2015 reviewed – with the year nearly over, how did YOUR investments do?

Posted on December 8, 2015 · Posted in Chris Mansfield - Blog

As we approach the end of another challenging year for investors, I thought I’d just do a quick round up of the major events that have impacted on our savings and investments. And I’d better start with an apology – this isn’t going to make for easy reading.

In the global context for investors, the year started badly, and it hasn’t ended any better. At the start of the year, the global economy, up to that time fuelled largely by the Chinese economy, was already showing signs of slowing. Chinese economic growth figures were still around 7%, which would make a great headline growth figure for any other country, but revealed the potential weakness of the Chinese economy, which could not replace the slowing external market demand for its products with a viable internal domestic market.

More locally, the European economy was still in turmoil, with the potential for a Greek exit from the Euro, and thereafter for potential contagion to the Spanish, and possibly even the French economies, neither of which were doing well, and to both of which the German Central Bank wanted to send a message – don’t even THINK about an exit.

Meanwhile, in the UK, we were being told that we were successfully recovering from the effects of the 2008 global credit crunch by all agreeing to an indefinite period of “austerity”. Which essentially meant that the Chancellor was JUST about able to balance his books by suppressing as much Government spending as possible. Ever deeper cuts hit services as Tax revenues fell due to the slack job market, in itself a consequence of the lack of private industry investment, which was due in part to lack of confidence in the ability of the economy to absorb any more output. And the Chancellor also struggled with the inexplicable inability of the UK workforce to increase its productivity.

UK interest rates continued at their historic low – with the Bank of England Base Rate at the start of the year holding at 0.5%, where it had been since March 5th 2009. Which was great if you were borrowing, but disastrous if you were saving. Savings rates at the High Street hovered between virtually nothing and around 3% tops, but inflation was also very low at 0.3%, so at least you weren’t losing as much as you’d been losing when inflation had been at 5%.

The UK buy-to-let market has trudged along in 2015, with research across 2,600 postcodes revealing that returns varied from just over 11% in some parts of Sheffield city centre, to a dismal 2.6% in West London, which is bottom of the table in terms of rental yield. Gross yields in the UK buy-to-let market averaged 4.17% across the country, but that was before the Bank of England and the Chancellor of the Exchequer got stuck in to the market at the latter end of the year (of which more later). Lenders in the market had launched a batch of cheap buy-to-let mortgage deals, largely in anticipation that an interest rate rise would be some way off. Gross yields do not take account of tax, mortgage repayments and maintenance costs (which will eat into returns), they are calculated by simply dividing the median annual rent by the median asking price. But by the end of the year, the market was poised to take a dramatic turn for the worse.

(I told you this wasn’t going to make easy reading.)

So to the middle of the year: Greece had narrowly avoided exiting the Euro, which was a relief to the European economy, and to nervous bankers, savers and investors. However, the Chinese managed to keep our nerves jangling by failing to prevent their stock market enduring its biggest one day fall since 2007, in a spectacular meltdown of stock values that caused even the Chinese state media to call August 24th “Black Monday”. The contagion spread to Western markets, with Germany’s DAX falling to 20% below its peak, and US stocks suffering too, with General Electric at one point wiping more than 20% off its stock value. Around $5 trillion was wiped off global equity markets overall.

Although the markets have steadied since that collapse, there are three remaining fears: firstly that China’s economy is actually in deep trouble; secondly that the emerging markets are vulnerable to a full-blown crisis; and thirdly that the long rally in rich-world markets is actually over. Whatever the situation, the underlying strength of the world economy is now being openly questioned.

Let’s look at what all that lot has done to our savings and investments.

Well, for a start, average ISA rates in 2015 were… how shall I put it? Oh yes, I know: pathetic.

The average cash ISA actually fell to its lowest rate of return since records began in 1999, this despite the Government’s efforts to re-ignite our attitude to savings by overhauling the system of Individual savings accounts in July, when it raised the limit that you could put into a cash ISA account to £15,000. At that time the rate on a typical, easy access, cash ISA had been falling for five consecutive months, to the derisory figure of 1.17% per annum. Yes, I have checked that figure, and yes, it is 1.17%. Per annum.

And so to today – at the time of writing (2nd December 2015), the Bank of England has just released the results of their “Stress Testing” of the UK’s seven major lenders, and the results are: they all passed. However, two of them, Standard Chartered and the Royal Bank of Scotland, only just made the cut, and were identified as having the “weakest financial positions”.

The Stress test involved the lenders being subjected to a hypothetical scenario that suggested the Chinese economy suffered a dramatic slowdown. (I wonder why they chose that as the hypothetical scenario?) As a consequence of the testing, the Bank has made a shift in policy, pronouncing that the UK banking system has moved out of the post-crisis phase, and that it was “actively considering” whether banks should start to use a less risky backdrop to prepare for turbulence in the future. The suggested method by which they do this is to amass capital, which in turn could push up lending rates without a rise in the Bank’s 0.5% interest rate.

Additionally, the Bank of England announced that it is ready to take action to cool the buy-to-let housing market by putting UK banks on notice that they could be forced to hold up to £10bn of capital in anticipation of any economic downturn. The Bank had been concerned for months about the buy-to-let mortgage market, which had risen by 10% in the first nine months of 2015.

This comes at the same time that George Osborne has imposed an extra 3% stamp duty on buy-to-let purchases in his autumn statement. The obvious intention of these measures is to take the heat out of the buy-to-let market, and the final damage to investors in the sector has yet to be seen.

To me, all the above only further justifies my faith in well chosen property-backed investments from around the world. All my experience, and all the experience of my colleagues, friends and clients, leads me to believe that well chosen property investments will always provide the most rewarding medium and long-term results. And that’s as true today as it was when I started Davenport some eight years ago. Right now, some of my clients are making around10% per annum on property-backed investments.

If you’d like to know more about how investing in property might help you, just get in touch with me, Chris Mansfield, at c.mansfield@davenport-wealth.com, or call me direct on 07710 294 255.