(The Freelance Informers) - Is your SIPP and mortgage in the best possible health to hedge against inflation and rising rates?
Professional investors that invest on behalf of institutional and pension funds have predicted that the UK, parts of Europe and the US won’t see inflation dramatically fall for another 12 months. Where are these investors putting their money to hedge against inflation and should your SIPP shadow their strategies? And are 95% mortgages soon going to be taken out of the market? Katherine Steiner-Dicks reports
- Most professional investors think UK and US inflation won’t fall dramatically until Q3 2023, with Eurozone and Swiss inflation not dropping until Q1 2024
- Growing demand for alternative asset classes (private equity, hedge funds, life settlements and infrastructure) that can beat inflation
- Mortgage brokers are expecting 95% LTV mortgages to be pulled from the market this year
It will be this time next year before UK inflation falls dramatically, according to predictions from professional investors who are collectively responsible for £276 billion assets under management. This is according to a new study from Managing Partners Group (MPG), the international asset management group.
The study, with 100 institutional investors and wealth managers across Switzerland, Germany, Italy, and the UK found 44% expect UK inflation to fall dramatically in Q3 2023, but almost a quarter (23%) predict it will take even longer until Q1 2024, before inflation eases.
Inflation predictions by region
UK inflation views are mirrored by predictions for the US, with 31% predicting inflation here won’t fall dramatically until Q3 2023. A further fifth (20%) say it will take until Q1 2024 before this happens.
Predictions for the Eurozone and Switzerland are even more cautious. The option attracting the most support from professional investors surveyed is Q1 2024 before Eurozone (33%) and Swiss (30%) inflation falls dramatically. Around a third (33%) chose Q1 2024 for the Eurozone and 30% for Switzerland.
Fewer of those surveyed think a dramatic fall in inflation will come earlier, with a quarter (26%) saying it will come in Q3 2023 in the Eurozone and a fifth (20%) saying it will come in Q3 2023 in Switzerland.
Where to invest when inflation is high?
Institutional investors are parking more of their capital into alternative assets that can grow or provide stable returns despite rising inflation. If you have a SIPP it might be worth understanding if there are pre-designed funds created by your SIPP provider that have exposure to alternative assets, or at least stocks that can protect your pension against inflation, and if so, can you add these to your portfolio and still get the tax benefits. If you run your own limited company, are there investments that you or your business can make that hedge inflation and get tax incentives?
Self Invested Personal Pensions vary widely in terms of the investment types they permit, particularly in relation to alternative investments – therefore, when looking to invest via SIPPs, it is important for you to focus on what asset classes the tax wrapper will be able to incorporate to ensure you select a product that is able to meet your investment needs, according to Defaqto.
People have different attitudes to risk and investment requirements and, likewise, SIPPs vary in the investment types they allow people to put into the tax wrapper. Some funds have a percentage earmarked for alternative assets, but usually under 10 per cent, such as the BlackRock Consensus 85.
Although the proportion of pure SIPPs allowing traditional investment types is generally high, Defaqto data shows that there is notable variation in how many permit alternative investments:
- Unit Trusts and OEICS: % of SIPPs permitting investment: 99%
- UK stocks and shares: 96%
- Investment trusts: 94%
- Exchange Traded Funds- 93%
- Offshore mutual funds: 91%
- Hedge funds: 88%
- Futures and options: 75%
- Commercial property: 61%
- Multi-member commercial property investment: 57%
- Third-party lending: 51%
If you need some guidance Defaqto’s Star Ratings for SIPPs aim to help people understand how they compare in terms of the level of features and benefits that they offer. Taking a wide range of elements into account, Defaqto has given each SIPP on the market a rating from 1 to 5 depending upon how comprehensive it is.
Growth strategies: are they in your SIPP?
Concerns about inflation are fuelling demand for high-yield funds and growth strategies. Fund managers, such as MPG, in the past 12 months have seen their investors put net inflows of $24 million into its High Protection Fund, which invests in life settlements, which sophisticated investors have been investing in for decades.
