The Brexit referendum result has shaken the very foundations of the UK’s financial service industry. As a result, both traditional and alternative finance institutions are undergoing real-time stress tests, however there are some financial products, services and institutions that are, by their very nature, “Brexit proof” and some that are not.
Brexit Proof for Investors
Simulated Bank of England stress tests are implemented. These aim to demonstrate that the big UK banks could survive even the worst-case scenario recession. This means that the banks are very likely to be resilient enough to withstand the Brexit repercussions. The Governor has suggested that likely Brexit risks fall far short of the extreme conditions those stress tests were designed for. However, investors need to be aware that this will come at a cost. Banks will more than likely be required to lower savings rates in order to maintain a sustainable model during the Brexit transition. Through following Bank Base Rate downwards and meaning it’s savers who will lose out.
P2P investing is thought to be less geared to external factors and the undulating confidence. Using the same stress testing methodology as used by the banks, our own business has demonstrated that it can also weather the worst-case Bank of England recession forecasts. Whilst at the same time avoiding the drastic lowering of saving rates that would otherwise hit investors. The main reason for this relative stability is that relatively low overhead Peer to Peer lending is able to offer a higher interest rate to an investor than a bank savings account can.
More over, they can still offer borrowers loans at a time when banks want to slow their lending. Hence, perhaps allowing higher borrower rates. Recessions can effectively increase Peer to Peer margins. This benefits investors with higher rates than banks whilst also being able to cover any increase in expected losses. Peer to Peer interest rates for investors are often fixed rate. This will be attractive with talk of even lower bank savings rates.
There are a number of other Brexit Proof options out there. For instance, non-cyclical investments such as renewable energy available from P2P and other alternative investment providers. As these are expected to behave in a stable manner. Also loans which have been secured against hard assets such as property with modest loan-to-value ratios are far more Brexit Proof than unsecured loans, even if default rates rise.
Buy to let, as we experienced in the last recession, saw rents rise quickly when house building stopped. This could happen again, however less so this time as P2P will probably keep on funding safe housing projects. Due to strong rental demand as well as a good sales exit. This is provided that banks carry on providing homebuyer or Buy to Let mortgages. Given housing underpins the banking system it is likely that the Bank of England and others will again do everything they can to keep house prices stable. This means homebuyer mortgages at least will need to keep flowing. Cash rich Buy to Let investors are likely to focus on yield again. Especially as London house prices reverse for a while and the potential for speculative house price growth becomes uncertain.
Businesses that export substantial parts of their production are likely to do well and outperform the wider stockmarket and vice versa many importers could fare badly.
Brexit Proof for Businesses
For businesses in need of short and long term loans, there are also some Brexit Proof options for them to consider.
Fixed rate loans offer businesses a stable way to predict part of their finances regardless of external market conditions. Brexit may put pressure on banks to reduce loan availability, but many alternative finance providers, and particularly Peer to Peer lenders like Assetz Capital, will continue to offer fixed rate loans as they currently do as their source of capital, retail investors, look to lock in good lending rates in a falling interest rate environment.
Generally speaking, loans are much safer for a business than overdrafts because banks can’t withdraw them on short notice and the large scale reduction in overdraft facilities is likely to continue even faster now driving more businesses to consider business loans to provide them more stability at a lower cost. Peer to Peer firms have been replacing expensive overdrafts for some time and this is expected to continue.
What is not Brexit Proof?
Whilst some financial products, services and institutions have the ability to be made Brexit Proof, many cannot and will need to ride out the turmoil.
Unfortunately, any product or business exposed to recession or weak currency is at risk. Thus, seriously needs to address new business models in order to minimise their exposure to the Brexit uncertainty.
In addition, the BoE has claimed that smaller challenger banks and building societies are more vulnerable to Brexit. This is due to the number of more risky loans they have on their books. Perhaps this means that depositors will consider moving elsewhere given the pitiful rates on offer. Consequently will those lenders then have to reduce their lending books? We will have to wait and see.
In the short time since the Leave vote, it has become apparent that any portfolio including shares with a high UK exposure will struggle to maintain stability. This also includes the investment trusts that are focused on mid-cap UK companies. Due to the majority of them being exposed to the vulnerability of the current UK economy.
Finally, it’s hard to ignore the impact Brexit is having on the London prime property market. While it was in decline in the months leading up to the referendum, a sudden surge after it has proven many correct. It’s a risky investment at the moment given the sudden fall in inward investment. Furthermore, no one is quite sure of the longer-term implications. Given the location’s rise in prices that was quite detached from the rest of the country, we expect its fall to be somewhat detached also.
At face value, the Brexit result has the potential to put our financial services industry into free-fall. With commercial property funds closing for redemptions and banks battening down the hatches and cutting back lending quickly. Whilst at the same time slashing savings rates. However, the alternative finance market has matured and grown since the last financial downturn. We will now see for the first time if Peer to Peer lending can help fill some of the gaps left by banks retreating in a recession. Perhaps even helping the country to avoid the worst effects seen last time around.
Firstly this will be by offering savers higher rates than bank savings accounts. Secondly, by still offering loans to credit-worthy businesses and managing defaults well. The critics and backers of Peer to Peer are about to have their respective theories tested and matters currently appear to bode well for the latter.
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Founder and CEO of Assetz Capital