Consumer appetite for major purchases fell at the second-fastest rate in almost two years during August, as Brexit uncertainty and fears of an economic slowdown held back spending.
IHS Markit’s monthly household finance index dipped to a three-month low after reporting the second-sharpest drop in demand for major purchases since September 2017.
The headline index from the survey – which measures households’ overall perceptions of financial wellbeing – recorded 43.7 in August, falling from July’s 44.3 and “signalling a stronger degree of pessimism towards current finances by UK households”, the report said.
Having been in positive territory during June and July, UK households signalled a negative outlook towards their financial health for the year ahead in August.
Pessimism towards job security remained, with UK households posting the strongest degree of negativity since March.
Income from employment continued to rise. However, the expansion slowed to a modest pace which was the weakest in five months.
“Latest survey data continued to highlight a fragile state among UK households towards their financial wellbeing,” according to Joe Hayes, an economist at IHS Markit.
Hayes said: “The Brexit haze, uncertainty over the political environment and the increased possibility of the UK entering recession appear to have dented expectations, which dipped into negative territory following positive readings in both June and July.”
He added: “A sharp decline in appetite for major purchases was also signalled, while pessimism towards job security also intensified during August, explaining why UK households have withdrawn into a more risk-averse approach and subsequently tapered their expectations for the coming year.”
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“Lower for longer” has been one of the rallying cries of this bull market cycle. Indeed, interest rates are not simply staying low; they have recently been cut again by the US Federal Reserve.
Why do low rates matter? If interest rates remain low, economic growth is stimulated, defaults are scarce, financing is easy and risk-taking is encouraged.
Signs of this can be seen today in many areas, from rising leverage in private equity buyouts, to rising overall debt levels and the growing popularity of so-called “covenant-lite” loans (i.e. loans issued with fewer restrictions on a borrower and fewer protections for the lender than is usual).
The chart below shows that the share of private equity deals with debt multiples of greater than seven times profits has risen to almost 40% of the total. Leveraged buyers expect the profits from their acquisition to be greater than the interest paid on the debt used to fund it. Clearly, when interest rates are low it is easier to afford debt repayments, but if rates were to rise then highly leveraged buyers could find they need higher profits to afford the repayments.
“Lower for longer” is even being overtaken by “lower forever”. Today, bond investors are prepared to give Austria money for the next 100 years for a nominal yield of 1%.
What very low interest rates have done is elongate this cycle. They have enabled businesses to stay afloat when they should have exited an industry. They have allowed start-ups to obtain funding at rates that enable the company to be economic, when higher rates would have revealed the business model to be unsustainable. So low rates have slowed the impact of the feedback mechanism of capitalism, but they have not negated the economic cycle entirely.
Unless you believe that the economic cycle no longer exists, that we are in a post-capitalist society and that the financial gravity of mean reversion has somehow been altered, value investing will remain a feature of the investing landscape.Do rates need to rise for value to recover?
Value’s recovery is not based on interest rates rising or falling. The experience of value’s outperformance in Japan during a long period of low interest rates highlights this, as the chart below shows.
If not rates, then what else? We don’t claim to be able to predict when value might recover, or what might be the cause. But we can offer some possible scenarios.
Today, corporate earnings are not actually falling, but if forecasts for future earnings are falling then that might be the catalyst for the market to start focusing on corporate debt levels. At that point, those over-leveraged companies will quickly look like very risky investments. Of course, highly leveraged companies with the highest earnings-per-share (EPS) growth forecasts have the furthest to fall.
Nine years into a bull market, equity investors have to be aware of where valuations are in comparison to their historic average. Within this, the dislocation between value and growth is at an extreme. Just as stocks priced for perfection eventually disappoint, stocks trading at a discount to the fundamental value of their underlying businesses are unlikely to maintain that discount forever.
Nick Kirrage is an author on The Value Perspective, a blog about value investing. It is a long-term investing approach which focuses on exploiting swings in stock market sentiment, targeting companies which are valued at less than their true worth and waiting for a correction.
Important Information: The views and opinions contained herein are of those named in the article and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The sectors and securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. This communication is marketing material.
