapon we didn’t know about.

Still, the foretelling goes on, with Bank of America Merrill Lynch latest into the fray with its top emerging market calls for this year.

“Our top trades for 2016 look to take advantage of monetary policy divergence within developed markets, between DM and EM, and within EM,” the bank’s analysts write.

“We are cautious on the return outlook given risks of a faster Federal Reserve (monetary) tightening, a sharper Chinese slowdown, volatile oil prices and US high-yield unraveling,” they go on.

Its not likely to be a blockbuster year though, with forecast returns of 1% for local EM debt, -0.4% for over all EM foreign exchange and 2.7% for EM’s external sovereign debt.

So, here’s the list:

BoAML’s top foreign exchange pick is to be long both Mexico’s peso and Poland’s zloty against the euro, while being short a basket of Korean won, Malaysian ringgit against the dollar, and South Africa’s rand against the rouble – all on the basis of monetary policy divergence.

The bank’s favourite local-debt long positions are in Russia, India and Brazil.

It prefers Russian paper to Turkish, fretting that, “the latest news on macro policy and constitutional changes” raises the risk that Turkey will be stripped of its investment-grade credit ratings.

Those who like Argentina’s chances under its new, more conciliatory and market-friendly administration might like to consider its EUR GDP warrants, perhaps hedged in currency terms in order to minimise exposure policy transition there. BoAML has raised Argentina to overweight thanks to the change in government.

However, events in China are clouding the outlook. Its the largest EM, after all, and its start to the year has been an epic, just not one that’s been fun to watch.

“We remain cautious amid renewed Chinese slowdown concerns and the global equity market rout,” the bank’s analysts conclude.

This article first appeared here: https://news.markets/bonds/bank-america-names-top-emerging-picks-2016-7901/

We’ve just seen the weakest year for inflation since the euro’s birth

Now that all the eurozone inflation numbers are in for 2015 we can see that it’s been a truly extraordinary year.

The eurozone’s December’s consumer price index rise of 0.2% left the average rate for the year as a whole at zero – the weakest year since the single currency’s birth in 1999. The past year’s figures take annual inflation below even the nadir of the financial crisis and, as the chart below shows, efforts to stimulate prices in the wake of that debacle petered out quickly. This is the sort of stubborn low inflation which is sure to invite uncomfortable comparisons with Japan’s long fight to bring some pricing power back to its economy.

Indeed, the forecaster Capital Economics finds it hard to see at this point where a sustained increase in inflation is going to come from. Its analysts concede that the headline rate is likely to rise, especially if oil prices recover. However, core inflation is set to remain subdued by any measure given weak cost pressures, little sign of wage inflation and “plentiful spare capacity in the economy,” they write.

And some base effects from weak oil are hardly the stuff of durable recovery.

Headline inflation has now been below 1% since October 2013 and, despite continued signs of recovery in the eurozone, domestically generated inflation is also proving sluggish. December services inflation was 1.1%, whereas in the pre-crisis days a print below 2% was unusual.

Market-based measures of medium-term inflation expectations remain adrift: a swap contract that estimates five-year inflation in five years’ time stands at 1.67%. Such measures are heavily influenced by moves in inflation now, which could be read as a lack of faith among investors in the European Central Bank’s ability to achieve its aim, which is supposedly inflation of near but not over 2%.

The ECB failed to match the markets’ exaggerated hopes of policy easing in December, but a few more months of inflation this docile are sure to see investors begging for more. Thursday’s account of that famously underwhelming policy meeting is going to be hotly awaited to see how close the ECB might have come to action back then.

Source: Capital Economics

This post is republished from news.markets: http://news.markets/bonds/weve-just-seen-weakest-year-inflation-since-euros-birth-7762/

Can the motor industry fend off Google and Apple’s attempts to control car tech?

Two of the world’s largest car makers remain wary about handing Apple and Google too much control over in-car displays.

