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Investment management consultant MATTHEW FEARGRIEVE discusses what 2021 holds in store for the UK housing market, why you should be wary of estate agent hype and why the supposed stamp duty savings currently on offer are illusory.

Now, the UK housing market has for the most part been a law unto itself. But the announcement by the UK government of the stamp duty holiday, at the height of the First Wave in the summer, combined with a paradigm shift from the office to the home for many affluent professionals, sparked a buying spree across the UK. The stamp duty relief is scheduled to end on 31 March next year. In this blog, we consider what the trajectory of UK house prices and demand will be in 2021, and explain some less-obvious ramifications for the stocks and shares you hold in your ISA, SIPP and retirement portfolios.

UK Property Market 2020: Roundup

Average asking prices across the nation have risen £19,920 to £319,945 over the past 12 months. The momentum provided by the stamp duty holiday - which enables savings of up to £15,000 on purchase prices up to £500,000 - has led to average asking prices finishing 6.6% up on 2019.

Average asking prices across the nation have risen £19,920 to £319,945 over the past twelve months.

Prices have undergone their strongest five-monthly gain since 2004, with the average property price rising more than £15,000 since June, according to the latest Halifax House Price Index.

It seemed that November’s nationwide lockdown failed to dampen buyers’ enthusiasm, with house prices up 1.2% over the month compared to October.

Demand has exceeded supply, with the number of properties being marketed for the year to December down by 0.6% on the same period in 2019, and the number of sales agreed up by 8.3%.

Some commentators consider that demand was already high prior to the announcement of the stamp duty holiday, and remains at 53% higher than tis time last year, notwithstanding the decreasing likelihood of completing a purchase by 31st March (thereby qualifying for the stamp duty exemption) if it is agreed now.

UK House Prices: the Outlook for 2021

It should come as no surprise that the commentary being mouthed by UK estate agents is couched in reassuring terms about the resilience of UK house prices in 2021. After all, why wouldn't it be? Estate agents live on the commissions they receive from properties which - let's face it - would sell themselves, without the agency of an odious intermeddling middleman. So don't expect any let-up in realtor hype over the festive period. You will read, and be told, that demand remains very high, and that there is "plenty of fuel left in the tank" for the housing market. Interest rates remain at near-record lows, and greater availability of low-deposit mortgages at competitive rates are expected in 2021.

Estate agents and online property websites will also - naturally - tell you that the number of available properties for sale is at a record low, and that there is therefore scope for further modest price increases in 2021.

We know that the stamp duty holiday will end on 31 March 2021. So whose view can we trust, and what will happen to house prices in 2021?

It goes without saying that the first three months of the New Year will be busy ones for the UK property market, as buyers try to complete before the 31 March deadline. Those trying to make savings on the stamp duty holiday are advised by eager estate agents to act promptly, and to have their offers in by January at the latest. 

The consensus view of estate agents is, unsurprisingly, that a "tidal wave" (as some agents put it) of buying momentum will keep the market buoyant until the stamp duty cut-off of 31 March, after which there will be a drop in demand that, far from leading to a drop in UK house prices, will more likely bring about a return to pre-pandemic normality which, in turn, will lay firm foundations for strong and consistent growth throughout 2021.

The eternally rosy picture painted by our nation's cherished estate agents will be familiar to anyone who has had dealings with them. But what is the objective, more truthful prediction of where the UK housing market will head in 2021?

Let's examine some of their assertions, and subject them to a spot of fact-checking.

The stamp duty holiday saves me money. Er, not any longer. Halifax points out that the current stamp duty saving of £2,500 on a property costing £250,000 is now far outweighed by the average increase in property prices since July. The index also shows how properties sold to home-movers recorded a much higher rate of annual house price inflation (7.9%) than first-time buyers (5.8%), even though the latter were the intended beneficiaries of the stamp duty holiday.

Buyers probably consider the stamp duty holiday when deciding to move, but it is unlikely to save them any more money than if they had moved this time last year. 

Interest rates will remain low in 2021. This looks like a dead cert. The Bank of England is sustaining very low interest rates as a means of fiscal stimulus, and even negative interest rates are being talked about. This environment certainly favours borrowers like mortgage buyers. But the economic theory behind keeping interest rates low points to the deeper problems that we will all have to face in the UK in 2021 and beyond: the extreme likelihood of shrunken economic growth (thanks to the lockdowns of 2020), inflation and rising numbers of jobless people nationwide. 

Low- or zero- rates of interest certainly give leveraged buyers more short-term buying power. But, their lending banks will be all too aware of the broader implications of these rock-bottom rates, even if their customers are not.

