Housebuilders in a new sweet spot, and Rolls-Royce struggles on

“Despite pushing ahead at the market open, the FTSE 100 couldn’t keep up the momentum and quickly dipped into negative territory with banks, utilities and tobacco dragging the index down,” says Russ Mould, Investment Director at AJ Bell.

“In the first hour of trading the FTSE 100 was 0.2% lower at 6,145. In comparison, the mid cap FTSE 250 index managed to press ahead, rising 0.4% thanks to a strong showing from retailers and builders’ merchants including Marks & Spencer, Travis Perkins and Games Workshop.

“Asian stocks fared better, with Shanghai’s SSE Composite index rising 1.4% on hopes for an economic recovery. Technology, telecoms and mining stocks led the index higher, with the top performer being Xining Special Steel.

“Brent Crude dipped 0.6% to $43.05 per barrel while gold briefly touched $1,813 per ounce.”

Persimmon / Vistry

“It’s been quite a week for the housebuilders with a tailwind from stamp duty changes being topped off with positive trading updates from various companies.

“Persimmon follows in the footsteps of Barratt Developments by reporting a strong forward order book. It says forward sales are ahead of last year and production rates have returned to normal levels. Vistry, formerly known as Bovis Homes, has also reported similar sales trends and productivity back up to 90%.

“The housebuilding sector could become the poster child for the Government’s desire for businesses to get back on their feet and revive the economy. The signs so far suggest these housebuilders are functioning well under new social distancing working arrangements, they can do their work and customers are lining up to buy the products. If only it was that simple for all industries.

“Admittedly the housebuilding sector has received one of the biggest incentives in the form of the higher stamp duty threshold which should create a flurry of activity in the property market until next March. The big question mark is what happens after that point, when the stamp duty incentive is taken away.

“Unemployment also presents a major challenge to the sector, so does the willingness of banks to offer mortgages without needing a very large deposit. A large chunk of house buyers relies on high loan to value mortgages, particularly those buying their first property.

“A widespread reduction in availability of such deals could cause the housing market recovery to stumble. The Government wouldn’t want that to happen and so it is plausible to suggest there will be some pressure on the banking sector to keep loans flowing.”

Rolls-Royce

“A big sticking point for investors in Rolls-Royce before the pandemic was its poor cash flow performance. It was towards the very top of the to-do list for chief executive Warren East when he was appointed to the top job in 2015.

“Covid-19 has undone any progress he might have achieved on this front over the last five years with cash, the very lifeblood of any business, draining away alarmingly in the first half of the year. Rolls expects the drastic measures it has taken in recent months to stem the bleeding in the second half.

“Severe damage was inevitable given how reliant the company is on spares and repairs income from the aircraft engines it manufactures, with this business in turn linked to flying hours that have dropped dramatically thanks to restrictions on civil aviation.

“The numbers are stark and will do little to stem recent speculation that the company might need to issue shares or even offload a part of the group to generate cash.

“Exposure to the downturn in the aviation industry is greater thanks to East’s strategy of focusing on this area, which at the time was outperforming other bits of the business, as part of a turnaround plan launched in 2016.

“Now the plan has reversed with the aerospace business being downsized through huge job losses and staff being moved into areas like defence.

“It is damaging for UK industry that one of its leading engineering businesses is having its wings clipped in this way.

“Perhaps the only good news in today’s trading update is that the crisis has given the company some breathing space to address technical issues on its Trent 1000 series of engines.”

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