Aurelia Butler

My mother was furious. It was 1977 and my father, a BBC lighting designer and not an investment specialist, had bought shares in Peachey Properties — a development company run by the flamboyant Eric Miller.Miller, the original champagne socialist, whose lavish lifestyle included spending more than £1.5mn in today’s money at Bond Street jeweller Asprey, and nearly as much as a deposit on a private jet, was caught using the business as his own private bank. He also lent money to Fulham football club and as a club director he was involved in poaching Bobby Moore from West Ham, so he was not all bad in my eyes.My mother did not see it like that, though. As the story broke, Dad’s investment looked decidedly uncertain.Property seems to attract excess. Rising interest rates often expose vulnerabilities and prick the bubble and in the mid-1970s rates hit double figures for the first time in the UK’s history. They peaked later in the US — in 1981, when the Federal Reserve moved aggressively to tame rampant inflation. The federal funds rate hit a record 22.36 per cent that July, according to data from the St Louis Fed.We forget the world has often coped with single-digit interest rates like today’s. The danger lies in transition. Companies and households that based their financial plans on much lower rates have difficulty adjusting. They are not alone. Lenders — historically, banks — can be swept up in the damage that often emerges only after rates are ramped up.In the mid-1970s, dozens of small UK lending banks faced bankruptcy as property prices plunged in reaction to rising rates — most famously Slater Walker, whose boss, Jim Slater, noted he had become a “minus millionaire”. Between 1980 and 1994 in the US, more than 1,600 banks closed or had to be rescued.I began working in the City of London in 1984. That year the grandly titled Continental Illinois National Bank and Trust Company, with over $40bn of assets, failed. It was the largest bank collapse in US history — a record held until the financial crisis of 2008-09.When lenders struggle, there is a knock-on effect for industries that rely on credit and find it has suddenly disappeared. In 1984, it was the oil sector which had seen over-investment, and could not cope with the combination of rising interest rates and falling oil prices — especially as oil exploration has a payback period from discovery to well depletion of 30 years or more.

We are in this danger zone today. The collapse of Silicon Valley Bank in the US and Credit Suisse in Europe is a reminder, along with the ongoing travails at First Republic. But there will be others. Anticipating where and when the next eruption will come is not easy.Property looks an obvious choice. Commercial property companies often negotiate five-year leases. If they think inflation will average, say, 6 per cent for the next five years, their optimum position is to make the new rate what it would be in five years were it to rise in line with inflation — a 34 per cent increase. This is unlikely to go down well with a tenant facing inflation pressures themselves.Most managers of major property companies understand this and the wise ones resist the temptation to borrow too much in the good times. Currently in the UK, debt costs most property companies about 5-6 per cent and properties are priced on yields of between 3.5 per cent and 4.5 per cent. This does not work. In addition, real estate trusts are facing the after-effects of the pandemic. Working from home and the consequent fall in shopping in city centres has affected demand for space in unexpected ways.Lavish lifestyle: Eric Miller, right, who ran Peachey Properties in the 1970s © Malcolm Clarke/Getty ImagesThis combination of factors has led property shares sharply lower. For instance, Land Securities shares — £10 before the pandemic — are £6.50 today. European commercial property companies look particularly vulnerable because they have not faced this environment for 15 years. Some property stocks, such as Shaftesbury, which owns much of London’s Covent Garden, will probably bounce back and may even look attractive at 114p. Its recent annual report valued assets at 192p per share, following a recent merger.As for lenders, I own only two banks. Both are in Japan, where depositors are unlikely to move their cash in search of higher rates because they are not available. If inflation proves persistent, interest rates could be allowed to rise modestly there, enabling these banks to make more from lending than has been possible in recent years.Investors may think technology companies are well-placed to cope with rising rates. The time between inventing a new software app and bringing it to market is often shorter for them than for those developing physical products, but marketing can require heavy cash burn just when the fuel of credit is running low. Entrepreneurs (and potential private equity funders) are motivated by reward. Floating a company on an exchange such as the Nasdaq has been a valuable way of generating that — as well as a source of additional capital. But valuations today are much lower than they were three years ago.

