Housing sector stocks bounced back last night, with Redrow rebounding by almost 7 per cent after the bulls moved in on the view that the market was disproportionately discounting the possibility of "double dip" in house prices.
Citigroup said sector shares prices had factored in a full "double dip", with the market discounting the possibility of prices tumbling after rising steadily in recent months. For its part, the broker said it did not foresee such a scenario unless the supply of houses and/or the cost of mortgages deteriorates unexpectedly. Indeed, for average prices to be down over the next twelve months, "the year end price would need to fall by close to 10 per cent from the starting point", making 2010 the second worst year on record after 2008.
"The last six months has been a strange period for... house-building shares. Newsflow on a day-to-day trading basis has consistently improved, while share prices have headed in the opposite direction, especially in the last 3-4 months," Citi said, adding that the lack of both new and second-hand sellers should mean that supply remains tight in coming months. "As a result, we see house prices edging ahead, albeit at a much slower pace than in the last 6 months," the broker added. "However, we expect prices across the country for 2010 to be around 7 per cent up on 2009 levels."
In keeping with its assessment, the broker moved Barratt Developments, Taylor Wimpey and Redrow to "buy", boosting their share prices by 6 per cent or 6.6p to 116p, 4.9 per cent or 1.67p to 35.6p and 8.5p to 131p respectively. "Redrow has recently seen the return of the well-respected former chief executive and company founder Steve Morgan," Citi said. "[It] lost its way when he left the company by changing its product mix and investing in non-core businesses."
Overall, the FTSE 100 gained 34.49 points to 5320.26, while the FTSE 250 rose by 114.48 points to 9141.35 amid relief at the latest UK unemployment figures, with the Office for National Statistics saying that the quarterly rise in unemployment in the three months to October was the smallest since spring 2008. The news boosted recovery hopes, although Howard Archer, chief UK economist at the forecasters IHS Global Insight, warned that youth unemployment remained a "major concern".
On the FTSE 100, the banking sector was firm, with Lloyds rising by 0.23p to 55.58p, Barclays edging up by 7.45p to 292p, HSBC rising by 7.2p to 709p and Standard Chartered, which was in focus as it emerged that Peter Sands had sold 50,000 shares in the bank, adding 15.5p to 1577.5p following reports that European regulators were planning a long grace period to allow banks to adjust to new capital adequacy rules.
Royal Bank of Scotland also gained ground, advancing by 0.22p to 31.85p, after the group said it was conducting an investigation after uncovering "potential irregularities" in its small and medium enterprise unit in China. RBS was also the focus of some comment from Citigroup, which expressed worries about politicisation of the bank.
Also on the downside, Diageo, the drinks giant, was under pressure, declining by 8p to 1057p after Deutsche Bank moved the stock to "hold" on valuation grounds. The broker said that while it still expected the company to outperform the wider sector, the stock had reached its 1050p target price. The downgrade offset the impact of some support from UBS, which revised its recommendation on Diageo to "buy".
On the upside, the speculators were once again busy touting the possibility of a 125p per share bid for the life insurer Legal & General, which was 1.3 per cent or 1.05p ahead at 80.25p. The wider sector was also firm, with RSA Insurance gaining 4p to 119.7p, Prudential gaining 17p to 626.5p and Standard Life rising by 3.1p to 212.2p.
Elsewhere, parts of the pubs sector suffered following an uninspiring update from Punch Taverns, which fell by 3.85p to 77.3p. KBC Peel Hunt, which switched its stance on Punch to "sell" from "hold", said there was little positive news on trading, though managed margins are stabilising and debt reduction continues. The read-across was especially hard to bear for Marston's, which declined by more than 6 per cent or 6p to 89.7p. Enterprise Inns was 2.15p weaker at 98.65p. Mitchells & Butlers was firm, rising by 0.5p to 259.2p, after Joe Lewis's Piedmont investment vehicle asked for John Lovering, Michael Balfour, Jeremy Blood and Simon Burke to be appointed as directors.
Back on the upside, and Premier Foods rose by 6.6 per cent or 2.18p to 35.12p after the analysts at UBS weighed in, revising their recommendation on food producer's stock to "buy" from "neutral", albeit with a revised 41p target price, compared to 43p previously. "The stock has fallen 25 per cent over the last 3 months, despite management continuing to indicate they are comfortable with consensus full-year estimates," the broker said, adding: "We believe the valuation has fallen to a level where it will start to attract interest from value investors."