2023 so far is shaping up to be a year of contradictions judging by the different reports on the UK Housing market and factors that impact it.

In the fews weeks of this new year so far, the reports coming from different sources regarding the state of the UK Housing market and what the future holds has ranged from confusing to frustrating.

Here is a list of a few examples:

1: Example one.

2: Example two.

3: Example three.

4: Example four.

5: Example five.

According to some reports, things are looking better since wages are going up, interest rates are going down and more houses are being sold.

On the other hand you have reports of an impending recession, possible market crash, job losses, house prices falling and higher costs associated with borrowing.

By the time you have read this article, you will have a number of questions answered, a lower blood pressure and breathe a sigh of relief.

This should ease your frustration and serve as a reminder of why you should share this article and follow us on Instagram and TikTok – worth a shot.

The four main factors that impact the housing market

If you read our Winter Outlook, you should be somewhat familiar with the main forces that are impacting the economy.

Here is a further breakdown of the main forces that impact the UK Housing market and how.

1: Interest Rates

2: Inflation

3: Real Incomes (Wages) and Jobs

4: Availability of Houses

Interest Rates: What are they and how does it impact the Housing Market

What are Interest Rates

The rate of interest on any loan shows the borrower how much more they will need to pay back in addition to what they have borrowed. This is the cost of borrowing.

As a saver, the interest rate shows what you can earn on your saved money (worth remembering without complicating things that banks lend out your money). When rates are high, your saved money earns you more interest.

From this illustration you can also deduce some of the reasons why interest rates are raised or reduced. 

To get people to save more, well, give them more return for saving their money and if you want people to spend more, make it easier (reduce the cost of borrowing) for them to borrow.

This has the effect of stimulating the economy or slowing it down when things get too hot.

How do Interest Rates affect the Housing Market

When you are looking to purchase a home, many if not all lenders will need you to put a deposit which is a percentage of the price of the house you are looking to purchase. 

The rest of the money is borrowed from a lender which could be a bank or building society. Since nothing is free, this borrowed money needs to be paid back over a period of time, with interest. You effectively have a mortgage arrangement with the lender.

The rate of interest you pay on the loan is impacted by the Bank Rate (another name for the Interest Rate in the UK). 

When interest rates are higher, your cost of borrowing increases and you will need to pay back more on the loan than you normally would if interest rates are lower.

Higher interest rates make it more expensive to borrow and encourages even more people to save because of the higher interest earned by money you have saved in the bank.

When the cost of borrowing increases, people are less likely to purchase big items such as houses or cars or anything that will require taking on debt.

Inflation: What it is and how it impacts the Housing Market

For starters I recommend you become acquainted with our article on inflation to have a basic understanding of inflation and its impact.

Inflation erodes the purchasing power of your money and in normal circumstances, inflation is not a bad thing.

The real issue here is high inflation and this is when inflation rises significantly over a short period of time. Most central banks aim for a steady two percent rise in inflation and anything greater than that may suggest the economy or parts of it is heating up.

When inflation is high, you need more of the currency to buy items or assets. If inflation is at 10%, that £100 you have is still £100 when you look at the currency but the purchasing power (what you can buy) with the £100, will be less.

Hard assets such as Real Estate, Gold and some other commodities ‘do well’ during periods of high inflation since these assets are illiquid and anyone looking to buy them will need more of the (increasingly weaker) currency to purchase these goods.

The effect of high inflation on the housing market is multi dimensional and can be better seen from the lens of the different participants.

1: Home owners see the value of their homes go up since inflation makes it more expensive to purchase hard assets. As a result, they are not keen to sell and this can reduce the supply of homes for sale.

2: Buyers will need to raise more money (borrow more) to buy these same hard assets because the value of their currency is not as strong due to inflation eroding some of the purchasing power.

Now there are reasons why buyers and sellers may benefit in this situation but one needs to look closer to see what the trend is showing.

People may not be so keen on buying a house when inflation is biting because there are other costs (living costs) and needs that are more pressing.

If more people choose not to buy homes due to high inflation, that has the effect of reducing demand and when demand reduces, the prices will wane. 

Many home owners too may not be willing to sell during periods of high inflation since the value of their homes is going up.

Real Income (Wages) and Jobs

The impact of wages and jobs on the housing market is quite straightforward. A strong job market and wage growth gives us confidence to spend more and buy homes or upgrade our living.