This affects more than just lenders and founders. Staff such as coders may be remunerated in part with stock options. These now look less valuable, just as employees’ monthly mortgage payments are spiking. We are underweight tech and our preference is for companies such as Google, Microsoft, Salesforce and Adobe — mature businesses, not dependent on banks and other lenders.Biotechnology could face a different squeeze. Rising rates squeeze the public purse. Although we are seeing a dramatic rate of innovation, especially in genetic biology, public health bodies face mounting bills from caring for an ageing population using existing treatments. Money for new cures, especially of rare diseases, may be scarce until proven successful and unless cheaper. Finally, we should not assume that renewable energy will escape. Investment in any utility requires a long payback. We assume governments will support this sector but they may be less protective of shareholders if they are perceived as profiting too much from the climate crisis.Inflation is starting to fall and the risk of it escalating is now reduced, with oil at less than $80 a barrel rather than the $123 it was a year ago. Hopefully, that means companies need make more modest adjustments — perhaps preparing for persistent inflation and interest rates between 3 per cent and 4 per cent. But this is a time to recheck the debt carried by companies in your portfolio. Interest rates may be close to peaking, but the danger is not over yet. The world looks decidedly more Peachey than peachy.Simon Edelsten is co-manager of the Mid Wynd International Investment Trust and Artemis Global Select Fund More

Confused about the 2023 economic outlook for the US, the world’s largest economy? You are far from the only one. Over the past six months, the consensus narrative among economists and Wall Street analysts has gone from an expected soft landing, to a hard landing, to no landing. Most recently, the consensus has appeared to move back to a hard landing, with some even worrying about a banking turmoil-induced crash. This rollercoaster mainly reflects the interaction of external developments with policy slippages and inconsistent policy communication from the Federal Reserve. It is one that is unusual for what is the world’s most influential economy, with mature institutions.And it is not just market narratives that have seen volatility. Moves in key segments of financial markets have also been akin to a rollercoaster ride. Consider, for example, the yield on the two-year Treasury bond, which plays a significant role in many financial activities. Normally anchored by Fed policies and its forward guidance, this yield fluctuated in March in the eye-poppingly wide range of 3.58 to 5.08 per cent. Meanwhile, markets have continued to dismiss the path for 2023 rates signalled by the Fed, pricing in a series of interest-rate cuts that chair Jay Powell and his colleagues repeatedly asserted would not happen. These unusual developments are unlikely to dissipate any time soon given the cyclical and structural uncertainties facing the US economy. Moreover, the Fed is unable to act as a strong enough anchor given its lack of a clear strategic vision and an outdated monetary policy framework. No wonder several veteran economists have acknowledged that this is one of the most uncertain times for the US economy that they have experienced in their careers.

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The right response to such unusual uncertainty is to embrace it and adapt. And as complicated as the outlook is, it is possible to specify a set of issues that is likely to determine the eventual economic outcomes. First, there is the less elastic supply side of the economy as the world navigates the energy transition, labour market tightness, corporate rewiring of supply chains and the manner in which geopolitical tensions are changing globalisation.Second is the Fed’s ability to reduce inflation while containing the damage to jobs and growth and maintaining financial stability — the policy trilemma.Third is the extent of adverse economic contagion arising from the recent tremors in community and regional banks, including First Republic’s fragility and the overall impact on bank lending of higher funding costs, greater loan loss provisions, a less stable deposit base and the likely onset of tighter supervision and regulation.And fourth is the ever more complicated relationship between economics and politics, both domestically (including the US debt ceiling) and internationally (including how national security considerations trump economic ones).On these complex issues, we are all facing a large set of plausible outcomes. So mindsets and planning approaches need to shift away from assuming a dominant baseline scenario with low probability tail risks.To do this, policymakers and companies must guard even more against behavioural traps such as confirmation bias, blind spots and active inertia. And have the humility to admit that, even in the best of circumstances, mistakes are likely to happen and it is important to remain open to course correction, learning from them and others’ experiences. This does not happen without a shift from comforting groupthink to greater cognitive diversity.

