P2P lending

Interest rates: lower for longer. Time to look at P2P investing.

Interesting perspective in the Financial Times on the effects of Brexit. The hunt for yield is likely to intensify. Building a diversified portfolio of Peer-to-Peer loans is a sensible option to consider.


Watch the interest rate outlook shift following Brexit vote

Gillian Tett

Future historians may conclude this is one of the most important ripple effects of the poll

When the results of the UK’s EU referendum emerged last Friday morning, the share price of MetLife, the stolid American insurance group, tumbled. In the course of two days its stock fell 14 per cent, making it one of the worst performers on the American indices.

At first glance, that seems bizarre. MetLife does not sell policies in the UK and its exposure to Europe is small. So it should be shielded from the more obvious potential effects of the vote that are looming over UK companies, eurozone banks and Wall Street giants, such as a European recession or a loss of business and influence for the City of London.

But MetLife has a vulnerability that highlights one impact of Brexit that will have further-reaching consequences. Market actors have turned their attention to the wider outlook for interest rates. Most notably, in recent days, investors have sharply downgraded their expectations for inflation and interest rates, not just in the UK but across the west.

That has nasty implications for asset managers of all stripes, including insurance companies, which need to earn decent returns to pay policyholders. It is also painful for banks, since low rates typically hurt their earnings.

When future historians look back at the Brexit shock, they may conclude that this shifting rate outlook is one of the most important ripple effects of the Leave vote — even if the implications of a Brexit for bond prices look less thrilling than, say, the political soap opera around Boris Johnson, the leading Leave campaigner who has pulled out of the race to be UK prime minister.

To understand this, take a look at the numbers. A couple of years ago negative-yielding bonds — which, in nominal terms, pay less at maturity than investors initially paid — were rare. But this week, Fitch Ratings agency calculated that there is now $11.7tn worth of sovereign debt in the global market that carries negative nominal interest rates.

That is extraordinary. Furthermore, this pile has swelled by $1.3tn in the past month alone, and includes $2.6tn of long-term bonds (those with more than seven years of maturity). Meanwhile, the pile of bonds with a yield that investors used to consider normal — above 2 per cent — is barely worth $2tn.

Most of this negative debt sits in Japan and the eurozone. But rate expectations in the UK and US are sliding, too. The US Treasuries market, for example, now expects a mere 125 basis points of rate rises in the next decade, with barely any hikes in the next two years. Indeed, one of America’s largest hedge funds is now warning its clients that “markets in aggregate are discounting . . . effectively no monetary tightening for a decade across the developed world”.

Can this gloomy market prognosis be believed? Maybe not. After all, the global economy is still growing overall, with lacklustre expansion in the US. A dash to havens may also have influenced some of the recent bond price swings. If the political climate stabilises and the Remain camp’s prediction of economic disaster in Europe turns out to be overblown, the downbeat outlook of the markets could be reversed.

But, there again, it is also possible to draw an even gloomier conclusion: that Brexit has crystallised and intensified more fundamental investor fears that the west is slipping ever-deeper into economic stagnation. After all, that $11.7tn negative-yield bond pile did not just emerge after the referendum but has in fact been swelling for many months.

Either way, the one thing that is clear is that unless that pile suddenly and unexpectedly shrinks, investors and policymakers need to prepare for yet more ripple effects in the months ahead. For one thing, asset managers and insurance companies will see their earnings slide unless they start buying more risky debt — which will bring dangers of its own.

Second, the central banks’ policy dilemma will intensify since they will face pressure to engage in further loosening monetary experiments — even though it is unclear that these unprecedented measures are actually boosting growth.

And there is another nasty twist. Negative, or low, rates may exacerbate income inequality, too, since these typically raise the value of assets that wealthy people own, such as property and stocks. If so, that might create even more political populism, sparking more political uncertainty and economic gloom.

