Today's Markets: Slow start for stocks, UK housebuilders dive on cladding bill woes

FTSE 100 still a touch below 7,500, with UK housebuilders falling on cladding decision.

January 10, 2022

FTSE 100 a touch below 7,500 to start the week
UK housebuilders to foot the bill for cladding repairs
S&P 500 continues run off loses to start year

Markets

Stocks are off to a sluggish start in Europe after a mixed bag in Asia overnight, following four straight days of losses on Wall Street. The FTSE 100 was keeping its head below 7,500 but not looking to test last week’s lows, whilst shares in Frankfurt were closer to the bottom touched last week following the tech rout in the US.

The S&P 500 is coming off a run of losses not seen since September and is now sitting around the key 50-day moving average support that has resolutely been bought through last year. Each time the index flirts with this level it seems to spark a fresh rally, but we’re not in Kansas anymore Toto – the Fed is in tightening mode. Speculative tech and megacap growth stocks can’t offer the same leadership. XLE – the S&P 500 energy ETF – rallied 10 per cent last week, whilst financials rose about 5 per cent. The Nasdaq declined by around 5 per cent in the first week of the year, whilst the S&P 500 was down around 2.5 per cent. So a pretty a clear picture of mass rotation, baton-passing and dumping in speculative tech; ARKK fell over 12 per cent.

Treasury yields rose as markets bet on the Fed raising rates at a swifter pace this year and reducing its balance sheet earlier. The yield on the benchmark 10-year paper touched 1.8 per cent. Markets will be closely attuned to this week’s US CPI inflation figures for more clarity on where the inflation story is heading. As expressed last week, we’re at the point where, having retired transitory, policymakers have to accept that it’s also not just a supply side thin – demand-led, broadening of inflation pressures. Friday’s jobs report pointed to the struggle for workers and nascent wage price spiral.

Yields are now hitting pre-pandemic levels and the kind of price action we have seen looks like everyone’s 2022 forecasts coming true in the first month. The question is whether a move towards 2 per cent for the 10-year limits equity markets – earnings growth will be critical. So far the market has repriced fairly rapidly to a higher rate environment and so looks in good shape to ride it out – even with further losses to come – over the course of the year.

Not a lot on the earnings front – looking ahead to British retailers Tesco (TSCO) and Sainsbury’s (SBRY) later in the week and the start of US earnings season with Citigroup (C) and JPMorgan Chase (JPM) due to report on Friday. Economic data is also thin on the ground today – focus on the inflation data from the US and Fed chair Jay Powell’s testimony this week.

Companies

Housebuilders hammered

UK housebuilders were on the move lower, with the big four all leading the decliners on the FTSE 100 – trading about 3 per cent lower for the session – as the government changed its tune on cladding redress, with developers to foot the bill for repairs, which could run to as much as £4bn. In addition to the blue chips Persimmon (PSN), Berkley (BKG), Barratt Developments (BDEV) and Taylor Wimpey (TW), the likes of Bellway (BWY), Countryside (CSP), Vistry (VTY), Redrow (RDW) and Crest Nicholson (CRST) also fell. It’s a nasty shock for developers – maybe there are others who should be shouldering some of the burden, maybe… but at the same time they’ve had years of making hay thanks to too much demand, not enough supply (which they control tightly), ultra-low rates and the Help to Buy scheme.

Levelling Up minister Michael Gove asked all housebuilders with profits of more than £10m to come up with a “fully funded plan of action” by March to fix unsafe cladding on buildings with a height of between 11m and 18m, and carry out any remedial work on properties they previously developed.

Though the government is yet to decide which companies must contribute to the fund, Gove said he wanted a “new deal with industry” to guarantee commitments made to date. The scandal, which followed reviews of building standards in the wake of the Grenfell Tower fire in 2017, has left thousands of homeowners with huge bills for remedial work to ensure their properties’ basic safety.

See more:

Housebuilders hit as cladding 'new deal' looms

Is cladding scandal the next PPI?

Avacta pulls Covid test

Shares in Avacta (AVCT) fell by almost 30 per cent this morning after the diagnostics company paused the sale of one of its Covid tests.

Laboratory analysis indicates that Avacta’s AffiDX SARS-CoV-2 antigen lateral flow test is less sensitive to Omicron than to previous strains of coronavirus. While the test is effective at identifying high viral loads of Omicron, the group said it appears less good at detecting lower viral loads when compared with earlier variants.

As such, Avacta has paused sales while it replaces an antibody contained within the product. The company has been unable to market its lateral flow test in the UK since October 2021, following the introduction of new regulations.

The suspension of sales also caused shares in Abingdon Health (ABDX) to fall by 20 per cent. Abingdon Health, which manufactures lateral flow tests, said it will work with Avacta to accelerate the process of replacing the antibody. It also noted that other lateral flow tests, already on the market, could be similarly affected by the Omicron variant.

See more: Novacyt shares pull back on possible revenue hit

TT Electronics buys Ferranti arm for £9m

TT Electronics (TTG), a manufacturer of electronic components, is buying Ferranti Technologies’ Power and Control arm from Elbit Systems for £9m.

Oldham-based Ferranti P&C makes power and control parts for aerospace and defence companies.

TT Electronics said one of the main benefits of the deal is access to Ferranti’s “highly skilled” workforce. It will also enhance earnings, generating a return that will be ahead of the group’s cost of capital from year one. By year three, TT expects to have generated about £400,000 of cost synergies.

Trading for its 2021 financial year is in line with an update provided in late November, which said the company stands to make an adjusted operating profit of about £35m on revenue growth of about 10 per cent.

Consensus earnings forecasts of about 18p per share for its current year indicate that TT Electronics’ shares trade at just over 14-times earnings, in line with their five-year average.

Like others in the sector, though, TT Electronics faced “tightening” supply chain pressures in the second half. Although it has thus far managed to pass on costs to customers, we maintain our hold recommendation until there are signs that these are easing.

Rotork appoints new chief executive

Rotork (ROR) announced the internal promotion of Kiet Huynh to fill the chief executive vacancy created in August last year when outgoing head Kevin Hostetler said he planned to return to the US.

Huynh, who joined Rotork as managing director of its instruments arm in 2018 but now leads both its water & power and chemical, process and industrials businesses, takes up the post immediately, although Hostetler will remain available to help with the transition, it added.

Chairman Martin Lamb said Huynh had excelled in driving profitable growth of the divisions he had already managed and thanked Hostetler for handing over a “much improved” business to his successor.

Broker Jefferies said the appointment could throw up questions from the market, as “we suspect this is possibly not the appointment investors would have necessarily expected”, although it acknowledged that the board had carried out a thorough search.

The company’s shares opened slightly lower following the news but are still trading at almost 28-times forward earnings. Shore Capital analysts believe this is too rich, suggesting that a price-to-earnings ratio closer to its ten-year average of 20x more fairly reflects its growth prospects and the risks associated with its work in oil and gas.

Although this sector provided 45 per cent of Rotork’s first-half revenue for 2021, the short-term prospects for it remain strong as companies in this market look to make up for years of underinvestment when oil prices were much lower.

However, with the company stating in November that component sourcing is “challenging”, with near term disruption likely to continue, this may be a good time for investors to take profits. We move to hold.

Elsewhere...

GBPUSD moved to touch last week’s two-month a whisker below 1.36. The dollar was firmer against the euro as EURUSD declined from around 1.1360 to 1.1320, holding within the narrow range of the last month and a half. Bitcoin held around $41k, a little above Friday’s low, the weakest the market has traded since the end of September.