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?

This post appeared first on news.markets: http://news.markets/shares/uk-house-prices-set-to-rise-7481/

How will the FTSE 100 winners and losers of 2015 perform in 2016?

Investors in London-listed housebuilders have had a year to celebrate in 2015, but markets were dominated by the growth slowdown in China and anyone invested in commodity-related stocks have had a tough time.

So what lessons can investors learn from 2015, and how will the stocks that did best and worst perform in 2016?

The  FTSE 100, like other global equity markets, started the year positively. The US and UK economies were improving, the eurozone had stabilised, the Asian economies were still doing well, and the key political factors that affected the latter part of 2014 like the Ukraine crisis had subsided.

It wasn’t all rosy of course. Commodity prices were still under pressure, several emerging market economies like that of Brazil were showing signs of stress and most of the world’s central banks were still having to pump money into the economy to try and boost growth.

However, sentiment turned for the worse and equity markets plunged over the summer when it became clear that China’s economic growth was slowing quicker than markets had anticipated. The country’s manufacturing sector had stopped consuming all the metals that the world could produce and oil demand had also fallen sharply, leaving a global supply glut. China’s equity markets went through a period of turmoil that sent ripples through the global markets.

The FTSE 100 is down 4.4% for the 2015 as a whole. A late rally seems very unlikely after another set of Chinese data rattled global equity markets on Monday. Profits earned by Chinese industrial companies fell 1.4% from a year earlier in November, a sixth consecutive month of decline.

However, it wasn’t all bad news for FTSE 100 stocks. Here’s a look at the winners and losers, and a look ahead to their prospects in 2016:

The winners:

Housebuilders. 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.

It’s no surprise given that the UK housing market is booming once more, and the housebuilders are selling more houses at higher average prices.

House prices are set to continue rising in 2016. The Royal Institution of Chartered Surveyors has predicted 6% average growth for the UK.

However, the housebuilders are facing a tougher time, and that’s already being reflected in the share prices which have leveled out in recent months. The comparatives are getting tougher, which means growth is unlikely to be as strong, and the builders are facing rising input costs, notably in the form of higher wages as workers with the necessary skills are in short supply.

Housebuilder shares have plateaued after several years of strong growth

 

Source: Thomson Reuters

DCC: The Irish sales, marketing and distribution company is the best-performing stock in the FTSE 100 in 2015, having risen 58% over the course of the year.

It sells and distributes oil and liquified petroleum gas, technology products, pharmaceuticals and medical devices and provides a range of recycling and waste management services.

Last month, it raised its interim dividend by 15%, after reporting strong growth in profits and revenues and predicting that its profits for the financial year as a whole would be somewhat better than analysts had expected at that time.

Its growth is being driven to an extent by acquisitions, with its interim results buoyed by the inclusion of the Esso unmanned and motorway petrol station network in France.

And what of its prospects in 2016? The analyst community remains positive on the stock, with one rating it at Strong Buy, five at Buy, four at Hold, and none at Sell, according to data compiled by Thomson Reuters.

Hargreaves Lansdown: Shares in the asset manager have risen 48% in 2015, meaning it’s third on the list of the FTSE 100’s best performers.

It is growing strongly in an industry that’s also on the rise. In October, Hargreaves reported net new business inflows of £1.43 billion in the first quarter of its new financial year, up 47% from a year earlier, while total active client numbers rose a further 24,000, compared with 10,000 additions a year earlier. That means it has 760,000 clients, up from 736,000 at the end of June.

That growth is more than offsetting a drop in client fees that’s related to the drop in the equity markets.

However, the strong rise in the share price means Hargreaves is an expensive stock to own – its shares trade at nearly 40 times expected 2016 earnings. While analysts remain positive about the company’s prospects, they think the stock is fully valued and several have cut their recommendations in recent months.

Overall, just one analyst has a Buy rating on the stock, while 10 have it at Hold, two at Sell and two at Strong Sell, according to data from Thomson Reuters.