“This alternative asset class has an extremely low correlation with equities and bonds, and in 2021 the High Protection Fund delivered net annualised returns of 8.25%, and it has returned 283.77% since it was launched in July 2009. The absolute return fund aims to achieve smooth predictable investment returns of between 8% and 9% per annum, net of fees,” says MPG.
Hedge funds are also attracting pension fund investors, but require specialist knowledge as strategies can change with market cycles. It would be wise to only consider exposure to an individual hedge fund if you are highly knowledgeable of how these assets work, the fund manager’s fees, and the risks and rewards that can come with the asset class. Like in all investment portfolios diversity and patience is key to outperforming in different market cycles, investments in alternative investments are no different.
Jeremy Leach, Chief Executive Officer of Managing Partners Group says, “Investors are braced for a long period of high inflation with few expecting significant falls until nearly a year away. That has implications for how investors need to think for the future and the tools they should be using. This has resulted in an increase in demand for alternative asset classes that can deliver sustained attractive returns irrespective of what is happening in the equity and bond markets.”
What’s the next big shock for the UK mortgage market?
With sudden tax policies U-turned and inflation and interest rates still on the rise for the foreseeable future, some mortgage brokers are predicting a property market crash. The next big shock for the UK mortgage market is most likely to be the “death of the 95% LTV mortgage while this uncertainty continues”
Mike Staton, director of Mansfield-based Staton Mortgages says the risk of homeowners ending up in negative equity right now is a “high one”, and it’s an uncertainty that many lenders just won’t be willing to gamble on.
The easiest way to avoid this risk is the removal of the 95% loan-to-value mortgage. Having talked with several BDMs from different building societies over the past week or so, they think the withdrawal of 95% products is next.
This happened during the pandemic so this is not as groundbreaking as we think. If Stephen King were to write a horror story about the mortgage market, the events would unfold in 2022 and 2023 and the victims would be first-time buyers.
Mike Staton, director of Mansfield-based Staton Mortgages
Ricky Dosanjh, managing director of Chatham-based mortgage broker, Reeds Financial believes it will be a huge shame and blow if 95% LTV mortgages disappear from the market as there are borrowers who can afford and need them.
“But much like at the height of the pandemic,” says Dosanjh, “we are likely to see a growing number of lenders shun them, at least in the short term. 95% loan-to-value borrowers are predominantly first-time buyers, who are crucial to the correct functioning of the property market.
“They generally buy entry-level homes, which enables other property owners to upsize. If first-time buyers can’t get mortgages, you get a ripple effect all the way up to the top of the property market,” he says.
However, Gaurav Shukla, mortgage adviser at London-based broker, Home Me, believes it is highly unlikely that 95% LTV mortgages will completely disappear, but suggests there are likely to be fewer lenders in that space.
Another trend Shukla sees potentially happening is lenders offering 95% LTV products on a 5-year deal only to safeguard themselves against any drop in house prices during this time.
95% loan-to-value products are currently still available but once property prices start to come down, we may well see fewer products on the market, similar to when lenders removed all 95% loan-to-value products when Covid hit.
They did this in the anticipation that the property market would crash, which it didn’t. In fact, it went supersonic due to the stamp duty holiday and the race for space.
Gaurav Shukla, mortgage adviser at London-based broker, Home Me
Government intervention in the UK mortgage market
“Without some sort of government intervention, I think it’s a nailed-on certainty that lenders will withdraw their 95% LTV mortgage products, for fear of borrowers falling into negative equity,” says Graham Cox, founder of the Bristol-based broker, SelfEmployedMortgageHub.com .
“No doubt Truss and Kwarteng will provide another backstop, though, for their bank and housebuilder friends,” he says.
Mark Dyason, founder of the mortgage broker Edinburgh Mortgage Advice says not to be surprised if we see the launch of a new Mortgage Support Scheme from the government to aid this sector and “keep the oxygen flowing into the whole housing market.”
DISCLAIMER
This article is for information purposes only and does not constitute investment advice.
Mortgages article archive – Freelance Informer
By Katherine Steiner-Dicks
October 4, 2022
