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June- July 2022 Update: The Information You Need On The Latest Financial Market Developments

June- July 2022 Update: The Information You Need On The Latest Financial Market Developments

By Alex Pritchard

We’re definitely riding the financial roller coaster this year, and the same word keeps being repeated over and over again: recession, recession, recession. 

 

While there has been volatility, and some losses and gains, I’m still not sure the UK is that close to recession in the market sense. 

 

From a value perspective, America is far closer to those calls of recession, in my opinion, than the UK. If you look at price/earning (or P/E) ratios, FTSE 100 P/E ratio of circa 14x the US market before and its recent fall, sort of 36x. 

 

(For reference: the P/E ratio is a statistic that helps to measure the value of stocks. The larger the number, the more expensive and valued something is; the smaller the number, the more cheap and undervalued. A par value for P/E ratios is 14x.)

 

For the UK, the last technical recession wasn’t in the Covid-19 lockdown (though you might have felt it should have been); it was during the 2008 credit crunch. Back then, the UK stock market was at an incredibly expensive 38x P/E ratio – then it took a real hit, going down to  earnings. So, whilst the UK has suffered some losses recently, from an investment point of view our portfolios have been insulated from further losses.

 

Stock market and equities

 

Recently, we’ve been backing UK domestic equities more and more, particularly FTSE 100 large caps. This means that any losses in the portfolio year have been less than they would have been by two times, if not two and a half times, than if our portfolios were more akin to 2015/2016, when we had a lot more overseas money.

 

As of 28 June 2022, the FTSE was only 2.3% down from where it started in January. However, in the American market, the Dow Jones was actually down 14%. So there’s been a big difference between the overseas funds that we keep an eye on and the FTSE 100 funds that are making up the majority of our portfolios at the moment. The UK stock market is currently the best value and the best setup to actually bring returns. Even if that return is an investment that loses less, you’ve still adopted a good strategy. If you’ve bought the least-falling investment, that value is there. 

 

In comparison to the North American market, the UK stock market’s value has been very good and the funds that we invest in have followed suit. They still look well placed to make money – though it may be in a day’s time or in a week’s time, or even a year or two years down the line – and we feel there’s value out there to be holding stock. 

 

Therefore, we’re very happy with the strategy that we have put in place. It has shown itself to be the right strategy with regard to staving off considerable losses, and we feel it’s well placed for those longer-term gains.

 

Fixed interest holdings

 

There are only four places in which to put your money: cash, property, fixed interest holdings and equities. For equities, we’ve talked about how we’ve backed the UK, which has been the right choice and helped with the losses. Regarding our fixed interest holdings, we’ve slightly reduced our UK holdings over the last few years, which again has been the right decision. 

 

Capital values are hurt by interest rates going up, which is guaranteed to continue happening until inflation has been beaten away. What helps protect against this is that the fixed interest that we’re currently holding is still paying very good rates of interest. If the capital value falls 5% but it pays a 5% interest, you’ve lost nothing. This also offsets some of the risk of the equities.

 

Property funds

 

In other blogs, we’ve talked about the BMO UK property fund, which is the one property fund that we hold across all our portfolios now. 

 

Its current 12-month performance is plus 20%, which has really helped the equities that have struggled this year. While it is a traditionally unloved asset class, its performance being very low at 2–5% per annum on average, it shows its value when the market struggles. 

 

If a portfolio is falling, it helps because it doesn’t care and just does its own thing; and if everything is going up, then even better. 

 

So protection from the current market volatility has been helped with other investments in the portfolio, some of which have made good money this year. 

 

This volatility probably isn’t going to go anywhere for a little while. The market seems to lose 5% and make 5%, but not move too much, and our portfolios are doing the same.

 

So I think that we need to keep the strategy that we’ve got. It’s working, and we were right in the first place to back the UK equities.

 

If you’d welcome input, expertise and experience from Applewood Independent, please get in touch via alex@applewoodindependent.co.uk or david@applewoodindependent.co.uk.

 

The views expressed in this article are those of the author and do not constitute financial advice. Applewood Independent Ltd is authorised and regulated by the Financial Conduct Authority. For financial advice designed for you and your specific circumstances, please contact the author using the contact details provided in this article or, alternatively, contact the Applewood Independent Ltd office on 01270 626555.

 

The value of your investment can go down as well as up, and you may not get back the full amount invested.

 

Past performance is not a guide to future performance.

Everything You Need To Know About The UK Government Debt

Everything You Need To Know About The UK Government Debt

By David Pritchard

The laws on the Trust Registration Service have changed, which has led new legislation to come into effect because of the Covid-19 borrowings. 

