January 2020

January 2020

Commentary

 

I was about to start by wishing all of our clients not only a happy new year but a happy new decade. However, a few social media pedants have pointed out that technically and in scientific terms, 2020 is the final year of the 2010s and 2021 will be the first year of the 2020s. Possibly a niche area of interest but more here for anyone wishing to delve into the matter.

However, the dawn of a new decade is a far more exciting than the dawn of a new year and so I decided to ignore the technicians, avoid any unnecessary delay of gratification and jump straight into some musings on the decade ahead. Some involve a bit of crystal ball gazing so please treat accordingly and note that we abnegate all responsibility for the time in 2030 (or 2031!) when you point out how wrong this all was!

 

1.Regional Policy. When we put pen to paper a month or so ago, the country was about to go to the polls. The result was more decisive than most pollsters had predicted and after 3 years of political paralysis, Boris Johnson has been given a stronger mandate than any PM since Tony Blair. One commentator this week has suggested the lack of a Gordon Brown figure in his cabinet gives him an even stronger grip, although things can change quickly in politics. This points to the possibility of a fairly radical agenda with regional policy to the fore as the Conservatives seek to cement their new-found support bases in the North and the Midlands. So HS2 to be mothballed in favour of Northern Crossrail, greater focus on large infrastructure & transport projects and low carbon industries along the East Coast and potentially, more funding to find its way into housing and regeneration in these regions.

 

2. The Great Inflation Battle. As we move into the 2020s, the battle lines are drawn in the world of economic forecasting between the inflationistas and the ice-age theorists, the former believing that ever more ambitious (and perhaps risky) iterations of QE will eventually overshoot into high inflation and the latter pointing to the repeated efforts of Japan to create inflation over a 30-year period and their having failed miserably. Higher inflation would bring an end to the 30-year bull market in interest rates and something of a golden period for HA borrowers. After all, had someone told you at the start of the last decade that by 2020 you would be able to borrow 30 year money at 2.5%, you might have suggested they have a lie down. We don’t know which side will win this forecasting battle but we will predict that if a paradigm shift does occur, it might happen rather more rapidly than people expect and with a propensity to overshoot. Be on your guard accordingly.

 

3. ESG. Most readers will be aware of the gathering momentum around ESG & impact investing. There is a huge push around this from investors, policy makers and regulators so our advice to clients is to engage fully with this in order to maintain your attractiveness to lenders and investors. We’ve already seen bank lending linked to outcomes and performance around key ESG type measures and banking regulators are considering changes to the capital rules which would have an impact on pricing. Some of this is just talk but certainly recent pensions regulations are putting the heat on asset managers to consider these areas. Pressure will continue to grow but the housing sector is well placed to respond. Centrus has recently set up an initiative to develop a more consistent ESG reporting framework, working with a number of associations and other stakeholders, which will publish its findings in the first half of 2020.

 

4. Low Carbon Agenda. Connected to the above, another thematic juggernaut likely to dominate the 2020s is de-carbonisation. This is squarely on the policy agenda and while they will not please everyone and may fall short – we will find out in due course – the new government is keen to demonstrate its green credentials with eye catching targets such as net carbon zero by 2050. One of the elephants in the room for the housing sector, as well as a major question mark around the “E” part of “ESG”, relates to retrofitting or re-provision of existing housing stock. The major challenge here is the weak commercial case for retrofitting/re-provision. Government could clearly force the issue for HAs here but if it also wants the sector to play a key role in much needed provision of new housing, this presents a rather difficult circle to be squared. This is likely to be the sort of grand project which requires government to step in directly or via a National Infrastructure Bank type entity – something that we can all agree will test the politicians’ commitment.

 

5. Housing Market. Depending upon which historical analysis you use, average housing market cycles last in full (upturn and downturn) for somewhere between 15 and 18 years. If we take 2009 as the start (albeit a slow one) of the recovery in UK house prices, the current bull market is getting long in the tooth and sometime in the 2020s we are likely to see another housing market crash. As HAs continue to work hard to address the housing shortage in the UK, they would do well to remember the risks of mean reversion and carefully to manage risks around their development programmes.

 

6. Technology. The pace of technological advance is increasing – or perhaps I’m just getting old and struggling to keep up with it all. This is likely to be transformational both for businesses and their employees. More and more data crunching and administrative work will become automated, HAs will become far more effective at managing their stock and data, using AI, predictive software, drone technology and mapping software to drive operational efficiencies. However, please ignore any software that purports to be able to provide corporate finance and treasury advice…

That’s enough from me. We will be holding our inaugural quarterly client webinar this week (Tuesday 14th) which will cover:

  • Market update
  • Update on Libor-Sonia transition
  • Quarterly business plan assumptions

We look forward to discussing these and other topical issues with you. If you haven’t received a webinar invitation, please contact tony.oakley@centrusadvisors.com for joining details.

The Centrus team wishes all of our clients a successful 2020 and we look forward to continuing to work with and support you over the coming 12 months.

 

 

Financial Markets & Economic Overview

 

The Conservative party’s landslide victory in December’s general election led to the biggest rally in the pound (2.7% increase) in almost three years as it soared to a 19-month high of $1.3514. By the end of the month, sterling was the second best performing major currency in the world against the dollar over 2019. However, the pound has since dropped, ending the year on $1.327, as worries of a hard Brexit and uncertainty around the UK-EU trade negotiations linger.

Whilst the pound rallied, the political uncertainty heading into the election drove the largest deterioration in UK manufacturing output, as the IHS manufacturing PMI dropped from 48.9 in November to 47.5 in December. A figure below 50 indicates deteriorating business activity and this was the eight consecutive reading below this threshold. This however, is not as severe as the decline seen in the manufacturing activity in the Eurozone, which saw its activity shrink for the eleventh straight month in November.

Additional UK economic data released last month for November’s business activity saw retail sales dropping for the fourth month in a row and inflation coming in at 1.5%, well below the Bank of England’s target of 2%. UK GDP also grew 0.7% in October, which was the slowest expansion in seven years.

The labour market, on the contrary, showed signs of resilience as the number of jobs increased by 24,000 in the three months to October compared to last year and wage inflation grew healthily at 3.5% in the same period.

Despite evidence of a slowing economy, the Bank of England left interest rates unchanged at 0.75%. They also maintained the message that interest rates could go either direction depending on upcoming domestic and global developments, such as Brexit and the US-China trade deal.

At the end of December, positive news came out around the US-China trade deal, as it was announced that both sides are to sign the first phase of the deal on 15th January. The prospects of the signing led to a rally in stock markets as the markets viewed a slight ease in tension.

Interest Rates

Inflation

Captial Markets

Bank Credit