Investec Pref Discussion Threads

[return_of_the_apeman] 05/7/2023 17:18

JPM have broken rank with others who are still predicting peak rates at 6.25% to say rates could need to rise to 7%



A 7% base rate would put this on a yield of 14.3% @560p, this still seems unloved/under the radar for now

6.25% is still 13% !!

[return_of_the_apeman] 05/7/2023 10:34

Continues to tick up

Spread 547.6 / 559.8 approx 2.5%

[return_of_the_apeman] 03/7/2023 15:38

Or perhaps as the money is already in a pension wrapper (lump sum excluded) except the risk associated with a basket of other prefs, a 300bps reward over gilts and a good chance for a capital gain, with a small allocation to invr. I don't see much risk with gacb for example @104p but that's just my opinion

Good luck in whatever is decided, hope it goes well

[return_of_the_apeman] 03/7/2023 15:26

A lower allocation, say 5% would limit downside if something crazy happens and you are wrong, but if you are right then will give the opportunity to recycle the gains into gilts or other prefs/bonds that should then have stellar yields

Just my thoughts, us humans are a bit pants at predicting the future :-)

[papy02] 03/7/2023 14:43

Many thanks for your good advice rota, which I have passed on.

The key risk with the main investment in a gilt ladder is runaway inflation/ interest rates. While INVR brings credit risk and interest-rate price-risk, it does mitigate that runaway inflation risk. So maybe a 5% allocation to INVR helps balance overall risk. (I’m tempted to say 10% as 5% won’t really move the needle, but am not yet comfortable that I understand the price-risk in particular).

This is the first time we are coming out of a massive QE experiment. I tend to the sticky inflation view, but no-one really knows, especially given future pandemic possibility, so I try to stay agnostic when considering risks.

[return_of_the_apeman] 03/7/2023 00:50

Not sure I would gamble with my friends money; managing the unknown in the decumalation phase can be tricky I hear

Sentiment and expectation will be the drivers and the market as a whole currently believes differently to what I do, so it is worth bearing that in mind

I like the idea of a gilt ladder, perhaps comparing that to what a financial advisor suggests for free in their initial discussion and searching monevator might be a useful starting point

Rathbones seem to have run the slide rule over investec fwiw

[papy02] 02/7/2023 16:29

Hi r-o-t-a / all

I'm still researching these. Trying to understand what drives the share price here.

(I should say this is actually research for a friend rather than myself. He is just retired at 69 and is fairly risk averse. His widow, if he is first to die, would cash in his investment pot and buy an annuity).

INVR should be a great hedge against high inflation rates and interest rates if that's what the future holds. And would complement a gilts ladder. So I'm tempted to think of as a long-term hold, eventually being sold only when annuity becomes appropriate.

But how do you assess possible downside risk to the share price from here (not far off ATH) if things go the other way at some point in the future? e.g. a new pandemic.

Previous lows were:
- 320p in Sep 12 when BoEI (bank rate) was under .5% and heading to .1%, and CPI around 2.4%, and
- 342p in Sep 20 with BoEI of .1% and CPI around .6% in the throes of Covid

The price should depend on Credit Risk, BoIE expectations, and maybe CPI expectations?, but I'm struggling to build a mental picture of this.

Sorry for vague, rambling, post. Any thoughts much appreciated. Just don't want to find there was significant risk that the great current yield gets eroded, and compounded by share price loss at the point it needs to be sold.

The other hesitation I have is the South Africa connection, given the state of the SA economy. Moody credit rating of Baa1 on Investec Plc long-term debt, senior unsecured, seems encouraging. But I haven't looked into the "sharing agreement" with the SA entity - is it something that needs to be considered from Credit Risk perspective?

[return_of_the_apeman] 29/6/2023 12:58

Scratch that, there have been some large buys :-)

Scroll down to trades and click on the blue dots underneath

[return_of_the_apeman] 29/6/2023 08:22

So these bits below say if you bought this today at 557p you can expect roughly 11.7% per annum over the next 2 years (assuming rates rise to 5.5 and stay there)

Still sod all volume in these prefs and these rate expectations are not priced in here yet for sure

Financial markets have currently priced in UK interest rates rising from 5 per cent to 6.25 per cent at around the end of the year, before beginning to fall during the spring or summer of 2024.

However, expectations for rates in the summer of 2025 have shifted markedly higher over the past month, rising from 4.5 per cent to 5.5 per cent

[return_of_the_apeman] 28/6/2023 23:24

Bank of England governor signals interest rates likely to stay higher for longer





Andrew Bailey suggests financial markets are wrong in their bets about future monetary policy

Chris Giles


Bank of England governor Andrew Bailey on Wednesday signalled interest rates in the UK are likely to stay higher for longer than financial markets are expecting because inflation has proved to be such a persistent problem.

Speaking at a European Central Bank conference in Sintra, Portugal, Bailey suggested markets were wrong to think rates would fall quickly from a peak reached around the end of this year.

Bailey said the BoE would be “evidence driven” in setting the cost of borrowing and it was looking at both the peak of rates and “how long [the peak] sustains beyond that”.

“I’ve always been interested that markets think that the peak will be shortlived in a world [where] we’re dealing with more persistent inflation,” he added.

Financial markets have currently priced in UK interest rates rising from 5 per cent to 6.25 per cent at around the end of the year, before beginning to fall during the spring or summer of 2024.

