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Does Brexit turmoil offer buy-to-let investors the perfect buying opportunity?

Brexit! What is it good for? Leavers and remainers are both struggling to answer that question right now but I’ve finally found something. The current turmoil may offer a chance for buy-to-let investors to pick up a property at reduced price, while share investors could also find bargains in the FTSE 100.

Slowing down
House prices have been relatively resilient since the referendum but now they are beginning to soften, with £1.6bn wiped off values over the past year. Buyers, sellers and investors are all adopting a ‘wait and see’ approach, as Brexit plays out, the global economy shows signs of fatigue, and interest rate rises potentially loom.

London prices are down 5% in a year as foreign investors are driven out by uncertainty and higher property taxes. The RICS says pessimism intensified in November and UK sales and prices will fall over the next three months. The average home now takes four months to dispose of.

Opportunity knocks
This is a blow for FTSE 100 housebuilders, whose share prices have fallen sharply, but their struggles may be good news for investors, because today’s low valuations could offer the opportunity of a lifetime. It may also be good news for those who are still keen on investing in buy-to-let.

That the last two or three years have undoubtedly been a disaster for buy-to-let, as the Treasury’s tax crackdown has driven up costs and slashed post-tax profits in a deliberate push to tilt the balance in favour of first-time buyers.

Second chance
The 3% stamp duty surcharge on second homebuyers and investors, combined with the phasing out of higher rate mortgage interest relief, has destroyed margins. You can’t do much about the second of these, but if you could get, say, a 5% or 10% discount on the purchase price, that will more than offset the extra stamp duty.

So if you are still tempted by buy-to-let, your chance may not have passed after all. As Brexit uncertainty looks set to drag on to the 29 March deadline for leaving the EU and beyond, you might pick up a bargain in the months ahead.

A better option
You should first decide whether buy-to-let is really something you want to do. As my colleague Royston Wild points out, enthusiasts have been hammered over recent years and it may be better to look at stocks and shares instead.

There is certainly a buying opportunity on the FTSE 100 now, with the index plunging from a peak of 7,877 in May to 6,826 today, a drop of 13% in just over six months. This means it now yields a whopping 4.37%, almost as much as you can get on a buy-to-let property, but with less bother. Trading at 15.63 times earnings, it isn’t overpriced either.

If you pop a FTSE 100 tracker inside your annual tax-free ISA allowance, you don’t have to worry about paying income tax or capital gains on your returns either. Plus there is no bother with tenants and all that nonsense. Now may be a buy-to-let buying opportunity, but the FTSE 100 could be a better one.

Source: Yahoo Finance UK

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Will Brexit leave UK economy in a lurch?

The UK economy is likely to witness better times, and emerge as one of the best performers in stock markets in 2019, says Fidelity’s Bill McQuaker. However, the manager of the Fidelity Multi-Asset Open range of funds said that medium term investors are not off the mark to tread with care.

On Thursday, FTSE 100 had the biggest one-day drop since the EU referendum poll, resulting a drop of 3.2% of 6,685 due to concerns that revolved around the vulnerability of ceasefire in US-China trade war. This might pose a threat to the UK economy.

Notwithstanding the political drama in the House of Commons on Tuesday, the UK stocks nosedived, with FTSE 100 dipping over 5% since the start of the week.

However, McQuaker is not worried about the mid-cap FTSE 250 outperforming its blue-chip counterpart, because he is confident that there are numerous aspects that could impact the UK stocks.

The UK economy is readying for a softer Brexit, as per McQuaker. Investors haven’t been showing a lot of interest in UK equities. This could be a blessing in disguise, for “if there is going to be a deterioration in market conditions, people won’t be selling the UK because they’ve sold out of it already,” he quipped.

If it actually goes the way McQuaker says it will, there will be some short-term upside to the Sterling. This could make the FTSE 250 outperform, as compared to the FTSE 100, as the latter is quite dependent on US dollar denominated revenues.