Rather than the systems offered by the two tech titans, Toyota has agreed to use a car-phone connectivity system championed by Ford. Toyota will introduce a telematics system with Ford’s SmartDeviceLink, an open platform that the car makers are also inviting their peers to adopt for in-car applications, the company said on Monday.

The company has resisted offering either Apple’s CarPlay or Google’s Android Auto, citing safety and security concerns, although Ford will offer them, but as apps within its Sync connectivity system.

“Developing a safer and more secure in-car smartphone connectivity service which better matches individual vehicle features is exactly the value and advantage an automaker can offer customers,” says Shigeki Terashi, a Toyota executive vice-president.

Meanwhile, Ford claims that Honda, Fuji Heavy Industries’ Subaru, Mazda and Peugeot also are considering using the SmartDeviceLink.

Toyota first signed up to work with Ford on car telematics systems five years ago and said in mid-2015 that it was exploring the SmartDeviceLink for its vehicles. Toyota is involved in another system called MirrorLink which allows drivers to run navigation and entertainment apps on their smartphones using large, on-dashboard icons. It was created by the Car Connectivity Consortium, a group of car makers and phone manufacturers including Volkswagen, General Motors, Hyundai, Samsung Electronics and HTC.

The world’s motor industry is clearly intent on denying anything like a clear run for the established technolgy giants as they seek to diversify out of their traditional markets and into the autmobile space. According to industry estimates the display pie is pretty sizeable, with $18.6 billion in sales thought possible by 2021. From estimates of a modest 497,000 cars with CarPlay, Android Auto or both to be sold this this year, five million are expected in 2018 and nearly 10 million by 2020, according to analysis from IHS.

It looks as though the big automakers are going to take their best shots at keeping those estimates optimistic.

This post first appeared here: http://news.markets/tech/can-motor-industry-fend-off-google-apples-attempts-control-car-tech-7670/

Shire’s long pursuit of Baxalta about to pay off – report

The pharmaceutical sector’s urge to merge endures.

Drugmaker Shire may be close to clinching a union with US-based Baxalta, perhaps as soon as this week, in a cash and stock deal valued at $32 billion, excluding debt, Bloomberg reported over the weekend, citing sources.

While final details are still being negotiated, the new offer by Shire could value Baxalta at $46.50-$48 per share, two sources told Bloomberg. An agreement would successfully end Shire’s six-month pursuit. Baxalta turned down an initial all-stock offer in July valued at $30.6 billion – based on Shire’s stock price at the time – as the offer excluded any cash payment. But in December Reuters reported that Shire’s deal makers had added enough cash to its previous bid for talks to advance.

It appears that they have.

The combined company would generate $20 billion in sales by 2020, according to Shire, which has focused its mergers and acquisitions firepower on companies that make rare-disease treatments. Shire bought Dyax for $5.9 billion in November and NPS Pharmaceuticals for $5 billion in February.

Deerfield, Illinois-based Baxalta – spun off from Baxter International in July – produces biotech treatments for rare blood conditions, cancers and immune-system disorders. It could enjoy a lower tax rate if it is taken over by Dublin-based Shire.

Irish companies pay taxes at a rate of about 12.5%, while the US, at almost 40% in some states, has some of the highest corporate taxes in any industrialised country.

This post is taken from news.markets: http://news.markets/shares/shires-long-pursuit-baxalta-pay-off-report-7549/

Insurers’ profits braced for hit after UK floods

Insurance company profits are braced to take a hit from the cost of the flooding across northern England.

The flooding caused by Storm Eva, which swept northern England over the Christmas weekend, and Storm Desmond, which hit Cumbria and Lancashire earlier in December, could wipe up to 0.2% off the UK’s economic output this year, according to consultancy group IHS.

The final cost of the winter flooding will exceed £5 billion, experts at KPMG have warned.

“The scale of the flooding over the last few weeks has seen communities across large sections of Northern England, Wales, Scotland and Ireland severely impacted,” says Justin Balcombe, KPMG’s UK head of general insurance management consulting.

