DIY Investor Magazine
/
Jan 2017
7
IN THE UK THERE IS LITTLE EXPECTATION OF
BASE RATE INCREASING THIS YEAR
THERE ARE FEW WAYS INVESTORS CAN MITIGATE
THE EFFECT OF INFLATION ON THEIR PORTFOLIOS
This currency weakness should continue to suit many
FTSE100 companies, several which earn and report in
US$. One that springs to mind is HSBC who not only
works in US$, but should additionally benefit as rates
start to rise. Whilst HSBC shares did well last year,
closing at c.660 off a low of c.401, they were c.1000
when they issued their profit warning, caused by losses
at Household in the US, in Q1 2007.
For many investors income is a key requirement, with
inflation predicted to almost triple to 2.7% this year (see
Graph 1) finding suitable investments will become more
challenging for investors to seeking a real return on their
assets. By real, I refer to the rate of growth after inflation
has been stripped out.
Graph 1
There are investment options that allow investors to
mitigate the effect of inflation on their portfolios, the most
obvious being Index-Linked Gilts which have continued
to rise in-price, likely driven by insurance companies
seeking to match their long-term pension liabilities.
This has had a commensurate impact on yields, for
example the 0 1/8% IL Gilt 2024 currently has a yield
of c.-2%.Looking at where long-term inflation-linked
income might be sourced, one area that interests me is
that of Housing Associations (‘HA’s’), which are private,
non-profit bodies that provide low-cost ‘social housing’.
Although HA’s are independent, they are regulated by
the state and receive public funding.
Their aim is to provide affordable housing for people
with lower-incomes, they also provide supported
accommodation, e.g. for people with mental health or
learning disabilities.
Altogether, housing associations provide about
two million homes for five million people across
England.
A recent equity issue that provided access to this
sector was Civitas Social Housing PLC, the IPO raised
£350m and trading started mid-November. The target
yield is c.5%, possibly linked to CPI. The attraction of
investments such as this is based on the following:
•
The issuer, e.g. Civitas, owns the freeholds meaning
they have hard assets on their balance sheet.
•
The underlying leases to the HA’s are linked to CPI
•
The leases are usually fully repairing and insuring,
putting the responsibility onto the HA
•
The leases are long-term, 20yrs+ isn’t unusual
•
Yields on the leases vary regionally but 4% plus is
expected
•
Some HA’s have strong credit ratings
•
HA’s have predictable cash flows through direct or
indirect capital grants, strong regulatory oversight,
and the likelihood of extraordinary support of
government in periods of financial distress. For
example, the Housing Community Agency provided
£ 2.8bn of grants to support housing association
during the recession in 2009.
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28bn-in-four-months/6504708.article
Whilst being a bear is often unfashionable caution is
sometimes required. It doesn’t take an expert to see
how uncertain the geopolitical situation is, and I haven’t
even considered Brexit and the situation within the EU.
In times like this, companies who have high demand for
their services, whose balance sheet owns hard assets,
and who have consistent cash-flows linked to inflation,
might be an appealing investment, especially for those
seeking income.
I wish all readers a healthy and prosperous New Year.
