Four charts that tell the story of 2023

From mortgage rates to VC struggles, we take a visual look at the year just gone

December 14, 2023

Housebuilders: Lower mortgage rates could provide welcome relief

The share prices of many of the UK’s volume housebuilders have made strong gains in recent weeks. Since mid-October, shares in Barratt Developments (BDEV) have gained 37 per cent, while Bellway (BWY) is up 22 per cent and Redrow (RDW) by 21 per cent as investors bet that the Bank of England (BoE) has not only finished hiking rates but may soon be on the way to cutting them. UBS analysts expect the BoE to start cutting interest rates in May – although the market is currently pricing a first cut in June.

These market expectations have already started to bring mortgage rates down. A further fall would be welcome, given it would address a key concern behind the slump in new housing starts – affordability.

Rates' climb higher, which accelerated notably during Kwasi Kwarteng’s (remarkably) brief spell as chancellor in late 2022, has caused a sustained fall in mortgage applications – from a steady rate of around 380,000 a quarter before the Covid-19 pandemic to less than 250,000 in the three months to September.

The average rate for a two-year fixed mortgage peaked at 6.86 per cent in July, and while it has just fallen back below the 6 per cent mark, according to Moneyfacts, this is still twice the rate of 18 months ago. House prices have remained resilient, though, falling by just 2 per cent in the year to November, according to Nationwide.

Despite the recent drop in rates, Nationwide’s chief economist, Robert Gardner, cautions against a rapid turnaround in the sector’s fortunes, pointing out that consumer confidence remains weak and new buyer enquiries to estate agents are still subdued.

Therefore, although the likes of Redrow and Bellway still look like decent long-term bets given that their shares trade below the value of their net assets, it may be a while before they make meaningful gains in earnings. After falling by a quarter this year, volumes are expected to remain largely flat next year, according to Investec analysts.

And even with prices holding up, further building cost inflation of around 3 per cent will eat into profit margins.

Airlines: Steering through the turbulence

The airline industry is set to make its first annual profit since the outbreak of Covid-19 almost four years ago.

Although the £23.3bn net profit forecast by the International Air Transport Association (IATA) for 2023 equates to a slender net margin of just 2.6 per cent, the organisation said it represents a “remarkable turnaround” from the billions lost in 2020.

Passenger traffic is currently now just 1.8 per cent below pre-pandemic levels and, although passing this milestone over the course of next year would be welcome, “the pandemic has cost aviation about four years of growth”, Willie Walsh, IATA's director general, added.

The recovery has been distinctly uneven. Airlines in Europe, the Middle East and North America are already generating decent operating margins, with traffic already above pre-pandemic levels. In Asia-Pacific, though, traffic is still only at 92 per cent of pre-pandemic levels (which is hardly surprising, given China only reopened its borders in January) and its airlines are still lossmaking.

Even within Europe, fortunes have diverged. Scandinavian Airlines, the company created from the former national airlines of Denmark, Norway and Sweden, recently had to be restructured through a deal in which Air France-KLM (FR:AF) took a stake, while Portugal’s government recently put its former flag-carrier up for sale two years after its most recent bailout. Meanwhile, low-cost carriers such as EasyJet (EZJ), Jet2 (JET2) and Ryanair (IE:RYA) have all recently recorded record profits as they expand capacity beyond pre-pandemic levels but still manage to increase ticket prices.

Whether this is a trick that can be repeated next year as travel demand normalises remains to be seen.

More planes are being delivered in the first half of next year, which will boost capacity further.

“The question is then does it fill itself, or do they have to fill it by changing the fares? I suspect next year’s going to be a bit tricky in terms of training to maintain fares,” Eddy Pieniazek, head of analytics and advisory at aviation finance data specialist Ishka, said on a recent webinar hosted by consultancy OAG.

OAG’s chief data analyst, John Grant, doesn’t expect any massive cuts to headline fares, though. “Let's not think that air fares are going to come down back to 2019 levels, because if they do, airlines are in serious trouble. If you've got 30 per cent more cost, and you're going back to 2019 airfares then it just doesn't add up,” he said.

Uranium prices: fission for some action

The revived interest in nuclear power since Russia’s invasion of Ukraine is not so much hot as radioactive. A heightened focus on energy security has led many countries to turn to the power source as the provider of a reliable base that can complement renewables such as solar and wind, the supply of which is intermittent. At the recent COP28 summit in the United Arab Emirates, 22 countries (including France, Japan, the UK and the US) pledged to triple global nuclear energy capacity by 2050.

This shift in attitude follows a decade of waning interest in nuclear after the Fukushima disaster in Japan, which led to many countries cutting back on nuclear investment, sending uranium prices tumbling and cooling investment in new mines.

That means the market is now undersupplied, and a revival of interest has sent uranium prices soaring – up 70 per cent so far this year to a 15-year high.

Governments are (understandably) keen to keep a tight rein on who gets their hands on physical uranium, so there’s no physical exchange and prices based on negotiations between buyers and sellers are published weekly by two trade titles. But there are other options for investors who are keen to limit their exposure to uranium to the purely financial.

There’s Yellow Cake (YCA), the London-listed vehicle that buys uranium from Kazakhstan’s state producer Kazatomprom (KZ:KZAP) and stores it. Then there are the uranium miners and processors such as Canada’s Cameco (CA:CCO), plus a couple of exchange traded funds that invest in the miners, refiners and other companies involved in the supply chain. Still, these are not exact replicas of the underlying price. Miners such as Cameco can either outperform or underperform, for instance. Although Yellow Cake theoretically offers a purer form of exposure to the spot market, it also undertakes frequent equity issues to boost its holdings and has its own running costs (including storage and management fees) to take into account.

Citi analysts remain bullish on the sector, stating in a note last month that they “expect continued upside momentum” in the short term, and for geopolitical tensions to potentially tighten the market further in the long term. Currently, both the US and the EU rely on Russia for the supply of more than 30 per cent of their enriched uranium, the investment bank said.

Nothing ventured: VC fundraising in a slump

Venture capital’s relative lack of attraction in a higher interest rate environment can be clearly seen in the figures. Globally, $117bn (£90bn) has been raised by venture funds in the first three quarters of this year, and data provider Pitchbook does not expect the full-year figure for 2023 to move much past $150bn. This would only be around half of the amount raised last year and the lowest annual amount since 2015.

The lack of activity is starkest at the top end of the market, with a much lower proportion of capital raised by managers of $1bn-plus funds. Among managers of new funds. In a tougher macroeconomic climate, investors “are particularly inclined to seek out funds with established track records”, Pitchbook said in its third quarter market report.

In the UK, the amounts raised by local venture capital funds stood at £3.5bn in the nine months to September, compared with £6.9bn for the entirety of 2022.

And yet, as the rally in the FTSE Small Cap index in recent weeks has shown, investors are already betting that interest rate cuts are on the way. The difficult question the industry has to grapple with is valuations. Companies that raised money at staggeringly high valuations a couple of years ago have avoided doing so again if at all possible, thereby avoiding “down rounds” where their valuations are slashed.

Indeed, the concern that fund managers are housing overvalued businesses in their portfolio is one reason why so many listed venture capital trusts (VCTs) currently trade at a discount to their stated net asset values (NAVs). Of the 53 VCTs listed on the Association of Investment Companies’ website, only two trade at a premium to their NAV.

Still, with £16bn of dry powder still left to deploy, there are signs that dealmaking activity among UK VCs is picking up. Deals by value have been higher in the past two quarters than they were in the first three months of this year and is the “area of the venture ecosystem in the UK showing the clearest signs of recovery”, Pitchbook said.