It is a sign that things are positive in the economy and can have the effect of increasing house prices as more people look to purchase homes.

Conversely, if people are earning less (especially due to inflation) or and if there are job cuts across the board, more people have a negative outlook on the economy and are reluctant to make large purchases such as buying a home or upgrading and the expectation is that house prices will fall as there is less demand. 

Availability of Houses: How Supply and Demand impacts the Housing Market

The housing market is not exempt from the dynamics of supply and demand. If there are more houses (supply) on the market and the demand is not met, house prices should fall.

When there is growing demand for houses and short supply of houses, prices will go up.

What to do in the current housing market

Now we have been reminded of the main factors that impact the housing market and the manner in which they do, this is what you need to consider and do if you are in the market or just an observer.

This should not be taken as financial advise and should you need financial advise, seek it before you purchase. And thank us for pointing you in the right direction.

What we see happing in the UK Housing market is a confluence of the four points mentioned above, with each one having a certain amount of impact on the market. 

High inflation and rising interest rates have a relationship such that as inflation is high, the central bank is raising rates until inflation falls to the target the central bank has set.

Wages and the supply of houses are directly impacted by the preceding points as people adjust their spending based on how they are impacted by prevailing economic circumstances.

These are the main things I will pay attention to if I was looking to buy a property in the current state of economy. 

First, do not be an observer if you can help it. There are opportunities to invest that should not be overlooked depending on your budget and other factors taken into account.

Indicators show that inflation is falling and although the central bank will continue to raise rates, if they do so without crashing the economy, it is likely the rate hikes will slow down. When that slows down, there may be an increased appetite to purchase houses.

Secondly, get your finances in order. Speak with an expert and this includes potential lenders, estate agents and any other relevant experts in the property market so you know what your options are.

Thirdly, be more specific in for search. Simply looking for a house in any area may not be the best way to go about it. Be specific on the type of house you want and use that in your search criteria.

If you are interested for example in a family home, look at the areas you are interesting, look at the street and see if any opportunities come up. People are still going to have to sell due to death, debt or divorce – life happens eh.

Fourthly, use the prevailing market conditions (inflation, high interest rates) as chips for bargaining once you find a seller. Try to understand why they are selling as that can help you find middle ground or a win-win situation where you are not overpaying for a home and the seller does not feel cheated.

It is ideal to buy something that is undervalued and needs works as this reduces the risk of you buying a property that is overvalued especially since home valuations are dropping (across the board but at different rates).

Final Notes

Congratulations on making it this far in the article. Here are the main points to note.

A lot of what you read is entertainment and not education and the experts are not always right. Read this article to see why.

Pay attention to the macro economic conditions and the factors that impact the housing market.

It is a dynamic situation and if you are prepared by looking for opportunities in the areas of interest and getting your finance in order, you improve your chances of getting a property especially when things in the economy begin to turn around.

Regardless of the headline and prevailing economic conditions, there are opportunities but not every opportunity is right for you.

A new year is upon us and it is time to bring out the crystal ball and predict what exactly will happen this year and how we can make loads of money. Aah, if only it were that simple.

The real challenge in many ways is not the lack of information as you will see by reading the last bit of this article, there are many opinions out there. Diverging perspectives and differing views further add to the challenge of not knowing what exactly to do with your hard earned cash. 

It is worth noting these views are broad and may not apply to every type of investor at the same time.

The main thing here is to think about the Event, Opportunity and Asset class that will allow you to benefit from what happens during the year. As always, we are not providing financial advice in anyway so do seek expert advice – and share some of it with us.

In this article we share details of the trends that will take focus this year and any possible opportunities this will create.

China

There are several aspects of this so we will break it down.

New Covid Variants

In the last few weeks of 2022 reports came to light that the Chinese authorities have been dealing with a surge in covid cases. Initially, the government had a zero covid policy which led to large swathes of the populations in cities to be locked down with strict rules applied.

Well, that did not go according to plan and the impact to the economy could not be ignored. Protests occurred in a number of cities too. The authorities have since relaxed these rules however, covid cases are rising rapidly and a number of countries have taken steps to check inbound flights from China for negative Covid results.

