r00lish67
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Post by r00lish67 on Oct 29, 2016 5:12:19 GMT
So, it seems we're almost inevitably bound for a course of high inflation in the UK due to the devaluation of Sterling. If so, what does this mean for P2P investment if anything, should we be doing anything differently?
As I see it, our real rate of return will be depressed. This could mean some offerings (e.g. Ratesetter rolling) would actually yield a negative real return, although this could still be better than watching our money fade away in a bank. Unfortunately the trend in P2P returns appears largely downwards (e.g. SS, Wellesley, Ratesetter, LendingWorks) which doesn't help.
If salaries also receive inflationary rises, could this mean property prices will also rise even further which would be a good thing for any pre-existing loans we hold? Although I guess they'd have to be pretty long term.
Ok, I'm struggling now - economists, help!
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Post by Deleted on Oct 29, 2016 5:50:11 GMT
Its a very good question - the short answer is, it depends on variables like the severity of the inflation, and whether wages keep pace or not.
For personal lending, if wages keep pace, this is generally good for defaults, since the notional value of the debt gets inflated away. However, if wages don't keep pace, or unemployment picks up, and consumers get squeezed by a spike in prices for non-discretionary spending like food or energy, this could get ugly for defaults.
For secured lending, moderate inflation is generally good since the debt notional gets inflated away, and the assets securing the debt become more valuable.
However, in both cases (secured and unsecured), if inflation gets so high that it erodes capital faster than the returns on the debt, thats bad. In that case, holding assets is generally preferable to lending (unless of course lending rates can be raised to compensate).
Too many unknowns atm. 3%-ish inflation with 3%-ish wage growth and no rise in unemployment will be fairly harmless. 5%+ inflation with no wage growth and rising unemployment will not be pretty at all.
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Post by jackpease on Oct 29, 2016 6:19:04 GMT
This could mean some offerings (e.g. Ratesetter rolling) would actually yield a negative real return, although this could still be better than watching our money fade away in a bank. I guess we need to reeducate ourselves and think of the *margin* of p2p over 'safe' 1% building societies etc. So if inflation is 2% say then you will definitely lose 1% if you keep it in protected banks etc, if you invest in p2p 3% 'solid' offerings then you have a pretty good chance of gaining 1%. If banks start charging us for holding our money then that'd really push people towards p2p (and drive rates down still further!) Jack P
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Post by Deleted on Oct 29, 2016 6:42:03 GMT
if you invest in p2p 3% 'solid' offerings then you have a pretty good chance of gaining 1%. The problem is, the 'wrong' kind of inflation (high food/energy/essentials inflation alongside low wage growth and/or rising unemployment) could put a dent in that 'pretty good chance'. The recent P2P years have been during a pretty benign credit environment, after all. The P2P industry hasn't really been tested during credit turmoil.
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Post by propman on Oct 29, 2016 10:16:53 GMT
The other point is that if inflation increases wages, we may see interest rates rise and so long loans at historic rates on the lower risk sites may give a poor return compared to future rates. That said, I expect that there will remain a glut of money chasing investment to keep rates down and I don't see evidence of widescale wage inflation any time soon.
- PM
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hendragon
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Post by hendragon on Oct 29, 2016 11:37:27 GMT
if you invest in p2p 3% 'solid' offerings then you have a pretty good chance of gaining 1%. The problem is, the 'wrong' kind of inflation (high food/energy/essentials inflation alongside low wage growth and/or rising unemployment) could put a dent in that 'pretty good chance'. The recent P2P years have been during a pretty benign credit environment, after all. The P2P industry hasn't really been tested during credit turmoil. Post 2008 did increase the default rate on ZOPA. If core inflation is to increase then I would be looking for sufficient rates the offset both inflation and the increased risk of default, particularly by unsecured borrowers. Deciding where that level is.........anyone got a crystal ball?
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Liz
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Post by Liz on Oct 29, 2016 11:56:26 GMT
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mnm
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Post by mnm on Oct 29, 2016 12:03:21 GMT
The problem is, the 'wrong' kind of inflation (high food/energy/essentials inflation alongside low wage growth and/or rising unemployment) could put a dent in that 'pretty good chance'. The recent P2P years have been during a pretty benign credit environment, after all. The P2P industry hasn't really been tested during credit turmoil. Post 2008 did increase the default rate on ZOPA. If core inflation is to increase then I would be looking for sufficient rates the offset both inflation and the increased risk of default, particularly by unsecured borrowers. Deciding where that level is.........anyone got a crystal ball? Present average my return is 16.98%. Any good? I have one spare crystal ball but it might already be spoken for - p2pindependentforum.com/thread/5333/more-defaults-facts?page=6
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ilmoro
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'Wondering which of the bu***rs to blame, and watching for pigs on the wing.' - Pink Floyd
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Post by ilmoro on Oct 29, 2016 13:46:53 GMT
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bigfoot12
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Post by bigfoot12 on Nov 1, 2016 20:27:34 GMT
Personally, I'm keeping my exposures to consumer lending and micro-enterprises light. Insolvencies from consumers have been rising since 2H15. ( link, page 4). The downtrend in insolvencies from companies seems to have based (page 3). The numbers are still very low on a historic basis but we have to remember that most P2P platforms that have appeared in the last few years have grown in an phenomenally benign credit environment. It's not clear how their processes will operate if defaults mean-revert back to more normal levels. The combination of higher inflation and stagnant wage growth (I can't see wage growth responding to higher CPI given the UK's poor productivity position vs. Europe and the US) is going to put more pressure on individuals and micro-enterprises. I can't quite see why anyone wants to invest in say consumer-based P2P lending at only 3-5% say; a few hundred bps over depos doesn't seem to offer a good risk-reward. I don't disagree with your overall direction, but I am interested in your thoughts on a couple of points in particular. You say a few hundred bps over depos. What is the best depo rate you are seeing? The best I see for 3 year fixed is 1.2%-1.4% and these are largely with inconvenient banks which I wouldn't want to invest in without FSCS. The rate on Ratesetter was 5.6-5.8% all weekend. Isn't 440bps starting to look interesting? Or have I misunderstood what you mean by depos? And I know that you are not a fan of the provision funds offered by RS (and others) but surely you don't value it at zero? What probability would you put on RS returning less than 88p in the £1 in the next 3 years?
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Post by stevefindlay on Nov 3, 2016 7:42:05 GMT
We discussed the inflation point at length at an investment conference over the last two days - fair to say, even the 'experts' don't have a consensus on the direction and nature of inflation ahead of us.
However, you can still take sensible actions to hedge against the risk:
- diversify across asset classes: in P2P Lending this means choosing a basket of borrower types
- try to keep the average term of your portfolio less than a year. Long term lending (5+ years) is not very appealing at present. And shorter duration loans means you can rebalanced pricing quickly or reallocate elsewhere once the nature of the inflation risk is known.
- don't get greedy: now, more than ever, chasing the last few percent of returns (i.e. loans at 12%+) could come back to bite. The default risk curve is not linear.
Hope that helps, and good luck. Obviously this is written in a personal capacity. And none of this should be taken as advice from BondMason (please see our T&Cs)
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Post by propman on Nov 4, 2016 10:14:10 GMT
Re inflation, its nice to maintain returns relative to the value of the investments, but in the post GFC world, there is a disconnect between investment returns and inflation. The reality is that all we can do is maximize the risk adjusted returns we can get and accept that at some times this will provide a good real return while at others trying not to make a real loss may be challenging. Anyone who thinks that returns are likely to rise by the increased inflation from the devaluation of Sterling and other global causes is IMHO likely to be disappointed.
- PM
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