November 2020

November 2020

Commentary

It’s all getting slightly claustrophobic with the combined effects of winter and lockdown version 2.0 across the country. I was just getting used to the London lockdown and the decision to shut even outside pub facilities has come as a bit of a blow … On the upside I have purchased a recipe book focused specifically on different types of pie and am fattening up myself and the rest of the family to ensure that we can cope with all eventualities. Macaroni cheese in pastry, anyone?

The housing association world, however, stops for no man or woman – as 2020 draws towards a close it looks like the rest of the year will continue to be fairly busy. Construction sites are not closing this time around (although seasonal effects remain of course) and we are working with several clients on business planning and capacity related issues.

Meanwhile, the best comment I’ve seen so far on the US election is still the photo of Boris Johnson in December 2019 standing next to the other candidates, including the guy with the medieval suit of armour and the other guy in the fluffy toy suit, with a self-deprecating comment about the quality of the UK’s democracy. It’s not always pretty but maybe the parliamentary system helps keep people’s feet a little closer to the ground. Another interesting contrast is that in Johnson’s case there was an official count of votes released fairly quickly and that was that, whereas in the US – land of a modern written constitution – the detail is decentralised and many official results are still some way off. Somewhat ironically, the “mainstream media” effectively plays the town crier role but barring anything exciting coming out of various proposed legal actions the outcome does now seem clear. The focus will likely shift to the Georgia Senate elections in January which have the potential to create a 50/50 Senate with a Democrat casting vote.

Back in the UK, there have been some long awaited ratings movements in the last month. Just to update on the sovereign rating position – if we go back a month the UK stood at AA (stable) with S&P, Aa2 (negative) with Moody’s and AA- (negative) with Fitch – Fitch being the outlier. Readers may be aware that ratings agencies are now required to operate to a timetable in terms of sovereign ratings and for all of them these points in time have come around recently. S&P affirmed AA (stable) on 23rd October, but Moody’s dropped the UK rating to Aa3 (stable) on 16th. Moody’s have however confirmed that they are maintaining the existing ratings on all of their UK housing associations. Fitch is increasingly a significant player in the HA market as readers will be aware, with seven public ratings, and they also had their UK rating refresh recently but affirmed AA- (negative outlook), having dropped the sovereign from AA in March. The Fitch news is however that they did take some action in the HA space this month, with a downgrade to A2Dominion from A+ to A.

Our observation on the ratings activity is that in an environment subject to change, it makes sense to control the things you can which include liquidity, quality of policy and governance arrangements, and quality of investor communications (including ratings agency communications).

In terms of financing activity in the last month, L&Q and Grand Union have both sold bonds. In L&Q’s case this was the first benchmark issuance since 2018 and its first issuance through its Euro Medium-Term Note (EMTN) programme. EMTN programmes offer flexibility around tenor and timing but bring a cost/complexity overhead to some extent; L&Q issued £250m with an 18-year maturity which priced at 140 basis points over gilts with a 2% coupon. Grand Union priced just under 2.2% for a 2043 maturity. It’s also been a busy month in terms of private placements and bank funding, with some banks continuing to be cautious on appetite for new names but with the market still providing attractive offers for new business which Centrus clients are taking forward.

As we move towards the end of the calendar year, the private placement market has a slight feel of fatigue having digested a considerable volume of HA issuance since the start of the year. However, with fresh budgets to fulfil, we expect the same investors to have renewed appetite going into Q1 of 2021.

Lastly, while strictly a comment on the first few days of November rather than October, with some material positive news at last on COVID19 vaccines there has been a meaningful move upwards on both stock markets and rates in the wake of Pfizer’s announcements of successful trials. This is positive in lots of ways of course but it has bumped up the gilt rate for HA borrowers; we will all I’m sure be watching how that pans out over the rest of the month.

 

Financial Markets & Economic Overview

 

Data releases last month showed the UK economy expanded for the fourth consecutive month. However, Growth slowed in August despite the eat-out-to-help-out scheme fueling an increase in spending. GDP increased in August by 2.1% on the previous month – less than expected by City economists – as the rebound slowed in the latter stages of summer, before new restrictions were imposed. Although continuing a fightback GDP remains 9.2% below pre-pandemic levels, and could take years to recover, especially once the impact of the latest lockdown are taken into account.

UK inflation rose in September as the price of eating out increased after the Treasury’s eat-out-to-help-out scheme came to an end, and transport and the price of cultural activities increased slightly. The consumer price index (CPI) increased to 0.5%, from 0.2% in August, but the effect of the pandemic on the UK economy means inflation remains significantly below the 2% target the government sets for the Bank of England.

Mortgage applications surged to a 12-year high as house prices rose at the fastest annual pace since mid-2016, according to Halifax. Its monthly house price index, (a key indicator for the UK economy) saw the average price of a home increase by 1.6% to £249,870 in September. This saw the annual growth rate rise to 7.3%, the fastest since summer 2016.

Short-term LIBOR rates remain depressed as the market continues to see negative rates as a risk at least in the short term. The Bank of England have continued their mixed messages but are unlikely to move to negative rates at their next release on the 5th of November, with the consultation with major UK banks not closing until the 12th of November. The new lockdown potentially maintains the pressure for negative rates but as we’ve seen there is also scope for a more optimistic market response with the Pfizer vaccine announcement.

GBP ended the month showing a small gain on the Euro at 1.11 compared to 1.10 at the start of the month but volatility has gone hand in hand with the continuing trade negotiations, with both having a few ups and downs over the course of October. Against the dollar the GBP ended the month where it started at 1.29, but all eyes have been and will continue to be on how the US election result plays out along with material UK factors in particular the final stages of post-transition Brexit negotiations.

Interest Rates

 

Inflation

 

Capital Markets

 

Bank Credit