The Housebuilders & Banks Recovery: How far can it run?

How things can change in two and a half months. Far from struggling after Brexit, the UK is doing more than just staying afloat. In some cases it looks to be thriving. Over half of UK 100 listed companies are trading above their pre-Brexit levels. A further 29% have posted fresh all-time highs over the same period. The Bank of England, having acted swiftly to keep Britain out of recession, may have done all it needs. Can this continue? Or is a reversal on the cards?

As the UK Index 100 trades around 6% higher than the close on 23^rd June, notable bounces in the share prices of UK Housebuilders and Banks have made a significant contribution to the spring in the UK Index ’s step. This report focuses on remarkable recoveries by both sectors and whether their post-Brexit rebounds have legs or not.

If you believe so, the next question to ask is ‘how far can it rally?’ There are still hurdles in the road for UK companies to overcome as the long-term impacts of Brexit remain unclear. Economic data, whilst perhaps unspectacular, remains favourable versus the doom-and-gloom forecasts for the fallout. However, it’s still early days and more data is likely required to be sure, with plenty of room for more uncertainty with the divorce from the EU still well over two years away.

Building Momentum or Cracks in the Foundations?

As the dust cleared in the days that followed the referendum, housebuilders’ share prices suffered some of the biggest losses on the UK 100 . The Brexit impact on UK house prices was touted to be one of the largest with a forecast 20% drop. Investors reacted pessimistically to short-term prospects for the sector expecting demand for property in the key London and South East area to evaporate overnight. Remarkably, however, many of the housebuilders are declaring ‘business as usual’, albeit with an uncertain outlook. Redrow even announced a reverse profit warning with people queuing up for viewings, so it is now expects profits ahead of schedule. However, McCarthy & Stone has gone against the grain with a negative update.

The table above details the share performance of the largest UK housebuilders since the Brexit vote, with the most notable recoveries being Persimmon and Barratt Developments. Bounces range from a respectable 10% to a staggering 290% headlining the resilience of this key part of UK economy since the referendum, although performances are still below pre-Brexit levels and that 5% to 30% deficit could prove too far to scale for some.

On the back of a +6% year on year increase in demand for new house builds in July, the impact of the June vote has been negligible so far for Barratt and other UK housebuilders. Persimmon’s home reservations are +17% since the referendum. Most recently, Galliford Try posted a better-than-expected +18% in full year profits. These figures, alongside promising consumer data, notably retail sales, may see the trend continue for housebuilders. However, the summer period is notably quiet for housing transactions.

For the moment, housing demand looks set to continue to outstrip supply which can only be good for house prices and the housebuilders. Will a weak pound eventually put the squeeze on housebuilders’ profit margins or will the attractiveness of a currency discount allow foreign demand to pick up the slack?

Depositing Further Gains?

Alongside housebuilders, UK financials also received a bruising at the hands of the referendum result. Due to Britain’s banks being a key driver of the UK economy, the economic uncertainty provided impetus for investors to become increasingly worried about future prospects. However, the banks have also shown an impressive rebound since their lows in the weeks following Brexit. The table below shows just how well the blue chip banks have fared in the interim. All five have offered bounces of greater than 20% from Brexit lows, with two (HSBC and Standard Chartered) even trading higher than before the vote.

These two Asia-exposed financials, rank outperformers in July and August thanks to the high growth markets in China and other emerging economies, have now had their rebounds overshadowed by the UK-focused banks as a British strikeback emerges amid improved UK economic prospects.

Barclays is leading the British pack thanks to its own global presence, therefore enjoying at least some of the benefits that the Asian-focused banks do, with RBS close behind. Lloyds Banking Group has the biggest mortgage book in the UK, so with the outlook for UK house sales more positive than expected, one can understand its shares pricing this in.

Lowering Interest, Increasing Demand?

Worth considering is the impact of the Bank of England’s monetary policy decision in August to lower interest rates to an all-time low of 0.25% on the two darlings of the recovery. Whilst Mark Carney shrugged off suggestions that he overplayed the financial impact of Brexit, the impact of measures undertaken may well have been all that was required for the UK economy. A raft of solid macro data in the form of August UK Retail Sales and those stellar PMI survey rebounds mean that this could increasingly be the case. If no more rate cuts are required, banks’ net interest margins should feel no further pressure. In turn, they should feel more inclined to lend (at higher rates than it pays on savings) to maintain profits. Good news for shareholders.

If the banks are more inclined to lend to businesses doing well, as well as aspiring homeowners, mortgage approvals should remain solid, therefore supporting house prices and housebuilders, even before government incentive schemes are considered. A mutually beneficial scenario for both of these key sectors. Importantly though, the banks may see this as an opportunity to recuperate some of the losses of the Brexit sell off and choose not to pass on the benefit.

Results Season: More Positive Surprises?

Earnings season is always an exciting time. Q2 bank results in late July and early August provided for some mixed shareholder reactions as the Brexit topic overshadowed, however, importantly all the blue chip shares sit higher since. Given that outlook was so key post-Brexit and that markets are now much more laid back with regards to the issue, could positive Q3 financial results be back in the driving seat? Does the recent positive UK macro data mean that outlook fears have subsided?

