House Price Growth Slows
Several recent reports have confirmed that house price growth is slowing, but there are reasons to believe that the housing market will be more stable than last year.
According to Knight Frank, the third lockdown and the imminent end of the Stamp Duty holiday have played a major part in delaying a certain amount of activity until the spring, which could result in some short-term downward pressure on prices, as more sellers come to the market at the same time. Over the course of the year, Knight Frank expects prices to remain flat and for there to be steady, seasonal demand after the summer as the vaccination rollout nears completion.
In January’s ‘UK Residential Market Survey’, the Royal Institution of Chartered Surveyors (RICS) expects all UK regions will see prices rise to some degree over the next twelve months, with Northern Ireland, Wales and Scotland expected to see the highest rises.
Nationwide’s Chief Economist Robert Gardner commented on the rate of growth, “The slowdown probably reflects a tapering of demand ahead of the end of the Stamp Duty holiday.”
Nearly 750,000 buyers benefit from Stamp Duty holiday
Almost three-quarters of a million homebuyers are in line to benefit from the Stamp Duty tax break, assuming they beat the 31 March completion deadline. This represents total savings of almost £5bn.
The analysis, from Zoopla, is broken down further; 600,000 buyers will not pay any Stamp Duty, which is an average saving of £4,660 each or £2.8bn in total. A further 140,500 people whose homes cost over £500,000 are set to benefit from a Stamp Duty reduction and will save £15,000 each or £2.1bn collectively. This latter group will still have to pay tax on the portion of the property value above £500,000.
Rightmove have reported rumours that the tax break may be extended in England and Northern Ireland by a further six weeks. If this were to be the case, Rightmove estimate that between 120,000 and 160,000 extra property transactions in England could benefit.
Property Data Expert at Rightmove, Tim Bannister commented “If there was a six week extension it should give the majority of the sales from last year the chance to complete in time.”
Regional variations in values of family homes
After three lockdowns and an increase in those working from home, many people have been reassessing their housing priorities.
Research by Zoopla has looked into which regions have seen the biggest jump in values of three to five-bedroom houses, finding that family homes in the Midlands have seen the biggest jump in value over the last four years. First place goes to East Midlands, with a sq ft price increase of 25.4%, or £43, to stand at £212. West Midlands takes second place, seeing a rise of 24.6% to reach £223.
Wales came third, with an increase of 23.6% per sq ft, followed by East of England (21.4%) and North West (21.3%). London came ninth, with a percentage rise of only 14.6%, but unsurprisingly, also seeing the biggest monetary increase, with a jump of £71per sq ft to stand at an average £558.
Window of Hope for 2021
Our vulnerabilities have been laid bare over the last year, as the pandemic took hold of all our lives, and continues to present challenges on a variety of levels. Economic frailties have been exposed but, as we enter 2021, hope hangs in the air with the prospect of recovery in the New Year and beyond.
Slowly but surely
A fitting portrayal of the situation was coined in the International Monetary Fund’s (IMF) final 2020 assessment of global economic prospects, entitled ‘A Long and Difficult Ascent’. The Fund predicts a moderate rebound this year with a continuing gradual recovery over the following few years, with the economic path ahead remaining challenging.
Reasons for optimism
Although the IMF forecast highlights ongoing uncertainties and risks, primarily centring on the future path of the pandemic, there are reasons for cautious optimism. Continuing progress in the rollout of vaccination programmes and the economic stimuli promised by Joe Biden, should both have a positive impact on market sentiment throughout the course of the year.
Forward focus
The linchpin to successful investing, whatever the future holds, inexorably remains embracing a long-term philosophy, based on sound financial planning principles. Maintaining a diversified investment portfolio which suits your attitude to risk and resisting any urge to panic trade, are essential elements. Looking forwards and focusing on future key trends and longer-term investment themes will stand us all in good stead too.
Advice reigns supreme
Given the heightened uncertainty and market turbulence, it has arguably never been more important to obtain professional financial advice. We can construct a tailored plan, setting out realistic and achievable financial goals, and help you navigate the challenges and opportunities that lie ahead as the New Year unfurls.
