Markets rebound after bad start to September, while Barratt prioritises balance sheet strength over dividends

“After a brutal couple of sessions, the FTSE 100 has bounced back with investors flocking to a mixture of companies offering strong growth prospects such as Aveva as well as ones that have been beaten up and look cheap relative to history including ITV,” says Russ Mould, Investment Director at AJ Bell.

“Rolls-Royce jumped 5.5% to 218p after yesterday hitting a 16-year low following disappointing results last week and expectations for a deeply discounted share placing. Today’s rebound would suggest some investors believe the stock to have been oversold and that plans to strengthen its balance sheet will give it enough breathing space to get through the current crisis.

“It may also be that some investors have mistakenly associated the quoted Rolls-Royce (which makes engines for the aerospace sector) with Rolls-Royce Motors Cars which is owned by BMW. The latter says demand for luxury cars is recovering, which has provided positive read-across to other luxury goods sellers including Burberry whose shares rise 3.6%.

“Helping to drive the FTSE was strength in the dollar, rising 0.4% against sterling which will benefit the large number of companies on the index with foreign earnings. Positive news on the UK property market will have also improved investor sentiment, giving a lift to housebuilders.

“Elsewhere on the markets, European stocks joined the FTSE with a decent recovery including a 1.4% rise in the Dax. Asian markets were mixed.”

Barratt Developments

“While Barratt talks of ‘cautious optimism’ alongside its full-year results, its true assessment of the outlook is best reflected by its continuing decision to keep dividends off the table.

“This is a perfectly rational response to a highly uncertain backdrop. It is indicative of management’s suspicion that the big jump in activity following the property market’s emergence from deep freeze is due to a flood of pent-up demand, boosted by a stamp duty holiday, which will eventually ebb away.

“News of UK house prices hitting record highs may provide some short-term fizz for Barratt and the rest of the sector but there could be a lingering hangover to come.

“Unemployment and a buoyant housing market typically don’t make for good bedfellows, so rising levels of joblessness are almost certain to create headaches in due course.

“If Barratt is in for a period of weaker demand then it will need to maintain a strong balance sheet as a buffer, enabling it to come out the other side ready to take advantage of any eventual recovery.

“Relative financial strength would also allow Barratt to add to its land bank at a time when prices are likely to be at bombed-out levels. This would have positive implications for long-term profitability although such considerations are a long way off just now.”

These articles are for information purposes only and are not a personal recommendation or advice.