If the potential is there for the banks to achieve and surpass highs of the past 18 months an upside of 15% to 110% is available, providing a very good reason why investors should keep an eye on the sector for a continued recovery. However, with the uncertainty surrounding the true impact of the vote to leave the EU still in the air, will a surprise announcement of decreased earnings from banks (already confident of better-than-expected results) provide a reason for investors to cash in on their positions sooner rather than later?

The Accendo Markets Research Offering

We aim to keep our clients abreast of all the relevant market-moving information, leaving them free to go about their daily business in the knowledge their investments are receiving the attention they need. Information such as:

• Macroeconomic data updates from around the world, including interest rate changes, inflation and unemployment rates, as well as economic growth indicators essential to domestic and international demand and supply. We don’t simply tell you which macro-economic data prints are due at what time, we break each driver down so that you fully understand what it all means. What are the expectations in relation to the historic trend? How will this affect the trading day ahead?

• Fallout from all-important earnings results from the UK’s blue chip banks in October. If a company has reported earnings before the market opens, we’ll tell you why the shares are called to open up or down in relation to that announcement.

• Our daily research publications such as the Morning Report and Index Focus that aim to prepare clients for the day ahead. Our Macro Calendar is sent out daily and details the next day’s market-moving data Our Weekly Newsletter and Week in Advance publications are simple to digest and prepare clients for the week ahead. We’re all about proaction, not re-action.

We’re proud that our editorials have become a hot commodity in the City, its content quoted daily by the journalists that are writing the news everyone else will be reading later in the day, if not the next. Our morning report tells you what’s driving the market at that moment and what to look out for in the day ahead.

The journalists don’t pay for it and neither should you, so why not give it a go? You’ve nothing to lose and perhaps a lot more to gain. Trial our research here for two weeks. When the time’s up, you’ll simply stop getting it.

How can you take advantage of these potentially attractive share price moves?

How do you see the housebuilders and banks recovery playing out? Will their share prices fall as we approach the crunch time of earnings season? Or will the post-Brexit rally continue as the UK economy is bolstered by Bank of England’s recent stimulus? Whether you see these sectors going up or down for the remainder of the year, tradable opportunities will present themselves regularly.

We’re here to help you weed them out and capitalise on the trading opportunities you’re looking for. Accendo Markets can help you increase your profit potential with the use of leveraged instruments such as CFDs, a flexible alternative to traditional shares that is currently exempt from UK stamp duty.

CFDs allow investors to take advantage of the market movements in either direction by providing investors with the ability to go long or short in the market depending on where they think it will move. Not only this, but through the use of our online facilities and dedicated mobile app you can stay up to date at any time of day (or night).

The following pages contain our top picks for each sector. First of all we’ll look at the Banking sector, focusing on the blue chip UK Banks Barclays, Lloyds and the Royal Bank of Scotland. Thereafter, we focus on Housebuilding’s market leaders Barratt Developments, Persimmon and Taylor Wimpey.

Each of these companies will receive our Accendo Markets analysts’ technical observations alongside broker consensus from across the market to give you a helping hand in identifying your trading opportunity.

Of course there are more opportunities in each sector than just the few we have selected here. Accendo Markets can provide you with access to all of the banks and housebuilders listed on the London Stock Exchange and more!

Barclays (BARC)

Will shares rally towards 290p highs or fall back towards Brexit lows of 120p?

Technical Observations

• Rebound by almost 50% after EU referendum
• Breakdown from rising trend which maintains 12 month falling highs
• Directional indicators close to a bearish cross; momentum turned negative
• 200 day moving average at 172p proved too much of a hurdle

Broker Consensus: 37% Buy, 52% Hold, 11% Sell

Average 12-month target price: 168p, +2% (revisions possible)

Bullish: Bankhaus Lampe, Buy, Target 250p, +52% (26 Apr)

Bearish: Bernstein, Market Perform, Target 110p, -33% (2 Aug)

All pricing and consensus data from Bloomberg on 15 Sept; Consensus breakdown available on request

Lloyds Banking Group (LLOY)

Will shares fall back towards Brexit lows of 47p or rally towards 72p highs?

Technical Observations

• Uptrend from July post-Brexit lows; rising channel
• Support at 56p (resistance-turned-support)
• Stochastics oversold
• Support via 50 day moving average

Broker Consensus: 43% Buy, 36% Hold, 21% Sell

Average 12-month target price: 60p, +6% (revisions possible)

Bullish: Alpha Value, Buy, Target 86.8p, +53% (15 Sept)

Bearish: Bernstein, Underperform, Target 40p, -29% (6 Sept)

All pricing and consensus data from Bloomberg on 15 Sept; Consensus breakdown available on request

Royal Bank of Scotland (RBS)

Will shares rally towards 260p highs or fall back towards Brexit lows of 150p?

