Growth v Value

In this week's blog, we are examining rates in relation to our proposition and the broader market. We operate under the assumption that central rates may have plateaued but could persist at high levels for an extended period. This shift in the global financial landscape could reshape investors' perspectives on the P2P asset class, offering a more favourable outlook. We also explore how some investors might consider repositioning their portfolios to capitalize on higher yields, countering the impact of currency debasement due to rising global liquidity from excessive debt issuance. The P2P asset class, with its unique potential for higher yields, presents a promising opportunity for investors to rebalance their portfolios and potentially increase their returns.

The expectation of rapid, successive rate cuts, both locally and internationally, is diminishing. This ongoing scenario poses a significant challenge for bond funds, as high rates are ultimately detrimental; Fidelity reports that the average global government bond fund has seen substantial outflows, around 10%, since 2022. With higher rates available for cash and inflation-eroding returns, the necessity for portfolio adjustments becomes more pressing. If we consider high-yield corporate bonds as an alternative investment route, on the one hand, a decrease in rates would boost returns, but the high-yield element carries a built-in default risk. Fitch Ratings predicts corporate default rates to rise to 4% and beyond in the latter half of 2024, underscoring the significant risk elements in the current macroeconomic conditions. Corporate defaults in terms of the total number are rising at their fastest pace since the 2008 financial crisis according to the S&P Global Ratings Agency, largely due to elevated borrowing costs.

Investors exploring our asset class and the deeper value proposition it offers may be familiar with rising global liquidity levels, which are widely perceived as both positive and negative. On one hand, a healthy international funding market means more cash coming into the system; in laypersons's terms, more cash is going in through the issuance of more and more debt. This is a short-term positive as it increases the value of global assets and fuels global credit markets, but some perceive this is a long-term negative, as the percentage of that debt required to service the old debt increases over time, and the spiral effect of constant quantitative easing debases the value of currency, so growth in asset values via issuance of debts is essentially a partial illusion. So, how does that correlate with a trend leaning towards credit markets?

To perhaps answer that and summarize our point in a more coherent way, many international investors are looking at a rate of global inflation at 4% plus the percentage increase in the global liquidity index to gauge a better understanding of how to stay ahead of the inflationary curve. With those two factors in play, the traditional spectrum of returns on offer in the bond market doesn't stay ahead of that curve without increasing the risk profile of your choices. Investors are looking more closely at deeper value propositions to find higher-yield investments to rebalance their portfolios. We are certainly seeing this evidenced in the booming Private Credit Markets and we believe we will also see this effect mirrored in P2P market inflows.

The depleted supply vs exponential demand issue in UK residential property ultimately provides a unique value proposition for investors looking for this additional yield. With Savills predicting UK house prices to rise by 17.9% by 2028, the components are certainly there to allow international money to access this opportunity using our sophisticated take on property-backed P2P as the conduit. Value investing doesn't come easy in mature markets because the scope for serious structural change that provides that future value proposition isn't really there; however, with housing delivery, those big changes are not only needed but they are also expected, making it such a unique and exciting opportunity.

Invest & Fund has returned over £200 million of capital and interest to lenders with zero losses, showing the rigour that governs our business.
To take maximum advantage of this robust and exciting asset class, please visit www.investandfund.com or contact Shaheel at shaheel@investandfund.com.

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