May 2019

May 2019

Commentary

At the start of this year, a number of our HA clients asked for our input and advice on their no deal Brexit stress testing, which largely comprised some fairly ghoulish predictions around house prices, sales, inflation and funding costs. However, all of this doomsday planning was subsequently proved if not surplus to requirements (hopefully or not, depending on one’s perspective) at the very least full of skew-whiff assumptions regarding timing, as our politicians decided in their wisdom to reject the deal negotiated with the EU for the third time while also taking no deal off the table. The result was yet another humiliating trip to Brussels for Mrs May to seek an extension on the extension, granted this time until 31 October or such earlier time as our political class gets its act together. So far, no clients have requested our input to a “rolling, never ending, will they won’t they Brexit” scenario. Perhaps like the rest of us, they are bored to death with the whole thing and getting on with something more productive?

As well as ushering in a further period of uncertainty, the now inevitable participation in the European elections also potentially takes us into uncharted political territory with a number of commentators questioning whether the era of dominance of the two main UK political parties may be coming to an end. This wouldn’t be without precedent given the near disappearance of long established and dominant political parties in other countries in recent years and the movement towards more polarised political parties and groupings. Either way, political uncertainty looks set to continue and with the current government barely able to deliver on any sort of legislative programme and a Conservative leadership contest looming, the odds of a General Election this year must be shortening.

It feels like living with political and economic uncertainty has become the new normal over the last three years and the resilience of the UK economy in the face of unrelenting negative news flow and uncertainty has been one of the few positives.

Nonetheless, while businesses have adjusted to this state of affairs by holding off on the investment necessary to stimulate productivity growth (with four quarters of falls in business investments including the quarter to March, the longest run of such falls since 2009) but otherwise getting on with things, we  also need to consider the view of lenders and investors being asked to make financing available to them. In the case of the housing sector, it is fair to say that a small number of non-UK investors looking to enter the sector have delayed their participation, specifically citing Brexit uncertainty as a reason and expressing a willingness to proceed once the outcome is clearer. More positively, the banking market for HAs continues to be buoyant, with new lenders like National Australia Bank and Wells Fargo entering the fray recently.

New entrants underpin an already competitive market, joining long established banks and others that have developed their lending business to HAs over the last 3-4 years. Overall, strong and positive demand across both the institutional and bank lending markets to HAs is meeting a steady flow of supply and also underpinning innovation and new developments as HAs seek funding structures which are tailored to the specific needs of their businesses. We see this trend continuing and expect to be able to introduce even more new funders to our clients just as soon as our politicians sort themselves out!

Financial Markets and Economics Overview

The UK came close to leaving the EU without a formal agreement in April, though this possibility was precluded when European Union leaders granted the UK a six-month extension to Brexit, with the new deadline now being 31st of October 2019.

Uncertainty over the nature and timing of the UK’s exit from the EU has hit corporate confidence and investment. UK equity and UK property funds were hit by the Brexit unease as investors cut their exposure to asset classes vulnerable to Brexit shocks.

By contrast UK unemployment fell to a 45-year low of 3.9% and real wages rose by 1.5%, the highest figure in the last two years. These have bolstered consumer spirits and delivered good growth in retail sales so far this year. The UK construction sector also showed signs of stability in April with the IHS Markit purchasing managers’ index for the construction industry rising to 50.5 in April from 49.7. The figure was boosted by residential work, while commercial construction and civil engineering activity continued to decline.

The Monetary Policy Committee revised up its expectation of growth this year from 1.3% in February to 1.6%, with higher than previously forecast growth also expected in 2021.

The 30-year Gilt yield increase by c. 14bps since March, even though the BoE maintained rates at 0.75%. The expectation is that the BoE’s next move on rates will be a raise. Nevertheless, UK CPI inflation remained at 1.9% in March, below expectations.

PMI data showed German and French manufacturing activity continued to contract in April. In particular the German economy has been hit hard by a weakening Chinese demand, trade tariffs and the new emission standards that caused disruption to car production. In contrast, the US is described to be in a “good place” by Fed’s vice-chair. Retail sales have increase by 1.6% in March relative to the previous month, the biggest gain since September 2017.

House prices, as measured by the Nationwide index, shows a positive increase since April 2018 at 0.9% (nationally). UK house price growth remained weak in April with prices rising 0.4% month-on-month.

Sources: The Financial Times / Nationwide House Price Index

Interest Rates

Inflation

Capital Markets

Bank Credit