Leading Indicators | Resilience, reforms and repricing
Discover key economic and financial metrics, and what to look out for in the week ahead
2 minutes to read
Here we look at the leading indicators commodities, trade, equities and more. in the world of economics. Download the dashboard for in-depth analysis into commodities, trade, equities and more.
UK BANKS REMAIN RESILIENT
The Bank of England conducted its annual stress test, and found that the major UK banks would be “resilient” to a severe stress scenario worse than the GFC. This included persistently higher inflation, rising interest rates, deep and simultaneous UK recessions, materially higher unemployment, and sharp falls in asset prices. The central bank concluded that the UK banking system could withstand these events and have the capacity to support households and businesses throughout the stress. For commercial real estate, the story is one of resilience too. Net lending to commercial real estate remained in positive territory in May at £621m, bringing the three-month total to £2.3bn, its highest level since June 2020. Some of this is thought to be investors borrowing against older assets to provide additional equity when refinancing newer loans. This could mitigate the risk of a future surge in defaults and distressed sales.
REFORMS AHEAD
More capital could find its way into commercial real estate, under reforms recently announced by Jeremy Hunt. The package of measures aims to increase UK productivity and pension savings. One aspect involves nine large financial service firms allocating at least 5% of their defined contribution (DC) pensions to shares in unlisted or private firms (instead of public) by 2030. If the rest of the DC pension industry follows suit, this could unlock c.£50bn of capital by 2030. Additionally, a consultation will be launched with the ambition to double existing investments in private equity to 10%, which according to the government could unlock a further £25bn by 2030. The relevance of these measures comes from the fact that some of this unlocked capital for the private sector may be allocated towards UK CRE, with private equity investors, amongst others, expected to be recipients.
POLARISATION IN PERFORMANCE
Nearly half of the UK all-sector market yields in the MSCI monthly index were stable in June on a three-month rolling average basis. Meanwhile, 20% were compressing, and 31% were softening. The softening share increased from 26% in May, but remains below the recent peak of 72% in December 2022 and the 89% record in 2008. However, our latest Investment Yield Guide shows that only 10% of prime UK yields softened in July, indicating polarisation within the market. The remaining 90% were stable. This divergence in performance could continue, as prime yields are expected to stabilise quicker than secondary.
Download the latest dashboard here