 

The government wants to make sure that they’ve got a register of all the trusts in the UK, in order to be certain that those trusts are paying the right amount of taxes. Due to the extra £300 billion that we borrowed as a result of the pandemic, we’ve now got extra sums of money to pay back to the NHS, for example. 

 

However, before Covid-19 even happened, the UK government was already a trillion pounds in debt, and needed to repay £80 billion of that debt this year (which is far more than we spend on anything, other than hospitals). 

 

In this blog, I will explain how UK government debt works. 

 

Gilts and bonds

 

When the UK government needs to borrow money, they are issued “gilts” (we will look at which institution in the UK issues these gilts to the government shortly). A gilt is a fixed-term loan (or bond) at a fixed rate of interest, and a guarantee of the capital back at the end of it.

 

The UK can issue what is called a “tenure index length bond”. It means you would get indexation, which is an adjusted price to combat things like inflation, plus 0.5% or 0.25% of interest. And that would be considered your interest rate for the next ten years. It comes in multiples of £100. So, in the event you put £10,000 into a gilt, you will get your interest returned to you over the following decade. 

 

However, a lot of the gilts aren’t index length, because indexation to inflation is currently at a high point. A lot of gilts are issued at slightly fixed rates. Taking this into account, you can get a 20-year gilt at a 3% rate of interest each year until you make the £10,000 back at the end of that period.

 

Who issues the gilt to the UK government?

 

The short answer is the Bank of England. 

 

Within the government, there’s a department attached to the Bank of England that issues gilts. That means that one of the few saving graces of the £300 billion we borrowed during the pandemic is the fact that, over the last two years, interest rates have been at their lowest since 1694. 

 

Basically, no interest rates were given out by the Bank of England; they used a base rate known as the interbank rate. 

 

Once the Bank of England says interest rates are going to be 1%, they will lend money to the big banks at the said 1%. Those big banks then set their interest rates based on what they need to borrow.

 

From this perspective, our banks make their income through giving people loans where they (the bank) make back a percentage over time. The loan can be for a mortgage or to invest in a small business, for example. Traditionally, that’s how banks have made their profits. 

 

When it comes to how the Bank of England lends, and the UK government receives their gilts, the process works in the same way. 

 

I hope this information was useful to you. If you’re curious to learn more, feel free to email me directly for any further information at david@applewoodindependent.co.uk

WE’RE HIRING – Executive Personal Assistant

We're Hiring

Executive Personal Assistant

We are now recruiting for an executive PA to cover the following key responsibilities:

  • Ability to work on many projects at once including personal projects for the directors as well as highly important work for the business
  • Comprehensive, highly proactive and responsive personal diary management
  • Monitoring correspondence email & post acting on / advising of any urgent matters
  • Organising travel and accommodation when necessary
  • Assisting with the marketing, sponsorships and advertising for the company
  • Managing the website, our social media and quarterly newsletter
  • Assisting with personal appointments and various projects on an adhoc basis
  • Reading / reporting of confidential information
  • Creation / typing of documents & presentations ahead of meetings
  • Acting as a liaison point for contacts and attending meetings to record, distribute and chase actions
  • Screening telephone calls, enquiries and requests, and handling them when appropriate
  • Monthly production of various reports

The salary available for this position is £30,000+ pa dependent on experience. The role requires someone who is highly organised, able to work on many different projects at once, has a fantastic eye for detail and a confident approach in dealing with the directors. In return we offer a discretionary bonus which is paid 6 monthly, 27 days holiday plus bank holiday, death in service (4 x Salary) and a 5% & 5% pension after your probationary period.

If you are interested in the above role, please email you CV and any questions to rebecca@applewoodindependent.co.uk

Congratulations

We are extremely pleased to report that Mike has made a fantastic start to 2022 by passing the last exam he required to reach Diploma status! Having been with us over 5 years, it has been a pleasure to see Mike reach a goal which he has worked incredibly hard for.

All of our team here at Applewood Independent are extremely proud of his accomplishment and it’s great to see that his determination has paid off. We have no doubt that this will continue into his plans to become chartered.

Well done Mike on your amazing achievement!!

 

Will Rising Interest Rates Burst The UK Buy-To-Let Property Bubble?

Will Rising Interest Rates Burst The UK Buy-To-Let Property Bubble?

If you’re an existing property investor, you’ll likely have enjoyed a period of time when your money really has been “as safe as houses”. However, 2022 may be the year to scrutinise your next move.

House prices have boomed, rental costs have gone up, and with the stamp duty holiday and low mortgage rates in 2021, landlords have had plenty to be cheerful about; but the pandemic created a lot of churn in the housing market, including a mass urban exodus to more tranquil locations!

There are many factors to take into account if you are thinking of selling your buy-to-let property. By the end of this article, you’ll have a clear understanding of the basics you need to consider and the next steps you need to take to help safeguard your investment portfolio as interest rates rise.

