Alex Maddox, Director of Business Origination and Development, Acenden
Over the last year, the UK’s residential mortgage market has witnessed strong interest from potential investors. This interest has been sparked, in particular, as banks have started a process of deleveraging their non-core units (including their residential mortgage portfolios) in a bid to boost capital margins, generating renewed vigour in the market. According to Ernst & Young, the market for secured mortgage/loan transactions has developed significantly in the last 12 months. Its recent reporti states that the markets – for both non-performing and performing assets – are proving increasingly attractive to institutional investors wishing to deploy funds against credit-related products.
As with all prospective investments, potential acquirers of these portfolios need to carefully analyse their risk positions to ensure they will be able to achieve optimal rewards. For example, investors need to pay close attention to both current and forecasted macroeconomic variables, as these will have an impact how likely it is that mortgage borrowers will keep up with their payment.
For better portfolio performance, investors need to adopt a dual approach. Prior to acquisition, they should apply analytical models at both a loan and portfolio level to understand more about the health of a loan book. If they then acquire the loan book, investors must consider how they intend to service the loans on a day-to-day basis – servicing being the continued administration of the individual loans, including the overseeing of payments and collections and the management of arrears.
If investors apply these forecasting and servicing strategies successfully, they can potentially reach appealing risk-adjusted yields of between six and nine percent, which compares well with other investment instruments available.
Phase 1: Bidding
As investors need to actively assign a value to the portfolios they are interested in during the bidding process, this stage is a key moment for them to conduct stress testing. This allows them to assess the portfolio’s risk exposure, playing different macroeconomic scenarios against the borrowers’ profiles to judge potential performance.
A key consideration in this stress testing is the Bank of England (BoE) base rate. Mark Carney, the current Bank of England Governor, has announced his intention to keep the BoE base rate low for the next few years until core indicators such as the unemployment rate drop. This would suggest that the short-term macroeconomic outlook is quite stable. However, in the long-term, borrowers may encounter problems should the base rate and, consequently, inflation, increase. Changes to these variables can place strain on borrowers’ monthly affordability – their financial capacity in any given month after mandatory deductions.
With this in mind, investors should focus on using analytical outputs to explore how well a portfolio will perform over a number of years, to ascertain how profitable the investment will be.
These outputs can be quite severe. Multiple research papers have highlighted how small macroeconomic changes can impact a typical mortgage portfolio in the UK. For example, according to data from the Mortgage Fiscal Cliff research paper published in May 2013, an interest rate rise of just two percent above the existing base rate, while all other variables remain equal, could have an impact on over half a million loans. This would then place over 150,000 of these at risk of falling into immediate arrears. It is these types of outcomes which investors need to be mindful of when considering a bid. That way, they can understand more about the profitability and risk profile of the loan book and, more importantly, if it is a worthwhile investment.
Due diligence is another key step at this point of the acquisition process. Specifically, investors need to check whether individual repayment plans are enforceable, update borrower credentials and verify property values. While it is not always feasible to gain the appropriate levels of information, desktop research and land registry checks can often provide a decent overview of the properties in question, without sacrificing too much time and resources.
After purchasing a loan book, investors also need to instigate an effective servicing strategy to ensure the loans are managed correctly. Without this, portfolio owners will feel the full force of regulators should their record keeping and decisioning procedures prove sub-optimal.
Many investors have found that a streamlined servicing strategy requires a level of expertise and resources seldom found in-house. It is therefore becoming more and more common to outsource this process to third parties. Partnering with an expert external party provides investors with servicing tools, an operations team and the wider market knowledge to prevent loans defaulting, ensure regulatory compliance and, overall, optimise forbearance procedures should borrowers encounter problems. While it is inevitable that some borrowers will experience negative financial changes during their lifetime; with the support of the latest automated technologies and analytics, portfolio owners can keep borrowers on affordable plans. This maintains borrower relationships, without compromising the profits on the initial investment.
Piecing together the jigsaw
If pre- and post-acquisition procedures are carried out in the correct manner, investors are well positioned to capture lucrative yields from the residential mortgage market. In order to achieve this margin, however, all elements of the puzzle require attention – appropriate counsel and forecasting for acquirers during the bidding rounds and an intelligent servicing strategy to manage the individual loans post-acquisition.
Not company earnings, not data but vaccines now steering investor sentiment
By Marc Jones and Dhara Ranasinghe
LONDON (Reuters) – Forget economic data releases and corporate trading statements — vaccine rollout progress is what fund managers and analysts are watching to gauge which markets may recover quickest from the COVID-19 devastation and to guide their investment decisions.
Consensus is for world economic growth to rebound this year above 5%, while Refinitiv I/B/E/S forecasts that 2021 earnings will expand 38% and 21% in Europe and the United States respectively.
Yet those projections and investment themes hinge almost entirely on how quickly inoculation campaigns progress; new COVID-19 strains and fresh lockdown extensions make official data releases and company profit-loss statements hopelessly out of date for anyone who uses them to guide investment decisions.
“The vaccine race remains the major wild card here. It will shape the outlook and perceptions of global growth leadership in 2021,” said Mark McCormick, head of currency strategy at TD Securities.
“While vaccines could reinforce a more synchronized recovery in the second half (2021), the early numbers reinforce the shifting fundamental between the United States, euro zone and others.”
The question is which country will be first to vaccinate 60%-70% of its population — the threshold generally seen as conferring herd immunity, where factories, bars and hotels can safely reopen. Delays could necessitate more stimulus from governments and central banks.
