At first glance it looked as if the finance markets’ euphoria over the outcome of the General Election had rubbed off remarkably quickly, with the FTSE 100 index dropping 113 points in two days. All is far from lost, however.
Once again the Footsie, composed mainly of global players, has found support around 6,900 points; equally significantly, the FTSE 250 index of medium sized companies promptly recovered all its lost ground in midweek. This is a reflection of the fact that the UK economy is doing better than most.
Employment is up; wages are creeping higher; the first interest rate rise has been postponed to the middle of next year on the latest indications. While there is some concern that growth may be slowing, we should remember that GDP figures go through several revisions, mainly upwards.
The economy is still moving in the right direction. Shares generally look far better value than bonds.
Housebuilder Justifies Share Price Rally
This week’s trading statement from housebuilder Barratt Development (BDEV) was quite revealing and it demonstrated that the hefty share price rises in the sector have been well justified.
Firstly, Barratt nailed the false notion that housebuilding slowed down in the run-up to the General Election. On the contrary, Barratt said that demand remained strong throughout the campaign. This has wider implications. Despite the widespread belief, which I readily confess I shared, that the election outcome would be very messy, the UK economy has carried on as usual, and in so doing may have tipped the scales in favour of the Conservatives.
I shall therefore look with suspicion on any company that over the next few months tries to blame any dip in performance so far this year on election uncertainty.
The second point about the Barratt update was that it saw stronger activity across the country, not just the South East, as had previously been the case with new homes during the recovery. Again, this bodes well for the wider economy.
It also means that Barratt will build 4,000 more homes than expected in the year to the end of June and the current order book is up 18% to a record £2.5 billion.
Barratt shares jumped further on the update and are now nearly 10 times as expensive as they were at the bottom of the market – and five times the price that I paid for my initial modest holding. A word of warning: the shares are at their highest level since October 2007, before the financial crash, so they are by no means cheap.
I did top up at a much lower level but can’t feel an urge to add further at current levels. However, in view of the desperate shortage of homes, it would be foolish to take profits yet.
Cheap Oil is Bad News for Caterers
I had rather lazily assumed that falling oil prices were good news for every company except explorers and suppliers of oil related services but caterer Compass (CPG) admitted to being an unexpected victim. Demand for hot meals on oil rigs and in remote regions has slipped. Falling commodities prices have had a similar effect in mining areas.
According to Compass chief executive Richard Cousins, this is high margin business. Those who spend weeks or months away from social activity and entertainment can be a bit picky about the quality of their food, their only pleasure in an isolated life.
Compass shares were the biggest faller in the FTSE 100 index on the day of the interim results but I can’t help feeling the reaction was overdone. Pre-tax profits rose 4.9% in the six months to the end of March and the interim dividend goes up from 8.8p to 9.8p.
With a yield of 2.4% and a price/earnings ratio of around 22 the case for buying is not compelling. However, if you were tempted to buy before the results, a better opportunity has now arisen.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice. His views are not necessarily the views of Morningstar UK.
