The UK has undergone a barrage of bad press lately, but TV and ticker symbols aren’t telling the whole story. In truth, there’s quite a bit to be encouraged by.
We don’t mean to downplay the current economic climate; this is without a doubt a challenging time for investors, homeowners and the public at large. You may see the value of certain investments decrease in the short term, and the cost-of-living crisis will only pick up as the temperature drops. On the political front, our government is so discombobulated it considered simply handing the last guy his job back.
But everyone is well aware of what has gone wrong in recent weeks. Not so publicised is what has gone right. As we head for the end of a tumultuous year, we thought it high time to highlight some of the positives coming down the pike.
Parts of the property market are booming
10 Downing Street isn’t the only vacancy Brits are clamouring to fill. The significantly higher mortgage rates homeowners will soon be faced with has made renting a very appealing alternative. UK rents have been rising since the start of the year thanks to offices reopening and the resumption of ‘live learning’ at universities. Students and professionals have moved back into cities and sought to secure housing in a very limited market, living out a classic example of ‘too little supply for serious demand’. As interest rates rose and people were priced out of the buyers’ market, demand for rentals bounced again, as did the prices landlords and property managers were able to charge for them. London rents reached an average £553 a week in September, an all-time high and an increase on the previous record set just three months ago. Compounding this was a 38% decrease in available properties year over year to September.
Portfolios invested in property management, private residential real estate and real estate investment trusts are going to benefit from this dynamic. Occupancy rates are near 98% for well-managed rentals; these are very desirable properties in the current climate, and as such, the companies that own them are able to charge higher rents. This equates to better returns for investors.
Workers are making more money
While inflation continues to erode our spending power faster than it has for 40 years, economic data shows that wage growth is rising as well. Over the three months to the end of August, UK wages increased by 6% year on year, a figure that beat consensus estimates and was higher than the 5.5% bounce recorded for the three months to the end of July. True, the UK’s 10.1% inflation rate means we are still in the red when it comes to real earnings, but this is a promising sign as regards the domestic economy’s ability to withstand the cost-of-living crisis as it relates to our ability to buy goods and services. Furthermore, a May 2022 study by Washington, DC think tank the Economic Policy Institute hypothesised that wage growth seen in the US and UK has actually kept inflation lower than it may have otherwise been; while healthy, wage growth hasn’t quite kept pace with higher consumer prices, forcing them to buy less and limiting the amount prices could bounce by.
Valuations — and some early earnings releases — are encouraging
While it is still early days in the third-quarter earnings season, there have been some promising results. The financials sector in particular is enjoying positive newsflow. Shares of Bank of America and JPMorgan rose by close to 15% in the days following the announcement of earnings that beat expectations. Banks are benefiting from higher interest rates and the associated possibility of greater income from loans. At the other end of the spectrum are companies that have seen their stock prices drop as a result of inflation and dwindling investor confidence, which is creating attractive entry points for perceptive investors.
We certainly aren’t denying that tough times are ahead. Inflation is on the up again, and the government is suggesting with worrying frequency that it may subject us to dining in the dark come January. It’s easy to be swept up in the negative during volatile times, and UK investors have been particularly susceptible in the year to date. But for the first time in a long time, there are options to secure real, potentially low risk assets that can compound wealth for you. Past crises prove that opportunity exists in adversity. A wise investor needs the resolve and resilience to stay the course, which we implore you to do now.
Investment View: Why the UK has a leg up when it comes to national debt
Here’s a sentence you haven’t seen for a while: when it comes to national debt, the UK government has made some very wise decisions.
Oh, the drama borne of the UK’s bond-buying in 2022 — a ‘will they/won’t they’ story for the ages. Things came to a head in late September when ex-Chancellor Kwasi Kwarteng’s ill-fated mini budget forced the BoE to reverse its previously announced plan to begin tightening its balance sheet ahead of the end of the year. As markets plummeted and gilt yields soared, the BoE initiated an emergency asset-purchase plan, committing to buying £65 billion in long-dated gilts through the end of October, and resume selling them thereafter.
But zoom out to take in the bigger picture and you’ll see a situation rarely commented on — that the UK is actually in very good shape regarding the way it has distributed its debt. For all the hammering the government has taken in the press this season, policymakers have actually made some very sensible decisions.
Think of it this way: the government has secured a reasonable mortgage. The total debt that the UK government owes is £2.2 trillion. Unlike another famous central bank, the BoE has spread this expense over many years with an average maturity of 14 years so that the burden of repayment will not come all at once. Each bar in the chart below represents a piece of this ‘mortgage’.
The US Treasury, finds itself in a decidedly less comfortable situation. The chart below reveals a challenging concentration of assets due to mature just months from now, in 2023, a result of the US government issuing mainly shorter-dated bonds. As opposed to the UK government, which (to stick with the analogy) has fixed its mortgage for 14 years, the US has only fixed for six. A bumper crop of the country’s $31.2 trillion debt will need to be refinanced next year, which translates to approximately $116 billion in additional interest per year post-maturity date.
On a global scale, the UK fares well, boasting a smaller percentage of debt to GDP than Canada and some of the eurozone’s largest constituents. The United States shares space with more traditionally challenged economies such as those of Italy and Greece.
Add this to the list of things going right as we race to the finish of an unusual, impactful year. Interest rates are going up, yes, but it will take a long time to feel their influence in our government borrowing costs. From an economic perspective, we have a good six years to sort ourselves out.
The information and opinion contained in this Monthly Commentary should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt any investment strategy. Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice. Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments, and the income from them, may fall as well as rise and is not guaranteed. Investors may not get back the original amount invested.