Miracles are for the long term

As the stock market recovers, investors should be asking two questions: which sectors bombed most and are those sectors getting left behind in the upturn.

Three major sectors spring to mind. They are the banks, house building and retail. These are the sectors that inevitably took the brunt when finance froze but the future is somewhat mixed and they will not recover in unison. One thing that these sectors do have in common, though, is that they are for the long term. Miracles take time.

House building is the most interesting, as the sector has swung most between extremes. Urged on by the undeniable fact that demand has outstripped supply for years, and with buy-to-let investors adding the froth, the housing market typified the mistaken belief throughout the economy that the only way was up.

When the bubble burst, the downfall was as sharp as the rise had been: buyers were unable to get loans and the buy-to-let market suffered as those who had bought at the top were left struggling. In addition, we have seen unemployment rising steadily, so it has now reached its highest level for 14 years with 2.47 million out of work in July.

Barratt Developments actually touched 1300p in February 2007. The bottom was 40p in July last year and after a premature recovery the shares were back below 50p at the end of 2008. Well done those brave souls who bought at year end and who have seen their investment soar to six times their value over the past nine months.

Persimmon likewise dropped from 1550p to 190p but has more than doubled this year while Redrow tumbled from 700p to 100p before starting a similar recovery in the middle of last year.

This recovery will inevitably continue over time, for the dynamics of supply and demand are basically unchanged. However, investors should be cautious. Banks remain stubbornly reluctant to overlend on mortgages, not because they have learnt their lesson but because they see housing as one of several ways to rebuild profits. The buy-to-let market is now a closed door to all except the ones who really know what they are doing.

Unemployment, now up to 7.9%, will top 8%, preventing more people from even thinking about applying for a mortgage. The labour market is still deteriorating, although it is not going downhill as quickly as it was. The short term outlook for shares in house builders suggests that the recovery has gone far enough for now but all the evidence indicates that house prices and demand have stabilised.

However, if you already own shares in any of the house builders, I see no reason to get out at this stage. The big question for you is to decide whether you want to commit yourselves further in the round of rights issues that is unfolding in the sector.

Other investors need to think very carefully about whether this is the right time to get in but I would suggest that all long term stock market players sensibly seeking to spread risk should consider one – and only one – house builder for inclusion in their portfolio.

Incidentally, I see the outlook as pretty much the opposite for the wider construction industry. Public sector spending has kept the sector going. With even the prime minister talking of cuts, construction is a prime target. The London Olympics will keep things moving for a time but this work will inevitably start to tail off. Anyone using the M11 can see that work on the main site has motored ahead. There should be no last minute scramble to get work finished.

Banks, like house builders, have begun the long and painful recovery that will be dragged out over several years but it will come eventually. For the shorter term, those banks such as Barclays, HSBC and Standard Chartered that evaded partial government ownership offer the best prospects.

Lloyds and RBS will be held back while the government milks them to repair its own finances. I cannot see them going far until they are in a position to pay a dividend and that cannot happen until they have paid off the government. Who knows how large a stake will eventually be dumped onto the market?

Retailing I feel least enthusiasm for, though I concede that every diversified portfolio should have one retailer. Cash strapped local authorities cannot cut business rates; the internet provides increasing competition; unemployment affects consumer spending; and the VAT reduction will almost certainly be reversed in January. We could see a bumper Christmas followed by catastrophic price reductions in the sales.

No monkey business
If you go down to the City tomorrow you’re in for a big surprise. It will not be teddy bears having a picnic but dozens of gorillas on the rampage. My daughter will be one of them.

Ruanda is one of the great success stories of the past few years, with the ghastly genocide followed by a national reconciliation that eclipses South Africa. Aid is being channelled into reviving the economy, such as in coffee growing and the nascent tourist industry (that takes visitors to see the real gorillas) rather than into some seedy dictator’s pocket.

If, in these hard times, you feel like supporting a worthwhile cause log onto www.justgiving.com/marie-hobson