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The FTSE 100 – the Footsie – is the major survivor stock market index of 2022.
Despite economic and geopolitical turmoil, it lost just 0.7 percent, while the US S&P 500 plummeted 20 percent.
But the Footsie’s apparent resilience masks the disparate performance of its constituents.
Mixed fortunes: High Street and online fashion retailer Next, considered the retail blue chip stock, is down 28% from early 2022
Defense titan BAE is up 55 percent and mining company Glencore is up 43 percent.
In contrast, homebuilders Barratt and Persimmon are down 47 percent and 57 percent, respectively, while Next, the chain considered to be the retail blue chip stock, is down 28 percent.
Some investors sense an opportunity. Could homebuilder and retailer stocks make a comeback in 2023? Inflationary pressures appear to be easing and the UK housing shortage may support property values.
But other investors will be wary, because they see these stocks as cheap for a reason, rather than bargains better than anything else on sale.
Shares in these household names have fallen due to factors that will persist into the new year: war in Ukraine, the energy crisis, the rising cost of living and rising interest rates.
David Coombs of Rathbones comments: ‘The drop in homebuilders and retailers shows that the market has been efficient.
“We’re heading into an old-fashioned recession and a 10 percent fall in house prices is not unrealistic given the affordability and other headwinds housing construction faces.”
Coombs says you should only start building positions if you’re both brave and patient. You must also recognize the magnitude of the obstacles on the road to recovery.
While Nationwide and Rightmove are less concerned, Halifax and Savills predict house price declines of 8 percent and 10 percent, respectively, in 2023. A sharp fall in prices would lower valuations of land purchased by homebuilders for future developments.
The companies will also likely be forced to pay more for remediation of the revetment or they will be excluded from the planning system.
As Michael Gove warned in April, the housing secretary is less inclined than his predecessors to be lenient with Barratt, Bellway, Berkeley, Crest Nicholson, Persimmon, Taylor Wimpey, Vistry and Redrow and the rest.
The government may have promised to deliver 300,000 homes a year. But a weakening of this goal means that much less can be built.
However, a consensus among analysts seems convinced that this and other bad news has been priced into homebuilder stocks. These brokers rate Barratt and Bellway a buy, while recommending the others are worth holding onto.
The rise in property values has left Britons feeling better off, and consumers seem to be shrugging off such concerns and splashing out.
Earlier this month, Deutsche Bank reported that Britons were enjoying trips to the shops without Covid restrictions.
Springboard, the analysis group, said Boxing Day shopping in the UK was 39 per cent higher than last year, although below pre-pandemic levels. A fuller picture will appear in the New Year’s trade updates; Next, the season starts on January 5.
However, expectations of more household restraint in 2023 have already led JP Morgan to cut Next and Marks & Spencer, a FTSE 250 stock.
Market forces: A sharp fall in real estate prices would lower valuations of land purchased by homebuilders for future developments
The broker has put Next on ‘negative catalyst watch’. This fashionable term suggests that a company may be struggling to capitalize on an uptick.
But others argue that Next, which sells about 500 other brands online, should be able to capitalize on the failure of recession-ravaged names by using its technology to revive these businesses.
Next already has a stake in Reiss and just acquired Made.com and Joules, the country-style clothing retailer.
Frasers Group, formerly Sports Direct, is pursuing a similar strategy and is acquiring Amara, luxury homeware specialist and tailor Gieves & Hawkes.
Andrew Brough, manager of the Schroder UK Mid-Cap fund, believes Frasers and Next will “dominate” the sector.
Deutsche Bank is enthusiastic about Next, but believes that AB Foods, the Primark group and discounter B&M should also be able to navigate in difficult times.
Having watched the hustle and bustle on Oxford Street over the past few weeks, happy to be out and about, I’m taking a bold and patient stance on retailers with stores and superior websites.
I will be expanding my holdings of Marks & Spencer impressed by the improvement in the merchandising and packaging which is quickly becoming more funky, less fusty.
With any further weakness, I want to put money into Barratt, Bellway and Berkeley, as the government risks being wiped out in the general election unless it encourages home ownership.
If homebuilders and retailers don’t spark your bargain-hunting instinct, but beat-up big names are your thing, then Big Tech in the form of Apple, Adobe and Microsoft could be an attractive proposition, according to Coombs.
The same caveat about being brutal and patient applies, of course.
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