Nearly the whole UK stock market has regained its pre-Brexit level, but there are three sectors clearly underperforming: real estate, telecoms providers and consumer discretionary. Does this make for an opportunity? It depends mainly on your opinions on the property market.
UK stocks quickly took back the losses suffered in the immediate aftermath of the surprise UK referendum result, as swift action from the Bank of England combined with a quick turnaround in prime minister to underpin confidence in the markets. The FTSE 100 is now nearly 7% above where it was at the close on June 23, while the FTSE 250 is up 3.4%.
The best-performing sectors in that turnaround have been the materials, health care and information technology sectors, while there are three clear laggards: real estate, the consumer discretionary sector and the telecoms providers. The question for investors is whether those laggards represent an opportunity in a market that has shrugged off Brexit, for now at least.
The FTSE 100 real estate sector is made up of four companies: Land Securities, Hammerson, British Land and Intu Properties. The whole sector was hit hard in the wake of Brexit, with the stocks falling and managers of many open-ended UK real estate funds freezing redemptions as money was pulled. The fear is that demand for offices and other commercial premises will weaken as businesses shift operations to continental Europe, hitting property valuations and perhaps forcing a fire sale of properties by some owners. For retail space owners like Hammerson, the fear is that demand for space will weaken as the economy stutters in the wake of the Brexit vote.
There’s no doubt that some impending property deals were pulled in the wake of the Brexit vote, and confidence in the sector remains weak. However, as with everything to do with Brexit, it’s not yet clear what sort of impact the UK’s commercial property sector will feel in the longer-run.
Some of Hammerson and Intu Properties’ customers are listed in the consumer discretionary sector that has also underperformed in the weeks since the Brexit vote. This is a large sector that includes the UK housebuilders, travel companies, clothing and electronics retailers, betting and entertainment companies and assorted others like media buyer WPP and catering giant Compass Group. Essentially, they’re consumer-facing companies more greatly exposed to volatility in consumer sentiment than the consumer staples sector that includes the food manufacturers and retailers.
Can the rally in UK housebuilders continue?
A look inside the FTSE 100 consumer discretionary sector reveals a wide spread in performance in the wake of the Brexit vote. Intercontinental Hotels, luxury fashion company Burberry Group, WPP, engineer GKN and Compass Group are all more than 10% up on their pre-Brexit levels. At the other end of the scale are the residential property companies, retailers including Dixons Carphone, Marks & Spencer and Next and media companies ITV, Sky and Pearson. Once again it’s the property sector that’s the real drag, with Berkeley Group and Taylor Wimpey some 19% below their pre-Brexit level and Persimmon and Barratt Developments down by 13% and 15% respectively.
Brexit is just one factor among several that are having a major impact on the UK housing market at the moment. Recent changes to stamp duty – the UK’s house buying tax – and to the tax regime governing buy-to-let investments, has taken the steam out of the property market as a whole in the south east and the top end of the market elsewhere. Meanwhile, the Brexit vote has apparently driven sellers away from the market, and that’s helping prop up house prices.
The interesting thing about the housebuilders is that they currently operate in a somewhat different market to the UK’s larger used property market. Berkeley is most exposed to the downturn in the market in the south east, but the others are still reporting strong demand and record levels of completions post-Brexit as government assistance programmes continue to help prop-up demand for new build homes. They’re also operating in a market that still has a chronic shortage of housing supply. That shortage may ease as the Brexit process continues as long as net immigration falls, but it’s not going to go away any time soon. Still, the stocks have always been heavily exposed to sentiment and conditions in the broader UK housing market and there’s no doubt the Brexit vote combined with recent government intervention has knocked sentiment in that market.
Take a look at Persimmon as an example. The stock has rallied strongly since diving in the wake of Brexit, but is still some way from its pre-Brexit highs. That’s despite the company reporting a 6% rise in both legal completions and average selling prices in the first half of the year, a 29% rise in pre-tax profit, and saying visitor numbers to its sites were 20% up on the year even in the wake of the Brexit vote.
Concerns about consumer spending also at fore
The third sector to have underperformed since Brexit is the telecommunications services sector. BT Group and Vodafone make up the FTSE 100 sector, with Vodafone up 1.56% and BT down 11.3% compared with the day before the Brexit result. That makes BT the real laggard.
BT has changed a great deal in recent years, as it re-entered the mobile market with its acquisition of EE and it moved to try and catch up with Sky in the TV market by paying billions of pounds to become a major football presenter. The TV move has made it much closer to the likes of consumer discretionary companies Sky and ITV, both of which are still well below their pre-Brexit levels. The mobile market is also highly competitive, and consumers have been shown to spend less on data and hold onto their phones for longer when they’re feeling economic strain. So it’s perhaps not surprising that BT is a straggler, especially compared with Vodafone which has seen its markets in southern Europe start to stabilise after many years of pain.
This all suggests there will need to be a continued re-rating of the property sector if the current post-Brexit dawdlers are to catch-up with the best-performing sectors of the UK equity markets. There will also have to be clear signs the UK economy will weather the Brexit storm better than many predict and that real wages start rising to fill consumer pockets to help boost spending on discretionary items.