I have to hand it to the government, they have been very clever with their recent announcements. Record levels of fiscal stimulus, sustained low interest rates and low inflation. The most recent fiscal stimulus is the changes in the stamp duty tax.. With the exemption of stamp duty for residential purchases of properties below £500,000 and partial exemption for landlords securing investment properties has definitely worked and stimulated the market. A combination of saving a few thousand pounds and the Fear Of Missing Out has brought out the ‘amateur’ investors.
I always recall Warren Buffet stating ‘Be fearful when everyone else is greedy. Be greedy when everyone else is fearful’. This is the perfect statement for this particular period of time. Don’t rush in. Don’t follow the crowd. Analyse every deal on its own merit. There is a ‘shitstorm’ brewing, it’s coming, the Government know this, they are just delaying the inevitable.
What are the longer term Covid-19 implications?
- low-interest rates for longer – due to the economic spare capacity, inflation will be kept low for the next couple of years at least
- less globalisation – already occurring due to Brexit, US/China trade war
- more Government debt – how will this be repaid
- higher inflation eventually – occurring long term due to low-interest rates
- pressure on profit margins – slower growth, higher taxes, high employee costs
The U.K. has been hit hard by the COVID-19 crisis. It has suffered high infection and death rates, which are delaying the easing of lockdowns. The OECD is forecasting an 11.5% GDP decline in 2020 followed by a 9% rebound in 2021.
Economic uncertainty is compounded by the Brexit negotiations. There is a year-end deadline for a European Union/U.K. trade deal, but negotiations seem to be at a stalemate. Our assumption is that a deal will be reached, but the risk of a no-deal exit, with negative consequences for trade and the economy, cannot be ignored.
This has been reflected in the FTSE 100 Index, which has been the worst performer of the major developed stock indices. We like the value in the U.K. market on a longer-term basis. It offers a dividend yield at mid-year of 4.5% with a trailing P/E ratio of 14.5 times.1 Brexit uncertainty and the slow decline in virus cases could continue to hold the U.K. market back.
Many commentators, which I agree with are expecting a short rebound before prices dip. With many employees coming off furlough and some not having jobs to go back to, the end of the mortgage holidays, many will face real financial hardships which in turn will effect property buying/selling. And don’t forget the Government needs to get their money back, expect extra and higher taxes. And let’s not forget the elephant in the room, the main risks come from the 2nd wave of virus infections.
As a very cautious investor myself, I will wait. I will wait for the inflated property prices to drop, I’ll wait for the amateur investors to disappear, I’ll wait for the bidding wars to be over. I’ll wait.
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