Top 9 Headlines in January 2019

1. Brexit and UK assets

Lone opinion has held sway among professional custodians of money for some time: steer clear of the UK. Taking the long view, a case can certainly be made that UK equities and sterling look cheap. But that must be weighed against an investing adage: cheap assets can remain cheap. In the case of the UK, that is particularly apt if we were to see a hard Brexit or a badly managed exit from the EU. Plenty more twists beckon — perhaps another referendum or even a general election — before there is likely to be any clarity. Despite flickers of optimism that the March deadline might be extended, you can’t dismiss the possibility of the UK crashing out of the EU. But kicking the can down the road will hardly infuse investors with confidence in UK assets. Indeed, it is easy to overlook the long-term consequences of the damage inflicted on the economy by a saga that shows little sign of ending quickly. The dysfunction on show has tarnished one the UK’s most compelling selling points: its political stability.

2. Sterling views

The pound staged a mini rally after Prime Minister Theresa May won the confidence vote last week, although that was as much to do with euro weakness as any positive sentiment towards the currency, or on clarity over Brexit. The battered British currency was headed for its best week against the euro in over a year, which likely says more about how far it has fallen than how far it has to rise.  Some experts believe the best course of action is to avoid sterling if you can, but if you do have exposure to use any rallies to lock in hedging as the Brexit process still has a long way to run. While the consensus is that a cliff-edge will be avoided, it is not a given.

3. First time buyers propping up the property market

The number of first-time buyers in the UK property market has hit its highest level in 12 years, research has found. Yorkshire Building Society found that 367,038 mortgages were issued to first-time buyers last year, half of all sales. That figure is more than double that in 2008 and 9% below the pre-crisis peak of 402,800 in 2006. Researchers looked at market-wide first-time buyer data for January to October 2018 and estimated sales in November and December. They found that first-time buyers accounted for 50% of all new mortgages in 2018, the highest proportion since 1995. Those looking to buy a first home have been squeezed since the financial crisis as wages have grown slower than inflation. But the researchers said the latest figures suggest government initiatives such as Help to Buy and stamp duty relief for first-time buyers may have made an impact.

4. Beating pensions contribution cost increases

Thousands of people are being urged to consider topping up their state pension before the price goes up in April. Someone who pays in £600-£700 now could potentially end up receiving £4,000-£5,000 of extra state pension over their retirement. Many people are unaware they can potentially cash in by paying subsidised voluntary national insurance contributions (NICs) to fill past gaps in their NI records. But the price of voluntary NICs will rise in April, so those considering topping up their state pension in this way should not delay doing so, according to former pensions minister Steve Webb.

5. The continues rise of passives

Active funds that invest in shares have a slightly higher gross performance than their passive investment counterparts, according to the European Securities and Markets Authority’s (ESMA) first annual report on cost and performance of retail investment products. However, the paper points out, that outperformance disappears as soon as the fees of actively managed funds are factored in. Actively managed equity funds provide a slightly better gross performance than passively managed funds, even though the margin is small. Using a sample of 2.4 trillion euro open-ended fund universe at the end of 2017, the paper shows that gross returns for active funds over both a one year and three year period were around 1% higher for active funds compared to passive.  However, that outperformance is flattened once the average active fund fee of 1% is included. In contrast, passive funds were found to have an average fee of 0.6%. Over a longer time horizon, performance for active funds begins to slip below those of passive funds. 

6. Banks hit by borrowing hit

British banks expect consumers’ appetite for borrowing to evaporate in the first quarter of 2019 as a weak economic outlook keeps households from taking on new borrowing, according to a Bank of England survey released on Thursday. The survey of major British lenders found that more forecast that demand for credit card lending would fall during the first quarter of the year than during the financial crisis. The survey added to a growing body of evidence that political turmoil in Westminster is having a chilling effect on the economy, with the uncertainty leading businesses and consumers to hold off from making major financial decisions.

7. Retail gloom

The FTSE 100 ended a wild week with a near 1% gain, closing 133 points higher at 6968. U.K. retailers experienced their customary post-Black Friday slump in December, Office for National Statistics figures showed Friday. The volume of goods sold in stores and online fell a larger-than-forecast 0.9 percent from November, when they surged 1.3 percent. Sales excluding auto fuel dropped 1.3 percent, the most since May 2017.

Key take-outs:

  • Sales of household goods fell 2.3% and “other stores” such as opticians and flooring firms saw sales drop 6.3%, more than offsetting gains at department stores and clothing retailers.
  • Non-food sales overall fell 2.3% and food sales rose 0.2%. Fuel retailers were boosted by a sharp fall in oil prices during the month, with sales rising 2.6%.
  • Statisticians have struggled to adjust for the Black Friday effect, with Christmas purchases increasingly being brought forward to November to take advantage of heavy discounts.
  • High Street trading remains tough as the Brexit crisis saps consumer confidence. Retail stocks slumped in the fourth quarter and 2019 began with warnings from firms including Halfords and John Lewis.

8. Buy-to-let hit by Brexit

Landlords in London are possibly £1,806 worse off since the vote to leave the EU in June 2016, according to specialist lender Landbay. The lender – using what it calls a conservative projection – says rental growth in the capital is now 2.84% lower than expected back in June 2016, but Landbay warns this could be as high as 4.15%. This higher estimate would leave the average landlord in London £1,806 short in rent due to subdued rental prices. The capital’s property market, which some observers believe has suffered from uncertainty since the referendum, saw average annual rental growth drop from 1.26% in June 2016 to a low of -0.33% June 2017, before starting a slow recovery. Meanwhile in the UK as a whole the average rent for a property grew by 0.96% in the year to December 2018.

9. Mortgages ahead of Brexit

This month the prime minister’s Brexit deal proposal suffered a loss of historic proportions, with 432 votes against to 202 in favour. As the political future of the country hangs in the balance in the form of vote on confidence in government, the mortgage and housing industry had their say as to what the latest developments could mean for the property market. The consensus is that, on the one hand, the risk of uncertainty for the property market increases after the vote but on the other, it helps to concentrate minds on all sides as the threat of a ’no deal’ rises, which was reflected in Sterling strengthening immediately after the result was announced. Most buyers and sellers seem to feel that a ’no deal’ Brexit will lead to greater property market uncertainty. A ‘hard’ Brexit could prompt more investor interest from abroad although owner-occupiers might be reluctant to commit until Visa rights are clarified.”