The Wealth Lounge

Wealth Lounge wishes you and your loved ones peace, happiness and prosperity this Eid. Eid Mubarak!

The rate rise show! ​

The Bank of England has finally implemented what’s expected to be the first of a series of interest rate increases for 2022. They had little choice. Inflation is expected to pass 7% by spring and peak soon after. It’s hoped that the measures, being taken by many central banks, will send inflation back down to normal levels by the end of the year. It’s important to note the consequences of a rate rise on our finances:​

• Homeowners​
Current mortgage-holders, especially those on Standard Variable Rates, could see their repayments increase. Those looking to buy may need to rework their calculations. Some lenders have already increased their rates. ​

• Savers​
Banks have been notoriously slow to pass on higher interest rates to savers. Or they’ve simply ignored the increase altogether. So it wouldn’t be advisable to hang on to cash until the possibility that banks might show some kindness. ​

• Businesses​
Companies will see higher borrowing costs for both operating lines and term loans. Many business lines reprice monthly, so higher interest costs will hit companies immediately.​

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Could the Ukraine conflict deepen market woes?​

As if there aren’t already numerous factors contributing to volatility this year, the Ukraine situation’s repercussions can’t be overlooked. Here are a few things to expect: ​

• Oil and Gas ​
With Russia supplying 35% of Europe’s gas, any conflict followed by sanctions on Russia (most vocally by Germany) could see a drop in gas imports to western Europe. In turn this could cause a spike in gas prices. Ukraine’s own distribution of Russian oil to parts of eastern Europe could be disrupted causing a jump in oil prices, possibly to USD150/barrel. ​

• Grains and Wheat ​
Kazakhstan, Romania, Russia and Ukraine are all major exporters of grain. If supplies are disrupted, and drop off, we will see likely increases in their costs, adding to already high inflation. ​

• Financial Markets ​
The spectre of war always causes a flight to safe havens, so we may see bond prices rising, with downward pressure on interest rates, which is of course against the current trend of planned rate hikes. ​

The conflict influencing an already volatile market could spell a rockier ride for the year ahead. ​

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Economic predictions for 2022​
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Information provider, IHS Markit shared its predictions for 2022 recently. Here are a few key thoughts:​

• New Covid variants will not derail the economy​
While general lockdowns will be avoided, service activities will remain constrained until effective and affordable cures become available and will make further restrictions unnecessary. The economy will not be derailed in 2022, but the pace of growth will slow.​

• Tapering​
Central banks will continue gradual monetary tightening at varying rates, with market conditions worsening for riskier asset classes but avoiding major "taper tantrums"​

• Plateauing inflation​
Supply chain challenges will continue to disrupt key industries, but upward pressures on prices will abate. Wage gains will be strong but prove temporary, with inflation sequentially diminishing, starting in the second half of the year​

• The US outlook​
US growth will slow in 2022 to a still above-trend pace despite sharply waning fiscal stimulus, keeping labour markets tightening and interest rates on the rise​

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Events that could shape the economy in 2022​

• US-China ties​
Both are battling for world domination. When countries begin to take sides or remain neutral, we’re likely to see economic decline, as they refrain from trading activities that would render their allegiance ambiguous. This could see countries operate two supply chains with different technological standards.​

• A US crash​
US inflation surged in 2021 thanks to supply chain woes, high energy prices and monetary policy. If interest rates are raised, with US stock price/earning ratios at an all time high, it could result in a sharp and prolonged downturn​

• A property crash in China​
Evergrande’s debt could cause financial repercussions globally, and this could be the start of a crisis where many of China’s real estate firms are overleveraged. A series of defaults could cause a meltdown in the global banking sector. ​

• Harsh fiscal policy​
Governments already under pressure from losses incurred through Covid have begun to implement higher taxes, and this trend will continue, contributing to a general slowdown.​

Keyman insurance – Why businesses need it.​
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Unforeseen events can unfold within businesses just as they can in life. The consequences may be different, but the impact can be equally severe. Most people take out insurances on life and critical illness within their personal finance exercise, but in many countries, this is largely overlooked in the business world, particularly in the SME and small business sector, where the risks of losing a key employee are greater. ​
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Anyone that contributes to the financial success of the company should have a safety net beneath them. This doesn’t just mean directors, but can also apply to staff with key or niche talent without which the business wouldn’t succeed. If any of these people were to die or fall critically ill, then keyman cover taken out for them by the business would cover the cost of profit loss, staff replacement, or loan repayments (creditors may call in loans where a key person dies). ​
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This lump sum payment can ensure the survival of the business, where a permanent hole in profit or revenue may cause it to restructure or even to close. ​
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Just like every new year, this one comes with new aspirations and projects. Let's continue our strife to success.