Rates this low, combined with the economic price for repeated lockdown and extensive furlough that the UK will surely have to pay in 2021, and for many years thereafter, are cause for deep concern. Lenders should be wary when taking an offer of lending today, when the chances of it being pulled tomorrow are higher than ever before.

Mortgage products are generous and plentiful. Not true, for the reasons we just mentioned. Anyone who has been house-hunting since September will have heard stories, and more than once, from homeowners whose property is "unexpectedly back on the market" (as the estate agent's spiel goes) because the would-be buyer's lender withdrew the mortgage offer at the last minute.

This trend has been particularly prevalent following Chancellor Rishi Sunak's Spending Review in November.

House hunters who need leverage to fund their purchases are fools if they tell themselves that there is no risk of their lender pulling the mortgage product before they complete or - worse - after they have moved in. 

We began this blog by pointing to the unhealthy disconnect between the economic fundamentals at play (recap, if you need one: shrunken economic growth, unprecedented government borrowing, Brexit upheaval to trade and rising unemployment and continuing fears over mutant strains of COVID-19) and the rising UK property market. Beware estate agent hype, and similar assurances of normality on property websites (we all know which ones) which try to convince you that everything is going to be fine in 2021 and (by implication) beyond.

Savings are at record high levels. Because no one could spend much during lockdown. This may to some extent be true. But beware the false corollary that estate agents extrapolate from this, that the "savings" of an estimated £100bn are available to spend on property in 2021.

Like hell they are. Those so-called savings will be absorbed by survival strategies of households who are trying to deal with the effects of rising food costs (Brexit) and loss of income (unemployment or reduced hours). And anything left over will be taken by the taxman, to pay for the overly-generous furlough and sundry other massive expenses undertaken by new boy Rishi.

Things are going to be Just Fine; aren't they? This in essence is what every estate agency in the country will tell you. Everything is going to be perfectly normal. Everything is tickety-boo. This is not peculiar to the year of plague that was 2020. It was the same during (and after, natch) the financial crisis of 2008, which was nothing compared to the global economic damage that COVID-19 is wreaking on us.

Think of the massive blow that the lockdowns have dealt the UK economy. Think of the massive tax take that is required to pay back the furlough schemes and all the other emergency expenditure: hikes in Capital Gains Tax, Corporation Tax, a raid on pension tax relief and lowering the State Pension, not to mention the raft of stealth, under-the-radar taxes that the government is able to deploy.

So what should I do?

Let's take a more grown-up look at the fundamental economics in play.

The UK’s economy has been walloped by the pandemic. It will take many years to recover. A slowdown in housing market activity should be expected soon. Given the parlous state of our national economy, there are concerns that the housing market could go into sharp reverse if the stamp duty holiday is not extended- and even if it is. The cut is currently due to end on 31 March, the same day as the furlough and the help-to-buy schemes close. That date is likely to be a distinct turn-off for more intelligent buyers. 

Nationwide have said that housing market activity "is likely to slow in the coming quarters, perhaps sharply, if the labour market weakens as most analysts expect, especially once the stamp duty holiday expires at the end of March”.

And, as ever, we must look to London as the pace-setter of the UK property market. Ignore stories about London emptying. It isn't, for three reasons: first, any half-sensible person should know not to sell their valuable London pad to buy a place in the Styx. It's a big change, schooling is rubbish in the country and the breadwinners of the household would be foolish to assume that they can work from home forever.

Secondly, many people living in London (the affluent kind, the type the property market is interested in) may well have bought second homes in the country, but their primary residence remains in London, where their jobs and friends are, where Heathrow is, and where their best shot at socialising and eating out is to be found when the lockdowns end.

Thirdly, and perhaps most importantly, ultra-rich foreign buyers are really only interested in buying in London, even if they seldom visit their properties there. And this investment is a major driver of the capital's property market and, therefore, the UK's. And overseas byers have been making merry with the discounted asking prices that 2020 has had to offer.

2021 action plan. Resist the temptation and the false encouragement from estate agents and property websites to rush into a home purchase before 31 March 2021. And resist these same things thereafter. Consider carefully the fundamental economic situation that each month of 2021 brings. Any supposed "stamp duty saving" will be wiped out by the overall price rises and bidding wars that you will find yourself in. And prices hikes, we believe, must be curtailed by the overarching economic fundamentals of 2021 and beyond.

