August 2020

August 2020

Commentary

 

This monthly report falls in the middle of the traditional “holiday season”. Chez Centrus most people are going away – based on a straw poll mostly for at least one period of physical absence from the vicinity of London and Dublin, where our two offices are located, in many cases in the UK of course. One younger member of the team has managed to complicate matters by joining the London team a few months ago from the Republic but spending lockdown working from his family home, back the other side of the Irish Sea. Another was caught between rented homes when lockdown started and after a brief period at his girlfriend’s parents (apparently went well … and a lot cheaper than renting in London) the two of them are taking a month-long break in Italy of which three weeks are “working from home”; alright for some! Speaking for myself I’m sufficiently keen that my kids start back at school in September I’m not taking any chances.

On this front, the last week has also seen some public debate over whether schools really will re-open in September, as a litmus test of government planning, stakeholder management and, to be fair, knowledge. It does seem clear that there will be a cycling of part-closures of various parts of the economy in parts of the country, perhaps for a long time. I made my first trip to the gym since February (ok, if I’m honest, since the New Year) this week; it felt quite ‘normal’ but it’s not hard to imagine that being shut down again for sensible reasons. This environment will surely keep people and businesses twitchy about discretionary spending and investment.

In common with many other businesses, we put recruitment on pause as the C-19 slowdown started biting, but we are now tentatively hiring again and have a new joiner starting in a month’s time. Hopefully, other businesses are similarly emerging from the eye of the storm too and taking steps towards a return to growth.

Uncertainties remain as to how and when the cards will fall over the medium term, affecting e.g. demand for living in / out of the major cities, job prospects, opportunities and aspirations etc. The last week has seen the first level of drawing back of furlough scheme support so the “real” impact may start to become clearer.

What strikes me, looking at our own business and talking to HA clients, is that everyone is now shifting to longer-term thinking. In recent months, a lot of decision-making was responsive but we now need clear strategizing about, for example, the way that we train and engage the junior members of the team; the way that we manage performance; how we formulate business plans (I mean real plans – not just the numbers), or the way we communicate as an industry when there are no casual meetings at conferences or networking events. Communication skills become even more important than they were before.

Against this backdrop, the housing sector continues to benefit from strong investor demand and bond yields reflective of a gloomier economic outlook than equity markets would have us believe.

In the public markets, Centrus client Platform Housing Group made its debut in the sterling bond market, issuing £350m bonds, of which £50m were retained, at a record low yield for a long dated housing issue of just over 1.7%. Other notable deals in debt capital markets included a number of private placements: Cadwyn, Settle, Community Gateway in Preston and Network Homes all issued private debt during July.

Financial Markets & Economic Overview

Coronavirus continues to grab headlines, with the impact from the past months reflected in recent GDP data. US GDP fell by a record 32.9% between April and June and coupled with negative growth in the first quarter, enters its first recession in 11 years. This is reflected in a strengthening Pound against the Dollar reaching a level of 1.309 at the end of July.

Data releases in Europe paint a similar picture, with Eurozone GDP falling by 12.1% in Q2, with Germany and France posting falls of 10.1% and 13.8% respectively.

The UK has seen an increase in measures to restrict movement. Regional lockdowns have been introduced over the past month, with Greater Manchester alongside parts of East Lancashire and West Yorkshire following a spike in new cases of Covid-19. In addition, quarantine rules have been reintroduced for anyone travelling from Spain, Belgium, Luxembourg and Croatia back to the UK.

In light of this backdrop, the MPC is set to meet this week and expected to keep policy unchanged, including maintaining the base rate of 0.10%. The key risk is still more towards the downside, with the key messaging likely to be continued support to do everything possible to support the recovery.

On a more positive note, the Nationwide House Price Index shows a rebound in house price growth to 1.5% YoY for July. This reflects a better than expected recovery in activity since the easing of lockdown restrictions. There is an element of pent up demand with delays due to lockdown, and potentially some behavioural shifts as people reassess their housing needs and preferences as a result of life in lockdown. The UK stamp duty holiday is also supporting near term growth and bringing some activity forward.

Gold prices have continued towards record highs as investors seek a “safer” asset with an ability to hold its price during turbulent times. In UK markets, gilt yields and swap rates have remained at historic lows which is being reflected in very competitive rates achieved for new funding.

Interest Rates

Inflation

 

Capital Markets

 

Bank Credit