Build it and they will come? Investors looking for upside in one of the world’s best performing markets so far this year, should be looking at constructions stocks, says HSBC.
That star index, the FTSE 100 UKX, -0.08%, is set to finish January with a gain of just over 1% gain, a rarity these days that makes it one of the best developed market performers in 2022. That said, the index was flat on Monday, underperforming European indexes as mining and some drug stocks pulled back.
The pound GBPUSD, +0.16% was up 0.2% to $1.3420, as investors look ahead to a Bank of England Monetary Policy meeting this week. A strong pound can weigh on multinational companies, many of which list on the FTSE 100, that earn revenue overseas.
Bank of America told clients in a note on Monday that they expect a 25 basis point hike this week, following November’s surprise increase. They also see similar increases in May and August.
As for that overlooked building sector, HSBC analyst John Fraser-Andrews cited “favorable demand and supply imbalance” that was putting a full pandemic recovery in sight beyond the government’s Help-to-Buy plan (HTOP) that is due to end in 2023.
“The pandemic’s ‘search for space’ structural boost to demand for the regional builders’ low density housing underpins demand, pricing power, high operating margin and ROICs [return on invested capital] through our forecast horizon,” said Fraser-Andrews.
A competitive mortgage market and “very high forward order books” would likely soak up a lower-than-expected fall in reservations from the end of the HTOP plan. He sees completions growth of 12% higher on average in 2024 than previously, raising average price/book forecasts within the sector by 17%.
Berkeley BKG, +1.31% was lifted to hold from reduce, while the analyst said they expect buy-rated Barratt BDEV, +0.86% and Taylor Wimpey TW, +1.05% will return surplus case for the full fiscal year ahead. That would put them in the same group with fellow-buy-rated Persimmon PSN, +1.06%, which is already paying out its special 2019 dividend.
“The year-to-date lurch downward in share prices leaves these three national volume builders dividend/buyback yields at a very attractive 9-10% in 2022, rising to 12-13% in 2024, including a first, slightly later return from Vistry (also buy rated), our other top pick,” he said.
He also said the proposed cladding fund tax on builders to help pay for dangerous cladding on thousands of high-rise apartments has also now been built into their forecasts. They are factoring in a “conservative” 50 basis point cost of equity risk premium for all builders for potential contributions required.
Shares of Berkeley rose 0.7%, Vistry was up 1.2%, while Barratt and Taylor Wimpey traded flat.
Elsewhere, among the top decliners was retailer J. Sainsbury SBRY, -3.51%, with a 3% drop and miner Rio Tinto RIO, -2.76% RIO, -2.56%, which fell 2%. Heavily-weighted pharmaceutical group AstraZeneca AZN, -2.40% saw a 1.5% drop.