Better to keep your money in the bank, proof your financial position against what the medium-term has in store for us all (essentially, lower economic growth and poorer employment prospects) and wait for lower property prices in 2021/22 before buying.

MATTHEW FEARGRIEVE is an investment management consultant. You can read his blog here and see his Instagram here.

Matthew Feargrieve

With COVID-19 still rife across the sub-continent, and Prime Minister Narendra Modi adjusting his foreign policy to a post-Trump era, investment management consultant MATTHEW FEARGRIEVE considers whether India is a viable investment proposition for 2021. 

India has been hit hard by the Covid-19 pandemic. And after Trump's defeat by Joe Biden in the US elections in November, Prime Minister Narendra Modi is scrambling to recalibrate the India's foreign policy in a way that both preserves the independence of the country's industrial sector in a region increasingly dominated by cheap exports from China, and make India attractive to foreign investment.

In this blog we consider the challenges that lie ahead for India and ask whether the country is a viable proposition for direct or indirect investment in 2021.

Covid-19 in India

The country is emerging from the stringent lockdown implemented in March this year, and daily new cases are decreasing, but with much of the developed world now tackling second waves, India must proceed with caution. 

A relatively low fatality rate of around 1.5% of all confirmed cases is reassuring but high population density in India’s cities and poorer hygiene standards contribute to high transmission rates.

The government’s decision to prioritise the health of the population over the health of the economy when cases were still relatively low saw GDP contract 24 per cent in the April to June quarter of this year. 

Regional Trade Developments

On 3 November 2020 Joe Biden won the US Presidential election. On 15 November the Regional Comprehensive Economic Partnership (RCEP), a fifteen-nation Asia-Pacific trade deal, was signed. The signing ceremony was done remotely, of course, in these days of plague. But a key regional protagonist - India - was notably absent, both virtually and spiritually.

Prime Minister of India, Narendra Modi, finds himself at a critical crossroads. His bromance with Donald Trump ended on 3 November. As omens proliferate about the new President’s desire to reformulate US trade and foreign policy in a values-based way, in a departure from Trump’s ‘business is business’, strictly transactional, approach, Modi has now to recalibrate India’s relationship with the US.

Since 2018, increased political pressure from China has undoubtedly exposed the fault lines in Modi’s personal world-view of India, resulting in a distinctly muddled foreign trade policy. In addition to the advancing tide of container loads of rupee-stretching goods made in China, there has been the ominous threat of amassed Chinese troops at the border. Not to mention the twenty Indian soldiers killed in the Galwan Valley.

It is against this backdrop of covid lockdown and regional trade pressures that Prime Minister Narendra Modi must reflate and build India's industrial and technology sector, and make them attractive to overseas investment.

Technology

Technology is one such area, with the acceleration of digitalisation forcing change across the whole economy. 

Office and school closures saw business and education move online, tele-consultations and availability of medicine online have improved healthcare efficiency. 

Organisations are spending more on cloud technology, allocating funds to platform as a service and software as a service to boost operational agility. 

With 654 million mobile internet users and data costs amongst the lowest globally - at US$0.10/GB - the opportunity for businesses and sectors embracing technology is huge.

These changing patterns in consumer behaviour have piqued investor attention and leaders in e-commerce, online education and fintech are announcing IPO plans for 2021 to 2022 as they look to fund future growth. 

Consumer spending post-covid

The lead up to Diwali traditionally welcomes a surge in consumer demand, with shopping and gift giving very much a part of the celebration. 

This year appears to be no different with macro indicators showing a steady recovery; India’s PMI for services entered expansionary territory for the first time in eight months in October, while its PMI for manufacturing continued to exhibit strong performance. 

As Covid-conscious shoppers shy away from bricks-and-mortar retail, e-commerce appears to be a big driving force here - although still a relatively small fraction of total retail at 3 per cent in 2019 compared with China’s 27 per cent - and is growing rapidly. 

Global tech companies are competing over the Indian consumer with Amazon and Flipkart upping their investments in Indian operations. Both companies have raced to acquire stakes in Indian retail firms to expand operations and leverage strategic partnerships.

Well-capitalised private sector banks are another area of the economy emerging strongly from the crisis. 

Having steadily gained market share over the past five years, this seems set to accelerate in a post-Covid world as state-owned banks continue to suffer from non-performing loans. 

Investments in fintech are helping private sector lenders to build strong digital infrastructures and improve customer journeys for loan approval, identity verification and so on. 

Industrials

Insurance companies are similarly benefitting from increased investment in their digital platforms. ICICI Lombard General Insurance, India’s largest private sector general insurance company, with a market cap of £6billion, is gaining market share with the development of its online claims process; 98 per cent of the insurer’s policies are now issued electronically. 