Direct Line shares have been rising ever since the insurer listed in 2012

 

Source: Thomson Reuters

Direct Line Insurance Group: The stock has risen 42% in 2015, continuing an uptrend that has existed since the stock listed in 2012.

The car and home insurance provider is continuing to grow, helped by its unique take on marketing which sees it shun price comparison sites to focus on selling products direct by phone and via the internet. It focuses on customer service, and is continually rated highly in consumer surveys.

Gross written premiums in its ongoing operations were up 1.3% in the first nine months of 2015, with 4.1% growth in motor insurance partially offset by a drop in home insurance premiums. Earlier this month, it announced it had lost its contract to underwrite home insurance for Nationwide Building Society customers.

Still, most analysts remain positive about the stock. Three have it at Strong Buy, six at Buy, seven at hold and two at Sell, according to the Thomson Reuters data.

Prospects for its motor insurance business look strong, with industry premiums on the increase again after a couple of years of highly competitive premium pressure. Analysts are also hoping for another special dividend when Direct Line announces its 2015 results next March.

“The balance sheet is strong, motor prices are once again on the rise, while the cost-cutting story continues. We expect the payment of special dividend to resume at the preliminary results in March 2016,” the analysts at RBC Capital Markets recently wrote.

Inmarsat: Shares in the satellite communications company have risen 41% in 2015, as demand for its services continues to grow strongly.

It has just awarded a $600 million contract to Airbus to build its next generation of satellites, while it has also been making strides in the developing market to provide data and communications systems for airline passengers.

Last month, Citi raised its price target on the stock because it thinks Inmarsat’s recent deals in the aviation sector will be a growth driver going forward.

However, just a month later, the same bank then downgraded the stock after paring back its expectations because the aviation business is still some way from hitting full scale and in the meantime Inmarsat has to fund its new generation of satellites.

Overall, two analysts have the stock at Strong Buy, three at Buy, seven at Hold, two at Sell, and one at Strong Sell, according to the Thomson Reuters data.

The losers

Mining stocks: Unsurprisingly, the four worst-performing stocks in the FTSE 100 in 2015 are mining stocks. Anglo American is down 73%, Glencore is down 69%, BHP Billiton is down 40% and Antofagasta is down 39%. Rio Tinto is also in the bottom 10, down by a third.

The companies have been forced to react to the sharp drop in commodity prices across the board. They are restructuring; selling assets and closing others; cutting costs and investments; and slashing dividends, all in an effort to shore up creaking balance sheets.

Read: Glencore upgraded by JP Morgan Cazenove, but not Anglo American

Read: The facts about Glencore’s debt pile, according to Citi

Read: As Glencore suffers, Rio Tinto continues bolstering balance sheet

Read: Goldman Sachs cuts its iron ore price forecasts

Analysts have been turning slightly less negative about Glencore in recent weeks, but that doesn’t mean investor sentiment is set to turn.

The prospects for these companies in 2016 rest on commodity prices and the success of their restructuring efforts. And the prospects for commodity prices rest on China.

Will 2015 mark the bottom of the commodity price cycle, or has that still to come?

 

 Source: News.Markets

Standard Chartered: The London-listed bank that’s focused on Asia has had three torrid years after surviving the financial crisis relatively unscathed. Its shares are down 40% in 2015, and are down some 65% since the start of 2013.

As the strong growth in the region faltered, Standard Chartered’s growth also faltered. It also been hit by weaker demand for products like currency hedging. That cost former chief executive Peter Sands his job, and the bank is now run by Bill Winters, the former JP Morgan investment bank chief.

He’s instigated a massive restructuring programme, and Standard Chartered shareholders earlier this month backed a £3.4 billion rights issue that’s being used to strengthen the balance sheet and help pay the costs of the reorganisation.

Analysts were pleased with the revamp plans, but Winters has admitted that recovery is going to take some time.

Pearson: The stock has fallen 35% in 2015, despite its sale of the Financial Times for £844 million in cash, giving it funds that it can plough back into its challenged main educational publishing business.

It is now focused purely on education markets, but those markets are struggling amid a move online for educational materials and US budget cuts.