The real ripple effects of Brexit, in other words, may have barely been seen yet. All eyes are on the political polls and trade flows, and on those bond prices.

http://www.ft.com/cms/s/0/63e265c0-3ebd-11e6-9f2c-36b487ebd80a.html#ixzz4D7AZiu00

Have a plan to bridge short term cashflow dips

Every business should have a contingency plan to deal with an unexpected dip in cash flow. While simply having a business overdraft available provides some degree of short-term protection, it’s best to have an array of lifelines at your disposal. Also, we find that the overdraft gets used for everyday purposes rather than for unexpected problems.

Peer-to-peer financing is another clever route to addressing temporary dips in cash flow. Conventional peer-to-peer financing involves online companies lending to businesses from funds gathered through a pool of investors. These loans are usually quicker and more straightforward than conventional borrowing and there is no minimum amount, so they are perfect for topping up cash flow. Beware: some offer much better value than others: don't be taken in by headline rates, do some calculations or check with your accountant.

Another smart take on peer-to-peer financing is an online improvement on invoice ‘factoring’, whereby a business in need of cash sells its ledger to a bank or another conventional lender. The online providers in this area of peer-to-peer financing, which include InvoiceX, will buy (for 1.5-3% per month) individual invoices – allowing companies to easily draw specific, limited amounts – but avoid the hidden fees, long contracts and slow decision processes of traditional factoring providers. For working capital spikes, this is often a better ongoing solution than a short term loan which can cause more cashflow problems a few months later. Importantly, watch out for whether your customer needs to be notified.

What could the Government do to fix our Broken Business Banks? And why does it really matter?

Insightful analysis by Alan Kohler in The Australian this weekend on what is holding business back and the negative effects on our economy. Sadly, our politicians seem to be disconnected from the reality of how to manage our economy.

How banks are running the economy

"A small business tax break is worthwhile perhaps, and likewise an RBA rate cut, and in each case it’s really all the government and the central bank can do."

Our view:

The Government could get involved investing modest sums on alternative finance platforms, like the UK Government did 3 years ago with powerful positive effects (and good returns on investment).

That would help overcome people's natural caution and skepticism. People tend to think that banks have some super-natural powers in deciding who is creditworthy. Overseas' experience makes it clear that they are simply expensive, bureaucratic building societies that have lost their way.

My father was a bank manager and retired when the computer took away his discretion. Bank managers in his days had real discretion and could support businesses with their growth plans. We need to re-invent banking by going back to why they came into existence in the first place. It had nothing to do with household mortgages which simply inflated the price of unproductive assets.

 

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Here's a more detailed extract from Alan's article:

APRA, in line with global bank regulators, has also told them to increase their capital ratios, and since the system of risk-weighting means that only a quarter of the value of a real estate mortgage is counted against capital versus 100 per cent of a loan secured only against a business, that means all lending these days is more or less confined to mortgages.

It means the banks are basically not lending to those who don’t own a house or are already fully committed on their mortgages, and those who are building houses for investors.

So they are going elsewhere and paying 10-15 per cent more in interest than the banks would charge, except they’re not.

It means the divide between the haves and have-nots (a house, that is) has never been this great, and it’s also why this week’s rate cut by the Reserve Bank will make no difference and why the government’s efforts in the budget to help small businesses and middle income earners will only scratch the surface.

Banks actually run the economy by both creating money and circulating it, not the RBA or the government, and these days banks are only serving those who have equity in real estate.

According to economist Saul Eslake, home ownership rates among households headed by people aged 25 to 55 have dropped by an average of 9 per cent since 1991.

Most dramatically, the rate of home ownership among 25-34 year olds has fallen from 61 per cent in 1981 to 47 per cent in the latest census.

That is a huge social change: in one generation the number of families starting out and having children who also own their own home has dropped from almost two-thirds to less than half, and in the past 10 years the decline is accelerating.

It means the number of young people able to get a bank loan to start or expand a business, or to get a car loan or personal loan for anything less than 15 per cent interest, has also fallen significantly.