Prior to these checks being introduced, it is very likely that passengers from China coming into Europe and other parts of the world, may well have been infected with this new strain of Covid.

Is this cause for alarm? The actual details are beyond the scope of this article because there are many factors to consider and it can get messy.

Main takeaway here is that the world may be dealing with a cocktail of covid variants and depending on the impact it has and what governments choose to do, there will be impact (on the Economy and Businesses) that range from little to severe.

On the severe side of things, a lockdown will ensue across the board, flights will be cancelled and we could see a 2020 playbook where demand for oil slumps, airline and hospitality sectors suffer, biotech stocks gaining more ground and ‘covid stocks’ such as Netflix, Disney, Zoom, Peloton and any other may see growth in their share prices – but this is an extreme example.

What is more likely to happen is that the situation is closely monitored and if the impact to the healthcare infrastructure increases, then action will be taken accordingly that may result in some temporary lockdowns and travel restrictions.

Countries are increasingly imposing stricter travel requirements on passengers from China and this is only set to ‘get worse’ as Covid cases rise across different countries.

Sectors and companies to watch here include airline, biotech, hospitality and travel. A simple google search can reveal these sectors and stocks. ETFs are also worth considering in this case.

Increased Demand for Resources

China’s end of the zero covid policy in may ways meant the Chinese economy is open without any interruptions for business and this is positive news (barring the issue with an explosion of covid cases) from an economic standpoint since it means demand for commodities, metals and other resources China is a major consumer of, increases.

As a side note, the Chinese government has put money aside to bail out troubled real estate companies which is also a positive sign as this will settle nerves and renew interests in that market especially since the Evergrande and the contagion from it.

These are some of the Chinese ETFs to watch; the opportunities will be more apparent as the year transpires.  

Chinese Companies Listed on US Exchanges

The 200 plus Chinese companies that would have been removed from the US Stock Exchange, will no longer be removed since US Auditors have been granted access to the books of these companies and have not found any issues.

This decision marks an important turning point and an end to the longstanding conflict between Beijing and Washington. There are a number of guidelines and rules a company will need to adhere to in order to be listed in the US.

Increased confidence in these companies from an audit stand point of view is positive news since many buy side clients and other investors that would otherwise be hesitant to invest, will consider doing so.

Companies such as Baidu, Alibaba and other blue chip Chinese companies listed in the US would have been impacted by this. There is potential upside for increased demand in these companies shares.

These are the Chinese companies listed in the US can be found here and there are a number of ETFs that have exposure to these companies. ETFs are good as they provide diversification and are low cost.

Geopolitical Issues

Unless you have lived under a rock (which to be fair, may be a safe place considering what is going on in the world right now), you will be aware of the main conflict in Europe.

The ongoing conflict in Ukraine and Russia means we are paying even more for energy and some soft commodities. While this conflict is not entirely to blame for the inflation in these goods, it is a factor that cannot be ignored. 

One potential opportunity from this is that more investments will pour into renewable and other sources of energy in an attempt to wean us off from Russian gas. These developments are still in the early stage but it is an area to closely watch.

We are going to be paying more for energy regardless of what happens. This conflict will last longer than experts may come to expect (we are dealing with egos and hidden agendas after all) and while this continues as we have seen, energy companies have made a killing in their profits. 

As I alluded to earlier, this was not all due to the conflict in Ukraine; as we can see, energy prices have been going up since 2021. This graph shows the Sectors and ETFs that are in the Energy Sector and you can see the performance.

Looking closer at the constituents of the ETFs, you can see individual companies and see how many of them have increased dividends due to how much money they have made.

Blue chip energy stocks with big balance sheets can navigate this energy crisis and benefit from it. Definitely a good idea to watch them closer. 

There are other potential geopolitical flashpoint such as China and Taiwan and the decoupling of these economies, North Korea testing even more missiles and Japan investing more in its military. Europe is closest to home and the impact of the conflict is felt more readily hence our focus on it.

Cost of Living Crisis

One pain point from this conflict is the cost of living and how we are paying more to heat our homes and businesses. Now some people have argued energy companies are opportunistic in their pricing and using the conflict as a reason to hike prices.

Whatever the case may be, the prospect and reality of spending a larger portion of your pay check on staying warm and just being able to live is something the population is struggling to understand and the strikes we have seen in the UK with the different Unions is a reflection of this frustrations.

