Market Prognosis

A concise summary of the major macro events of the past 24 hours, and selected UK company-specific news.

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October 20, 2023

It’s the debt, stupid

Macro & Overnight

Oil prices and gold rose again yesterday and overnight on the continuing Middle Eastern conflict without any signs of a diplomatic breakthrough.

When geopolitical tensions rise, US bond yields fall as investors seek the safe haven of Uncle Sam. Yesterday, US Treasury yields rose again, and the dollar has hardly moved since the conflict reignited two weeks ago. Why have investors not rushed to buy Treasuries this time?

If investors’ reluctance to seek the dollar safe haven is fear of resurgent inflation, then Jay Powell’s soothing words that the Fed’s policies were working and they would extend the rate pause should have helped. But it didn’t seem to.

Bond investors fear increased bond issuance, concerns that would only have heightened by Biden’s promise of another $100bn in aid in a day trip to Jerusalem this week. As Bill Clinton might have said, it’s the debt stupid.

Where the Fed has left off, bond investors have continued the tightening job along the maturity curve, prompting concern that the Fed has lost control of the broader rate environment and the Treasury has an insatiable appetite for debt.

The UK has today released deteriorating retail sales and consumer confidence measures.

UK Company News

Impact Healthcare REIT released a 1.3% increase in NAV per share to 115.1p in its quarterly update. It said that it achieved a 4.69% average increase in rent from the 12 rent reviews, and it had collected 99% of rent due YTD. Its current average debt cost is 4.47%, and it has now hedged rates on 98% of its debt. It has re-iterated its annual dividend target of 6.77 pence per share for the year ending 31 December 2023

Impact Healthcare is a property landlord that owns 140 care homes leased to hand-picked operators on long-term inflation-adjusted leases of an average term over 20 years. It constructs dependable income and dividend streams from investing in alternative assets, in this case, care homes. These vehicles became popular and raised lots of capital from yield-starved investors over the past decade. However, investors today are overwhelmed with yield opportunities and can get a 5% “risk free” yield by lending to the US government. Owning care homes or assets such as music royalties involves operational and financial risk, so they must offer a higher return. Impact Healthcare now yields 8%. Investors must decide if this is sufficient while also considering the risk that Treasury yields push out further. Impact has demonstrated a capable specialist landlord protecting its asset value. However, investors are attaching a nearly 30% discount to those assets for the perceived risk that its tenants can’t continue paying their rent or that Impact encounters financial difficulties emerging elsewhere in the “alternatives” space. Its issues will remain until the rate cycle changes. 


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