When there is market volatility, what actually happens to lending? Economic headwinds don’t mean that finance dries up. Instead, different finance products typically become more useful.
For starters, when markets get choppy, lenders become more discerning. There is currently plenty of liquidity, but lenders can change their risk appetite or become more selective in who – and what kind of projects – they will finance. The higher the LTV or loan value, the more discerning lenders will be.
The demand for finance never really wanes, whatever happens in the market. What does happen though, is that high-net-worth individuals look at different financing products, and many will turn to their assets to unlock liquidity as it is often an easier way to raise debt. There are plenty of products that will help do this: bridging, equity release, different types of corporate finance (stock loans, for example) and luxury asset finance.
Securities-backed financing can also be a way to raise finance, especially in the private sector where valuations have dropped. Despite what many people assume, there is still plenty of lender appetite for private sector lending including high-value single stock loans. The fact that valuations have dopped means that there is less risk of margin calls as stock is not overvalued.
One thing that’s certain in the current economic environment: the cards are up in the air, what remains to be seen is how they will play out. The press is full of every type of opinion, from dire warnings about a new world order to cautiously optimistic outlooks about a global recession not hitting as hard as initially thought.
Monetary, fiscal and policy aside factors aside, current economic headwinds are further compounded by everything from global supply chain issues to hiring challenges. These factors impact everything from where companies will choose to operate to how wealth opportunities are created.
As things shift in reaction to a changing world (geographically, in terms of emerging sectors what wealth opportunities look like), there will be winners and losers. Winners will see opportunities for investment and will look to raise finance to get ahead. Those who struggle will look to release equity from existing assets to tide them over.
Increasingly, finance is likely to be high value and have cross border elements as investors and HNWI take a broader view to where they want to invest, own assets and where and how wealth will be generated.
For everything that might change, other things will remain the same. Economic volatility does not make the most desirable places in the world to own property less attractive. Monaco is no less appealing in a recession for example, and those that want to go and live there will do so.
While economic volatility can temper demand and sales volume for things like investment and trophy property sales, there are always buyers for these kinds of asset. There will always be strong demand for luxury assets for those that can finance them – if economics mean there is the opportunity to snap up a bargain from someone who needs to dispose of an asset to create liquidity, all the better.
Finally, entrepreneurship and business ownership will continue to provide most opportunities to create significant wealth. Emerging markets and industries will offer both risk and reward for those who will venture into them.
More broadly, themes like sustainability and clean energy will also remain strong, partly because of consumer sentiment, but more practically because of current issues that make them a necessity – Europe’s reliance on Russian gas has only underlined the practical and economic benefits of a renewable energy supply closer to home. In industries and sectors that remain in-demand even in periods of volatility, there are plenty of opportunities. Lenders will also have identified these and will be looking to leverage points.
Inflation is having a marked effect on the economy, and it will continue to do so – not only because of its day-to-day impact on the cost of living and policy as central banks look to curb it.
In low interest rate environments with little inflation, property sales do exceptionally well – as we saw in 2020. Buyers look to take advantage of low interest rates and buying property (and taking on mortgages) when borrowing is as cheap as possible, driving volume.
In rising interest rate environments, property sales can cool and there can be a slight downturn in mortgage numbers, but there will generally be more rental demand. There is also increased demand for rentals as inflation impacts what prospective buyers can save towards deposits – many also choose to wait out economic volatility.
Landlords can raise the cost of the property rental in line with inflation and property prices also rise. This means that rental investments can be a way to hedge inflation and those who can often finance investment properties to do so, as well as invest into a relatively safe haven.