From what I've seen on the P2P platforms I lend through, the interest returns they are offering to pay me for the loans they are launching are the same or very slightly higher than the pre-Coronavirus crash. Considering that the risk profile of the projects they are launching has changed dramatically, this doesn't seem to make sense?
They probably had these loans in the pipeline from weeks ago and have just decided to go ahead with them at the same or a similar rates of interest as they would have done previously.
If we can all invest in companies on the stockmarket at massively lower rates compared to a month ago (FTSE 250 was 20,623 then, now 14,172), does it make sense for us to lend to companies via P2P platforms at the same rate as the pre-Corona period?
You've asked an almost impossible to answer question, but I'll give it a go
p2p is illiquid even if discounts are offered and as traders on here often point out there is no real mechanism for price discovery in SM's where as equity markets will always have willing buyers/sellers at some price.
Most p2p projects are predominately dependent on UK supply chains for inputs. There are exceptions that have to be imported (marble for higher end devs for example). FTSE250 whilst being a good representation of the UK ecomomy has significant links across global supply chains.
The point here I think is that broadly for p2p there is less scope for panic selling, and in general the crystal ball only needs to see the UK picture.
The bank base rate has dropped, so in effect an unchanged p2p rate is already 0.65% ahead compared to 2 weeks ago.
Now to what I think is the crucial point - timeframes. Ryanair when confirming the suspension of all scheduled flights till June (Independent) said "based on the length of China’s lockdown, most travel is likely to be suspended for three months.". Prof Ferguson / team yesterday commented in a report (Guardian) that based on China "after containment, a carefully managed and monitored relaxation of effective large-scale lockdowns may be possible even before an effective vaccine is available" (subtext ... test, test, test and test ...). The Italian PM also sounded hopeful yesterday that the tide is turning and some easing of the lockdown in Italy may be possible before too much longer.
There is a lot of noise in UK at the moment regarding anti-body testing but if that does prove to be a viable approach the modellers will be able to map our progress towards 'Herd Immunity' (the only viable strategy until a proven vaccine is available) with relative ease.
I commented last week that the problem China now has with its limited confirmed cases (vs total population) is the risk of re-seeding from outside China. Investing in any FTSE250 company with supply chains involving China could be risky as China might have to reapply lockdowns again as future waves crash through the population (pending a vaccine). FTSE250 also has a fair number of travel related companies.
For all the talk of 'flattening the curve' this epidemic is hitting faster and harder than any country has really appreciated but its looking increasingly likely that for the UK its going to be a relatively short grim episode (don't get me wrong I'm still expecting this lockdown to last two plus months and to get stricter ... but not 12 months to pluck a number out of the air). Within 2 months I'm expecting some restrictions to be eased (hairdressers and barbers as examples, construction and general non retail employment as others).
So on one hand the equation for p2p risk is I think simplified by being mainly an internal UK issue. But on the otherhand it is undeniable that the UK economy is taking a battering. I mentioned earlier in the week residential devs might be slower to sell whilst properties of the deceased are absorbed by the market, but the more optimistic forecasts for total deaths in the UK are not too horrendous (hard to be objective here when its our families being counted in potential deaths, and I apologise if what I write feels insensitive). But with the government underwriting employee salaries (at least to the extent of an adequate standard of living) maybe the economy can emerge battered but still alive. The arguments on support for self-employed are I think as much a health issue as an economic one in that without support they are more likely to continue to work and add to the spread one way or another.
Which is a long winded way of saying its not immediately obvious to me that a new p2p loan with a term of 12 months plus (and certainly 2 years plus) at a similiar rate to loans over the last six months is a massively higher risk. Clearly there will be exceptions, writing new loans to companies involved in the travel, leisure and hospitality sector is obviously higher risk given the dependency on global conditions for both outbound and inbound travel.
If we can all invest in companies on the stockmarket at massively lower rates compared to a month ago ... does it make sense for us to lend to companies via P2P platforms at the same rate as the pre-Corona period?
If the most optimistic cases hold true, if government finance bails out every SME or consumer you lend to, if the recovery is the sharpest V shape ever then you might find you earn the headline amount - but remember many P2P platforms were disappointing their lenders before this. In this best case it is possible that because of the BoE rate cut you find new investment is 0.1-0.2% lower than now.
If any of the above fail to happen, or if the isolation measures are relaxed and then re-introduced, or economic activity doesn't quickly return to that seen before then many people will be looking at significant haircuts on their lending. More platforms might find themselves in difficulty. Borrowers and platforms might use this as a convenient excuse to dump a bad situation and move on.
The two most discussed direct lending investment trusts (both used to be P2P but they both abandoned P2P) are down 30% from the prices of a month or so ago.
I can't think of any case for new P2P lending at the moment, other than possibly buying secondary loans at a large discount if you really know what you are doing, and understand how strong the platform is.
I echo the sentiments of others in saying thank you mrclondon for a thoughtful and considerate detailed response. You make some excellent points.
Just to emphasise one point, I wasn't referring to companies on the the FTSE 250 specifically. Investing into companies via pretty much most stockmarkets and any index is dramatically cheaper than a month ago.
bigfoot12 I'm with your appraisal. I can't see many loans on P2P platforms, either on the primaries or secondaries, offering even a 5% discount to what we might have receive pre-Corona. With so many additional layers of risk to a month ago, not only on the loan itself but, for instance, the platform itself having a significantly higher chance of going bust, it beggars belief that they haven't priced this increased risk into the returns they are offering.
Hardly anybody would buy shares on any stockmarket if they were the same price as a month ago despite much of the world having turned upside down.
Post by Harland Kearney on Mar 26, 2020 15:34:14 GMT
Not got much time, but surprised its not been mentioned yet (or maybe I missed it)
Most investors in P2P fear the platform stability over the actual investments they are making half the time. It be the same if brokers like HL closed down left and right last year like we saw in P2P since 2018. Most retail investors throw asset security out of the window as soon as the platform stability comes into the mix. Can't blame them either, platform mis-management, bad handling can erase your gains and capital just like a stock market crash, but with no potential for repent.
Many of the closures of platforms like Lendy, Funding Secure were due to poor performance in the industry to be frank. They shined very brightly on the way up, as investors flocked to them with unbelieveble returns. I still renember 1% a month from Lendy, I made some crazy money. I only ended up with £70 in default, I was extremely lucky in hindsight. Anyway, many investors are paniced at the very sign of a slowdown of ability to sell these assets. It is kind of ironic since it goes as a given that P2P is a illquid asset. I really think alot of retail investors mis read the product advertised here, due to flowers over the potential gains; with a lack of respect for the risk in the sector, and then the painc and anger (seen alot of that past 20 days). Its unfair to current platforms which elearly are alive still because they are at least compotent in their fields respective.
Reguardless, diversfication is key, that is all. If I had 100% in a any platform right now i'd be sh**ting bricks. But as I'm balanced, I can sit back and reflect. Yes, its illquid but (ac) I can hold these assets for a long long time, and it hasn't decreased in potenital divinend yield (yet, whole other topic yada yada, PF but harland ree qoute)
I can almost gurrantee you the investors on this board who are panicing or seem very stressed are over exposed to this sector, way beyond 10%, probs in the 50%+ margin. All due respect. Those who are able to take a more stood back, realistic view without screaming *ima sue you terms of service!* are those with proper portfilios and cash reserves to take up Equity prices right now.