This site uses cookies for better functionality. Close this notification to go ahead, or read more about our cookie policy.

close
LGT Vestra US

CIO Question Time – Housing crises and volatility - Feb 2017

Jonathan Marriott – Chief Investment Officer, LGT Vestra LLP

What will be the impact of the government’s White Paper on housing released this week?

One of the key points in the report is a reiteration of an additional £3 billion in financial support that will be extended to small house builders, specifically targeting small and medium-sized enterprises (SME) custom-builders etc. The government is aiming to deliver up to 25,000 homes this parliament. In reality, whilst growth in SME builders may help to reduce the housing deficit, the extra 25,000 homes are small relative to total housing demand.

In order to help people get onto the housing ladder, the report also outlines that a 25% saving bonus will be available for those saving via a Lifetime ISA for Starter Homes. The government are encouraging local authorities to deliver Starter Homes as part of a mixed package of affordable housing that can respond to local needs and local markets; this is useful for those starting out, but it is small in the scheme of things.

There are of course other components to the report, but overall the general consensus is that the impact of the White Paper will be insufficient to correct the issues in the UK housing market. However, there is also talk of the government allowing housing associations and local authority landlords to build more themselves, for the period beyond 2020, to help them to borrow against future income to build their own supply of public rented housing. Further discussions are due to take place with the sector before doing so, however were this to be implemented, it could have a more notable impact.

Why is volatility so low?

Over the longer term, volatility tends to spike in financial markets when equities fall. In recent years, every drop in the equity market has been countered by central bank action. Perceived central bank support for economies has acted to reduce equity market volatility.

Since Trump’s election victory, the VIX index (a widely used measure of volatility of S&P 500 index options) has stayed very low as a result of the rally in equity markets. The most recent spike in this volatility index was at the start of November due to uncertainty ahead of the US election. It has since declined as markets have moved more positive on Trump’s supposed ‘business friendly’ policies. More widely, economic data has been broadly better than expected which has supported equity markets further reducing volatility measures. As central banks reach the limits of rate action there is greater emphasis in fiscal support for economies, which could further dampen volatility in the short term.

However, systematic trading and a reduction in the size of trading books held by banks may make markets more sensitive to changes in sentiment going forward. As a result, we may see periodic equity market corrections and spikes in volatility. As investment managers we need to look through short-term effects to see if there are longer-term changes at work.

 

 

 

This communication is provided for information purposes only. The information presented herein provides a general update on market conditions and is not intended and should not be construed as an offer, invitation, solicitation or recommendation to buy or sell any specific investment or participate in any investment (or other) strategy. Past performance is not an indication of future performance and the value of investments and the income derived from them may fluctuate and you may not receive back the amount you originally invest. Although this document has been prepared on the basis of information we believe to be reliable, LGT Vestra LLP gives no representation or warranty in relation to the accuracy or completeness of the information presented herein. The information presented herein does not provide sufficient information on which to make an informed investment decision. No liability is accepted whatsoever by LGT Vestra LLP, employees and associated companies for any direct or consequential loss arising from this document.

LGT Vestra LLP is authorised and regulated by the Financial Conduct Authority (FCA).