However, expectations for rates in the summer of 2025 have shifted markedly higher over the past month, rising from 4.5 per cent to 5.5 per cent.

UK inflation remained stuck at 8.7 per cent in May, according to official data.

Bailey said the most important problem facing the UK was core inflation, which excludes volatile food and energy prices and is currently 2 percentage points higher than in the eurozone or the US.

“It’s core that’s the issue, it’s much stickier,” he added, citing a buoyant UK labour market and a fall in the size of the workforce after the Covid crisis.

Bailey said the BoE would not ask the government to make the central bank’s task of restoring price stability easier by raising the inflation target from its current 2 per cent level.

“We are facing the biggest challenge for a very long time, but we’ve got to meet that challenge,” he added.

He refused to comment on whether his task would be made easier if the government raised taxes or cut public spending to damp demand and spending in the UK economy.

But he struck a different stance to that of BoE chief economist Huw Pill by suggesting there was a virtue in the central bank’s forecasts being partly based on announced government policies on tax and spending.

“We always, when setting monetary policy, take fiscal policy as announced,” said Bailey.

Andrew Bailey, governor of the Bank of England. The economy will not get back to 2% inflation without a sharp slowdown and higher unemployment

By contrast, Pill highlighted how the BoE had got its August 2022 forecast of a UK recession wrong, partly because it assumed the government would not provide any support for households struggling with high energy bills.

At the time of the forecast, the government had not announced support, but it went on to provide a cap on gas and electricity bills.

“What was particularly unlikely was energy prices being at this very high level for ever and yet there being no fiscal response,” said Pill at the same ECB conference.

The BoE this month announced a review of how it makes and uses economic forecasts, in an acknowledgment that it has made mistakes.

[cassini] 26/6/2023 09:06

Yes, but don't interest rates always get slashed when something in the economy 'breaks' after a tightening cycle?

Maybe it's different now though, hopefully ZIRP has had its day. 5% is certainly a long-term average value for BOE interest rates.

[return_of_the_apeman] 26/6/2023 08:35

I don't think the mispricing is due to the risk of default, instead it seems the market is in denial that a 5% BR is perfectly normal and longs for a return towards ZIRP, which is clearly absurdly optimistic :-)

[papy02] 25/6/2023 23:05

Many thanks for the replies.

600bps above gilts! Am I right to think that’s effectively pricing in a 1 in 16 chance of default each year - which is clearly absurdly pessimistic.

[return_of_the_apeman] 25/6/2023 18:48

Hi Papy02,

As a minimum regarding risk, read the prospectus (in the header) and look at the the three most recent trading updates - so that might be a qtry, half yearly and annual one in total. If you don't think Investec will go bust during your decided holding period then that's great, then just keep one eye on them going forwards. In reality the ords would normally have to be wiped out first if they did go bust but another company would normally be forced to take them over - like what happened with Credit Suisse and SVB etc. If you think the risk is worth 600bps above gilts in a SIPP then life is good. And/or a stock screener can be useful to check the fundamentals are acceptable too.

For bonds the companies just need to stay solvent until maturity (and be able to refinance them if needed). An interesting example of one that might not make it is Metro Bank. I am not touching them but it's a useful example for a risk assessment exercise



Just my thoughts, thanks to others for chipping in :-)

[joey52] 25/6/2023 13:38

Halifax also allowed me to buy without any problems.

[cassini] 25/6/2023 13:33

Papy2,

I don't know about HL, but ii let me buy these without any problem or warnings. I think ii treat them as any other pref share.

[papy02] 25/6/2023 11:11

(Bond novice hère). How do you guys assess the credit risk you are taking with these, and judge if fair value from that perspective.

Does anyone know what hurdles AJ Bell set before you can buy these (in a SIPP)? If an « exam » what do I need to bone up on to pass. (I have the same query on bonds and gilts and prefs generally).

The main Fixed Interest thread, and this one, are real havens compared to the typical ADVFN board. I’ve learnt a lot reading back through recent and not so recent posts. It is such a pleasure to see folk sharing real expertise and experiences without rancour.

[return_of_the_apeman] 23/6/2023 09:05

Divi received at ii this morning

[return_of_the_apeman] 22/6/2023 18:00

I guess for those that care about a capital gain, if this stays in step at an 11% yield, if/when rates get to 6% the price would be 636p

Joey52 - glad you are already in the money :-)

[joey52] 22/6/2023 13:45

Return of the Apeman, thanks for highlighting.

[return_of_the_apeman] 22/6/2023 12:46

50bps base rate rise means INVR now yielding 10.95% @548p

I doubt 548p will hold for long

[return_of_the_apeman] 22/6/2023 08:10

Bloomberg reporting market consensus is for 6%+ base rate by Xmas

Most likely just 25pbs hike today

This might start to move quicker now

[joey52] 20/6/2023 11:14

Added a position in SIPP yesterday,
depending on inflation rate tomorrow could be 0.5% rise on Thursday.
Seems they are forecasting drop from 8.7% to 8.2%

[return_of_the_apeman] 20/6/2023 10:20

Some rough calculations

Next rate rise of 0.25 on Thursday takes the yield on this to just shy of 11%

Last time I looked rates were forecast to come down from a peak at Xmas to around 3.5% over 5 years, that would still give a yield of around 8.5% on todays prices. What could the capital value of this pref be at that base rate in 5yrs? - I would think somewhere in the range 450p (10% yield) to 750p (6% yield) and my moneys on much nearer to 750p