Market snapshot: inflation fears and Berkeley Group's latest results

Sentiment is fragile and policymakers everywhere face the dilemma about how to control inflation while not stifling economic growth. Our head of markets brings you the latest on this and results from FTSE 100 housebuilder Berkeley Group. 

Markets were again unable to sustain gains as investor focus moved to inflation, which at present is of equal concern to the developing situation between Russia and Ukraine.

US consumer inflation rose to annualised 7.9% last month, representing the largest increase in 40 years. This brought concerns around the Federal Reserve, which is due to make an announcement next week.

Inflation had been a pressing issue even before the further spike which will inevitably follow the rise in energy, food and metal prices. However, the Fed needs to walk a fine line between fighting inflation and yet recognising slower economic growth. Market consensus is less convinced but is nonetheless hoping that the interest rate rise next week will be 0.25%, as opposed to the 0.5% which had previously been expected.

Such is the fragility of sentiment at the moment that a hike of any description will leave investors with little positive room for manoeuvre. Alongside the potential for personal income erosion and slower than expected global growth, the near-term outlook remains dour.

Meanwhile, part of the cause for market spikes earlier in the week had been hopes that progress would be made on peace talks around the conflict, but for the moment these have failed to provide any grounds for optimism.

In the year to date, the Dow Jones has now given up 8.7%, the S&P500 10.6% and the Nasdaq 16%.

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The FTSE100, meanwhile, remains a relative beacon of hope. The underlying defensiveness and exposure to energy sectors has seen some interest in a UK market which is still seen as undervalued compared to many of its global peers. At the same time, an average dividend yield of approaching 4% is providing some solace to investors. As such, the index has been an outperformer so far, having lost just 3% in the year to date.

Berkeley Group (LSE:BKG) is the latest in a line of housebuilders to underline the disconnect between trading performance and share price performance.

Its underlying sales reservations remain slightly ahead of pre-pandemic levels, sales pricing is sufficient to absorb cost increases and its earnings guidance is on track. Net cash is expected to increase to £900 million by year end, let alone further access to liquidity if it were needed and, including the special dividend currently in place, the shares are yielding over 10%. While this is likely to settle to a number nearing 5% on a prospective basis, it nonetheless remains a punchy yield for the income-seeking investor to consider.

However, Berkeley is not immune from the pressures facing the sector from both the macro environment and for the moment the sector is underperforming. Cost inflation, pressure on household incomes, the potential for rising interest rates and supply chain constraints are all clouding prospects, and Berkeley has added planning complexity and delays to the mix of headwinds being faced.

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The shares have declined by 24.5% over the last year, as compared to a gain of 5.4% for the wider FTSE100. The market consensus of the shares remains defiant, however, coming in at a "buy", largely on the basis of the group’s exposure to London and the South East and, with the housing market generally still suffering from a shortage of supply, both of which should bolster longer term prospects.