Talking about how Brexit would pan out in the next decade, he says, “When I look at the environment that I think we’re likely to face in the medium term, I’d say that’s where I get a bit more depressed, quite frankly.”

“We’re not going to get the benefits of staying in the EU, and we’re not going to get the benefits of Brexit,” McQuaker points out.

This is true indeed, for the world will not be interested in investing in a country that’s going to be in a limbo for the next 10 years. Does this mean Brexit will leave the UK economy in a lurch?

Source: Mirror Herald

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Does this week’s data impact the GBP and FTSE 100 outlook?

This week has provided markets with a crucial insight into the UK economy with the release of inflation, jobs and retail sales figures. Those numbers are so important because they have an array of signals and consequences. Let’s take a look at how the UK economy is faring and what these data points mean for the Bank of England (BoE) and local markets going forward.

Employment

The UK jobs picture soured somewhat in September, with a rise in claimants coupled with an upward revision to the August number. The figure of 18,500 claimants is the second highest monthly figure since mid-2017. Meanwhile, the August average earnings figure rose to 2.7%, which is not far off the highest level seen over the past three years (2.8%). Put this together and you have a warning sign against the BoE raising rates (rising unemployment claims), alongside a signal that allows the BoE to worry less about the problem of falling real wages seen throughout 2018. The issue of rising inflation is certainly a problem for the BoE, but as long as wages rise by a greater amount, that worry is mitigated to an extent.

Inflation

With wages on the rise, a sharp decline in inflation has provided yet another signal that the BoE can rest easy for the time being, with consumer price index (CPI) declining from 2.7% to 2.4%; the joint lowest level since first quarter (Q1) 2017. Crucially, we also saw a sharp reduction in the core CPI reading, which strips out volatile elements such as food, energy, alcohol and tobacco items. The energy aspect is particularly important as this is an element which the central bank cannot do much about through the use of monetary policy. Thus, if the cost of petrol rises, the BoE would be foolhardy to think that they could mitigate that shift by raising rates. The fact that inflation has been declining with those more volatile aspects stripped out means that the BoE will take greater attention to the shift.

This reduction in inflation coupled with the rise in wages means that real wages are on the rise, taking some of the pressure off the BoE and lesseneing the chances of another rate rise in the near future.

Retail sales

The retail sales figure is often overlooked in terms of its impact on the economy, with the term retail typically associated with the small players in trading rather than institutional whales. However, in the economic sense, consumption is a huge determinant of growth, with household expenditure accounting for 60% of UK gross domestic product (GDP). Retail sales do not account for the total household consumption amount, yet it certainly has a significant impact on the total figure. The volatile monthly figure is less of an interest for us, yet with the yearly number declining to 3%, we are seeing continued stability following the recent recovery. That measure was below 2% for eight months between Q3 2017 and Q2 2018, so anyone worried about the declining monthly figure (-0.8%) today should look at the monthly trend to note that things are actually looking relatively rosy.

Taken in the context of the BoE, the recent recovery in retail sales will bolster the idea that growth could begin to pick up thanks to improving consumption. The rise in retail sales could point towards a strong Q3 GDP number, which could counteract any fears.

Brexit

It is important to note that while the BoE has previously showed intent to normalise rates to some extent, given the threat posed by inflation, the impact of Brexit will always remain a key determinant of whether the Monetary Policy Committee (MPC) can act. Easing real wages reduces the need to raise rates, while improving GDP prospects through the recovery in retail sales will prove that the economy could possibly handle another rate rise. However, the risk of a no-deal Brexit will loom large at the moment, making any action unlikely for the time being. A deal between the UK and EU would likely remove that barrier, and such a deal would make the pound more responsive to shifts in economic data. The decline in the pound this week has been partly due to the diminishing hopes of a deal at this week’s EU summit, but also a reaction to the falling economic data (rising claimant count and retail sales) and an easing on pressure for the BoE to act (rising wages, falling inflation).

