Your somewhat poorly author (“man flu”?) is coughing and spluttering his way to the last Centrus monthly update of 2019. Let’s face it, most people are feeling somewhat fatigued at the end of a year the whole country might be pleased to see the back of, given the endless political saga that we’ve all had to endure. By December 13th, we will at least have a better idea of the direction of travel, even if further uncertainty beckons.
One positive aspect of UK Plc is the way in which the economy has maintained a relative sense of “business as usual” in the teeth of near political paralysis and relentlessly negative sentiment. In spite of this, it is clear that business investment both domestically and from overseas has been held back pending a resolution to the Brexit deadlock.
A recent report from US investment bank Goldman Sachs cited a catch-up surge in undervalued UK assets as one of its top seven trade ideas for 2020, advising clients take advantage of a cheap currency and domestic stock market, claiming that:
“We have identified more than $150bn (£116bn) of UK inflows that could be unlocked by some progress towards Brexit resolution. The upcoming election will reset the Parliamentary arithmetic and potentially clear the way.”
It continues: “Conditional on Brexit clarity and fiscal stimulus, our economists now look for annualised growth of 2.0pc in 2021 and 2.1pc in 2022.” The flipside of this equation for issuers taking advantage of record low interest rates is that the bank expects this reflation and more significant government borrowing (to fund spending promises) to push ten-year gilt yields above 1% from their current levels of just under 0.7%.
At Centrus, we have seen first-hand evidence of domestic and overseas investors delaying investment decisions until at least some clarity is provided as to Brexit. As many trade commentators have pointed out, a deal to leave the EU is but Stage 1 of what will likely be long and tortuous negotiations over the future relationship but perhaps this will be more acceptable to investors IF (and it remains a big if) the primary political logjam is broken.
Closer to home, Centrus clients Radian and Yarlington completed their partnership deal on 4th November, bringing to a close a busy period working on this transaction since the Spring. Centrus supported through the business strategy / corporate finance strategy as well as then with lender negotiations to agree terms for the combined business. Radian had a group structure which opened up a number of opportunities for the transaction structure and impact on lender relationships; Yarlington has joined in the first instance as a subsidiary of the Radian parent.
Things have gone a little quieter on the ‘partnerships / mergers’ front generally over the course of the last twelve months. It remains to be seen whether the general election will bring more economic or policy clarity. But in anticipation that the environment will remain somewhat uncertain, one takeaway from this deal is that we’ve seen over time these transactions involving an increasingly detailed and considered discussion of the business plan and corporate plan generally. The approaches and answers vary, but the clarity of focus on this area must reflect in part the direction of travel of the regulator’s expectations and is in our view a good thing.
The domestic and overseas funding markets for HAs and other issuers remain active and buoyant. Over the course of 2019, Centrus has advised on and executed more than £2bn of private and public markets issuance. We expect this activity to continue into 2020 on the housing side and for Local Authority issuance to ramp up on the back of the recent move in PWLB borrowing rates from 0.8% over gilts to 1.8%.
The team here at Centrus would like to thank all of our clients for their continued support and custom during 2019 and we wish you all the very best both personally and professionally for 2020.
Financial Markets & Economic Overview
With only a few days to go until the UK General Election, markets are watching the polls nervously, with the latest indications showing a modest Conservative lead. The pound has been rallying on this news. However uncertainty remains high with investors maintaining a high degree of caution. Some polls are showing that the gap between Conservatives and Labour may have narrowed, with maybe a 70% probability of a Conservative majority vs a 30% chance of a hung parliament.
The election news has largely dominated headlines, with little attention paid to other UK economic data. IHS Markit released final November PMIs for manufacturing and services, with surprisingly weak results. This is in stark contrast to the Lloyds Business Barometer showing optimism for the UK economy.
In the Eurozone Christine Lagarde made her first appearance as ECB President. She stated that the ECB will be “resolute” in restoring eurozone price stability under her presidency. Recent inflation data from the Eurozone has shown little sign of increasing. Some key data releases will be eagerly watched, with a large fall in German retail sales (down 1.9% MoM) potentially dragging down the Eurozone results.
UK house price data released by Nationwide showed a growth rate below 1% for the 12th month in a row, despite this being the strongest outturn since April. As noted in the Nationwide release, the underlying pace of growth appears to have slowed as a result of weaker global growth and an intensification of Brexit uncertainty. To date, the slowdown has largely centred on business investment, while household spending has been more resilient.
The UK consumer price index (“CPI”) of 1.5% was the lowest since November 2016 largely due to falling gas and electricity prices on the back of the introduction of the new energy price cap. On average, gas and electricity prices fell by 8.7% and 2.2% respectively.