Still a relatively under-penetrated industry, India’s 230 million vehicles and around 1,200 daily accidents provide substantial scope for growth. The removal of paperwork and time spent queuing are helping to build customer loyalty amongst progressive financial institutions.

There is a possibility of retail stress in private sector lending books but the major clean-up in the banking sector following the IL&FS default in September 2018 has already removed a lot of this risk - something which valuations are not yet reflecting. 

A decrease in unemployment will help here with recent labour reforms significantly simplifying labour laws in order to be more effective for employees and incentivise organisations to add jobs. 

This is particularly pertinent as India rolls out its China+1 strategy, encouraging global manufacturers to consider it as a viable alternative; corporate tax rate cuts, the Production Linked Incentive scheme, and an improvement in the World Bank’s Ease of Doing Business ranking - now 63rd compared with 142nd five years ago - should all fuel India’s case. 

Sino-Indian Relations

On top of this, India’s labour costs are around one-third of China’s, it holds the benefit of conducting business in English and boasts a steady, political reform-driven government. 

The macro-economic environment remains stable in spite of Covid disruption with low inflation, forex reserves at all-time highs and a more resilient Rupee.

With a huge domestic market opportunity and the PLI scheme supporting mobile phone production, the company is well-positioned to benefit.

Whilst a full recovery from the crisis may take some time, the outlook for India is encouraging. 

Economic activity is starting to exceed pre-Covid levels, the government are once again focused on growth and enacting reform, and necessary diversification away from China is opening up exciting opportunities for Indian manufacturers. 

While accessing individual stocks can be a complicated process, long-term investors should look to single country funds in order to capture the full upside potential.

India's Advantages
Investors would do well to keep in mind the unassailable advantages that India enjoys as a receptacle for foreign investment, the primary ones being as follows:

1. her population of 1.4 billion, which accounts for 18% of the world’s total population;

2. her young population with its median age standing at just 28; the relative youth of the Indian people being one reason why the spread of COVID has not ravaged the country in quite the way that many health officials (and, admittedly, this writer, as his earlier blog testifies) had predicted; and

3. her workforce being the second largest in the world, after China’s, with growth predictions in the region of 200 million over the next 30 years so that, by 2050, it will have far surpassed China’s workforce in sheer size.

Complementing these advantages is the likely trajectory of education and urbanisation across the Indian subcontinent, both of which are trending upwards with a momentum that is expected to be sustained over the coming decade, dragging up average income and consumption levels too.
MATTHEW FEARGRIEVE is an investment funds consultant. You can read more of his blogs here.

With interest rates falling to zero, and stock markets on the rebound, now is the time to invest in mutual funds, says investment management consultant MATTHEW FEARGRIEVE.

With governments and central banks around the world scrambling to limit the economic damage being caused by COVID-19 lockdowns, investors and savers worldwide are faced with the prospect of negative interest rates. In the United Kingdom, the Bank of England has refused  rule out negative interest rates, which in theory is a move designed to stimulate the economy. the Bank's monetary policy committee has decided to stick for the time being with a base rate of 0.1 per cent, but a further rate cut to zero or lower cannot be ruled out.

The idea behind negative rates is to get money flowing out of banks and into the economy in the form of loans and mortgages. Negative rates should encourage borrowing, while discouraging savings    

The prospect of negative rates should provide a further, final impetus for savers to reconsider hoarding all their spare cash in bank accounts that provide negligible or nil rewards and instead invest their money in stocks and shares. 

So what should savers do to counter the rewardless, close-to-zero interest rate environment that we currently find ourselves in?  

Don't worry about whether interest rates turn negative or not 

The Bank of England has already asked banks to report on their 'operational readiness' to deal with zero or negative interest rates. But there are differences of opinion as to whether negative rate will actually help the economy. Andrew Bailey, Governor of the Bank of England, has indicated that the Bank is still considering whether or not to impose negative rates. 

However, you should not worry a great deal about whether rates go negative or not. The fact of life at the moment is that rates are close to zero, and will not work their way upwards for some time to come. And so savers might as well act now. 

If you are holding large cash reserves, you should take the opportunity now to consider investing more. Think carefully about whether you have the right balance between cash savings and investments, and consider funnelling some cash that you are not likely to need over the medium term into investments that have the potential to deliver better returns than the pathetic rates of interest that the banks are offering. 

