Interactive Investor

Lloyds Bank and housebuilders hammered by Spending Review warning

26th November 2020 12:58

Graeme Evans from interactive investor

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There’s a long casualty list as traders price in the impact of chancellor Rishi Sunak’s Spending Review.

House prices falling 8% next year as the UK embarks on a “long slog” back to health were today among gloomy forecasts puncturing the recovery mood of banks and building stocks.

The Office for Budget Responsibility's (OBR) warning that the UK will take until the end of 2022 for GDP to reach its pre-pandemic level was far from the worst of it, with the watchdog believing the economy will be 3% smaller in 2025 than it would have been without Covid-19.

It estimates that at least £27 billion of tax rises will be needed to fix the public finances and to cope with weaker economic output.  The OBR also warned of a significant slowing in the house market once the Chancellor's stamp duty holiday comes to an end in the spring.

This could push prices down by more than 8% in 2021, with the cost of an average home 17% lower in 2025 than the watchdog predicted in March. These are just forecasts, with plenty still to be understood about how potential vaccines or Brexit will alter the economic recovery.

But there's no doubting that the figures published yesterday have sent a chill through many UK-focused stocks, particularly in the FTSE 250 index where the domestic-focused benchmark fell by more than 1% for a second successive session today.

Many of the “recovery trades” were under pressure, including Upper Crust owner SSP Group and retailer WH Smith - down 5% and 4% respectively. They have risen sharply on the back of the vaccine breakthroughs but are now being spooked by the weaker consumer outlook.

In the FTSE 100 index, Halifax mortgage lender Lloyds Banking Group (LSE:LLOY) was the biggest faller after a drop of 6% to 36p added to the 4% fall seen yesterday. Shares started November at 28p but neared 40p on Wednesday after the positive vaccine update from AstraZeneca (LSE:AZN).

NatWest (LSE:NWG) also fell 7.8p to 155.65p and Barclays (LSE:BARC) slipped 5p to 138.5p as the OBR guidance fuelled the impairment jitters already in play after Virgin Money (LSE:VMUK) yesterday set aside a bigger-than-expected £501 million to cover potential bad debts. FTSE 250-listed Virgin was down another 10% to 125.75p, having already fallen by 5% on Wednesday.

Housebuilders also struggled, with Persimmon (LSE:PSN) off 129p to 2,705p, Barratt Developments (LSE:BDEV) down 12.2p to 624p and second-tier Crest Nicholson (LSE:CRST) 10.6p cheaper at 299.8p.

The consumer-focused weakness has come as reality check for many investors after the FTSE 100 index surged by as much as 14% earlier in the month.

Updating its economic outlook for 2021/22, UBS said the UK's recovery was likely to be slower than the one seen in the eurozone due to the higher proportion of services in the economy.

The Swiss bank, which earlier this week forecast a recovery for the FTSE 100 index to 7,200 as international investors return to these shores, thinks output will also be disrupted to some extent by new trading arrangements with the EU.

The Astra vaccine means its eurozone GDP forecast for next year is now 6.2% from 5.2% previously, with the following year up from 3.9% to 5%. Its estimates for the UK are 5.8% followed by 4.9%, with output still likely to be below pre-crisis levels at the end of 2022.

That compares with the OBR's forecasts for GDP to fall 11.3% this year before growth of 5.5% in 2021 and then 6.6% in 2022.

Jefferies said yesterday's spending review was only a first, tentative step on a long journey to consolidating the UK's public sector finances, with the Chancellor's Budget in March likely to offer much more detail on tax rises.

While it noted that small changes in GDP can have a significant impact on the projections for debt, it said the current forecasts of the OBR and the IMF both showed the UK running a budget deficit of 4%-5% of GDP by 2025, compared with 2.5% in 2019.

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