Not to be outdone, Denmark’s Jyske Bank (CPH:JYSK) is now offering a 10-year fixed-rate mortgage at negative 0.5 per cent, enabling borrowers to effectively pay back less than they originally borrowed. One would imagine, however, that lenders will be able to make up, or at least mitigate, any shortfall in repayments through an increase in arrangement and/or redemption fees. Anyway, these products can be withdrawn at a moment’s notice and it’s hard to believe that the good burghers at Jyske Bank view this as a viable long-term business proposition, let alone Danish savers and pensioners.
Under normal circumstances – whatever that means – it usually follows that lenders would be reluctant to expose themselves to fixed-term rates over that timeframe, but the cost of capital for lenders has narrowed appreciably between short- and long-dated debt maturities.
That narrowing provides a catalyst for both Virgin Money and the Yorkshire Building Society, but what about the timing? There is some evidence to suggest that the UK property market may have already bottomed out, although there is a clear divergence between a still flatlining London market and other parts of the country. A recent Bank of England survey showed that mortgage completions rose significantly in the second quarter, with Wales and Scotland to the fore. Even with lingering Brexit uncertainties, completions are expected to hold steady in the third quarter, with lenders reporting that product transfers are also on the rise, as householders take advantage of the dismal outlook on rates.
The long-dated arrangements are being offered in expectation that many potential mortgagees may be willing to risk further narrowing in the spread due to the prevailing level of economic uncertainty. The bottom line, however, is that lenders are buying into the ‘lower for longer’ narrative on interest rates, a somewhat disturbing notion following a decade of loose monetary policy.
For equity investors, the outlook on interest rates is critical given they're viewed as the most important determinant in stock market valuations. Investors shift out of risk assets into debt markets when interest rates are on the fly, as higher valuation multiples for equities become less attractive. Naturally, the converse also holds true, although institutional investors will always try and analyse why central banks are trimming interest rates. If a rate cut is triggered by moribund economic activity, then there is less incentive to move into risk assets.
Where are we now? Certainly, in the case of the UK, it would be unwise to make too many assumptions given the current impasse over our proposed departure from the European Union. But it’s hard to envisage a scenario under which the Bank of England would be inclined to up the current base rate of 0.75 per cent. Valuations could also be underpinned by continued sterling weakness. The FTSE 100 index, sporting an average PE ratio of 14.2 per cent and a dividend yield of 4.6 per cent, is appreciably cheaper than the benchmarks of our principal trading partners, but risk appetite is likely to remain subdued this side of a Brexit resolution.
The eventual form of a settlement, assuming there is one, is still impossible to determine. But if a degree of clarity returns to proceedings, then it wouldn’t be fanciful to suggest that valuation metrics will regress to their long-term norms. Consider that the FTSE 100 has delivered a total return of 1.32 per cent over the past year, against a 6.21 per cent annualised figure over the past three years and a return of 7.76 per cent over the past decade.
The trend is clearly negative, but there is little reason to think that either interest rates or the value of the pound will rebound in the coming months. Theoretically, at least, this should help to support equity prices, along with the sterling value of distributions from the FTSE 100 constituents, many of which are dollar denominated.