“In 2007 when a similar pattern of flooding hit, total insured claims were £3.2 billion, however, we consider that the actual financial impact far exceeded this. We are assessing this month’s events through a number of economic lenses, resulting in an initial total cost estimate of £5-£5.8 billion.”

The accountancy firm says the costs of re-building infrastructure and flood defences will reach £2.75 billion. It is warning that many businesses will have insufficient cover for the damage and losses incurred.

“We believe that there is a serious level of underinsurance and would estimate this economic impact to be as significant as the insured event, to the tune of an additional £1 billion,” says Balcombe.

York is among the northern cities hit by the flooding

Source: Shutterstock

Another accountancy firm, PwC, estimates the economic loss from the floods could be between £900.0 million and £1.3 billion, with insurers bearing up to £1.0 billion of that.

It says costs could breach £1.5 billion if further rainfall causes more floods.

“It is still early to estimate losses but, based on the areas where significant rain has fallen, the great number of roads submerged and including the losses arising from Storm Desmond earlier this month, we would give a very initial estimate of economic losses of between £900 million and £1.3 billion, with the insurance industry bearing between £700 million to £1 billion of this,” says Mohammad Khan, general insurance leader at PwC.

Many areas that were affected during Storm Desmond have been flooded again. A fresh storm, named Frank is expected to arrive on Tuesday evening and threatens more parts of the UK.

“If rain continues to fall in large quantities, and the areas with warnings in place do indeed flood significantly, it could well be that the total economic losses could breach £1.5 billion with an additional significant increase in insurer losses from our initial estimate,” writes PwC’s Khan.

He says profits for insurers and commercial property firms are at risk. “The insurance losses that arose from the flooding and storm damage during Storm Desmond were severe but were within nearly all affected insurers’ large loss expectations for 2015, as 2015 was such a benign year prior to the December weather,” he says.

“The additional damage from Storm Eva and any further damage caused by additional rain will impact relevant insurers’ year-end profitability. It is too early to say whether it causes the 2015 profitability of the household and commercial property business they write to be loss-making.”

In the first trading day since the floods hit, insurance company Aviva is down 0.5% at 516.65 pence. RSA Insurance Group is down 1.6% at 423.90 pence.

Analysts have said house building stocks are holding up on the potential windfalls from repairing damaged homes.

First published here: http://news.markets/uncategorised/insurers-profits-braced-for-7426/

UK house prices set to rise in 2016, but will housebuilder stocks continue rally?

UK house price growth accelerated more than expected in December, ensuring another year of strong growth in 2015, according to latest industry data. Forecasts are for further rises in 2016, but this doesn’t necessarily mean housebuilding stocks will continue a multi-year rise.

Nationwide, the mortgage lender, reports that UK house prices rose 0.8% month-on-month in December, the largest monthly rise since April. It compares with a 0.1% increase in November. Economists had expected a 0.5% rise in December.

Annual house price inflation climbed to a seven-month high of 4.5% in December after dipping to 3.7% in November from 3.9% in October. This is up from a six-month low of 3.2% in August.

London outperformed the rest of the UK with a rise of 12.2% year-on-year rise in the fourth quarter, compared with a 4.3% increase nationally.

“As we look ahead to 2016, the risks are skewed towards a modest acceleration in house price growth, at least at the national level, despite the likelihood of interest rate increases from the middle of next year,” says Nationwide’s chief economist Robert Gardner.

Howard Archer, chief UK and European economist at IHS Global Insight, agrees. “The stronger Nationwide data for December reinforce our belief that house prices are likely to see solid increases over the coming months. We expect house prices to rise by around 6% over 2016 amid healthy buyer interest, supported by largely decent fundamentals, and a shortage of properties. While latest mortgage approvals data for house purchases indicates that activity has recently levelled off, it is at a decent level following a pick-up over the first three quarters of 2015.”

It is notable that the Nationwide’s house price measure has been weaker than most other reports. At the top end, latest data from the Halifax show that house prices were up 9.0% year-on-year in the three months to November, which is double the 4.5% annual rate reported by the Nationwide for December.