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Prices in the Eurozone rose by just one per cent in July, official figures showed today, which is far below the European Central Bank’s (ECB) inflation target and lower than an initial estimate.
The weak inflation rate will boost the chances that the ECB will inject more stimulus into the economy when it meets next month by either cutting interest rates or relaunching its bond-buying programme, known as quantitative easing (QE).
The one per cent annual rate of inflation for July was down from 1.3 per cent in June, and comes despite the ECB’s record-low interest rates and years of QE that have aimed to boost prices to around two per cent.
Inflation was just 0.3 per cent in Italy, which narrowly avoided recession in the second quarter, and fell by 0.7 per cent in Portugal.
In Germany, Europe’s biggest economy, inflation fell to 1.1 per cent in July from 1.5 per cent in June.
The highest contribution to inflation in the euro area in July came from services, a sign that household spending is propping up the zone’s economy while its manufacturing sector struggles.
“The report paints a picture of falling demand in the region, and that is likely to increase chatter for a stimulus package from the European Central Bank,” said David Madden, market analyst at CMC Markets.
(Image credit: Getty)
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For those who say World Cup warm-up matches should not count as Tests, this was anything but a friendly.
More than 73,000 came to watch Wales beat England 13-6 on Saturday in a hugely physical battle at the Principality Stadium that saw tempers flare and the hosts become the world’s No1 side.
Warren Gatland warned his Welsh players that if they started this Test in the same vein as last weekend’s defeat at Twickenham, their position in the team would be in jeopardy.
As they kept England scoreless in the first half for the first time since the 2011 World Cup, his words had clearly been heeded.
There was a typically hostile reception for Eddie Jones’s men as they arrived in the dragons’ den, and this time England were not able to score early on as Wales matched their opponents’ physicality and intensity from the off.
It took Wales 26 minutes to put points on the board themselves when Dan Biggar opted for the posts after failing to capitalise on some try-scoring opportunities.Wales celebrate after holding out a final England push
With half-time approaching and the match in the balance, Anthony Watson, who was brought in just hours before kick-off to replace the injured Ruaridh McConnochie, was sent to the sin-bin for preventing a scoring opportunity with a knock-on.
From the resulting penalty, Biggar kicked it out wide before Watson had even left the field, catching England unaware, before sending it the opposite way to George North for what turned out to be the game’s only try.
George Ford, England captain for the day, would convert two penalties early in the second half to bring the visitors back into the match at 10-6, but Wales, led by Alun Wyn Jones, defended resolutely to keep the visitors at bay.
Tensions were high in both camps following England’s 33-19 win a week before and there were a number of melees throughout the match as emotions boiled over.George Ford captained England and converted both penalties during a testing match
Away from those antics, up in the stands, the game will have given both head coaches plenty to think about, with Jones proclaiming that each warm-up game would serve a different purpose.
As he was forced to bring on key personnel like Owen Farrell, Manu Tuilagi, George Kruis and Jamie George, it was a sign Saturday’s game plan had not gone as hoped, with Wales matching, or besting, England at every scrum and breakdown.
For Gatland the match demonstrated Wales’s quality in depth, with man of the match Biggar filling in seamlessly for injured Gareth Anscombe, but there will be concerns at the number of injuries occurring.
Liam Williams was replaced during the warm-up with a hamstring issue, James Davis was removed following a head injury, and Jake Ball and Biggar hobbled off late on, with Anscombe and Taulupe Faletau already ruled out of the World Cup.
The result leaves England and Wales one apiece from these matches, and a third and decisive encounter could occur in Japan, with the teams set to meet in either the quarter-final or final.
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A final version of the Upper Marshwood Vale Neighbourhood Plan has been submitted to Dorset Council for examination.Have your say on Upper Marshwood Neighbourhood Plan.
The plan was created by local people, and was approved by the Upper Marshwood Vale Parish Council which is made up of the parishes of Bettiscombe, Pilsdon, Stoke Abbott and Marshwood. The Parish Council feel confident that the plan reflects the hopes and views of the local community.