Of course, it is obvious to keep an eye out for a Brexit deal as a key driver of price action in the pound, but be aware that a deal could open up the markets to recent economic trends. The BoE does want to raise rates again, but that will only happen if the economy is strong enough and the chance of a no-deal Brexit is negated. With retail sales pointing towards a strong Q3 growth reading, we could see a hawkish BoE soon after an agreement is found (if indeed it is). Such an event would point towards a likely rate rise soon after.

The daily chart below highlights the holding pattern we find ourselves within over the past month, with markets showing some signs of wanting to get into a relief rally in the event that a deal is reached, yet not confident enough to really follow through. Expect an initial boost to the pound if a deal is reached in the coming months, but bear in mind that such a shift could be accentuated when people realise that this would have a significant knock-on effect on the BoE’s monetary policy approach.

Interestingly, traders should remain aware of the potential counter-intuitive nature of the FTSE in all of this. The FTSE 100 has an inverse relationship to the pound, driven by the highly internationalised nature of the index. A higher pound will reduce the value of foreign earnings when they are reported back in sterling. Therefore, while many would expect to see a rise for the FTSE 100 and pound in the event of a breakthrough, there is a strong likeliness that we could see the index fall. Thus, expect to see the pound reflect improvements to the UK economy or a Brexit breakthrough, while the FTSE 100 will likely to do the opposite, as was the case on referendum day.

The weekly chart below sees breakdown from the rising wedge formation, with the price falling back towards the crucial 6841 swing low. This points towards a possible break to the downside in the event that an agreement is found in Brexit negotiations. While the trendline break is worrying for FTSE bulls, we would need to see a break below that 6841 level to signal the beginning of another leg lower for the index from here on in.

Source: IG
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4 reasons why investing in the FTSE 100 could beat a buy-to-let property

The FTSE 100’s performance has been disappointing this year, with the index declining by 5%. Its risk/reward ratio, however, suggests that it may still offer a more favourable investment outlook than a buy-to-let property.

Unexpected costs
One reason for this is the index’s lack of unexpected charges. A buy-to-let property may require the owner to contribute to building repairs, which in the case of modern flats can be excessive. There may also be a lack of payments from tenants due to a worsening financial situation, while higher interest rates than are forecast could squeeze the income return on a rental property.

In contrast, investing in the FTSE 100 requires no additional costs once shares are purchased. Although dividends are not guaranteed, history shows that investing in a wide variety of companies generally leads to a fairly robust income outlook.

Debt
While the purchase of shares can mean that an investor loses their entire investment, they are unable to lose anything beyond that. A buy-to-let that is financed through debt, though, can mean that an investor loses more than their entire investment.

Although house prices have been on a winning streak for two decades, no asset price has ever risen in perpetuity. Brexit could yet cause difficulties for the UK housing market, with Mark Carney suggesting that a 35% fall in house prices could be ahead. In such a scenario, an investor needing to sell a property may find themselves in negative equity. As such, the risk of loss remains higher with a buy-to-let than in shares, simply because of the debt levels that are generally used.

Liquidity
FTSE 100 shares are generally highly liquid. Should an investor need to raise cash, they can quickly be sold and the proceeds will appear in their bank account within a few days. This provides greater flexibility than a buy-to-let, which can take months to sell. The property will need to be advertised, then the process of exchanging contracts and completing is fraught with uncertainty, costs and difficulties.

As a result, for investors who feel they may need access to the capital invested at some point further down the line, shares could offer a more flexible experience over the long term.

Returns
As mentioned, property has been a good place to invest in the last 20 years. The shortage of supply versus demand is showing little sign of slowing down, and this could act as a positive catalyst on house prices over the medium term.

However, in recent years house prices have benefitted from government policies such as Help to Buy, while interest rates have been kept at a low level. This has encouraged activity in the housing market. Should either of these policies change, the returns available could fall significantly.

In contrast, the FTSE 100 is closely linked to the performance of the global economy. And with its prospects being relatively sound, the investment returns on offer from the index could be high over the coming years.

Source: Yahoo Finance UK