12 May 2016
Week In Brief: BUSINESS AND THE CITY
“IT’S THE ECONOMY…”: Last week saw the release of a large quantum of data regarding economic performance in both the UK and USA. The figures for the USA made the more cheerful reading at first sight, with a continuing climb in employment – though not as much as the recently revised forecasts suggested. But on closer inspection there were also some reasons for concern – consumer spending is slowing, and growth in GDP is down to 0.5% in Q1 2016 – against over 1.5% last year. That may be due to weather factors though. The US had a disruptively bad winter in many areas compared with the UK. There is no sign yet of any “Trump Effect” in the figures, despite Mr Trump’s recent and controversial achievement of the Republican nomination for the 2106 Presidential elections, but analysts comment that this is probably because he is so far seen as having a very outside chance of actually becoming President.
In the UK the figures causing most concern were the production figures where in two important sectors, construction and manufacturing, there appears to have been no growth, which suggests that overall growth in GDP is slowing, but where the inflation forecast shows that UK inflation seems to be rising, albeit from a very low base. The Bank of England has already cut the growth forecast for 2016 from 2.5% to 2.25%, but if these indications are in any way correct, a much larger slicing off could be required. The first port of call for blame for bad news at the moment is the possibility of Brexit, but that is not really a viable culprit for the poor performance in the first quarter – though it may have to shoulder the blame for bad news in the second, which seems inevitable.
What is more concerning, if this pattern continues, is how to deal with the dangerous combination of falling output and rising inflation – even without the inevitable dislocation a “Leave” vote in the referendum will cause. Realistically, interest rates cannot be cut further without severely damaging the banking industry, to say nothing of the damage to the savings side of the economy. Let inflation run is the conventional answer, but that carries great risks of letting it get out of control, with consequent sudden sharp rises in interest rates to try to reduce it. Those whose memories go back beyond the Thatcher years will know what can happen after that.
PEER TO VEER: One of the great growth markets for debt provision since the banking crash of 2008 has been so called Peer-to-Peer lending. A plethora of funds have appeared in both the UK and USA whose business model is the very simple one of acting as an intermediary between “depositors” – or more properly, “lenders”, usually private individuals, but increasingly also major investing institutions with a need to improve the return on their investments – and “borrowers”, generally businesses who find it difficult or impossible to borrow from conventional banks. This is usually because they have higher risk profiles than modern bankers want to take on, and the amounts involved are too small. Typically borrowers are smaller property developers, business start-ups which have got off the ground and now wish to grow, and independent retailers. The loans are pooled to spread risk to the lenders who get somewhere between 4% to 6% return depending on risk. The borrowers pay 9% to 12% and upwards; the difference goes to a risk pool to cover losses and mostly to the peer to peer operator who runs the whole operation. As the banks have returned to the market, and more and more peer to peer funds have popped up, borrower’s margins have diminished but, typically, market risk has risen. The funds, although regulated, are lightly so, and increasingly concern has been expressed that the peer to peers – or rather, their lender/depositors – could be very vulnerable in any downturn. There is a suspicion that many of them are people investing parts of their pension funds or other money they could ill afford to lose, chasing higher returns than are available from any conventional investments.
So far losses have been low and the funds continue to attract large amounts of cash, whilst the regulators and Treasury chat about how best to control the sector without killing what has become a useful goose. Now a warning call has come from the USA where the largest peer to peer operator, LendingClub, has discovered during an internal audit that the risk on some loans has been mis-stated and investors deliberately misled. A full audit is in course, but in the meantime the chief executive, Renaud Laplanche has resigned, and the LendingClub share price has dropped by a third; other quoted firms in the sector have seen similar hits to their quoted values.
SLOW PAYERS: Small businesses are notoriously prone to the dangers of insolvency caused by slow payers, especially when the debtor is large and powerful. Some of the nation’s supermarket chains have been especially criticised for slow payments, and the government has threatened several times to take action to force them to pay suppliers faster, including mandating the publication of average credit terms and policies in published annul accounts. Now Britain’s farmers have complained that many of them are facing extreme hardship because of “unacceptable” delays in payments. But it is not the supermarkets they are complaining about – it is the government, which is months late in paying many of them amounts due under EU agricultural support systems. The government blamed the EC for the lack of payment but a Commons committee has said the fault lies in Defra, the ministry dealing with agriculture, which it says has poor IT made worse by “serious failures of management.” Last year, farmer’s incomes in total were 29% down – and of the increasingly vital support payments, only 51% were paid by the due date, with many several months late.
CAPTIVE PATIENTS: It’s probably not something which the average citizen gives much thought to, but what happens about caring for prisoners who get ill? Moving convicted or remand prisoners to a hospital represents serious security risks and considerable expense for guarding, to say nothing of disruption of the customer experience for other patients. So a lot of healthcare has to be done in hospital units within jails, with NHS staff been seconded to the jobs as required, but that has problems as well. Now increasingly the answer is to bring in private healthcare contractors who will provide dedicated and comprehensive in-care (the emphasis on the “in” part). The largest provider is Care UK who have just announced that they have won a further 21 contracts of this type. With the prison population ever growing and also aging, it’s a growth business, albeit a niche one.
REASONS TO BE CHEERFUL: If you are pro “Leave” anyway! George Osborne, the Chancellor, campaigning for the “Remain” camp, warned that leaving the EC would imperil over 100,000 well paid jobs in the City of London. We suspect that quite a lot of Brits will think that is a good argument for a Leave vote, George – the City has not yet recovered its reputation from the 2008 crash.
KEY MARKET INDICES: (as at 10th May 2016; comments refer to changes on the week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.63% (steady); 5 year 0.87% (falling).
Euro€: 1 mth -0.28% (steady); 3 mth -0.22% (steady); 5 year -0.14% (falling)
US$: 1 mth 0.46% (steady); 3 mth 0.62% (rising); 5 year 1.15% (falling)
Currency Exchanges:
£/Euro: 1.27, £ steady
£/$: 1.44, £ steady
Euro/$: 1.14, € steady
Gold, oz: $1,285, slight fall
Aluminium, tonne: $1,556, slight fall
Copper, tonne: $4,739, falling
Oil, Brent Crude barrel: $42.95, slight fall
Wheat, tonne: £106, falling
London Stock Exchange: FTSE 100: 6,115 (falling). FTSE Allshare: 3,361 (falling)
Briefly: “Sell in May and go away” was always your stockbroker’s favourite adage. At the moment, if you had sold in April that might have been better advice for this year. It’s been a very dull week with commodity prices and the FTSE indices drifting weaker, and interest rates falling. Too much uncertainty is perhaps making investors nervous?
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