Pearson shares slid in October after it issued a profit warning due to lost textbook orders in the US. That prompted Berenberg to warn investors that they may face a dividend cut.

Still, Exane BNP Paribas upgraded the stock to Outperform, from Neutral, shortly before Christmas, saying that while earnings were set to suffer in 2016, they should recover from 2017. Exane also expects the dividend to remain stable. At the same time, Bernstein said the company is well positioned to take advantage of the shift towards online educational material.

Overall, four analysts have the stock at Strong Buy, four at Buy, nine at Hold, three at Sell and two at Strong Sell, according to data compiled by Thomson Reuters.

Prospects for 2016 appear to hinge on whether the bad news is now behind the company and fully priced into the stock.

Rolls-Royce Holdings: Shares in the aircraft and marine engine maker are down 30% in 2015, after a difficult couple of years marked by profit warnings caused by weaker defence markets are difficulties in the marine markets.

Rolls-Royce has had a difficult couple of years. It was first hit by the reduction in UK and US military operations in recent conflict zones like Afghanistan and Iraq, and then by a weaker marine market that’s partly related to the fall in energy prices.

It’s also facing difficulties in its civil aerospace markets. It makes engines for long-haul aircraft and many of the older aircraft that its fits engines to are being retired from fleets over coming years while there’s a lag before newer aircraft with more-efficient Rolls-Royce engines are introduced.

The shares hit a four-year low in November after the company issued its fourth profit warning in little over a year.

Chief Executive Warren East has unveiled his new strategy plan, but analysts are remaining cautious on the stock until they see signs it is going to pay off.

This post appeared on news.markets: http://news.markets/shares/the-year-that-was-2015-was-all-about-china-7403/

Fed rate hike boosts stocks, bonds and the dollar; hits commodities

European financial markets’ reaction to Wednesday’s widely forecast US interest rate increase suggests that, far from clarifying the outlook for 2016, the Federal Reserve has raised more questions than it has answered.

The decision by the US central bank to raise rates by a quarter of a percentage point was widely seen as a ‘dovish hike’, implying that any further rate increases will be modest and spread over time. That has lifted stock markets around the world, with European bourses following their counterparts in the US and Asia higher.

By 1130 GMT, London’s benchmark FTSE 100 was up 1.4%, Frankfurt’s DAX up 3.3% and Paris’s CAC 40 up 2.6% following gains on Wall Street and through Asia.

Similarly, in the European government bond markets, 10-year yields were lower all round on the prospect of further rate rises arriving only slowly. Money that was parked in cash ahead of the Fed’s decision may also have been put back to work in bonds as well as shares.

“The decision to raise rates for the first time following almost a decade of crises and unconventional policy measures is being welcomed as much for its end to uncertainty as its vote of confidence in US economic recovery,” writes Mike van Dulken, head of research at Accendo Markets.

However, the dollar – far from weakening as it does usually when bond yields decline – was actually stronger all round; gaining against all the other major currencies such as the euro, the yen, sterling, the Swiss franc and the Australian and New Zealand dollars.

That may have been a simple response to higher US rates and relief that the Fed’s decision is now out of the way, or it may have been because the Fed still sees rates rising more quickly than the markets are pricing in.

“The hike, usually bad news for stocks and good news for the currency, saw both rally as relief that the central bank hadn’t disappointed was clear to see,” writes James Hughes, chief market analyst at GKFX.

The rise in the dollar may explain a strongly adverse reaction in commodities, which are largely priced in dollars and therefore tend to fall in price when the greenback advances. Brent crude oil recovered earlier losses but Comex gold was down 0.9% and the overall Bloomberg commodities index was 0.4% weaker.

“In the wake of the FOMC decision, base and precious metals along with oil prices are all trading lower,” writes Brenda Kelly, head analyst at London Capital Group, referring to the rate-setting Federal Open Market Committee.

She adds that Goldman Sachs’ call that iron ore will likely remain below $40 over the next three years is also weighing on sentiment.

This article originally appeared here: http://news.markets/bonds/fed-rate-hike-boosts-6994/