How might the interest rate rise impact me?

Interest rates have been low in the UK for some time, so upward movement is to be expected (bear in mind the government has its own loans to pay, so its borrowing becomes more expensive when interest rates go up).

When interest rates go up, a bit more is added to your savings account, but it will be minimal. However, when you consider large mortgages worth hundreds of thousands of pounds, a 0.5% increase could be very significant indeed. 

Rising interest rates can hurt fixed interest investments. For example, if you have a corporate bond that you buy over 10 years and it pays 0.3% per annum, you will still receive 0.3% per annum if interest rates go up; but if they go down, the value of your bond goes down because you are still only receiving a fixed rate of 0.3%.

This is one of the reasons why it’s safer to diversify your portfolio. It’s not possible to take fixed interest funds out of a portfolio without greater risk.

Whilst building a housing portfolio has been considered relatively “safe” for some time, one of the biggest threats rising interest rates pose is to your buy-to-let property investments.

Look at the big picture

As with any investment, you need to consider the long game to help maximise your profit.

Landlords have greater responsibilities now with an increase in regulatory hoops around Energy Performance Certificates (EPC) and gas safety checks (repeated every year where relevant). New tenancies have required a valid Electrical Installation Condition Report (EICR) since July 2020, but as of April last year, it also applies to all existing tenancies. Once completed, a new inspection is required every five years. EPCs are also expected to be high on the agenda in 2022 as the government attempts to achieve its zero carbon emissions target by 2050. 

These costs add up and take chunks out of your bottom line. 

Many of our clients at Applewood Independent sold their investment properties in 2021 at a generous profit, but the evidence hints that the property bubble may be preparing to burst.

What might cause the property bubble to burst?

With a rise in the cost of living, fewer people will be in a position to get on the property ladder for the first time because they have to pay more for their heating and electricity, which means they have less ability to save.

If people are struggling to buy their first home, there will be a plethora of houses on the market, which actively drives prices down. Residential house prices will also be hurt by the rise in interest rates. We keep seeing downward pressures and this will impact investment portfolios.

In addition to this, due to the rise in interest rates, any properties that are financed by a buy to let mortgage will become more expensive, especially if they are on a variable interest rate. This has the potential to deter some investors; the additional cost will increase their monthly mortgage payments, and eat into their overall profit.

What should I do about my property portfolio?

We anticipate that the writing is on the wall for buy-to-let property investors, especially if you have an interest only or variable rate mortgage. You might like to reconsider your position; it’s highly unlikely that the financial landscape in 2022 will make your investment any better unless you are holding a huge amount of equity.

Houses have been selling fast but we predict that will slow down if not deflate, especially when people receive their utility bills for the first and second quarter of the year, and the reality of a hike in the cost of living kicks in. If homeowners find themselves in negative equity, there will be many more homes flooding the market; competition drives the price down. Instead of there being very few buy-to-let opportunities, there’ll likely be a huge number in your area (which negatively impacts property investors).

The cheapest ones will be sold or rented out first, which is a downward pressure on capital values. This means your investment is not as valuable any more because there is an abundance of choice.

Unfortunately in the UK if property investors defer making a decision on their next steps, they’ll feel the pinch. As French-British financier and business tycoon James Goldsmith once said: “If you see a bandwagon, it’s too late.”

Should I worry about my buy-to-let investments?

Everything has peaks and troughs, nothing can make or lose money forever. However, if you want to safeguard your hard-earned cash, it’s vital that you get professional insight to help you make your decision if you are thinking about selling. Remember that you may have capital gains tax to pay if you do decide to make the most of the current market.

This article has highlighted the regulatory hoops, the changing landscape of the property market, and demonstrated how the rising cost of living will lead to more homes being sold which means it’s no longer a seller’s market. There are, of course, also long-term implications for those who invest in buy-to-let properties (if you buy at the peak, you decrease your chance of making more substantial profit over time).

If you’d welcome input, expertise and experience from Applewood Independent, please get in touch via alex@applewoodindependent.co.uk or david@applewoodindependent.co.uk.

As I mentioned earlier, it’s no time to sit on the fence and ponder; interest rates, alongside the other factors we’ve explored, will impact the buy-to-let property market. 

The views expressed in this article are those of the author and do not constitute financial advice. Applewood Independent Ltd is authorised and regulated by the Financial Conduct Authority. For financial advice designed for you and your specific circumstances, please contact the author using the contact details provided in this article or, alternatively, contact the Applewood Independent Ltd office on 01270 626555.

The value of your investment can go down as well as up, and you may not get back the full amount invested.

Past performance is not a guide to future performance.