Markets calm despite latest twist in pensions saga and Barratt warning triggers sell-off in housebuilder shares

“Despite some harsh words from Bank of England governor Andrew Bailey towards the pensions industry last night, causing the pound to slump again, equity markets have not descended into chaos” says Russ Mould, Investment Director at AJ Bell.

“The FTSE 100 held firm at 6,884 as approximately three quarters of its constituents earn in foreign currencies, many in dollars, and they benefit from the translational effects of a weak pound.

“Bailey last night said the central bank would end its bond buying programme on Friday, telling pension funds they have three days to sort out their problems. However, media reports subsequently suggested that the Bank would extend its emergency support if market conditions demanded it. That helped to recover some of yesterday’s losses in the pound.

“This back and forth jostling and inconsistent messaging is becoming an unwanted trend, leaving investors scratching their heads, wondering what’s going on. It may only get worse in the coming weeks leading up to Kwasi Kwarteng’s debt-cutting plan on 31 October.

“In the meantime, it is clear investors are becoming more concerned about the state of the UK, particularly as the latest economic figures show a decline in GDP. The biggest fallers on the FTSE 100 were housebuilders, banks, pension fund operators and retailers.

“There are growing fears that property prices are going to fall as mortgage rates shoot up and fewer people can afford to buy a house or flat. That’s bad news for the housebuilding sector and not helped by a warning from Barratt Developments.

“Sentiment towards banks is weak as the benefits to their earnings from higher interest rates might be offset by a growing number of bad debts, together with the potential for mortgage activity to reduce due to affordability issues.

“Legal & General and Phoenix Group have been weak for several days as investors wonder how they’re exposed to troubles in the pensions sector. And retailers have been weak because the market fears they’re going to see a big downturn in trading as consumers tighten their belts.”

Barratt Developments

“The market has been expecting bad news from the housebuilding sector and now we’ve got it. Barratt Development says net private reservations have fallen and the outlook has become less certain, suggesting we’re now seeing the start of a downturn in the industry.

“While many individuals and couples aspire to own a house or flat, it’s becoming out of reach for more and more people.

“Rising interest rates means mortgages are now considerably more expensive than they were at the start of the year. Mortgage lenders have generally been more cautious since the global financial crisis in 2008 and certainly won’t be more relaxed now when deciding to whom they should lend money.

“Housebuilders in general are sitting on a lot of cash and so dividends look safe for now. The one plus point from today’s sector sell-off is that dividend yields have become even more attractive. The risk is that management become more cautious as we move into 2023 and think it prudent to stash away more money for a rainy day, in case we get a prolonged downturn.”

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