What’s more, figures from the Land Registry, which is based on completed house transactions, show annual house price inflation rose to an eight-month high of 5.6% in November, from 5.2% in October, 4.8% in September and 4.2% in August (the lowest level since November 2013.)

Archer expects the upside for house prices to be constrained by more stretched house prices to earnings ratios, tighter checking of prospective mortgage borrowers by lenders and the probability that interest rates will start rising gradually during 2016, though he too believes higher interest rates are unlikely to have a major dampening impact on the housing market.

He says buyer interest will be sustained by increased earnings growth, high and rising employment, relatively elevated consumer confidence and still very low mortgage interest rates.

He adds that the shortage of UK housing stock is currently providing appreciable support to house prices. The latest survey from the Royal Institution of Chartered Surveyors reported that new instructions fell for the 15^th time in 16 months in November with the result that average stocks per surveyor fell to a survey low.

Nationwide, however, says that London is unlikely to experience another year of above-average price gains owing to a slowing price-growth momentum.

The top end of the London market is being crimped by recent changes to the so-called stamp duty, the house buying tax. The changes mean that buyers of more expensive properties are paying a much higher level of stamp duty.

Changes to the regime governing buy-to-let investments is also expected to hit the London market as well as other areas. From next April buy-to-let investors will pay an extra 3% stamp duty on top of existing rates. Landlords will also only now get mortgage interest relief on the basic rate of income tax.

Investors in FTSE-listed housebuilders have had a year to celebrate in 2015, thanks to the revitalised UK housing market and the fact and the housebuilders are selling more houses at higher average prices.

In fact, shares in the housebuilders have been rising strongly since 2012, having plunged in 2008 as the financial crisis and ensuing economic downturn brought house building to an almost complete halt. The companies focused on preserving cash on their balance sheets and their market valuations nosedived.

Taylor Wimpey is the largest housebuilder by market value, but can the rally continue?

Source: Thomson Reuters

The four FTSE 100 housebuilders are all in the top 10 individual stock gainers of the year. Taylor Wimpey is up 49%, Berkeley Group up nearly 46%, Barratt Developments up 33% and Persimmon up 32%. In the FTSE 250, property portal Rightmove and housebuilder Redrow are among the top performers over the year as a whole.

But shares have levelled out of late. Last month the broker Liberum warned that the incredible rally in housebuilder stocks over the last three years had run its course and valuations had become stretched.

Indeed, FTSE house builders were on the back foot on Wednesday morning even though the Nationwide house price data was better than expectations. The sector rose on Tuesday as traders decided it would likely benefit from the flood damage in the north of England.

The problem for the housebuilders is that comparative figures are becoming tougher each year, and therefore growth rates are set to slow. On top of that, they’re facing increased input costs, particular wages as there’s a shortage of skilled labour in the workforce.

The housebuilders remain positive about their own outlooks, but some analysts say market valuations are looking high and they’re expecting the rising costs to put pressure on profit margins in coming years.

The analysts community is far from unanimous on whether the rally is at an end. Two of the last three analyst ratings changes for Taylor Wimpey have been downgrades, but the most recent change was an upgrade. The latest three changes for Persimmon were all downgrades, while Barratt Developments has suffered a downgrade, and initiation at Buy, and an upgrade.

Persimmon shares are recovering after a two-month dip

Source: Thomson Reuters

Overall, four analysts have Barratt at Buy, seven at Hold, and one at Strong Sell, according to data compiled by Thomson Reuters. For Persimmon, there is one Strong Buy, nine Holds, three Sells and one Strong Sell. Two analysts have Taylor Wimpey at Strong Buy, five at Buy, five at Hold and one at Strong Sell, while one has a Strong Buy on Berkeley Group, three have it at Buy, nine at Hold and none at Sell.

While prospects for the UK housing market in 2016 appear to be positive, barring another economic downturn, prospects for housebuilder shares appear less certain. Can the rally continue, or will profit margins come under pressure as some analysts predict?

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