Building on momentum or cracks in foundations?

Next week sees the final batch of UK 100 companies reporting their earnings from the previous quarter; a host of names from a key sector to the British economy will announce financial figures to the market.

The Housebuilders, bellwethers for the state of the UK economy, are traditionally some of the latest UK 100 and 250 companies to report results. This, however, goes against the Housebuilders’ tendency to be a leading indicator of how an economy is performing:

• When Housebuilding increases as consumers buy houses, the economy is said to be growing
• When demand for houses is falling, this shows people are less willing to spend money and house prices drop. Falling profits for Housebuilders can often act as a precursor to a wider economic downturn.

Which is why results from three of the largest companies in the sector next week could be more crucial to the UK 100 ‘s run on record highs than any other company that has so far reported in the past four weeks. After all, these names have some of the biggest YTD returns of 25-50%.

Even more so given that the sector as a whole has suffered this week on the back of some very disappointing macro data – the RICS House Price Survey reported that UK house prices were growing at a paltry 1%, much lower than the 4% expected and slowing sharply, especially in the crucial London and South East markets.

This puts the onus on the trifecta of Housebuilders reporting over the course of the week, kicking off with Taylor Wimpey (TW) reporting its third quarter results.

The second largest of the UK 100 Housebuilders after peer Persimmon (PSN) – a stock that has fallen 5.5% this week after its own results – releases its figures on Monday morning. Analysts are not expecting any major changed to guidance, despite an expected dip in sales in line with its peers. Can it repeat last year’s 3.1% share price rally after its Q3 update, also making it the fourth consecutive update to be met positively?

Its UK 100 peer Barratt Developments (BDEV) follows suit the very next day as it releases the figures from its first quarter of trading. Its investors will be hoping that it can start the new financial year positively, avoiding the negativity that met its full-year results back in September.

Finally, the Housebuilder Bovis Homes (BVS) reports its third quarter figures on Wednesday. peer Redrow this week had the unfortunate timing of releasing its latest quarterly figures on the same day as the disappointing RICS release, so can Bovis restore some faith in the second-tier index’s builders?

Against a backdrop of the sixth round of Brexit negotiations and at the start of the annual Santa Rally phenomenon, could these results help the sector to reverse the fortunes of the UK 100 , which has fallen as much as 1.5% this week fresh from a record closing high on Monday?

With just seven weeks remaining until the end of 2017, we’ve analysed available data since 1994 to assess how UK 100 companies perform over the ‘Santa Rally’ period – where the majority of UK Index stocks tend to rally towards the end of the year thanks to favourable trading conditions.

For example, the aforementioned Barratt Developments has seen its share price rise 17 times in the past 23 years during this 8-week window from early November onwards, rallying on average by 4.8%. For a full list of companies that outperform during the Santa Rally, sign up for our research offering to get access to our Special Report on the annual phenomenon.

Suni Dhanjal, Senior Trader, 10 November 2017