Markets will punish companies and their managements if they do not adapt. Indeed, we are likely to see more financial stress and bankruptcies for businesses lacking resilience, as well as those with operating approaches that are not easily adaptable to a world of higher rates for longer. The latter includes commercial real estate whose moment of truth will materialise as more than $1tn of holdings need to be refinanced in the next 18 months.The pressure to adapt in a timely fashion is notably lacking for institutions with managements not subject to market discipline or regular democratic elections, such as the Fed. For the wellbeing of the country, it is incumbent on these institutions to be more open to self-disruptions and for their governance structure to involve stronger accountability.Without that, the steadying and guiding role of US institutional maturity will weaken even faster in the face of eroding credibility, turning this once dominant US comparative advantage into an even greater source of domestic and global instability. More

For Gabe Stones, deciding what kind of a mortgage to take out “literally feels like a gamble”.A video games artist in his thirties, Stones lives with his partner in a two-bedroom flat in east London, which the couple bought as their first property five years ago.In the heyday of ultra-low interest rates, they secured a mortgage at a five-year fixed rate of 1.9 per cent. With their fix expiring in a month, they now face the formidable challenge of refinancing at rates around twice as high — even though they are fortunate in only needing to borrow about 50 per cent of the value of the home.What’s more, Stones suspects they might struggle to pass an affordability test with a new lender, as their personal circumstances have changed: they now have two young children; and his partner, made redundant during her maternity leave, has seen her income decline as she turned to freelance work. This has left him, like borrowers up and down the UK, facing a crunch decision: how to keep monthly mortgage repayments as low as possible, without locking into a deal that later leaves them paying over the odds in a shifting climate for inflation, interest rates and the mortgage market. “It is a real dilemma for people at the moment,” says Simon Gammon, managing partner at mortgage broker Knight Frank Finance. “Are we at the bottom on mortgage rates, or is there a pause while we wait to get on top of inflation and we start to see rates fall a bit further?”For many, these are far from academic questions. An estimated 1.7mn people will come to the end of their fix in 2023, according to the Bank of England. Banks eager for new mortgage business have chased down rates from their highs of late 2022, but with margins tightening, there is little room for further big moves. In making a call on the issue of the moment — where inflation and base rates will lead over the next few months — borrowers refinancing what is typically their biggest asset will make a decision with consequences that could stretch all the way to 2028 — and spell the difference between securing an affordable mortgage and hitting a financial crunch point.Fix now or take a breath?For more than a decade, borrowers grew accustomed to choosing a fixed-rate deal — often the shortest and cheapest — knowing they could roll on to a comparable rate or better when the fix ended. As interest rates and inflation have soared over the past year, however, well-worn assumptions about the mortgage market have been overturned. The refinancing decision now involves balancing the pros and cons of fixed and floating rates and the impact of fees. And the cheapest deal is no longer the classic two-year fix, but the five-year equivalent. A key decision for those looking to refinance is whether to lock in a fixed rate today at about 4 per cent — giving certainty over monthly payments and, for many, peace of mind — or to go for a variable or tracker mortgage. Two-year trackers, which follow Bank of England base rates, currently average around 5 per cent, according to finance site Moneyfacts. So why would a borrower sign up for the more expensive option?The answer lies in market expectations of headline inflation. If inflation falls faster than expected, this could lead to earlier cuts in base rates and provide more opportunity for lenders to trim their interest rates on fixed- rate mortgages (see below). So fixing for a long period now could leave borrowers paying more than they need in the latter part of their fix — and facing a potentially heavy penalty to end the deal early.James Christopher, a homeowner near Norwich in his forties, came to the end of his five-year fix — on a rate of 1.9 per cent with Nationwide — in March. He decided to stay with his lender, taking a two-year tracker at 0.24 percentage points above the 4.25 per cent BoE base rate. “This is a short-term gamble on the basis that we can move on to a fix if and when rates fall.” An A-level economics teacher, he keeps a close eye on the relevant data. “I check rates weekly because I’m not entirely sure it’s the right decision. We are at the top of our repayment budget and would be immediately better off by £100 or more a month if we moved to a five-year fix . . . However, I am loath to lock this in for such a long period.”Trackers may allow borrowers to switch out to another deal with no penalty and some will allow overpayments exceeding the annual 10 per cent limit typically enforced on a