These investments can include corporate bonds, index-linked bonds, absolute return funds, real assets such as gold and infrastructure, and equities (also known as shares). We consider some of these investment products below. 

Research how markets are reacting to low or negative rates

If interest rates do turn negative, it would affect the value of assets in different ways. Holding cash would earn little reward and there is even a chance savers may have to pay to keep cash in the bank. Also, if negative rates drove down yields on Government bonds, investors might be tempted to seek riskier assets in the hope of a better return. 

Jason Hollands, a director at wealth manager Tilney, says those in search of a real return (one above inflation) from their savings would be 'pushed up the risk curve into corporate bonds and equities'. But he warns that the value of such assets would not be guaranteed and would fluctuate. 

McDermott also says negative rates would be a 'positive' for the value of gold. He says: 'Gold is a much safer store of value than cash at this point. Also, negative interest rates would mitigate the Achilles heel of gold – namely its inability to earn interest or produce an income. Suddenly a major disadvantage becomes an asset.' 

Research the investment funds that will benefit

Having weighed up how negative rates might impact your investment portfolio, the next step is to ensure you have the right investment funds. 

Investment funds (also called mutual funds) are collective investment vehicles which pool investors' money and then invest that money in stocks, shares and other financial products. Equity funds invest in stocks and shares (which are really the same thing) whilst bond funds invest in debt instruments that can be issued either by governments (gilts) or by companies (corporate bonds). There are other investment funds that invest in other things; for example, commodities like silver and gold, or alternative assets like Bitcoin and other cryptocurrencies.  

Some investment funds are riskier than others, and some are more expensive than others; remember that the manager of the fund will charge you an annual fee for managing the portfolio on your behalf. Your aim, in general, should be to invest in fund that delivers an index-beating or index-tracking return at a reasonable cost.

So your objective should be to identify fund managers who have delivered returns that have beaten or at least tracked the markets over the previous five year, with investment products that have an OCF (the "ongoing charges figure": broadly speaking the annual fee you pay the manager) of less than 1.00% per year (we think that any fee greater than 1.00% per year is too high). We divide them into two groups: actively managed investments and passive investments (index trackers). Actively managed funds charge you higher fees, often around 1.00% a year or more. Passive funds track a given index, and so their fees are lower.
You can read more about how to select investment funds here.

A good idea is to start with five investment funds offering good exposure to regions and also different types of funds. 

A global tracker or index fund offers geographical exposure at a competitive cost. A technology fund taps into the rise of tech titans, while an emerging markets fund gives you access to the growth in emerging economies.

You might also want a little exposure to a healthcare or biotech fund to back efforts to prevent a repeat of Covid-19. And a small exposure to a gold fund is a good hedge against inflation and volatility. You might even view Bitcoin as a safe-haven asset for 2021. You can read about gold and cryptocurrencies as safe-haven assets in our blog here. 

UK Shares are Cheap

UK stocks are cheap, so this a good time to invest. UK businesses are undervalued, and have a lot to offer.

The UK also has strong areas of growth, such as renewables. We have a big natural resource in offshore wind which is set to surge. 

But you will need to be quick. Economic stabilisers are on the horizon, like the covid vaccine and Brexit certainty, and these will hike the price of UK bluechip companies in the medium-term. You can read more about investing in the shares of UK companies in our blog here.    

Act your Age!

An important rule of thumb is that the older you are, the more you should put into safer assets (bonds). Younger people can afford to take more risk and have more invested in riskier assets (shares, also known as equities). 

For example, a 60 year old would have 60 per cent in bonds, 40 per cent in shares, and a 30 year old would have 30 per cent in bonds, 70 per cent in shares. 

Bear in mind also that you may well already be an investor without knowing it, if you have investments via a workplace pension. Through this investment you, and your employer, will be putting money each month into investment funds, which in turn invest in companies listed on stock markets.

It may seem boring, but it is important to spend a Sunday afternoon taking time to find out how much you have invested in your workplace pension scheme and crucially, the investment funds in which it is invested. With a little research, you may find that you are not overly impressed with the performance or the fees being charged by these funds; or both. Then you might wish to use fund supermarkets, like Fidelity or Hargreaves Lansdown, to pick your own investment fund and move your pension money into those.

Keep it Simple

Don't over-complicate things, or get too ambitious. While you might hear stories of the dramatic profits people have made from buying bitcoin, or day trading, these are complex and risky and, chances are, they don't crow too much about their losses.

Read up about the investments you're interested in and never buy anything you don't understand.

MATTHEW FEARGRIEVE is an investment management consultant. You can read his blog here and his Twitter feed here.