Tatton – COVID worsening the UK’s high street headache
The ‘scientific cavalry’, as Boris Johnson likes to put it, has arrived. The UK became the first western country to implement a COVID vaccine for mass use, and authorities are wasting no time rolling it out. 800,000 doses of Pfizer and BioNTech’s celebrated vaccine are expected to be started, with the world’s first, 91 year old Margaret Keenan, gaining world wide media coverage. The most vulnerable are first, before the remaining 40 million ordered doses are injected into the population over the next year. The government’s scientific advisers stress that the virus is still ever-present, and restrictions will have to remain tight for several months, although the UK’s Deputy Chief Medical Officer, Professor Van-Tam also said that once all on the priority list had been vaccinated (over 50s and vulnerable groups), 99% of fatalities could be prevented. News of the vaccine roll-out undoubtedly brings respite, and hope that Britain’s epidemic will fade as the winter months do.
The good news was certainly needed. Along with being one of the worst-hit countries in the world in virus terms, Britain’s economy has shrunk by the biggest margin in the G7. And, according to the latest report published by the Organisation for Economic Co-operation and Development (OECD), things are hardly looking up from here. By the end of 2021, the only major economy expected to have worse growth numbers is Argentina. OECD forecasters expect Britain’s economy to be 6% smaller at the end of 2021 than it was at the end of 2019. This fall is down to a predicted 11.2% GDP contraction this year, compared with a 10.1% contraction forecast back in September.
If expected growth figures were not sobering enough, this week we had a visceral reminder of COVID’s economic fallout. On Monday, Phillip Green’s Arcadia Group – owner of fashion retailers Topshop, Burton, Evans and more – went into administration. Hours later, Debenhams followed suit, bringing its 200-year history to an abrupt end. The liquidations close another act in Britain’s ‘Death of the High street’ drama. Few will shed a tear for the scandal-ridden almost-billionaire Phillip Green, but the wider economic impact should not be understated. The Arcadia Group alone has over 400 stores, and the collapse of both companies could lead to around 25,000 job losses. This is not good news for an economy which is still effectively under national restrictions.
COVID will get some of the blame here, but the struggles of both predate the pandemic. ‘Bricks and mortar’ retailers have been under immense pressure for years, faced with fierce online competition, stagnant consumer demand and bloated rental costs. Debenhams is a prime example. After being gobbled up by private equity, the high street chain was saddled with debts and had much of its freehold property portfolio sold then leased back. According to its administrator, Debenhams went into administration with £700 million of secured debt and £200 million of trade creditors.
Whatever hope the company had of finding its feet were dashed once the virus emptied Britain’s streets. “There was a salvageable business in there” said previous Debenhams chair Ian Cheshire. “Then the pandemic blew a hole in the side of it.”
Aside from the hit to employment, the fall of household-name retailers has had a big effect on Britain’s property market. We wrote recently that signs are positive for UK residential property, backed by regulatory changes and easy lending standards from the country’s banks. Commercial property, however, is a different story. With restrictions set to remain for the foreseeable future (and psychological ‘scarring’ likely to last much longer) it is hard to be positive about retailing real estate, even if tiered restrictions ease off in 2021. Some of the physical spaces once occupied by Debenhams and Arcadia will be snapped up by competitors, but it is likely many stores will just be left empty. “They’re just too big,” according to one commercial real estate agent. “Most will need rethinking and repurposing once a new normal resumes”.
However, despite the gloomy headlines, the wider UK retail equity market actually saw a significant rally this week. As the chart below shows, the FTSE 350 General Retailers index spiked around the same time as the Debenhams and Arcadia news. Perhaps the demise of these two ‘names’ makes things easier for the rest – particularly if they can capitalise on resurgent demand from a freshly-vaccinated population.
Back to dire pronouncements on the UK economy. The OECD noted that Britain’s slowness to react to the pandemic meant harsh lockdown measures came in more abruptly – and lasted longer – than other nations in Europe and Asia. A failure to agree a Brexit deal with the European Union (EU), or an early fiscal retrenchment were mentioned as other potential negatives.
The OECD has a mixed record as a forecaster, and its predictions may have slight, if inadvertent, political dimensions. It may be right about the lasting virus impacts, but the probability of a Brexit deal is rising, in our opinion (and was high last week). We also think the UK government is not about to revert to austerity.
