SPR/IPF UK Outlook Seminar, Tuesday 10 January
Allen & Overy, 1 Bishops Square, London, E1 6AD
Looking for silver linings
In what seemed like one of the most uncertain SPR/IPF UK outlook seminars in recent years, all the speakers followed the call of moderator Sophie Van Oosterom (Schroders) to find something positive at what all agreed was a difficult moment for making investment decisions.
Painting the economic backdrop for the year ahead, Melanie Baker of Royal London Asset Management noted that there was now evidence that inflation – the primary cause of the recessions taking hold globally – was starting to moderate, helped by lower energy and commodity prices, and easing supply chains. If this trend continues, it will take pressure off central banks to keep raising interest rates and should strengthen the likelihood that the UK’s recession will be shallow, as indicated by an expected fall in GDP of about one per cent over the year, according to her forecasts.
But Baker conceded that the consensus among forecasters of the UK economy is gloomy, due to the effects of weakening consumer confidence and spending, partly driven by rising mortgage costs, combined with government fiscal tightening and the possibility of growing unemployment. In addition, structural factors in the UK like climate mitigation costs, demographics and labour market constraints run the risk of embedding inflation for the longer term.
In a thought-provoking presentation, multi asset allocator John Roe of Legal & General Investment Management characterised the year ahead as akin to a duckbill platypus, given that no-one is sure exactly what kind of creature it might be – there is huge uncertainty for all asset classes. On the positive side, the warm winter may mean that climate change is helping reduce energy costs in Europe, although he quipped that we may end up getting fried later.
Looking across the asset classes, there could be advantages for real estate, given that equities and bonds have shown a strong positive correlation in the past year, potentially limiting their diversification potential, at least if this continues. Meanwhile property fund valuations have now been adjusted downward, following a similar movement in the listed market some months earlier. However, it is very difficult to predict how property markets will behave as 2023 progresses, and much will depend on the direction of market sentiment. The past year has shown how this can change very rapidly, and at certain points there could be advantages in going against market trends, since some repricing may not ultimately be justified by economic fundamentals.
Martin Towns of M&G Real Estate entitled his property-focused presentation ‘New Year, New Cycle?’, reflecting the possibility that the rapid price correction seen at the end of 2022 could encourage investors to find value and opportunity in the sector once again, particularly as the adjustment has been more dramatic in the UK than elsewhere in Europe. Write-downs had been strongest in the industrial market, where yields had previously tightened most in the wake of rising bond yields. Here could be the strongest potential for a rebound, given that occupational markets remain relatively strong.
For offices, there is much more of a bifurcation between good and poor-quality assets, and it could make sense to repurpose some of the latter if values fall much further. Private rented residential may be in the strongest position among the sectors as people increasingly choose to rent rather than buy their homes in light of rising mortgage rates. Thinking about property as a whole, Towns sees ESG as the hottest topic, with investors particularly focusing on the social element, where impact investing may be increasingly favoured as a way of ensuring a positive social gain from their investments.
In the panel discussion that followed, Van Oosterom asked if retail assets might see a dispersion of performance similar to offices. Towns said that retail parks could continue to fare relatively well based on a strong income return, but the story is very different for shopping centres, where secondary assets might again require changing to other or perhaps a mix of uses, even if rents have stabilised post-pandemic in more favourable locations.
Thinking about real assets more generally, Roe was positive about their potential to access different economic drivers to other asset classes, but he also stressed the high cost of entry and the tendency for these markets only to reprice slowly, as had been seen in the recent downturn. This could lead to investors fearing entrapment in the ‘prisoner’s dilemma’ of only seeing the need to enter the market once activity had already dried up.
Tim Horsey