Technical Observations

• Breakdown from Brexit uptrend
• 210p April-June support now turned resistance
• Bearish cross by directional indicators; momentum turned negative
• Shares broken below 50 day moving average (MA) after resistance at 100 day MA

Broker Consensus: 15% Buy, 50% Hold, 35% Sell

Average 12-month target price: 183p, -1% (revisions possible)

Bullish: Berenberg, Hold, Target 250p, +36% (12 May)

Bearish: RBC Capital Markets, Underperform, Target 150p, -19% (12 Sept)

All pricing and consensus data from Bloomberg on 15 Sept; Consensus breakdown available on request

Barratt Developments (BDEV)

Will shares fall back towards Brexit lows of 330p or rally towards 660p highs?

Technical Observations

• 2 month uptrend still valid
• Stochastics oversold
• Directional indicators could be heading for bearish cross
• Momentum dropped to negative

Broker Consensus: 44% Buy, 50% Hold, 6% Sell

Average 12-month target price: 522p, +10% (revisions possible)

Bullish: Whitman Howard, Buy, Target 707p, +49% (31 Aug)

Bearish: Liberum, Hold, Target 350p, -26% (1 Sept)

All pricing and consensus data from Bloomberg on 15 Sept; Consensus breakdown available on request

Persimmon (PSN)

Will shares rally towards 2150p highs or fall back towards Brexit lows of 1250p?

Technical Observations

• Post-Brexit uptrend breached
• Bearish cross by directional indicators
• Stochastics and RSI oversold
• 50 day moving average support still valid

Broker Consensus: 33% Buy, 56% Hold, 11% Sell

Average 12-month target price: 1837p, +5% (revisions possible)

Bullish: HSBC, Buy, Target 2640p, +50% (16 Mar)

Bearish: Credit Suisse, Neutral, Target 1273p, -28% (30 June)

All pricing and consensus data from Bloomberg on 15 Sept; Consensus breakdown available on request

Taylor Wimpey (TW.)

Will shares rally towards 210p highs or fall back towards Brexit lows of 110p?

Technical Observations

• Breakdown of post-Brexit uptrend
• Bearish cross by directional indicators
• Break below 50 day moving average
• Stochastics and RSI oversold

Broker Consensus: 56% Buy, 38% Hold, 6% Sell

Average 12-month target price: 174p, +17% (revisions possible)

Bullish: Whitman Howard, Buy, Target 220p, +49% (31 Aug)

Bearish: Credit Suisse, Neutral, Target 118p, -21% (30 June)

All pricing and consensus data from Bloomberg on 15 Sept; Consensus breakdown available on request

CFDs: Like shares, but more flexible

Figure 1: Buying 1,450 shares in British Land @ £6.90 requires an outlay of around £10,000 plus commission (above left), while the same exposure via a CFD requires about £500 plus commission (above right). If a trader invests in British Land, one would assume she believes the share price is likely to move in her favour. After considering the ‘worst case scenario’ and assigning funds to cover it,  the trader may conclude there’s little point in exposing the full £10,000  to the BLND shares - some of that capital could be put to good use elsewhere in the markets.

CFDs are leveraged instruments, but you don’t have to use the leverage

If you had, say, £10,000 to invest in the stock market, you could deposit that amount into a share dealing account and purchase shares in a company. You would pay commission to open the position, 0.5% in stamp duty and the full £10,000 will be tied up in your chosen shares with any profit or loss based on that exposure.

The same £10,000 worth of exposure can be secured with a CFD for a fraction of the initial outlay thanks to leverage, with the risk and reward the same as if £10,000 worth of traditional shares were held. But should you not be interested in leverage, you can always treat CFDs like shares. Simply deposit £10,000 into a CFD trading account and take the equivalent CFD position which will tie up just £500 (note that overnight financing costs will still apply). The remaining £9,500 is not tied up, so you can use some of that to take advantage of another short-term opportunity elsewhere, or simply leave it on the account to support any losses. Best of all, using a CFD means you pay no stamp duty!

What’s your view?

Think shares will rise? Take a long position by buying CFDs (buy low, aiming to sell high). Think they’ll fall? Take a short position by selling CFDs (sell high, aiming to buy low). For a more detailed rundown of CFDs, their mechanics, associated costs and some trading scenarios click here.

How Accendo Markets can help you

We won’t tell you what to do - it’s your call whether you buy or sell. Our aim is to provide the help you need, if you need it. We’ll highlight opportunities which may be profitable to you, the investor, and assist you in making your own trading decisions. Our approach focuses on these 3 elements:

• Education - not obligation
• Observations - not recommendations
• Assistance - not persistence

Our unique, award-winning service provides you with the help and tools you need to make appropriate trading decisions in the financial markets, both to grow and protect your capital. Just imagine how you’ll feel when you’re confident enough to make you own investment and trading decisions, rather than blindly following those of an expensive advisory broker who really has no better chance of calling the market than you anyway.

Before taking a position in the Index or Stocks, be sure to contact Accendo for…

• Updates - How does the index or your preferred stock look in terms of investor sentiment? News and broker updates can emerge daily affecting share prices. Pessimism can switch to optimism in the blink of an eye depending on what’s going on around the world.
• How to use CFDs and Spread Bets to maximise your profit potential.
• How to use the tools available to minimise the risk involved