And in itself, Brexit can bring advantages, even if those advantages (e.g. a greater flexibility and potential speed of policy implementation) may struggle to counterbalance the drawbacks. To make actual gains from the potential offered by Brexit, we need an agile government, and a responsive private sector.
One area where the UK can be a real leader is in climate change, sustainability, ethical investing, and environmental, social and governance (ESG) issues. The UK’s investment managers are awash with liquidity looking for the right assets. There are UK universities and companies’ research groups with ideas waiting. There is a huge demand globally for viable solutions, and that will be increased substantially if US President-elect Joe Biden gets his policies underway and the US re-joins the Paris Agreement on climate change.
The UK will host the postponed COP26 summit next year. Ahead of that, on 12 December (and on the fifth anniversary of the forging of the Paris Agreement) a ‘climate ambition summit’ will be hosted by Boris Johnson and United Nations Secretary-General, António Guterres. Beforehand, Johnson has taken the opportunity to announce an ambitious national target for cutting emissions substantially by 2030. He has the opportunity to encourage UK businesses to take the (much needed) lead in this area.
Kind regards
Lothar Mentel
CEO Tatton Investment Management Limited
CIO Tatton Asset Management
Home sales pipeline increases
According to Zoopla, the home sales pipeline is now 50% bigger than this time last year, with 140,000 more buyers rushing to buy a home before losing out on the Stamp Duty holiday, which is due to end on 31 March 2021.
Elsewhere, Nationwide have reported a total 91,500 mortgages approvals were granted in September, which is well above the August figure of 84,700 approvals and represents the highest level since September 2007.
The stampede to buy homes is being driven by a combination of the government’s Stamp Duty holiday, as well as people reassessing their housing needs following lockdowns. There are concerns that the current high volume of sales going through will create delays in the conveyancing process and this could be exacerbated by lockdowns. Zoopla have estimated that only 54% of sales agreed in January will have completed by the end of March, compared with 92% of those agreed in November.
COVID – a true black swan event?
The severity of the impact of the pandemic on economies and societies around the globe has been overwhelming; it seems not one person has been free of its force. However, critics are unrelenting in their claims that the ramifications could (and should) have been anticipated. Does this make COVID-19 qualify as a ‘black swan’ event?
As devised by financial theorist and writer Nassim Nicholas Taleb, the expression ‘black swan’ denotes any event that is extremely rare, has a severe impact and cannot be predicted, although after the event, people will rationalise it as predictable. The term is based on an ancient saying that assumed black swans do not exist.
Black swans of the past
By way of example, the history pages contain a number of black swan events such as the Spanish flu outbreak (1918), ‘Black Monday’ (1987), the 9/11 terrorist attacks (2001), the dotcom bubble (bursting 2001), the SARS outbreak (2003) and the global financial crisis (2008).
Textbook case?
Although COVID may present as a textbook case, some commentators are arguing that it fails to constitute a black swan event. Rare? Maybe. Severe impact? Absolutely. Unpredictable? Perhaps not.
Back to the history books. They teach us that major outbreaks of infectious. diseases do occur. In addition, Barack Obama, Bill Gates, George W. Bush – and Nassim Nicholas Taleb – have all delivered ominous warnings about what could happen if we failed to prepare for future pandemics. Based on this, is it plausible to say the coronavirus pandemic was entirely unpredictable?
A fine line?
Those who say it does qualify as a black swan have signposted the exceptional brutality and rapidity with which the virus spread and impacted financial markets. One financial commentator added: “It has been incredibly fast-paced… The speed and ferocity has been utterly breathtaking.”
Conversely, Taleb advocates that the virus does not fit his description. You can’t dispute that it has had a major impact on the global economy and people’s lives, but there are also multiple examples of severe global outbreaks, including SARS, Ebola, and the H1N1 influenza pandemic – from the 21st century alone.
Be prepared
Whether the pandemic qualifies as a black swan event or not, history has taught us that black swans come along every so often and are an inevitable part of life for long-term investors. You can rely on us for expert advice and guidance to navigate the road ahead, and to ensure your finances are as well prepared as possible for all eventualities.
