House prices are rising and already the cry goes up: We are heading for a bubble. No doubt we are, someday, but not for a long time yet. Meanwhile every investor should have at least one housebuilder or construction related stock in their portfolio.
The so-called ‘official’ definition of recession is in fact unofficial
I’m actually overweight on construction stocks in my portfolio, having bought too soon if anything in hopes of a recovery in the sector. I actually started buying in 2009, which proved wildly optimistic. Still, better too soon that never.
For the record, I bought Barratt Developments and Taylor Wimpey for little more than a third of their current value and my only disappointment has been the lack of dividends. I also picked up Speedy Hire at around half its present price – again not much in the way of payouts though – and also Balfour Beatty, which has paid handsome dividends but has fallen below my purchase price after two profit warnings and this week’s set of poor results.
I’ve been involved in an exchange of views on Twitter (@rodneyhobson) over whether housebuilders, and Taylor Wimpey in particular, are still undervalued. I’m worried that I am being influenced irrationally by two factors.
Firstly, because housebuilder shares have recovered so much I have the nagging feeling that they are now overvalued, which is probably wrong because there is a very good case for arguing that they are in fact still cheap.
Official figures released this week show more homes are under construction and although the figure is well short of pre-recession levels it is still moving in the right direction as far as housebuilders are concerned. Particularly striking are indications that some areas – admittedly not many – outside London and the south east are picking up at last.
The second, and even worse, factor in my thinking is that I am reluctant to buy because any new purchases will raise my average buying price substantially.
I have always argued strongly against averaging out share purchase prices, since each purchase is a separate investment that should be based on the circumstances at that specific time. However, when my online ISA stocks and shares account automatically lumps together separate purchases and averages out the price it is hard to treat any additional investments as a separate decision.
There is no doubt that the government’s Help to Buy scheme, although derided by many when it was launched, is getting the housing market going. I suspect that it is doing more good for existing home owners, who see the value of their homes rise, housebuilders and buy-to-let investors, than for first time buyers but that is not the main consideration for holders of shares in housebuilders.
The sharp drop in share prices of housebuilders this week does present a buying opportunity because it was largely irrational. Clear signs of improvement in the US and UK economies, with the implication that artificial stimulation can end sooner rather than later, is good news, not least for housebuilders.
A sunny outlook for retail
The hot weather helped to boost retail sales by 1.1% in July compared with June but I do not join the general celebration at this display of consumer confidence for several reasons. Inflation is still running at 2.8% of the consumer price index, so wages continue to be squeezed.
The sharp improvement is in any case skewed, with supermarkets enjoying the biggest gains as stay-at-homes bought barbeque food. Alas, even the supermarkets tell a mixed story, for much of the gain was down to food price inflation.
In any case, it’s the bit about hot weather that bothers me most. It won’t be long before retailers are complaining that the weather in some form or another is hitting rather than boosting sales.
The eurozone remains in recession
The nonsense that is talked about recession reached new depths this week with claims that the Eurozone had ended an 18-month recession just because the region as a whole grew by 0.3% in the second quarter of this year.
Yes, that is good news and the figure was fractionally better than forecasts of 0.2% growth. Since Germany, the zone’s largest economy, expanded by 0.7% and France by a surprisingly good 0.5%, it is blindingly obvious that other countries are doing badly, and bringing down the average.
Italy and Spain both showed negative growth and Portugal, despite expansion in the latest quarter, is still in recession. Don’t ask about Greece, where Government receipts barely cover spending and come nowhere near to meeting interest payments on the debt burden.
Just remember that the so-called ‘official’ definition of recession is in fact unofficial and has no basis in reality. The Eurozone remains in recession. Try telling the ranks of the unemployed in southern Europe otherwise.