And a lot of that change is caused by the real estate market distortion inherent in negative gearing and the capital gains tax discount, which rewards highly geared property investors at the expense of owner-occupiers, who are in turn paying higher taxes than they otherwise would be in order to fund the subsidy to property investors.

So the combination of high house prices caused, in part, by negative gearing and the capital gains discount, with the transformation of banks into little more than building societies that lend almost exclusively against real estate, is the reason growth is weak.

A small business tax break is worthwhile perhaps, and likewise an RBA rate cut, and in each case it’s really all the government and the central bank can do.

But what’s really crimping entrepreneurship and growth is the post-GFC change to banking.

It means business people looking to expand have to come to Shylocks like your correspondent.

Most don’t bother.

Invoice trading is booming in Australia, according to a report by KMPG, University of Sydney, Cambridge University and Tsinghua Graduate School

As reported in The Australian today, in the first Asia-Pacific report surveying Alternative Finance published this week, it is notable that, relative to consumer lending, alternative business finance and, in particular invoice trading, has developed much more strongly in Australia than in the US and the UK.

We are quoted in the article as noting that this underlines the exceptionally under-served nature of the Australian small business lending market, which at the recent Altfi Summit in Sydney was estimated to be seeking an additional $95bn of finance.

This trend is also reflected in RBA lending statistics which show property loans since the GFC have grown by $538.7bn (+54%) while business lending has increased by just $72.5bn (+9%).

(RBA Statistics: Business Credit Seasonally Adjusted: $765.5bn in December 2008 to $838.0bn; Housing Credit (Owner Occupied and Investor) $992.9bn to $1,531.6bn)

KPMG’s endorsement of invoice trading will go a long way, but regulation is what really builds trust in a sector. The truth is, unlike consumer lending, a sandbox won’t accelerate the development of innovative new business finance products – but increased involvement from and endorsement by the gamekeeper will accelerate business adoption.

The government’s most pressing need now is to accelerate the adoption of alternative finance by SMEs, which would provide a kick-start to our economic growth. Introducing disclosure standards as to the cost of finance and terms and conditions of finance – similar to comparison rates for mortgages – is a simple step to take, but would dramatically change the reputation of the sector.

It’s clear that the regulatory environment needs a 21st century approach, and the government seems to be aware of this, but we are all waiting to see words turn into action. We’re in a similar position to when the SMSF market first emerged – the regulators had to rapidly come up with a new approach then, and the need is even more pressing now with the increased speed of the development of new business finance products.

As Paul Keating said: “When we laid the foundations for the current superannuation system in the 1991 Budget, I never expected Self Managed Super Funds (SMSFs) to become the largest segment of super. They were almost an afterthought added to the legislation as a replacement for defined benefit schemes.” 

Time to get wriggle on!

  

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Lending money is easy. Lending money well is much harder.

Wise words from the CEO of a leading UK P2P lender in an interesting article by David Stevenson for Altfi:

But for me the most important point came in a comment from LendInvest’s boss Christian Faes following the announcement of his excellent results. 

Christian observed that “the world of P2P is a slightly bizarre one in that there’s a lot of talk about how much platforms are lending. But for the industry to mature, investors should start looking at how viable underlying business models are, rather than simply how much a platform has lent. 

Lending money is easy. Lending money well is much harder. 

At LendInvest we are lending substantial volumes but, more crucially, we are a profitable business without having to rely on external funding to stay alive.” 

And what’s true of alternative finance is also true of virtually any disruptive business sector transformed by technology. Bet on profitable businesses with sound business franchises where the revenue lines are transparent and obvious.

 

Our escalating super problems - need for reliable income

Interesting article in today's Sydney Morning Herald:

"The Baby Boomer generation is now retiring, with some 700 Australians turning 65 every day.

Challenger estimates that at the moment some $73 billion of our super savings are moving from the accumulation phase to the retirement phase a year.

It estimates that this will rise to some $206 billion a year by 2026.

One of the ways to make the system work is to make sure the money that is in the super system is not wasted once the person moves into retirement."

As recognised overseas, peer-to-peer lending should be part of the solution.