June News Round Up
18th June 2020
Markets surging, but what next?
In the current circumstances the complex nexus of what-ifs that creates that broad market call has been simplified. Is there going to be a material coronavirus second wave? If yes, the market will crash. So that is all you need to consider. Coronavirus second wave, yes or no. A replay of the 1929-1932 depression would not be brought on by bank failure, it would be set off by the reaction to a second wave of the pandemic. Experts believe that the world economy would not survive in its present form if there was another lockdown and even the risk of another lockdown will crash the markets. It might not even take a second wave of the pandemic to get to the bottom, but it would certainly get us there quickly. A large fast bounce will certainly set off the next leg down. The market future would be the map of a borderline survivable economically recovery, a couple of years of gritty clawback. But a 1932 situation will require an inescapable economic reset, some believe. These two outcomes are not fate; a lot of incredibly clever people are working flat out to avoid “the Great Depression 2” and they really are very good at their jobs. However, it will take some incredible political contortions to escape economic annihilation if there is a second wave of the pandemic.
Active funds lead the way
Britain’s investors poured £4.1billion back into investment funds in April after a torrid March saw them pull money out in the coronavirus crash. Investment Association figures showed that a quarter of April’s uptick was thanks to a significant flow of money into responsible investing funds – a theme that has been under the spotlight in light of the current situation. While the return to investing in a month that covers the start and end of the tax year indicated some investor confidence returning after the crash, April’s money put in came nowhere near the record £9.6billion that was withdrawn in March. In addition to showing an appetite for funds that can have the power to do good, Britain’s investors also seemed keen to back fund managers’ claims that they can pick winning investments rather than tracker funds that follow the market. Active funds had a strong April with £2.7billion worth of sales, almost doubling the amount of sales for tracker funds, which saw £1.4billion worth of inflows. According to DIY investing platform Interactive Investor, there was a renewed appetite for actively managed funds in April, accounting for half of its top 10 list of most bought funds. The £2.4billion invested was the largest amount of monthly sales for equity funds over the last 12 months. Bonds were the second best-selling asset class with £903million of sales, followed by mixed asset funds and money market funds with sales of £872million and £154million respectively. Even property funds saw £52million of net retail inflows despite the sector currently struggling with some having suspended trading since 2019. The only sectors to experience withdrawals were those including Targeted Absolute Return, Volatility Managed, and Unclassified funds, which net retail outflows of £172 million.
Deflation fears and what it would mean
The Eurozone is on the brink of sliding into deflation after the economic disruption of the coronavirus pandemic dragged price growth in the bloc down to 0.1% in May, its lowest level for four years. The fall in inflation — which turned negative in 12 of 19 Eurozone countries in May — has added to investors’ expectations that the European Central Bank will inject more monetary stimulus into the economy when its governing council meets virtually next week. Economists worry that a prolonged period of deflation would be painful for the Eurozone as it would make high corporate and government debt levels even harder to manage as interest payments stay fixed but wages, prices and tax payments all fall in cash terms. Commentators believe steps must be taken to counter the significant risk of low inflation and the marked fall in economic activity from translating into a permanent reduction in expected inflation or into the possible resurfacing of the threat of deflation. Also as a result of the high levels of public and private debt in the euro area as a whole, this could trigger a dangerous spiral between the fall in prices and that in aggregate demand.
Price growth diverged between Europe’s largest economies, with inflation of 0.% in Germany, 0.2% in France and 1% in the Netherlands. But prices fell 0.9% in Spain and 0.2% in Italy. The lockdowns imposed in many European countries to contain coronavirus brought many activities to a standstill and are expected to lead to a record post-war recession this year. With economic output set to remain below pre-virus levels for the next couple of years, the ECB will keep policy ultra-loose for the foreseeable future. The ECB has flooded the financial system with cheap money in an attempt to stimulate activity and keep inflation from falling further below its target of just below 2%. Meanwhile, Sweden revised up its first-quarter economic performance from its initial estimate of a slight contraction to growth of 0.1 per cent, as its no-lockdown approach to coronavirus helped prevent the deep recessions suffered by most other European countries.
Mortgage conundrum – to holiday or not to holiday?
The Coronavirus pandemic has had financial implications for almost everyone. For many, it’s meant that their incomes have taken a hit, with millions of workers furloughed and effectively now employees of the Government. If you’re self-employed, then you may not have been able to work at all. But the chaos caused by the pandemic stretches into our household bills too, with thousands of mortgage borrowers condemned to spending even longer on terrible, overpriced deals than expected. There are currently around 140,000 mortgage prisoners in the UK. These are borrowers who are trapped on their current, expensive mortgage deal, unable to move to a cheaper loan. Often, these borrowers took out their initial mortgage with a lender that is no longer operating in the UK, like Northern Rock or Bradford & Bingley, lenders that hit the wall in the financial crash. Their loans weren’t just written off though ‒ instead the loan books were sold onto other financial firms who manage the loans, but aren’t regulated to offer new deals. And unsurprisingly these firms crank up the interest rates, charging rates higher than you will typically see from active lenders. The problem is that these borrowers are unable to switch to a new lender, generally because of new, stricter underwriting rules brought in by the regulators following the financial crash which force lenders to be much tougher when assessing whether a loan is affordable or not. When it comes to mortgage prisoners, these tests simply go too far. These borrowers are up to date with their payments ‒ if they are shelling out £1,000 a month to the hedge fund that bought their loan, of course they could afford £700 a month with an actual, proper mortgage lender. But if the strict tests aren’t passed, then they can’t move. Thankfully, last October the FCA tweaked its rules to allow lenders to be a bit more flexible when assessing the affordability of mortgage prisoners. They were also given a deadline for contacting relevant borrowers who may be able to take advantage of these new assessments and therefore qualify for a new deal. However, it wasn’t the most encouraging change. For example, the new, more moderate affordability tests are entirely voluntary. If a lender doesn’t want to apply them, they don’t have to. There’s also the fact that only around one in 12 mortgage prisoners would actually be eligible for a new deal under these new rules. In other words, the vast majority of prisoners are still stuck on their expensive deals.
Pandemic spurs digital revolution
While many aspects of life remain on hold, many organizations are charging full steam ahead on digital transformation efforts – even giving some pieces a speed boost. As the pandemic stretches on and companies get used to their new “normal,” many are thinking about how their plans will evolve for the long term. What will start, stop, or continue after the crisis eases? With plenty of unknowns ahead, it might make sense to take a step back and reassess goals and timelines in some areas. However, the speed at which IT has had to adapt during the pandemic, and the need for laser focus, provided exactly the boost many leaders needed to fast-track certain digital transformation objectives, experts say. Both the dot-com bubble burst and 9/11 may seem like ancient history to some, but the lessons from that era are coming around again during these pandemic, say commentators. These events forced businesses to focus on what’s really important: providing value to customers and investing in projects with measurable impact on revenue and cash flow. The current situation will be no different. Businesses will have to adapt to a new environment and adapt quickly. The ones who build change into their DNA will continue to succeed. In terms of the wealth management, There were few plans in place for a lockdown combined with a stock market upheaval. But as we emerge from months of significant disruption, clients are seeing changes in how they work with some of their most important advisers that will make their relationships more efficient and flexible. This is most welcome for investors and advisers alike.