January 2021

January 2021

Commentary

We start by wishing all our clients and readers a very happy new year and our best wishes for a healthy, happy and successful 2021.

Given the many ups and (mainly) downs of 2020, the year ended on a more upbeat note with the UK leading the way in approving Covid vaccines and beginning vaccination programmes for those deemed most vulnerable to the virus. To cap it off, just before Christmas, a puff of white smoke appeared somewhere in Brussels to signal that an agreement had been reached between the EU and UK negotiating teams over a zero-tariff, zero-quota free trade agreement between the two parties, drawing a line under a chaotic, fractious and dramatic four-and-a-half-years in UK politics since the referendum in 2016, a period which has seemed to stretch the UK constitutional and political framework to breaking point at times.

Although views on the Brexit question remain polarised, the country does at least have a degree of clarity in terms of its future relationship with its largest trading partner and the uncertainty and numerous cliff-edges of recent years can be put behind us. It has been notable in our discussions with non-UK investors in recent years that their appetite for UK assets has been tempered by outstanding questions and uncertainty and with global allocations to the UK below historic levels, we may see renewed interest in the UK from international investors through 2021 and beyond.

However, with Tier 4 restrictions tightened on Boxing Day and a new national lockdown and school closures announced this week, December’s bubble of optimism has been well and truly pricked. People, businesses and public services face a long grind through the winter weather and short days to the end of February at least. In an attempt to alleviate the economic damage of a further lockdown, the Chancellor announced another package of measures to support workers, businesses and local authorities, including business grants, business rates relief, grant funding for local authorities and the extension of the furlough and business lending schemes, although this will be of limited comfort to the businesses hardest hit in the retail, leisure, hospitality and travel sectors of the economy.

So in order to lighten the mood a bit, in the words of Ian Dury and The Blockheads (to readers of a certain vintage…), we thought of Reasons to be cheerful – 1,2,3 as we embark on 2021.

  1. Vaccine roll-out = faster economic recovery

Although the UK was first out of the blocks in approving vaccines, the ensuing roll out has been less than stellar compared to runaway leader Israel, which has already vaccinated 10.5% of its population compared to 1.5% in the UK. However, to put this in context, the UK is in third place globally and with military, public and private sector resources and logistics being thrown into the fray, the Government has set itself the challenge of vaccinating 13 million of the most vulnerable people in society by mid-February.

The faster this programme is rolled out, the sooner restrictions can be lifted with an obvious boost to economic recovery and employment. This all pre-supposes that the vaccines turn out to be effective against mutations of the virus of course.

  1. UK PLC open for business

As covered above, throughout the Brexit imbroglio, although overseas investment into the UK has continued to flow, numbers have fallen since 2016 and we have had numerous conversations with non-UK investors across different asset classes including social housing in which they have stated that investment appetite for the UK is limited or on hold until the post Brexit position becomes clearer. Although we formally left the EU in January 2020, the 12 month transition period and what lay after presented an obvious challenge. With the Free Trade Agreement now signed, although there will doubtless be teething problems as businesses and supply chains adjust to a new world, one of the main impediments to international investment in the UK has been removed. On the back of this, we may see a boost to UK equity markets through increased M&A activity and an increase in global allocations to the UK market making it easier for listed companies to raise cash for investment and acquisitions. Along with a broader uptick in investment across different UK asset classes (including credit), this should be supportive of a recovery in economic activity and employment.

  1. Still a borrower’s market

For now, economic recovery is tomorrow’s business and most of the Western world remains mired in the sharpest economic slowdown in modern history. Government bond yields remain at or near to their historic lows reflecting investor sentiment and large swathes of the government and investment grade bond market (particularly in Europe) are in negative yielding territory. From the perspective of HA borrowers, the combination of low gilt yields and tight credit spreads (which we believe will be further underpinned by increased overseas interest as described above) is delivering a historically low all-in cost of capital.

Hot of the press is the news that bLend has issued a tap for a Centrus client (Cardiff Community HA) at their lowest ever rate of 1.932% with a credit spread of 115bps and a negative 5bps new issue premium. This augurs well for the PP and public bond markets for HAs over the next 12 months and by achieving borrowing costs well below business plan assumptions, HAs can approach a challenging business and operating environment with confidence, at least from a treasury perspective!

In terms of other markets activity, there were no single-name bonds in the month of December but the banking market remains busy. Having spoken to the main sector banks since 1st January they appear also to expect a reasonably busy year both on the capital markets and lending side.

Financial Markets & Economic Overview

The UK may be very happy to see the back of 2020, with GDP dropping by 8.6% year on year in the third quarter with hope of a slow and modest upturn in the final quarter.

UK inflation slowed down in November as clothing and food prices shrank after tightened coronavirus restrictions. The annual growth rate in the consumer price index (CPI) decreased to 0.3% in November, from 0.7% in October. This figure fell significantly below the 2% target the government sets for the Bank of England. The latest inflation forecast continues to project a return to the 2% level.

The Bank of England’s Monetary Policy Committee (MPC) voted to keep the base rate on hold at 0.1% and continue with the existing bond purchase programme at £895bn in the hopes of a boost to the economy next year following the roll-out of vaccines.

Investors in London appear bullish with the FTSE100 continuing to rise closer and closer to its pre-crisis level. Much of the increase was due to shares in energy stocks becoming more lucrative following the surge in oil prices, while shares in banks kept up their strong demand.

The property market also finished the year strongly during what is usually a slow season for the sector. Nationwide’s house price index conveyed a 0.80% rise from November to December in 2020 resulting in a 6 year high for the index. The average house price currently stands at £230,920, a c.£15k increase against December 2019 and 5.3% higher than in March 2020.

Sterling also continued to hold strong against the euro and the dollar despite amid fears of failed Brexit negotiations, however a last-minute deal cemented a strong finish for the UK. A key area to watch during 2021 will of course be how the detailed implications of that pan out.

Interest Rates

Inflation

Capital Markets

Bank Credit