Wishing you a year fully loaded with happiness, health and wealth. Happy New Year!​

2021 UK property round up​
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Savills recently released their housing market update for the end of 2021. There are a few interesting facts coming through which further bolster the argument for holding property in UK:​
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• Despite the inevitable dip in sales following the end of the stamp duty holiday, new sales agreed are still running high​

• The number of new Buy-To-Let mortgages have doubled, with 13000 loans in September​

• Tenant demand is at an all time high, with the most recent RICS survey showing the highest quarterly reading since the series began in 1999​

• Average UK rent increased 4.6% during the year to September​

• Rents in the south west grew by 12% and in the London area, by 4%​
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For those seeking to grow property assets, opportunities to build a strategically strong real estate portfolio are widespread. Residential property offers low correlation to the markets, and in the long-term, assuming you follow some simple rules, appreciation is both inevitable and strong.​

Check your correlation​
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During these times of volatility and predictions of impending doom, it’s worth checking that our portfolio is not only well-diversified, but also benefitting from low correlation. Reducing correlation between asset types mean they react differently to market activity. While some assets may drop in value, others may flourish. Here’s a reminder of a few options:​
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• Real estate/REITs​
• Real estate investments are generally not impacted by headline events. Prices depend on other factors like long-term leases. US REITs have a low correlation to the S&P 500 of approximately 0.6. They also make a good hedge against inflation.​
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Gold and other precious metals​
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Gold’s place as a low correlation asset is proven. Its correlation is known to change with the markets, with higher correlation during a stable market, but lower correlation during volatility or a downturn. ​
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A wider investment strategy can also consider these options:​
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• Peer-to-peer lending ​
• Commodities​
• Emerging market bonds​
• Art​
• Collectibles​
• Wine​

May this Christmas fill your life with joy, health and happiness.

The Wealth Lounge wishes you a very Happy Christmas!

Hayes, London, from under £300k ​
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The options to take advantage of a London hotspot at a reasonable price, are now few and far between, as savvy investors, who’ve done their homework, snap up property in these areas just as they’re launched. ​

One such area is Hayes, west London. Our partners, RPA are offering units in Hayes Village, a new development on the site of the old Nestle factory, built by UK’s biggest homebuilders, Barratt Homes. Lying in Zone 5, units are available from just under £300,000. With a lease of 999 years, and quality assured with a 10-year NHBC warranty, investors would be hard pressed to find a better deal in the London area right now. More exciting is the location, and why Hayes is expected to see strong growth:​

• 10 minutes’ drive from Heathrow​
• 15 minutes’ Crossrail journey time to London Paddington station​
• Vibrant town centre and retail parks within 5 minutes’ drive​
• Within 5-7 minutes’ drive of both the M4 motorway and the A40​
• Close to major corporates, eg. Procter and Gamble, Mars, SAP, Johnson and Johnson​

For further details, please feel free to contact us.​

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Are bonds really worthy of their cautious representation?​
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Although bonds still represent caution in portfolios, questions are being raised about their reliability. None more noticeably than comments made recently by Warren Buffett, who said that “bonds were not the place to be these days.” Weak treasury yields and negative interest rates in many countries have pushed fixed income into a bubble, spelling uncertainty for retirees, the alternative for them being to lend to risky borrowers, placing their capital at risk. ​

If interest rates are hiked to combat inflation, the dollar’s value could drop, reducing spend as prices increase. Investors will seek compensation for inflation risk. Eventually, bond prices will drop as investors lose interest. This in turn impacts the value of investments. ​

The debt to GDP ratio is at an all-time high, which automatically creates risk within a traditionally safe asset. ​

For those who have control over their portfolios, it may be time to look at REITs, defensive stocks like utility companies and alternative safe havens gold, to dilute their reliance on bonds as a cautious stake. ​

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