With interest rates set to move higher, many investors may be rather concerned about the prospects for the housebuilding sector. That’s because higher rates could mean demand for new properties is pegged back by higher debt servicing costs. And with buy-to-let investors also set to be hurt by tax changes, the outlook for the property market is somewhat uncertain.
Safety margin
As a result, housebuilders such as Berkeley (LSE: BKG) trade on relatively low valuations. For example, it has a forward price-to-earnings (P/E) ratio of just 9.4, which indicates that there’s significant scope for an upward rerating in 2016.
Of course, Berkeley’s future is uncertain and demand for housing could come under pressure. However, there’s such a fundamental disparity between demand and supply in the UK housing market at the moment that even a reduction in demand would still be likely to leave it comfortably exceeding supply. And with Berkeley having such a wide margin of safety, the external risks that it faces appear to be more than adequately priced-in, thereby making it an excellent purchase for 2016.
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Housing bubble
Similarly, there are fears that challenger banks such as Shawbrook (LSE: SHAW) will be required to hold a greater amount of cash on their balance sheets over the medium term. This could take place because regulators are concerned about the risks to the UK economy from the bursting of a buy-to-let bubble. As a result, they’re considering new rules to beef up the balance sheets of Shawbrook and its challenger peers to protect them (and the economy) from falling house prices.
Clearly, rules of this kind would have the potential to act as a brake on Shawbrook’s growth outlook. However, with the bank trading on a price-to-earnings growth (PEG) ratio of just 0.4, it offers a sufficiently wide margin of safety to merit purchase right now – especially for long-term investors who can live with the potential for above average volatility in 2016.
Misery over?
Meanwhile, Tesco (LSE: TSCO) could also prove to be a positive surprise for investors in 2016. Like Berkeley and Shawbrook, it faces a great deal of uncertainty, with the outlook for the UK supermarket sector continuing to be highly challenging.
Furthermore, Tesco is in the middle of a major transformation programme and as history shows, the sale of multiple assets, a focus on generating efficiencies and on changing the customer experience can be a risky path to follow. There’s plenty of potential for delays and unforeseen difficulties.
Despite this, Tesco’s margin of safety appears to be sufficiently wide to warrant buying its shares as it has a PEG ratio of just 0.2. This, plus the scope for improving consumer confidence as household budgets expand in 2016, mean that Tesco’s miserable share price performance of recent years could be about to come to an end.