Inflation

We have written a bit about inflation and how it affects us. Sadly enough inflation is not going away any time soon and while this persists, the Central Banks will continue to do what they can to bring it under control without crashing the economy – some would argue we are already seeing a slow down that will get worse.

The question on peoples minds here is if inflation has peaked. Some experts suggest this will be in cycles so as far as this cycle is concerned, we are seeing inflation peak. It is important to understand how inflation is measured to see what items influence the calculation.

As we exist winter, there is (should be) lower demand for energy and this has the effect of reducing inflation from energy. Gas companies may choose to obtain more gas and shore up their storage in the meantime.

Getting into winter 2023, we may well see inflation from energy rise and a new cycle return.

The monetary policy of the Central Banks post covid contributed is a factor in causing inflation in many ways since the availability of easy money meant investors were borrowing hands over fist and buying whatever they pleased (including Cryptocurrencies and NFTs).

Now, money printers no longer goes ‘brrrrrr’ (check the meme) as Central Banks have increased interest rates in an attempt to combat inflation – so far it appears to be working. A reversal or change in the central bank policy has the aim of reducing inflation and there are promising results but the main danger is not to crash the economy in the process.

Recessions Fears

Muttering and whispers of a recession have been around since he last quarter of 2022 and these whispers have grown louder. Looking at the economic numbers it is hard to debate that we are in a recession in the UK, in Europe and many major economies.

The IMF has revised its growth forecast for world economic growth. There are opportunities to invest in the right type of companies and the right companies in this economic climate are those that are:

• Cheap: Trading at a discount to their value. There are metrics such as PE and other ratios that can reveal this. Here is a quick breakdown of some of the ratios.
• Staple and Consumer Groups: There are companies in this sectors we cannot do without recession or not.
• Large Balance Sheets: Companies that are large enough to weather the economic storm of inflation and recession. Just bear in mind no there are unforeseen events that can potentially impact these companies.

Artificial Intelligence: The Rise of the Machines – Again

ChatGpt3 by OpenAI is a game changer in the making and the recent developments they have made is cause for excitement.

Artificial Intelligence is set to replace many jobs and while it may not be apparent which jobs will cease to exist, the opportunity is there to invest in the future.

The thought process here is to look for companies that fit one or more of these criteria:

1. Companies that invest in Open AI directly or partnering with them. Microsoft is a candidate for that.
2. Companies that are using the technology to further reduce costs and streamline operations or create more innovative solutions.
3. Startups that are heavily use A.I to create innovative products and capture market share.

Any companies that fit that profile are potentially good candidates to look further into and invest in, all other things considered. 

Final Words and Input from the Real Experts

2023 is expected to be a challenging year in many ways carrying on from what we have seen in 2022 but there are opportunities. These opportunities may not be apparent at the beginning of the year and will require investors to look closer to find value and to be dynamic in their approach.

This suggests simply putting your money in a passive fund may not give you superior returns – just a thought.

As Warren B says, it is only when the tide goes out we can see who has been swimming naked (yikes). Challenges present a chance to grow and that is how we see 2023. 

Side note, India has overtaken the UK (go India!) in GDP terms and is looking promising going into the year. India is one country to watch in the coming years and there are a number of ETFs that are India-focused should you look to benefit from the potential growth of the Indian economy.

Another honourable mention is Cryptocurrencies and at this stage it seems like there is drama each year (sigh). The latest and ongoing FTX Scandal for lack of a better word has shown and continues to reveal what can happen without due diligence or regulatory framework.

The price of Bitcoin and the other cryptocurrencies have slumped in the last 12 months and may have hit a bottom but it is unclear. 

Two things we see coming out of this is that if some sort of regulatory framework is put together to protect investors in Cryptocurrencies, that can renew investor confidence.

Investors can also focus on other applications of the Blockchain and not merely cryptocurrencies. The Blockchain technology is useful and has a lot more application so rather than focus on only one aspect of it (cryptos), perhaps it is better to find other applications of this technology and seek ways to benefit from it.

Expert’s 2023 Forecast

Some of the heavy hitters in the industry with their army of research analysts have put their thoughts on the coming year and I have put them together for your reading pleasure.

Worth remembering some of these experts did not foresee the impact of covid, high inflation and the Russian-Ukrainian conflict. So read what they say but decide for yourself.

