Housebuilders’ shares fell victim to another surprise election result which sent shivers through the financial market this morning. However, while spooked investors hastily sold off their shares, savvy buyers will be keen to invest in a sector that always bounces back.
After the snap election left uncertainty hanging in the air, Persimmon, Taylor Wimpey, Barratt Developments, Crest Nicholson, Berkeley Group and Bovis Homes all saw between 3-5% shaved off their values as investors mobbed safe havens such as gold.
“An initial flight to safety is likely in UK equities as investors favour resilient companies with international earnings,” said David Docherty, Fund Manager, UK Equities. “Domestic financial stocks such as banks, housing and real estate may also be weak.”
Housebuilders’ shares have always been vulnerable to market sentiment and are usually the first victims of economic and political shocks. However, these blips signal the start of a sales season for steely investors.
Remember after the EU referendum when some housebuilders saw as much as 60% of their share price demolished? Less than a year later, housebuilders’ shares had not only bounced back to pre-referendum levels, but some were trading at five-year highs in early May.
This is partly thanks to a weaker pound attracting foreign investors and a political will to support the vital sector. Of course, the pound has taken a fresh battering, stumbling at the exit polls and falling through the night.
“The pound is paying the price for Theresa May’s failed gamble – and after a 2% fall overnight it remains deeply vulnerable,” said David Lamb, head of dealing at FEXCO Corporate Payments. “The Prime Minister had hoped to begin Britain’s Brexit negotiations this month with a thumping mandate and a spring in her step. Instead she will do so walking on eggshells and looking nervously over her shoulder for cabinet members wielding knives. In short, everything the markets didn’t want from Britain’s Brexit negotiators.”
However, there is one thing that the pound fears more than uncertainty: a hard Brexit. Now that Theresa May is highly likely to form a coalition with the DUP, this is less likely to happen. “With Brexit negotiations due to start in little over a week, many in Brussels will be secretly licking their lips at the prospect of Britain’s weakened leader kicking off the process in shame rather than with a swagger,” said Richard Berry, founder of the currency specialists, Berry FX. “In reality, of course, the Brexit negotiations will be put on ice.
“There are so many variables in play that the pound could even rise in the days ahead as the likelihood of a soft and more palatable Brexit increases. As perverse as it seems, political chaos could ultimately translate into sterling strength.”
The same logic applies to the housebuilding sector, which has been the beating heart of Labour’s election campaign. Labour’s proximity to power, greater public spending, government support for housebuilders and a weak pound to tempt foreign investors are likely to restore investor confidence.
“The Tories have had their wings clipped but maybe it’s no bad thing, said Will Herrmann, founder and director of West Eleven. “The Tories will have to react to the agenda set by Corbyn et. al and so I think less austerity and a softer Brexit are probably on the cards. This is likely to benefit the economy and therefore the property market where there is still a shortage of housing.
“I think the effects will not be as bad as is being bandied about in the media right now and it could lead to opportunity. With the pound plummeting we expect it to create overseas interest in premium property.”
It also creates an opportunity for long-term investors to buy bargain shares in a sector which market fundamentals dictate must rise again – as long as they move quickly.