fixed deal. Barclays offers the lowest rate on a two-year tracker mortgage, at 4.39 per cent with a £999 fee on a loan-to-value ratio of up to 60 per cent, according to Moneyfacts. Lenders have been competing hard on rates to win new customers as housing market activity has slowed, with mortgage approvals down to 43,000 in February compared with 69,000 in the same month in 2022, according to the BoE. But it is by no means one-way traffic on rates: this week, lenders such as Nationwide raised interest rates on selected fixes.Chris Sykes, consultant at broker Private Finance, says most of his clients are plumping for five-year fixes, preferring the certainty of fixed monthly payments even if a drop in base rates later brings cheaper alternatives. Virgin Money currently offers the lowest five-year fix at 3.79 per cent on a loan-to-value ratio of up to 65 per cent and an arrangement fee of £1,495, according to Moneyfacts. The share of five-year fixes among new mortgages ticked up from 49 per cent in December 2021 to 67 per cent at the end of 2022, according to the latest data from the BoE. He adds that the track-and-fix strategy may also carry extra costs through the fees that can be charged at a later date for refinancing — arrangement, valuation, legal and brokers’ fees. Sykes says: “Once you take into account all of the different costs involved, at what point is it actually saving you money to be on a tracker versus a fix?”The variable or tracker route is nonetheless one that often appeals to those with the wherewithal to ride out higher rates — higher earners with bigger mortgages, for whom a fixed product or arrangement fee represents a relatively small additional cost. “The clients that are going for trackers are those that generally have a little bit more liquidity. They could afford to take that hit if rates went up. For others that uplift in rates is prohibitive,” Sykes says. One thing for fans of short-term products to bear in mind is the effect of a fall in house prices. If a borrower takes a tracker for 18 months or opts for a two-year fix, and prices fall by 10 per cent during this period, the loan-to-value ratio of the mortgage will rise. If the LTV started out on the verge of 75 per cent, they could find themselves in a higher LTV bracket on refinancing, and stuck with less attractive rates. “This is quite a big thing and I’m not sure whether everybody’s factoring it in. If you’re thinking of remortgaging in 18 months time and values have gone down, you might not get the same loan to valuation you had today,” says Adrian Anderson, director at broker Anderson Harris.Sticking with your lenderFaced with tough choices, more borrowers are choosing to stay with their existing lender, and take up the advantages of a “product transfer”. Moving to a new lender requires borrowers to pass an affordability test and a new valuation of the property, usually incurring a fee; these are waived by their existing lender, unless they are asking to borrow more.“It’s a lot less hassle to take a product with your existing lender than to start all over again,” says Gammon.Brokers say rates on product transfer deals are also the same as or very close to those offered to new customers, as lenders are keen to keep customers on their books. But many borrowers may also find that a product transfer is scarcely a matter of choice. As rates have soared, they may be unable to access a mortgage they secured before the pandemic or before the September “mini” Budget — particularly if their circumstances have changed.“They’re not quite mortgage prisoners, but if they try and get the same mortgage, it might be deemed unaffordable,” says Gammon.Change the terms Lenders may allow customers to move from a repayment mortgage to an interest-only product as a temporary measure to cut monthly payments. They may also let borrowers extend the term length of their loan, from 30 to 35 years, for example. Monthly payments will come down, but the homeowner should be warned they will pay more interest over the life of the mortgage.Some borrowers are fortunate enough to be able to overpay their mortgage. Brokers say more people have been doing this, as it not only reduces the overall debt but may bring down the loan-to-value ratio on their mortgage. This can open up the better rates and terms offered by lenders to attract lower-risk borrowers with plenty of housing equity. “If they have cash or investments that aren’t yielding an awful lot, a lot of people are making some quite large overpayments towards their mortgages where they can,” says Sykes.In particular, he has noticed a drop-off in a long-running trend for higher-earning clients, often receiving a large annual bonus, to use the lump sum for a buy-to-let purchase. “With those making less sense [for tax and regulatory reasons] people prefer the security of starting to pay down the mortgage on their home because it’s going to cost them more over the next few years. It just looks more and more attractive as a proposition.”For Gabe Stones and his partner in east London, paying down a large chunk of the mortgage is not an option. Instead, they are minded to stick with their existing lender, Accord, on a five-year fix at 4.13 per cent to minimise monthly outgoings. But, like many borrowers who now face mortgage rates at levels not seen for over a decade, Stones is struggling to make a decision. “I just saw another headline saying rates are going up in May. I still don’t quite know what to do.” More

