A number of prominent FTSE 100 stocks fell sharply Wednesday afternoon (2 July) following a rapid rise in UK borrowing costs.
Investors appeared to be spooked at the sight of a tearful Rachel Reeves sitting next to the Prime Minister in the House of Commons. It’s unclear why the Chancellor was so upset. A Downing Street official described it as a “personal matter”. But in the absence of a definitive explanation, there was inevitably plenty of speculation.
Some commentators blame it on an argument with the Speaker. Less charitable observers claimed it was because she was about to be sacked. Others reckon it was caused by the fallout from the government’s u-turn on its social welfare bill.
Whatever the reason, it’s affected my portfolio, which comprises mainly FTSE 100 shares. Among them is Persimmon (LSE:PSN), which was the second-biggest faller on the day.
The housebuilder’s shares closed 6.78% lower. The stock was already on the retreat following publication earlier in the week of the Nationwide’s latest house price survey. This showed the biggest drop in prices for over two years.
The group’s share price is now back to where it was soon after President Trump threw a spanner in the works with his ‘America First’ trade policy.
What’s the problem?
Yesterday’s market reaction illustrates how crucial interest rates are to the group’s fortunes. Lower borrowing costs improve the affordability of mortgages. The cost of credit is particularly important to those looking to get on the housing ladder. It’s believed that around half of Persimmon’s homes are sold to first-time buyers.
Even before yesterday’s events, the 10-year gilt rate was higher than when Liz Truss was Prime Minister. If the Bank of England doesn’t cut interest rates as quickly as hoped this could stall a housing market recovery.
And problems in the wider economy – such as persistent inflation or further tax rises – are also likely to adversely affect consumer sentiment.
Personally, despite these challenges facing the industry, I think there are a few reasons why Persimmon’s in a good position to benefit from a housing market recovery, something that I believe is probable, albeit not guaranteed.
I’m still optimistic
Firstly, it has a lower average selling price than its FTSE 100 peers. I think demand for cheaper properties is likely to recover more quickly.
Also, it has no debt on its balance sheet. I think that’s impressive given the post-pandemic problems that have beset the industry. Occasionally, the group has dipped into its £700m credit facility. But at the end of each of its last four financial years, it’s remained undrawn.
In addition, it has plenty of land to build on. At 31 December 2024, it owned and controlled 82,084 plots. Of these, 49% had “detailed implementable planning consent”.
Finally, although there are no certainties, the stock’s currently offering a generous 5% dividend yield that’s likely to appeal to income hunters.
For these reasons, I think Persimmon’s a stock that investors could consider.
Although it’s never good to see the value of my ISA fall, I know that short-term price fluctuations are inevitable. Hopefully, the Chancellor’s tears are not a sign of anything too serious and that she can carry on with the task in hand of improving the British economy. If she succeeds, we’ll all shed tears of joy.