Neighbourhood plans were introduced in the Localism Act 2011 and aim to give residents more say in the future use of land and buildings in their area. For example, the plan can say where new homes, shops or offices might be built or where important green spaces might be protected.
Dorset Council is required to consult on the plan proposals before the examination can take place. Following the examination, if the plan is approved and supported by a local referendum, then it will be used to inform future decisions on planning applications. Consultations will start on Monday 19th August and will run for eight weeks.View the Upper Marshwood Vale Neighbourhood plan
The plan can be viewed on the Dorset Council website: dorsetcouncil.gov.uk/upper-marshwood-vale-neighbourhood-plan, and via the Upper Marshwood Vale website: uppermarshwoodvale.org/home/neighbourhood-plan/.
Hard copies will also be made available at the council offices at South Walks House, Dorchester.
Please contact the Upper Marshwood Vale Neighbourhood Plan group, or view their website: uppermarshwoodvale.org/home/neighbourhood-plan/ for the locations of reference copies and dates of public events that will be going on around the area throughout the consultation period.Comment on the plan
Those who live, work or run a business in the Upper Marshwood Vale neighbourhood plan area have until 14 October 2019, to raise any concerns they may have about the plan. These will then be passed on to an independent examiner to consider. Anyone commenting on the plan should let the council know if they wish to be kept informed of the progress of the Upper Marshwood Vale Neighbourhood Plan.
Comments on the plan can be emailed to: email@example.com
Alternatively, they can be posted to: Spatial Planning, South Walks House, South Walks Road, Dorchester DT1 1UZ.
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European stock markets have risen sharply after opening and bond yields have fallen as investors react to the news that Germany could inject some stimulus into its stalling economy.
Germany’s Dax was the biggest riser, climbing 1.2 per cent in early trading. Meanwhile the FTSE 100 rose one per cent, France’s CAC 40 climbed 0.9 per cent and the pan-European Euronext 100 was one per cent higher.
Germany is strong enough to tackle any future economic crisis “with full force,” the country’s finance minister, Olaf Scholz, said yesterday.
The German economy, the biggest in Europe, shrank by 0.1 per cent in the second quarter, official figures showed last week.
Global Investors were buoyed on Friday by the news that China, whose economy is also slowing, is planning to inject some stimulus into its economy. Its state planning office said it would act to increase disposable income.
More to follow.
A supply starved market and weakened investment has led to vacancy rates in London offices falling to their lowest level since 2007, a new report has found.
The amount of available office space in London has fallen 19 per cent over the past year, with vacancies in the City dropping 27 per cent, according to research by Knight Frank.
The current vacancy rate of 5.6 per cent is the lowest level since the autumn of 2007, with a “dearth of supply” driving up rents as occupiers compete over fewer properties.
Average prime rents in the West End – the capital’s most expensive area – rose 7 per cent to £107 per square foot, while rents in the City climbed 3.6 per cent in the City to £72.50.
Takeup of office space for the second quarter of 2019 was five per cent lower than the same period in 2019, but still increased ten per cent on the first quarter, as ongoing political uncertainty failed to deter occupiers. Faisal Durrani, a Knight Frank researcher, told City A.M. the occupier market had held up “remarkably well”.
“The message that we’re getting is that occupiers are keen to crack on with life, almost irrespective of the outcome of Brexit,” he said.
The picture is very different on the investment side, Darrani said, with activity “thin on the ground” with the exception of a few large deals as investors wait for “a conclusion” to ongoing Brexit uncertainty.
One of these large deals, Citibank’s purchase of its new Canary Wharf building, helped make the US London’s top overseas investor – accounting for £1.1bn of the £1.9bn the country invested in the second quarter.
A high proportion of the 5.4 million square feet under construction and due to be completed in the City over the next year is already spoken for – 42 per cent. The proportion in the West End was slightly higher, at 45 per cent.
Durrani said the current supply shortage is a “direct result” of developers “pressing the pause button on developments in the run up to the referendum three years ago”, and that there’s no indication the supply shortage will ease up any time soon. “We need to see more development,” he said.
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