The countries whose finance leaders will be invited to attend the outreach meeting include India, Indonesia, South Korea, Singapore and Brazil, Suzuki said in a post-cabinet meeting news conference.Japan is chair of this year’s meeting of G7 advanced economies. The meeting of finance ministers and central bank governors is scheduled to be held in Niigata on May 11-13. More

SINGAPORE (Reuters) – The U.S. dollar was on track for a second straight monthly loss on Friday on mounting expectations the Federal Reserve could soon end its aggressive rate-hike cycle, while the yen steadied near a one-week high ahead of a pivotal central bank decision.The Bank of Japan’s (BOJ) monetary policy decision on Friday takes centre stage in Asia, where expectations are for new BOJ Governor Kazuo Ueda to keep monetary settings ultra-loose at his debut policy meeting.Focus will also be on Ueda’s tone, with investors closely looking out for any tweak in forward guidance. Ahead of the decision, the Japanese yen was roughly 0.1% higher at 133.84 per U.S. dollar, and similarly gained more than 0.1% against the British pound.”I don’t expect the BOJ to change its monetary policy this tme, but the newly-released Tokyo CPI was higher than expected … I think this puts pressure on the BOJ, they might do something in the near future,” said Tina Teng, market analyst at CMC Markets.Core consumer prices in Japan’s capital, Tokyo, rose 3.5% in April from a year earlier, government data showed on Friday, beating market forecasts in a sign of broadening inflationary pressure in the world’s third-largest economy.In the broader currency market, the U.S. dollar dipped against most major peers but its losses were capped by data pointing to still-sticky inflation in the world’s largest economy, which reinforced expectations for a 25-basis-point rate hike at next week’s FOMC meeting.Against a basket of currencies, the U.S. dollar index last stood at 101.45 and was headed for a monthly loss of more than 1%, after having fallen about 2.3% in March.Sterling slipped 0.06% to $1.2492.Data released on Thursday showed that while U.S. economic growth slowed more than expected in the first quarter, consumer spending, which was accompanied by a rise in inflation, accelerated.A measure of inflation in the economy, the price index for gross domestic purchases, rose at a 3.8% pace after increasing at a 3.6% rate in the fourth quarter, while the core PCE price index jumped at a 4.9% rate after advancing at a 4.4% pace in the prior quarter.”The Fed is widely expected to hike again next week but with inflation remaining sticky, we expect the Fed to stay on hold for the remainder of the year, dashing hopes of a policy pivot in (the second half),” said analysts at Societe Generale (OTC:SCGLY).Elsewhere, the euro held near a recent one-year high and last bought $1.1033. It was eyeing a monthly gain of close to 2%.The common currency has been buoyed by expectations the European Central Bank still has more to go in raising interest rates, in contrast with a dovish repricing of its U.S. counterpart.”Investors favour currencies that can offer both an ongoing domestic tightening cycle and still some room for a hawkish surprise at the coming meetings,” said ING analysts. “In that sense, the euro is one of the very few currencies that can offer this combination at the moment.”Down Under, the Australian dollar rose 0.05% to $0.66335, while the kiwi gained 0.07% to $0.61515. More