Brexit bother as Boris’s Mexican stand-off misfires
Having spent most of 2020 hoping things can get back to normal, Britain’s political news over the last couple of weeks has left us thinking ‘be careful what you wish for’. Stalling Brexit talks, political disarray and the potential for a full-blown constitutional crisis all created that familiar feeling of prepandemic times. Indeed, as if there was not enough déjà vu, parliamentary action even saw Ed Miliband standing in as leader of the opposition.
Jokes aside, the emphatic return of Brexit risks to Britain’s economy and capital markets is clearly bad news. Those sympathetic to the government insist that the provisions laid out in the Internal Market Bill – allowing the government to unilaterally break international law – are just a negotiating tactic to establish a credible threat of ‘no deal’. But reaction from the continent, and within Johnson’s party itself, suggests this particular negotiating ploy is unlikely to pay off.
Even if it does, in the short-term it will cause great uncertainty over Britain’s relations with its largest trading partner – not to mention the constitutional chaos it might bring (if passed in its current form, the bill would almost certainly be challenged in the Supreme Court). As we have seen over the last four years, uncertainty is highly detrimental to businesses and consumer expectations.
Accordingly, capital markets reacted swiftly to the news. After a strong run in recent months, sterling fell dramatically last week, sinking to €1.07 against the euro and $1.27 against the dollar – its deepest weekly fall since March. At the time, head of Lombard Odier’s currency strategy Vasileios Gkionakis told the Financial Times that “The market is simply going through a rude awakening,” readjusting for Brexit risks that seemed to clear over the summer.
However, the sell-off was short lived. Throughout this week, sterling has regained much of its losses against its global peers and, at the time of writing, sits around €1.10 and $1.29 against the euro and dollar respectively. UK equities made marginal gains last week – partly down to the weakness of sterling itself – and this week have edged slightly higher overall. Interestingly, Brexit turbulence gave investors a fright, but only briefly. For nearly five years, Britain’s long and drawnout divorce from Europe has been one of the main drivers of UK asset prices (and in the case of sterling, practically the driver). Now that we are again facing down a precarious Brexit deadline, why the nonchalance from global capital markets?
Put simply, we suspect it is the pandemic. With the world edging out of lockdown in recent months, the key question on the mind of most investors has been when the cyclical rally – backed by a recovering economy – will begin. Historically, UK equities (especially the FTSE 100) are extremely sensitive to cyclical forces – growing when global growth is strong and lagging when it is not. If growth – in its conventional ‘analogue’ rather than ‘digital’ shape – is indeed returning, it therefore bodes well for UK assets.
From this perspective, UK stocks look cheap. Even before Brexit, the UK was unloved by global investors. With political risks piled on, British assets have been consistently underbought relative to other major markets, resulting in UK stocks making up a much smaller portion of global investment portfolios than a decade ago. In valuation terms, UK stocks are currently trading at around 16.5x their expected future earnings on average, compared to around 19x for European stocks and well over 20x for US equities. It is even slightly below the global (excluding US) average at around 18x.
That relative undervaluation is – to an extent – justified.
The prospect of a hard Brexit as the UK is still reeling from a total economic shutdown is a significant economic risk. But for the past few years, anxious investors at home and abroad have been selling UK assets. As such, even in the worst-case scenario of a chaotic ‘no deal’ Brexit, the immediate downside is limited.
There are just not as many investors left to sell. This can be seen from the performance of the FTSE 100, which has traded mostly sideways for months. When you combine the prospect of a global cyclical recovery, UK assets look like a bargain. Indeed, even if global investors remain pessimistic on UK equities, a rebound in global activity – and subsequent increase in company earnings – would mean that equity prices could rise without much of a change in valuations.
However, two things need to happen for this positive scenario. First, the cyclical rally has to materialise. While there are some emerging signs, it is simply too early to tell. Second, some kind of resolution to the Brexit drama needs to be found. For now, the dark cloud of a hard Brexit looms large over UK markets, making many investors uninterested even at cheap valuation levels. Threats to unilaterally break components of an already-agreed treaty do little to help them.
