Peer to peer lending research firm 4thWay has published a note touting the benefits of investing in P2P loans in contrast to more volatile equity investing. 4thWay says that Brexit induced market volatility should compel investors to consider investing in online loans.
4thWay says it is simple for lenders (ie investors) to diversify across thousands of investments – loans – as opposed to a typical stock investor who diversifies across hundreds of shares through share funds. Additionally, lenders are frequently in a better place in the queue compared to equity investors when recovering losses is involved, in case a company struggles or fails.
According to 4thWay:
“A turbulent P2P Brexit would mean a tripling of defaulting loans in some kinds of lending and cut-price sales of borrowers’ assets. Interest rates and reserve funds are prepped for most disasters, leaving a very low chance of a sizeable overall loss on a well-diversified, low-risk lending portfolio.”
The note acknowledges that default rates have risen but explains that “losses have still been easily contained.”
4thWay makes a “conservative forecast” of results in a severe downturn loosely comparable with the Great Recession. The top-ranked P2P lending sites are predicted to perform well and lenders can expect to “survive such a disaster with positive results.”
Neil Faulkner, co-founder and managing director of 4thWay comments, says that investors making substantial investments in P2P loans are taking up the chance to steady their portfolios with an asset that fits in between savings and equity in the risk scale.
“The worst-case Brexit scenario would see a substantial recession, impacting jobs and profits, as well as the property market, causing bad debt write-offs to rise as much as fourfold, although I expect most lenders using many 3 PLUS-Rated P2P products and IFISAs to survive the blast,” says Faulkner. “In the best-case Brexit scenario, lenders will have a soft landing, and the extra interest they earn over the period will form an additional nice buffer before the next crisis, whatever and whenever that may be.”
Faulkner adds that some investors are using P2P lending to capture a high yield in riskier segments such as property or asset-based lending but counsels investors to “play a longer, lower-risk game, which is where lending usually shines best.”
“It surely will during a Brexit meltdown scenario,” says Faulkner
