March 2020

March 2020

Commentary

We thought it might be an interesting challenge to try to pen the introduction to the monthly update for March without a single mention of a certain virus sweeping the planet. However, with the end of the month seeing a one-week equity market sell off worse than any since 2008, we decided to throw our lot in with the crowd, so let’s talk Coronavirus. High volatility and a “risk-off” environment has created a sudden change to the benign and relatively optimistic start to 2020. Investors and businesses cheering a return to some semblance of political and economic stability (domestically at least) have now been forced to return to risk planning mode, trying to get their heads around a set of issues which potentially make last year’s no-deal Brexit scenarios look like a walk in the park.

Market movements in the first week or so of March (not helped by debates over oil production) only add to the confusion, we’ll have to see whether investors take a more sanguine view as the month progresses.

Part of the problem is the uncertainty over the extent of disruption that might be caused by the what the WHO expects to be classified as a pandemic. While the effects might be most keenly and immediately be felt in the tourism, travel, sporting and conference sectors, this has and will continue to move on quickly to impacting supply chains across multiple sectors, particularly more cyclical ones and will likely reduce output and productivity in all parts of the economy. It is the as yet unknown impact on the real economy that caused the sharp sell off in equity markets last week and which led to a rare inter-meeting interest rate cut by the Federal Reserve.

HAs can at least point to the fact that they are far from being a cyclical business sector and that for the most part, underlying cashflows are unlikely to suffer major interruption. However, those associations with development programmes including market sale and shared ownership may be concerned that the confidence that had been seeping back into the property market might once again be dented as buyers delay major investment decisions. Like all other businesses, HAs will also be planning for business disruption with potentially large numbers of staff either off sick or being encouraged/required to work from home. We even had the first instance this week of an HA cancelling a lunch meeting with us as part of a drive to reduce external meetings. Of most concern perhaps, is the idea that a lunch with the Centrus team isn’t considered business critical.

In financial markets terms, the “deflationistas” are hailing this as the trigger for the final deflationary bust that they’ve

been calling for over the last ten years. To be fair to one of the perma-bears, Albert Edwards, his long-held view has been that the current cycle would see US bond yields in negative territory and he is now not far away from having been proved correct. By way of a “live” update from him on Twitter last week:

“Unbelievable? But in a year or so time I suspect we will look back at today’s +0.84% (note – now closer to 0.5%) US 10 year in the same way that we now look back [at] yield of +1.8% at the start of this year or indeed October 2018 3.2% spike, ie a distant memory. IMO the US 10y will converge with Germany well below zero.”

It is certainly striking how the UK social housing sector has repeatedly breached psychological coupon barriers at 5%, 4%, 3% and more recently 2%. For the time being at least, the question is less “will interest rates stay low” and more “how much lower can they go”. The firm expectation in the financial markets is that the rate cut by the Federal Reserve last week is merely the opening shot in a potential barrage of co-ordinated Central Bank “shock and awe”. Indeed, “Modern Monetary Theory” (which when you strip it all back involves more money printing but injected into the real economy rather than bank balance sheets) continues its march from the fringes of economic orthodoxy towards the mainstream. The latest swoon in the markets and associated broader economic uncertainty certainly gives cover to its proponents to persuade policy makers to throw caution to the wind and to give it a try. For those scanning further into the distance, the ultimate question may be the extent to which they believe the idea that central banks have the ability to create just the right amount of inflation.

Finally, readers may be aware that Centrus has played a leading role in bringing together a group of housing sector stakeholders to issue a White Paper on building an ESG framework for HAs. We are pleased to say that the White Paper will be published later in March which will kick start a period of consultation from across the market. We would encourage clients to look out for announcements and to engage with this process.

In terms of bond issues and sales in February, there have been a handful of private deals and retained bond sales, including Radian’s £35.5m of retained bonds which we advised on, but others towards the end of the month slowed down a little in the face of market uncertainty. It will be interesting to see how borrowers and investors respond to the extremely low rates being plumbed in March.

 

Financial Markets & Economic Overview

With the US Federal Reserves recent emergency interest rate cut of 0.5% to help combat the economic impact of the coronavirus, all eyes will be on the Bank of England during March to see if they follow suit.

Investors continue to bet on cuts later in the year with the impact of the coronavirus placing further pressure on rates and gilt yields, with the later have fallen materially over the month, with the 30 year gilt yield falling a further 10bps during February to end on 0.94%.

UK CPI inflation saw a sharp rebound in January moving up to 1.8%, from 1.3% in December, this is the UK’s highest rate of inflation in 6 months and close to the 2% BOE target. The increase was driven by surge in petrol and energy prices.

It was confirmed in February that the British economy failed to grow in the final three months of 2019 amid political uncertainty over Brexit and the snap general election. The Office for National Statistics said growth in gross domestic product (GDP) flatlined between October and the end of December, as consumer spending slumped over the Christmas shopping period and manufacturing output nosedived in the run-up to the general election.

However, February’s PMI data indicates that demand and confidence across the UK’s manufacturing and constructions sectors is picking up.

The all-sector IHS Markit/CIPS UK Purchasing Managers’ Index rose to 53.0 in February from 52.8 in January, as a jump in construction and manufacturing activity outweighed small losses in momentum in the larger sectors.

The services PMI slipped to 53.2 from a flash estimate of 53.3 and a 16-month high of 53.9 in January, which reflected a post-election bounce in business sentiment that risks being undermined by the coronavirus. All eyes will be on March’s surveys to see how the coronavirus is impacting on the UK’s economy.

Nationwide’s house price index indicated that property values continued their post election recovery with February recording a year on year increase of 2.3%, up from 1.8% in January.

Interest Rates

Inflation

 

 

Capital Markets

Bank Credit