Builders outperform on price forecast amid falling wider market

Housebuilders outperformed a falling London market on Thursday with Bellway and Crest Nicholson hitting record highs.

The sector climbed after a supply squeeze led the Royal Institution of Chartered Surveyors to double its house price inflation forecast to 6 per cent this year.

Merrill Lynch advised clients to buy into the trend, predicting that England and Wales would have a housing shortfall “similar to the size of West Yorkshire” by early next decade.

Household formation is expected to run at 234,629 per annum for the next four years in a market that already has 505,000 too few homes, Merrill said.

“If we assume that house building grew at 10 per cent per annum, it would be 2021 before annual production caught up household formation creating an additional undersupply of 348,000 homes,” its broker told clients.

The response among housebuilders so far has been to chase margin by building big houses in the south of England, which has left a hole in the market for one and two-bedroom homes at a time when first-time buyer demand is rising strongly, continued Merrill.

That led it to turn positive on Bellway, up 1.7 per cent to £25.85, and name as its preferred sector picks Persimmon, up 1.1 per cent to £21.24, and Taylor Wimpey, up 1.6 per cent to 202.1p.

An oil-led pullback in the wider market left the FTSE 100 lower by 1.2 per cent, or 73.2 points, at 6,155.81.

Tullow Oil faded 7.4 per cent to 192.4p with Investec Securities repeating “sell” advice.

Rather than be a hostage to the oil price, Tullow should launch a cash call to raise about $750m as well as exiting east Africa, said the broker.

“Tullow needs to refocus its narrative back to exploration as fast as it can,” said Investec.

“Otherwise, its investment case will remain impaired until its debt falls at the end of the decade. A capital injection would be the first step in this process.

“New equity would also reduce near-term balance sheet risk, strengthen its bargaining position in asset sales and reduce funding costs, facilitating capital allocation back to exploration and to Ghana.”

Phoenix advanced 2.4 per cent to 858.5p on an upgrade to “buy” from Canaccord Genuity.

With Fitch recently awarding Phoenix an investment grade credit rating, the insurer is well placed to make an acquisition with an enterprise value of up to £1.5bn, said Canaccord, which added: “Based on business mix and book size, we conclude that Abbey Life, Aegon UK and the UK arm of Sun Life Financial of Canada could be good fits.”

Dixons Carphone rose 1.8 per cent to 427.5p after its quarterly like-for-like sales growth topped expectations, thanks in part to mobile market share gains.

Weak quarterly sales at Argos and a caution that pre-Christmas marketing spend would rise in “a less certain promotional environment” meant Home Retail Group faded 5.9 per cent to 140p.

Asos hit a seven-month low, down 5.6 per cent to £26.22, on word that one of its top-10 shareholders had sold a 3 per cent stake at £26.73 apiece.