Patchy vaccine progress has forced some to push back initial estimates of when herd immunity could be reached. Deutsche Bank says late autumn is now more realistic than summer, though it expects the northern hemisphere spring to be a turning point, with 20%-25% of people vaccinated and restrictions slowly being lifted.
But race winners are already becoming evident, above all Israel, where a speedy immunisation campaign has brought a torrent of investment into its markets and pushed the shekel to quarter-century highs.
(Graphic: Vaccinations per 100 people by country, https://fingfx.thomsonreuters.com/gfx/mkt/azgvolalapd/Pasted%20image%201611247476583.png)
SHOT IN THE ARM
Others such as South Africa and Brazil, slower to get off the ground, have been punished by markets.
Britain’s pound meanwhile is at eight-month highs versus the euro which analysts attribute partly to better vaccination prospects; about 5 million people have had their first shot with numbers doubling in the past week.
Shamik Dhar, chief economist at BNY Mellon Investment Management expects double-digit GDP bouncebacks in Britain and the United States but noted sluggish euro zone progress.
“It is harder in the euro zone, the outlook is a bit more cloudy there as it looks like it will take longer to get herd immunity (due to slower vaccine programmes),” he added.
The euro bloc currently lags the likes of Britain and Israel in terms of per capita coverage, leading Germany to extend a hard lockdown until Feb. 14, while France and Netherlands are moving to impose night-time curfews.
Jack Allen-Reynolds, senior European economist at Capital Economics, said the slow vaccine progress and lockdowns had led him to revise down his euro zone 2021 GDP forecasts by a whole percentage point to 4%.
“We assume GDP gets back to pre-pandemic levels around 2022…the general story is that we think the euro zone will recover more slowly than US and UK.”
The United States, which started vaccinating its population last month, is also ahead of most other major economies with its vaccination rollout running at a rate of about 5 per 100.
Deutsche said at current rates 70 million Americans would have been immunised around April, the threshold for protecting the most vulnerable.
Some such as Eric Baurmeister, head of emerging markets fixed income at Morgan Stanley Investment Management, highlight risks to the vaccine trade, noting that markets appear to have more or less priced normality being restored, leaving room for disappointment.
Broadly though the view is that eventually consumers will channel pent-up savings into travel, shopping and entertainment, against a backdrop of abundant stimulus. In the meantime, investors are just trying to capture market moves when lockdowns are eased, said Hans Peterson global head of asset allocation at SEB Investment Management.
“All (market) moves depend now on the lower pace of infections,” Peterson said. “If that reverts, we have to go back to investing in the FAANGS (U.S. tech stocks) for good or for bad.”
(GRAPHIC: Renewed surge in COVID-19 across Europe – https://fingfx.thomsonreuters.com/gfx/mkt/xegvbejqwpq/COVID2101.PNG)
(Reporting by Dhara Ranasinghe and Marc Jones; Additional reporting by Karin Strohecker; Writing by Sujata Rao; Editing by Hugh Lawson)
BlackRock to add bitcoin as eligible investment to two funds
By David Randall
(Reuters) – BlackRock Inc, the world’s largest asset manager, is adding bitcoin futures as an eligible investment to two funds, a company filing showed.
The company said it could use bitcoin derivatives for its funds BlackRock Strategic Income Opportunities and BlackRock Global Allocation Fund Inc.
The funds will invest only in cash-settled bitcoin futures traded on commodity exchanges registered with the Commodity Futures Trading Commission, the company said in a filing to the Securities and Exchange Commission on Wednesday.
A BlackRock representative declined to comment beyond the filings when contacted by Reuters.
Earlier this month, Bitcoin, the world’s most popular cryptocurrency, hit a record high of $40,000, rallying more than 900% from a low in March and having only just breached $20,000 in mid-December.
Bitcoin tumbled 10.6% in midday U.S. trading Thursday.
Other U.S.-based asset managers will likely follow BlackRock’s lead and add exposure to bitcoin in some form to their go-anywhere or macro strategies as the cryptocurrency market becomes more liquid and developed, said Todd Rosenbluth, director of mutual fund research at CFRA.
“It’s easy to see how strong the performance has been of late and look at a historical asset allocation strategy that would have included a slice of crypto and how returns would have been enhanced as a result,” he said. “Large institutional investors are going to be able to tap into the futures market in a way that a retail investor could not do.”
There is currently no U.S.-based exchange-traded fund that owns bitcoin, limiting the ability of most fund managers to own the cryptocurrency in their portfolios.
BlackRock Chief Executive Officer Larry Fink had said at the Council of Foreign Relations in December that bitcoin is seeing giant moves every day and could possibly evolve into a global market. (https://bit.ly/2XXFHrB)
(Reporting by David Randall; Additional reporting by Radhika Anilkumar and Bhargav Acharya in Bengaluru; Editing by Arun Koyyur and Lisa Shumaker)
Bitcoin slumps 10% as pullback from record continues
LONDON (Reuters) – Bitcoin slumped 10% on Thursday to a 10-day low of $31,977 as the world’s most popular cryptocurrency continued to retreat from the $42,000 record high hit on Jan. 8.
The pullback came amid growing concerns that bitcoin is one of a number of financial bubbles threatening the overall stability of global markets.
Fears that U.S. President Joe Biden’s administration could attempt to regulate cryptocurrencies have also weighed, traders said.
(Reporting by Julien Ponthus; editing by Tom Wilson)
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