UK housebuilders are now one of the most attractive domestic sectors in the UK, with valuations not reflecting the positive fundamentals, Smith & Williamson’s Enterprise Fund manager Mark Boucher has said.
Boucher, who co-manages the £126m (as at 28th February 2019) fund alongside Mark Swain and Rupert Fleming, said the UK housebuilding sector now offers standout valuation opportunities versus other areas of the UK domestic market.
‘Its relative valuation is the lowest out of all the domestically focused areas of the UK, and since it is also the most geared to UK consumers, it is the cleanest way to play UK domestic growth,’ Boucher said.
‘As such, we recently added to our housebuilders exposure, with a new position in Persimmon complementing our top 10 holding of Barratt Developments,’ Boucher added.
Swain said that Persimmon had been oversold prior to its latest set of results, in which it revealed a jump in profits which saw it become the first domestic UK housebuilder to make more than £1bn of annual pre-tax profit.
‘Persimmon’s shares had become oversold, and recent updates from the business confirmed what we suspected about the housebuilding sector in general; earnings have continued to rise despite investors selling out,’ he added.
Swain said that although housebuilders were hit alongside other equities during the sell-off in the last quarter of 2018, the fundamentals underpinning the stocks remain healthy.
‘We are still seeing demand for housing despite the fear of Brexit, and build costs have not increased at all. Indeed, they have actually fallen since the sell-off,’ Swain said.
‘Naturally Brexit remains a worry, but we are optimistic that the current government will not push through a no-deal Brexit, and any deal should see UK-focused equities rally hard,’ Boucher added.
The team is wary of those housebuilders that are focused on London, however, as the market there looks more challenging.
‘While we remain optimistic for the outlook for the housebuilding sector broadly and are net long housebuilders, we are wary of the players that are geared only to London,’ Swain said.
Looking more broadly at UK valuations, Boucher and Swain believe that UK equities are attractive in anything other than a no-deal scenario. However, they said with such a binary outcome, it was important not to get too carried away.
‘Although we remain sanguine about UK equities, we do not think now is the right time to adopt a ‘gung-ho’ approach. Once there is some clarity, we can increase gross exposure, but in the interim keeping exposure to factor risks relatively low is a prudent way to invest.”
 Persimmon, Final Results 2018 (https://www.persimmonhomes.com/corporate/media/359156/final-results-announcement-final.pdf), p. 1