There are reasons for positivity, though. Reports this week suggest Britain is willing to deal with the thorny issue of fisheries more pragmatically in its negotiations with the EU. And, while much was made on the issue of full sovereignty in deciding state aid in the latest Brexit spat, the recently agreed free trade agreement with Japan already commits Britain to stricter state aid restrictions than the ones that have caused the latest furore. Given a negotiation success towards the EU on the freedom to subsidise issue would therefore not actually result in any more leeway for the UK, this suggests the government may be willing to reconsider its position – leading to a swifter resolution.
For now, the barriers to an agreement seem to be mostly superficial. But as the last four years have shown, things can quickly take a turn for the worse. If an agreement can be reached – and if the cyclical rally does indeed begin – UK assets will be in a good position. Until then, we will all have to wait and see.
Lothar Mentel, Chief Investment Officer, Tatton Investment Management
Rule of Six
With the number of coronavirus cases rising across the UK, the Prime Minister was back on the Downing Street podium last Wednesday to announce new measures. As we enter the autumn, with the country at a critical moment and the average rate of new infection four times higher than in mid-July, the government announced the introduction of the rule of six. From Monday (14 September) social gatherings of more than six people (of all ages) are banned in England. This limit applies to indoor and outside settings and is enforceable by police, who will issue fines or make arrests.
A support bubble or single household larger than six, will still be able to gather and COVID-secure venues such as gyms, restaurants and places of worship, can still hold more than six in total. The rules do not affect education and work settings.
Boris Johnson said, “we must act” to avoid another lockdown, adding, “Let me be clear – these measures are not a second national lockdown – the whole point of them is to avoid a second national lockdown… I wish that we did not have to take this step, but, as your Prime Minister, I must do what is necessary to stop the spread of the virus and to save lives… it is so important that we take these tough measures now.” Matt Hancock said the new rules will not be kept in place “any longer than we have to.”
During the briefing, the Prime Minister also outlined ‘Operation Moonshot’, an expansion of testing to ten million a day by early 2021. Frequent testing of the population would allow people without the virus to conduct their lives as normal, allowing the economy and society to remain open despite the virus being in circulation. Boris Johnson said the government was “working hard” to increase testing capacity to 500,000 tests a day by the end of October.
Quarantine list additions: Last week, in a change of policy for the government, England introduced island-specific quarantine, rather than restrictions applying to an entire country. Travellers arriving in England from seven Greek islands needed to self-isolate from 4am last Wednesday. Mainland Portugal was placed back on the quarantine list last week, effective from Saturday (12 September) morning. Meanwhile, Sweden has been added to England, Scotland and Wales’ safe lists.
Economic growth and trade talk wrangling’s: According to official figures from the Office for National Statistics, the UK economy grew by 6.6% in July, the third month in a row of economic expansion. Despite this, output remains below prepandemic levels and the ONS outlined the UK ‘has still only recovered just over half of the lost output caused by the coronavirus.’ The UK’s economy is 11.7% smaller than it was in February.
Despite subdued trading, the FTSE 100 ended higher last week. Trade deal negotiations between the UK’s Brexit negotiator Lord Frost and his EU counterpart Michel Barnier continued last week. The UK has published a bill to rewrite parts of the withdrawal agreement it signed in January, but the EU is demanding the UK drops plans to alter it. Lord Frost said, “Challenging areas remain and the divergences on some are still significant”, but UK negotiators “remain committed” to reaching a deal by the middle of October.
Here to help: Financial advice is key, so please do not hesitate to get in contact with any questions or concerns you may have.
Covid 19 update
As Storm Francis lashed the UK last week, another storm was brewing as the government took a late U-turn regarding the use of face coverings in schools in England. From the beginning of September, secondary pupils and adults in local lockdown areas of England and in areas facing extra government restrictions, will be required to wear face coverings when moving around the school, in corridors and communal areas.
Any secondary school in England will have discretion to introduce the use of face coverings in communal areas, where social distancing is not possible, a move which has prompted criticism from some teachers, with the announcement last Tuesday being made just hours before schools reopened in Leicestershire. The guidance does not include the use of face coverings in the classroom during lessons, where the government says they could ‘inhibit learning.’ The guidance extends to further education colleges but not to primary schools. Education Secretary Gavin Williamson said the new policy follows updated advice from the World Health Organisation, “Our priority is to get children back to school safely. At each stage we have listened to the latest medical and scientific advice… I hope these steps will provide parents, pupils and teachers with further reassurance.”