In no particular order, here they are. Happy reading and all the best in the new year.

Goldman Sachs: https://www.goldmansachs.com/insights/pages/gs-research/macro-outlook-2023-this-cycle-is-different/report.pdf

J.P Morgan: https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/mi-investment-outlook-ce-en.pdf

Morgan Stanley: https://www.morganstanley.com/im/publication/insights/articles/article_2023investmentoutlook_enin.pdf 

Bank of America: https://about.bankofamerica.com/en/making-an-impact/outlook-2023-webcast 

Schroders: https://www.schroders.com/en/insights/economics/outlook-2023-cio-and-multi-asset-its-all-about-valuations/

Blackrock: https://www.blackrock.com/corporate/literature/whitepaper/bii-global-outlook-2023.pdf 

Societe Generale: https://insight-public.sgmarkets.com/insights/multi-asset-portfolio-outlook-2023 

Allianz: https://www.allianz.com/en/economic_research/publications/specials_fmo/global-economy-outlook.html 

HSBC: https://www.privatebanking.hsbc.com/content/dam/privatebanking/gpb/wealth-insights/investment-insights/house-views/2023/brochure/Q1%202023%20Investment%20Outlook%20-%20Looking%20for%20the%20Silver%20Lining%20-%20Brochure.pdf

Barclays: https://www.cib.barclays/our-insights/3-point-perspective/q1-2023-global-outlook.html#:~:text=2023%20may%20well%20be%20one,3.2%25%20growth%20expected%20for%202022

Natwest: https://www.natwest.com/corporates/insights/markets/the-year-ahead-2023.html 

Citigroup: https://www.privatebank.citibank.com/newcpb-media/media/documents/outlook/outlookwealthreport2023.pdf

UBS: https://www.ubs.com/global/en/assetmanagement/insights/investment-outlook/panorama/panorama-end-year-2022/articles/calm-waters.html 

Franklin Templeton: https://www.franklintempleton.lu/articles/brandywine-global/outlook-for-2023-complicated-fragmented-macro-road-map 

TSLombard: https://blogs.tslombard.com/things-that-wont-happen-in-2023 

PGIM: https://www.pgim.com/investments/getpidoc?file=DF1B2252A93C42328E3C0AF5BC12455E 

Nordea: https://docs.nordeamarkets.com/nordea-economic-outlook/economic-outlook-2022/eo-en-03-2022/ 

Capital Group: https://www.capitalgroup.com/advisor/insights/categories/outlook.html 

Vanguard: https://investor.vanguard.com/investor-resources-education/news/vanguard-economic-and-market-outlook-for-2023-global-summary

S&P Global: https://www.spglobal.com/ratings/en/research-insights/topics/outlook-2023 

Moodys: https://www.moodys.com/newsandevents/topics/2023-Outlooks-00705F 

AXA Investment Managers: https://www.axa-im.com/investment-institute/outlook-2023 

Invesco: https://www.invesco.com/middle-east/en/insights/investment-outlooks.html 

Macquarie: https://www.macquarie.com/us/en/about/company/macquarie-asset-management/outlook-2023.html?creative=637442313013&keyword=economic+outlook&matchtype=b&network=g&device=c&adgroupid=150691169984#:~:text=Download%20the%20magazine%20(PDF) 

Amundi: https://www.amundi.com/usinvestors/Local-Content/News/Investment-Outlook-2023-Some-Light-for-Investors-After-the-Storm 

DWS: https://www.dws.com/en-es/our-profile/media/media-releases/dws-market-outlook-2023/ 

T.Rowe Price: https://www.troweprice.com/financial-intermediary/uk/en/lp/global-market-outlook.html 

Lazard: https://www.lazardassetmanagement.com/uk/en_uk 

Fidelity: https://professionals.fidelity.co.uk/static/master/media/pdf/outlook/annual_outlook_2023.pdf 

BNY Mellon: https://www.bnymellonwealth.com/content/dam/bnymellonwealth/pdf-library/articles/Final_BNYM2023OutlookMaster12_20_22.pdf 

Wells Fargo: https://www08.wellsfargomedia.com/assets/pdf/personal/investing/investment-institute/2023-outlook-report_ADA.pdf 

State Street: https://www.ssga.com/library-content/pdfs/gmo-2023-navigating-a-bumpy-landing.pdf 

ING: https://think.ing.com/uploads/reports/ING_global_outlook_2023_Dec_2022_OT.pdf

Deutsche: https://www.deutschewealth.com/content/dam/deutschewealth/cio-perspectives/cio-insights-assets/q1-2023/CIO-Insights-Outlook-2023-Resilience-versus-recession.pdf 

2022 was an interesting year in quite a few ways and there are a number of charts that reveal how interesting it has been.

