Sector in focus: UK homebuilders

With the indecision of the general election behind, UK homebuilders have enjoyed a strong May. Will it last?

Housebuilder
Source: Bloomberg

The weeks leading up to the UK election saw significant uncertainty dominate the housing sector, where the Labour party’s promise of a mansion tax and capped rent increases threatened to derail demand for housing. The stagnation of UK house prices since November meant that much of the enthusiasm among investors may have started to cool somewhat. Yet historically, we have seen house prices plummet on average 20% for the three-month pre-election period, since 1979. Thus the ability to keep its head above water proves that perhaps we are due a particularly strong rebound in house prices for the months following. This positive outlook does seem to be shared by the markets, seeing the share price of some of the key players reaching new multi-year highs in May.

Barratt Developments

The company saw over 13% added to its share price in May, much of which was attributed to the election effect of seeing David Cameron secure another term on the 8 May. Since then we have seen a strong appreciation in share price and on Friday we finally saw some form of significant selloff for the share. Now, I personally believe that this will be a short-lived phenomenon and thus any continued move lower would be an opportunity to buy in at a better price.

The price has moved below the 50-hour SMA for the first time since before the election and it is clear that for now, this is providing consistent resistance. The recent downside bounced off the 23.6% Fibonacci retracement and thus any further movement towards the downside would likely run into support around £5.8283.

With the daily MACD coming off the highest level seen following the 2007 financial crash, it is clear that we could see the price ease back a little. However, with house prices likely to continue rising and a strong multi-year uptrend in place, I expect to see a return to £6 and on to £6.50 in the coming months.

Persimmon

Unlike Barratt Developments, Persimmon has suffered very few losses recently, with Friday’s more moderate selloff representing a mere blip on what has been a perfect score card since the early May election. The ability to shrug off any challenges to the recent upside despite a clearly ‘overbought’ market shows substantial innate underlying strength in the share price and thus points to further gains.

The intraday chart shows this consistent run higher, with price maintained above the 20-period SMA (four-hour) for over three weeks now. With that in mind, along with the clear uptrend in play, I see any moves back to the 20-period SMA as a buying opportunity for another leg higher.

Taylor Wimpey

The recent ex-dividend date from Taylor Wimpey has seemingly put a little bit of a dampener on the share price in comparison to Persimmon, given the gap lower on 21 May. However, this is part of the process for any firm, where the value of a dividend is factored into the share price until the cut off date upon which that same amount is largely sold upon market opening. This should not hold investors back for what is a very strong share; rising over 36% in 2015 so far, while doubling it’s dividend payments.

The consolidation seen since the dividend-induced fall in price in May has a potential to be the backstop to any selling, given that it is supported by the 38.2% retracement. This current rectangle also provides a helpful range to watch for a breakout, where a move above 188 would likely lead to a move back to 193, while a close below 181 would likely lead to a move towards 177.

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