By Rebecca Ellis
With current low interest rates globally many people are considering the advantages of leverage. Rebecca Ellis of Pomona Wealth, a multi-family office, has advice on the current opportunities within the credit environment of the international markets…
Why has 2016 started off badly? Is there another credit crunch on its way?
2016 started off with the worst performance in history with the ongoing issues with the oil prices and the drag that this is causing countries that will be forced to conceive a future beyond oil. These countries will need to diversify their economic activities to become less dependent on oil revenues. Combined with this, fear took hold of the markets for the first seven weeks as if we were about to see a repeat of the financial crisis. What is going on so far this year is nothing remotely close to what happened in 2008. That financial crisis was the result of a once-in-a-generation de-leveraging across both the consumer and business economies. In 2016, banks are still lending, albeit now regulated, consumers are still borrowing, and the credit markets are still active. Banks have far stronger balance sheets today, central banks around the world have much better crisis-prevention systems in place, and businesses and consumers carry far-less debt than they did eight years ago. For all these reasons, 2016 is not like 2008.
Will interest rates remain low?
The US is further advanced in its economic recovery than Europe and the United Kingdom: we expect the US economy to expand between 2.0% and 2.5%, in line with its stable post-crisis recovery while growth is also steady in Europe and UK. The Fed is the only major central bank having increased rates in 2015 and looking at raising them more albeit gradually. On the other hand, the Bank of England has said it will hold its rates whilst the discussion of its European destiny unfolds, while the ECB have further pushed into negative rates. These policy moves into uncharted waters challenge long-held beliefs and behavior of market participants and thereby cause great uncertainty meaning a low interest rate environment for the next three years.
What about swings in foreign currency?
We may see more abrupt and more pronounced swings in the foreign exchange markets in oil-derived markets as the lack of revenue may force their governments to devalue their currency. With ongoing heavy capital restriction and spending, this will add more frustration from their citizens. For example,
The Nigeria Naira hit its 43-year low at N305 per dollar as a scarcity of dollars intensified in the unofficial markets. The official decrease of 2015 and a reduction of the purchase power of 12.3% makes bleak reading to a nation that has a fondness for travelling.
What’s happening in the UK Property Market?
For the last 20 years, London has had a property boom with property prices increasing an average of 22.7 % per annum and a whopping 454% in value. If you bought a modest value property for 123,054 GBP million today the property value would be 681, 592GBP.
This may look very extremely enticing to international investors who seek investment for security for investment return and passing wealth onto the next generation, however the UK government has increasingly targeted such investors by increasing their exposure to tax with increased rates of SDLT, capital gains tax being applied to all homeowners since April 2015 and with Inheritance Tax to apply to all owners including financial trust and companies from April 2017, the return is expected to dramatically reduce. That said double-digit returns have been reported and with the lack of supply the market is still regarded as a good investment. In 2015 the London market made 12.2% and in a diversified portfolio real estate can be an important element in adding long-term growth.
Leverage – What is the real story?
If you have real estate in the UK which does not have leverage this maybe an opportune time to obtain financing prudently to help provide funding for investment to help diversify your risk.We would remain cautious and seek to borrow 50% of the value to ensure leverage can be paid and maintained.
For UK lenders, the key focus is on serviceability of the loan. If your property is not rented out it is important you can show regular income which can cover the loan re-payments by 130%.
Typically lenders offer interest only and rates currently between 3-5 % offer an opportunity to release cash flow at reasonable rates in a major currency.
The key benefits are:
- Equity release – Sleeping assets
- Loan at a low rate for a long duration, typically 4.5 % for 25 years.
- Diversification of asset class
- Tax deductable
The proceeds then can be invested in asset classes where regular cash flow can be generated. We believe that the equity markets are a good investment alternative, offering solid investment returns over the last 100 years of history in the region of 8-12% per annum if a portfolio held for 3-5 years. Currently, the markets have corrected and are oversold. There are a number of solid stocks that have been beaten down and are now trading at attractive valuations. We take a long-term view when we pick our stocks. Some of stocks pay regular dividends and as long as the companies are in a position to service their payments, the portfolio will receive regular income.
For further advice on asset diverification and cash flow management, please contact Rebecca who will visit Lagos from Monday 10th April until Friday 15th April.
Rebecca Ellis is Managing Partner, Pomona Wealth.
Email: rebecca.ellis@pomonawealth.com
Mobile: +41 79 789 5313
Nigeria: +234 9082065573 )