TOKYO (Reuters) -Core consumer inflation in Japan’s capital beat expectations in April and an index stripping away fuel costs rose at the fastest pace in four decades, highlighting the challenge the new central bank chief faces in keeping ultra-low interest rates.The data comes hours before the Bank of Japan’s policy meeting that concludes on Friday, where the board is likely to produce new inflation forecasts that could offer clues on how soon the central bank could phase out its massive stimulus.The core consumer price index (CPI), which excludes volatile fresh food but includes fuel costs, for Tokyo rose 3.5% in April from a year earlier, government data showed on Friday, faster than a median market for a 3.2% rise and well above the BOJ’s 2% target. It accelerated from a 3.2% increase in March.The core-core CPI, which strips away both fresh food and fuel costs, rose 3.8% in April from a year earlier, pacing up from a 3.4% gain in March, the data showed.The core-core index, which is closely watched by the BOJ in gauging trend inflation, rose at the fastest annual pace since April 1982, when it rose 4.2%.The rise in the Tokyo’s inflation, which is seen as a leading indicator of nationwide trends, may cast doubt on the BOJ’s view that the recent cost-driven price rises are temporary, some analysts say.Separate data released on Friday showed Japan’s factory output rose 0.8% in March from the previous month, exceeding market forecasts for a 0.5% gain.Manufacturers surveyed by the government expect industrial production to rise 4.1% in April and by 2.0% in May, a sign auto output is recovering from disruptions caused by supply constraints.Japan’s economy is finally recovering from the scars of the COVID-19 pandemic, though risks of a global slowdown and rising food prices hang over the outlook for exports and consumption. With inflation already exceeding its target, markets are rife with speculation the BOJ could soon phase out ultra-loose monetary policy under new governor Kazuo Ueda.Markets, however, widely expect the BOJ to keep monetary settings unchanged at Friday’s policy meeting as it awaits more clarity on whether recent wage increases will become durable enough to keep inflation sustainably around its target. More

(Reuters) -Amazon.com Inc signaled on Thursday its long lofty cloud growth would slow further as its business customers braced for turbulence and clamped down on spending, overshadowing the company’s quarterly sales and profit that topped expectations.In extended trading, Amazon (NASDAQ:AMZN)’s stock initially added about $125 billion in value on its upbeat view of consumer sentiment and the company’s holding its own among cloud competitors, only to see the entire gain vanish in a matter of minutes.The drop in the share price followed remarks by Chief Financial Officer Brian Olsavsky, who told analysts that cloud customers kept trying to slim down their bills as of the second quarter and that Amazon was helping them do so to build long-term relationships.That meant revenue growth rates were about 5 percentage points lower in April than in the first quarter, he said, referring to a period that saw a sequential drop.Shares are now down 2%.Amazon’s surprise rise and fall are signs of a precarious moment for the company. Addressing what he has called an uncertain economy, CEO Andy Jassy has aimed to slash spending across Amazon’s vast array of divisions. At the same time, Amazon is facing a nascent threat from its cloud rivals Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOGL), which are rolling out high-profile artificial intelligence tools.The cost cuts have run deep. Amazon has aimed to axe 27,000 corporate roles since November; and its headcount has fallen 10% to 1.47 million full and part-time workers, including in warehouses, as of the just-ended quarter.The company likewise is ending entire services, among them its Halo health trackers. It has reorganized its national fulfillment operation so it can locate goods closer to shoppers and deliver them faster and cheaper.These moves contributed to Amazon’s $3.17 billion profit in the period ended March 31, compared with a loss of $3.84 billion, a year earlier.But this did little to draw investors. David Klink, an analyst at Huntington National Bank, said the company’s cloud slowdown was “tremendous.””You’re not seeing (that) at either Microsoft or Google,” said Klink, whose bank owned $129 million in Amazon stock as of Thursday.CONSUMER CONFIDENCE?Amazon has sought new revenue all the while. Olsavsky told reporters that the economy has brightened internationally.”It’s good to see inflation going down there,” he said. “It’s good to see consumer confidence increasing.”In North America, Amazon’s largest market, demand held up, he said. But “you see signs that customers are looking for value” and “probably putting off some discretionary purchases.”Ultimately, the online retailer reported better-than-expected sales of $127.36 billion in the first three months of the year, and it forecast revenue between $127 billion and $133 billion in the second quarter.Its economy-wary customers aside, Amazon aimed to project confidence for its cloud longer-term.Jassy said the growing adoption of generative AI, which can create text, imagery and other content from past data, represented a huge opportunity for Amazon’s cloud. One reason is its proprietary chips that he said can power much of what businesses wish to do with AI; another is Amazon’s own new AI tools.Likewise, Olsavsky told reporters, Amazon had seen no shift in the competitive balance among cloud providers. His comments followed a financial report by Microsoft this week that exceeded analysts’ expectations as the Amazon rival drew business through AI. AWS sales growth slowed to 15.8% in the first quarter.Dennis Dick, an equity trader and market structure analyst at Triple D Trading, said shareholders were likely to sell.”AWS growth slowing is a signal for investors to take profits,” he said. More