It is a year where almost every asset class has been impacted by Geopolitical, Energy and Economic events.

Here are a number of charts we have chosen that reflect the ‘best bits’ of 2022.

Bitcoin Versus the US Dollar

It has been a rough year for Bitcoin which is chief among the cryptocurrencies, and other cryptocurrencies. Cryptocurrencies are largely unregulated and that creates an environment where due diligence may not be a top priority.

The current FTX debacle ongoing and the arrest of Sam Bankman Fried has brought more attention to this topic. Many crypto investors are having cold feet and we can see the price of Bitcoin has slumped.

Other crypto assets have seen their prices drop significantly and this includes exchanges and other industries related to cryptocurrencies.

The performance of Bitcoin in the past few months of 2022 cannot be simply attributed to fraudulent activities at FTX. Crypto assets are mainly speculated with and as we saw access to cheap money dry up due to the Fed tightening, let’s say there was less money available YOLO.

The High Cost and Profit of Energy

The cost of living crisis is something the government is tackling and alongside Inflation, this has become one of the biggest challenges this year to people’s bank accounts.

On one hand, inflation is a runaway train trying to be brought under control and on the other, the cost of living is making it much more difficult to pay for goods or services.

As we mentioned earlier in our article here, the higher cost of energy is not entirely due to the conflict in Russia and Ukraine. Check any chart and you will see we have been paying more for energy since the end of 2020.

Energy is the lifeblood of any economy and we have seen energy weaponised for political gain. Energy companies as we can see here make up most of the holdings in this ETF. These companies have seen increased profits as we have paid more for energy.

It has been a tale of two companies (or more) considering Uniper needed to be bailed out by the German government. Uniper and Shell operate in different parts of the Energy sector with each facing and dealing with the ongoing energy crisis.

What happened to the Pound Sterling

What may now seem to be a distant memory, felt like an eternity at the time as we saw the turmoil unfold in the market. The pound took a pounding and a serious beating.

Believe or not, Liz Truss is the United Kingdom’s shortest serving Prime Minister and in that time, damage was caused to UK economy and that is reflected in the GBP/USD chart.

While she was in power, she appointed Kwasi Kwaerteng to be her Chancellor and announced a mini-budget. Mini in name but maximum in damage to the UK economy.

The long short of it is that the budget did not have any tax increases – if anything it had tax cuts. The UK economy is impacted to a large extent by what happens in Europe (strange, I know considering the outcome of the Brexit vote) so if things are not looking quite positive in the EU, the UK is also impacted by that economic outlook.

The UK government needed to raise money to pay for services and to keep things running along. Tax cuts were not the way to do it so once this mini-disaster-budget was announced, the GBP took a steep dive versus the USD, Pension Funds sold UK Gilts (UK Government Bonds) and the Bank of England had to step in to provide liquidity.

Calm was restored, Kwasi bore some of the brunt of the fall out, Liz is out and Rishi is back in but this time was the Prime Minister. What a saga eh? This has the makings of a good movie or TV show.

The GBP fell sharply against the dollar in those days however has improved since then. Crisis averted, we are safe for now.

The Dollar Strength

The USD gained versus many currencies and that caused a real problem for some countries. Here we shared more details on the impact of a strong USD and it is worth a read and reminder.

Inflation plays a part in this story too. In the past few weeks, inflation appears to be cooling and the Fed did a 50 basis point as opposed to a more aggressive 75 basis point hike and the market sees this as a positive sign the measures taking to stem inflation, is working.

Final Notes

Check out our Winter Outlook article and look out for our 2023 trends article. Most of what we have seen transpire in 2022 will carry on to 2023 and will have an impact regarding how savvy investors deploy capital and hedge existing positions.

Strictly speaking there are no good years or bad years; there are events and opportunities and what you do about them. C’est la vie.