Having jumped the gun at the start of December ('Time to start building once more', 7 December 2015), and advised buying shares in the nine FTSE 350 housebuilders at the time, they have subsequently produced a total return of minus 1.8 per cent over the past four months, a percentage point worse than the loss of 0.7 per cent total return on the benchmark FTSE All-Share index after factoring in dividend income. It's a rare occurrence, indeed, and only the sixth time since 1980 that the UK housebuilding sector has failed to rally in the first quarter of the year.
How the FTSE 350 Housebuilders' performed
| Company | Offer price on 07.12.16 | Bid price on 06.04.16 | Total return (%) |
|---|---|---|---|
| Persimmon (see note 2) | 1,975 | 2,120 | 12.9 |
| Crest Nicholson (see note 3) | 556 | 566 | 4.2 |
| Bellway | 2,616 | 2,653 | 1.4 |
| Galliford Try (see note 6) | 1,488 | 1,410 | -3.5 |
| Taylor Wimpey | 199.5 | 192.2 | -3.7 |
| Bovis (see note 5) | 998 | 931 | -4.1 |
| Berkeley Group (see note 1) | 3,601 | 3,275 | -6.3 |
| Barratt Developments | 615.5 | 570 | -7.4 |
| Redrow (see note 4) | 458 | 409 | -9.4 |
| Average | -1.8 | ||
| FTSE All-share | 3428 | 3368 | -0.7 |
1. Berkeley paid a dividend of 100p per share on 22 January 2016 to shareholders on the register on 18 December 2015. 2. Persimmon made a cash return of 110p per share as an interim dividend payment on 1 April 2016 to shareholders on the register on 4 March 2016. 3. Crest Nicholson pays a dividend of 13.3p on 8 April 2016 (ex-dividend date: 10 March 2016) 4. Redrow paid a dividend of 6p on 31 March 2016 5. Bovis pays a final dividend of 26.3p on 20 May 2016 (ex-dividend date: 24 March 2016) 6. Galliford Try pays a interim dividend of 26p on 7 April 2016 (ex-dividend date: 24 March 2016) | |||
That said, having produced an average quarterly gain in excess of 11 per cent even after factoring in the six down years this trade is still a standing dish as far as I am concerned. Moreover, even though it failed to deliver this time, it has only cost a few percentage points off your invested capital, hardly a disaster in the scheme of things. In my view, the reason why the sector failed to rally is probably down to four key factors.
Firstly, the sharp fall in stock markets in the first quarter was primarily driven by global growth concerns that led to a spike in investor risk aversion. Cyclical or value stocks, of which the housebuilders are a prime example, are very sensitive to changes in macroeconomic conditions, so were unable to escape the collateral damage as investors took fright.
Secondly, although share prices have bounced back, perhaps investors are rightly being cautious in their stock selection given that some of the other factors that caused the sell-off have not disappeared. Indeed, the sector also sold off sharply in late summer last year when the market took a tumble on the potential fallout from the Chinese slowdown. And it's clear that the EU economy is still struggling with deflationary and growth concerns, a fact that the European Central Bank acknowledged by loosening monetary policy even further at the March meeting.
Thirdly, as I flagged up in my December article when I recommended buying the shares to profit from a first quarter rally, the FTSE 350 housebuilders had seen their share prices rise by almost a third on average in 2015, which "could make them more susceptible to general market weakness if another growth scare emerges as it did in the summer". In the event it did.
Fourthly, although housebuilders have been making hay, the government has been taking steps to make residential investment less attractive for professional investors, introducing a stamp duty surcharge on second homes and less favourable tax treatment of mortgage interest. It's also clear that the top end of the London market has weakened significantly post the introduction in new stamp duty bands that penalise multi-million pound properties. This has proved a drag on Berkeley Group (BKG:3,275p), in particular.
Ultimately, sentiment and fundamentals are the key drivers of share prices, and with the aforementioned headwinds to sentiment making investors more risk-averse, this was just one of those years when the first quarter rally failed to deliver despite the attractive valuations on offer. Of course, you may wish to hold on to try to recoup the tiny loss on the FTSE 350 housebuilders, and April is historically one of the best months of the year to hold equities, but as I always intended this to be a short-term trade, I am happy to close the position and move on.
However, I did pick out small-cap company Inland (INL:80.25p), a brownfield land developer and housebuilder, as a great way to play this trade ('On a roll', 15 December 2015). The company's share price subsequently rallied from the 74.5p level at the time of that mid-December article to a high of 89p on Friday, 8 January, just shy of my 90p target price. I then advised holding on to the shares at 86p and nudged up my target price to 95p ('Valuation surge boosts Inland', 22 March 2016), a recommendation I maintain for company-specific reasons I outlined in that article. So, if you followed my advice I would continue to run your profits on this holding.