Eat Out success prompts extension – Some restaurants are keen to continue offering discounted meals in September, following the success of the Eat Out to Help Out initiative in August. The scheme ended on 31 August, but nationwide chains including Prezzo, Harvester, Toby Carvery, Bill’s and Pizza Hut are amongst those due to take part, although the eateries will have to cover the costs themselves.
Support for those self-isolating on low incomes – From Tuesday (1 September), workers on low incomes living in parts of England where there are high coronavirus rates will be able to claim up to £182 if they have to self-isolate. Strict eligibility criteria mean people claiming Universal Credit or Working Tax Credit, who are unable to work from home, will qualify for the £13 per day payment. The benefit is initially being trialled in parts of North West England. Eligible individuals who test positive and are employed or self-employed, need to isolate for 10 days and will receive £130. Eligible members of the household, who would have to self-isolate for 14 days, will be entitled to a maximum of £182. In addition, anyone who is told to self-isolate by NHS contact tracers and meets the eligibility criteria will be entitled to £13 a day for the duration of self-isolation.
Renewed optimism US stocks hit record highs last week after Federal Reserve Chairman Jerome Powell outlined the central bank’s strategy for avoiding future crises and inflation control measures. During the week, stocks rose amid renewed optimism about US China trade tensions, with both Chinese Vice Premier Liu He and US Treasury Secretary Steven Mnuchin renewing their commitment to a trade deal.
Quarantine list additions – Due to a rise in infection rates, quarantine rules were implemented on Saturday morning for travellers returning to the UK from Jamaica, Switzerland and the Czech Republic. Cuba has been added to the list of countries now exempt from quarantine.
In other news The government is preparing to launch a campaign this week aimed at encouraging employees back to their workplaces. Lockdown restrictions in parts of Greater Manchester, Lancashire and West Yorkshire will be lifted on 2 September due to ‘positive progress’, the government has announced.
Here to help Financial advice is key, so please do not hesitate to get in contact with any questions or concerns you may have.
Retail Sales Bounce Back
Retail Sales Bounce Back
The latest batch of retail sales statistics revealed grounds for
cautious optimism, with official data reporting a sharp rebound
in June’s overall figure and survey evidence pointing to further
growth in July.
Data published by ONS showed that retail sales volumes increased
by 13.9% in June compared to the previous month. This surge in
sales, which followed April’s record fall and a partial recovery in May,
resulted in volumes recovering to around pre-lockdown levels as the
reopening of shops released significant pent-up demand.
Indeed, sales rose to within 0.6% of the figure recorded in February
2020, the last month unaffected by the coronavirus lockdown.
However, while this does point to a significant recovery, the data also
highlighted some notable variations across the retail landscape, with
some store types performing much better than others.
Picking up on these themes, ONS deputy national statistician
Jonathan Athow commented: “Clothing is down by about a third and
if you look at the High Street more generally, sales in physical shops
are also down by about a third. Food shops continue to do quite well,
as we’re eating at home more. But the real growth has been in online
sales. Online sales continue to go from strength to strength.”
The latest Distributive Trades Survey published by the Confederation
of British Industry (CBI) also reported further signs of optimism, with
the monthly retail sales balance rising to +4 from -37 in June. This was
the survey’s highest reported balance in over a year and suggests the
overall recovery in sales continued in July.
Perhaps unsurprisingly, the CBI survey also painted a mixed picture
across the retail scene, with the improvement primarily driven by
strong grocery and hardware/DIY sales. Most other retail sectors
continued to report declines, although these were generally less
severe than in recent months.
Stamp Duty receipts fall
Tax receipts from Stamp Duty on property sales fell by £1bn over the last tax year, to a total of £11.9bn according to latest figures from HMRC.
However, Capital Gains Tax, which is payable when buy-to-let homes are sold, rose to £9.2bn, up from £7.8bn a year earlier.
The decline in Stamp Duty has been blamed on a decline in buy-to-let purchases and a slowdown in the higher end of the property market, in addition to the majority of first-time buyers having been removed from the tax.