Having invested through several cycles, the extent to which markets are willing to look quite some distance into the future, capture significant anticipated differences in moods, trends and events and reflect these in today’s share prices still surprises me. This is particularly exacerbated around turning points in a cycle.
As an investor, the ability to see around a corner and into the long term is one of the most difficult and valuable skills to master.
Take the UK housebuilding sector. Share prices in this sector bottomed in July 2008, almost a full year before the overall stockmarket, and at a time when house prices still had a further 10 per cent to fall. Anyone who sold the sector in July 2008 would have lost around 70 per cent of outperformance up until the wider market turned in March 2009.
Clearly, in the summer of 2008, investors were already starting to look across the valley of further house price falls and anticipating the sunny uplands of a consumer recovery on the other side.
Today, with the housing market having staged its initial recovery and average selling prices around 10 per cent off trough levels, it is still hard to get excited about investing in the sector.
New housing volumes and overall housing transactions are still woefully thin, with completions this year forecast to be 44 per cent below peak and 40 per cent below long-term average.
Some housebuilders are still loss-making, and most important, will not cover their cost of capital on current forecasts for three or four years.
So, with the sector trading on only a modest discount to book value, why invest in a housebuilder when you would have to believe in a significant improvement in growth and returns in order to justify a re-rating and decent share price upside?
The market is beginning to speculate (albeit in a somewhat schizophrenic manner) that this improvement might just look credible with time.
If you believe the corporate profit cycle is firmly on its way up and of greater significance globally than either an inexperienced/ weakly led Government or record levels of Government net borrowing, then confidence, along with jobs, aspiration and spending could all return in abundance within a couple of years.
Furthermore, new entrants to the mortgage market could boost the demand side while Government disposals of land holdings at levels where they wash their face could loosen the supply side.
As an analyst, I am not feeling confident enough to bake any of this into my forecasts three to five years out. The housebuilding industry still looks like a hard way to make a return on capital under the current model in the UK.
However, as a fund manager, I recognise I may need the tools within my portfolios to gear my investors in to any improvement in sentiment in domestic prospects.
With the market’s tendency to see events in the far distance, investment success in the housebuilding sector in 2010 will depend on how the view of 2013 evolves.