Weekly Market Commentary: 31st May 2019

Trump Threatens Mexico with Tariffs over Immigation Row

This week markets have been rattled by a further escalation in Donald Trump’s trade war, when he opened a new front with Mexico. Despite renegotiating the NAFTA agreement more to his liking, he has now threatened to impose tariffs unless Mexico does something to stem the flow of immigrants crossing the Southern border. This comes in the same week that the confrontation with China spilled over into diplomatic channels, with the UK taking fire for defying American orders not to work with Chinese telecoms firm Huawei.

Since the trade negotiations fell apart and the trade war restarted on the 5th May, the S&P 500 is down around 5%. This suggests that while the increasing hostilities are gaining a lot of press coverage, they’re not troubling investors too much for now. This is probably because no-one is taking it seriously and expects it all to blow over. That feels too optimistic to us, we wouldn’t be surprised to see this drag on another 12 months, before a big truce is declared just before the presidential elections next November.

Europe: Italy and the EU Renew Hostilities over spending

This week the EU sent a letter to Italy kickstarting renewed tensions between the pair.  Brussels is unhappy with Italy’s lack of progress in cutting down the ballooning debt to an acceptable level. If the nation fails to produce a clear plan on tackling the debt burden, it could potentially be fined for breaking budgetary rules. However, swelling support for the populist government whose key election campaign focuses on cutting taxes, along with the fact that no country has been fined previously will most likely see Italy refuse to comply with EU demands.

Elsewhere, Portugal became the first eurozone country to tap into China’s colossal debt market, issuing a three year $289m “panda bond” (non-Chinese bond issued in local currency). The “panda bond” will help the country widen its investor base. China’s increasing presence in the international debt markets coupled with the highest savings rate in the world has made launching sovereign bonds in this area an attractive proposition. Austria looks set to be the next eurozone country to enter the Chinese market.

Autos: Brexit Cuts car manufacturing by almost a half

UK car production fell 45 per cent for the month of April as manufacturers battened down the hatches for a Brexit storm that never came. Annual stoppages normally scheduled for the summer holidays were bought forward to cope with a No Deal Brexit. Other additional costly measures were also implemented such as rerouting logistics and gearing up training for the new customs procedures.

Meanwhile electrification, autonomous vehicles and unconventional industry entrants have all increased the pace of consolidation within the global auto industry. As a result, merger activity has increased as companies seek to increase economies of scale in order to keep up. Industry mergers last year doubled to $98bn and this week Fiat Chrysler (FCA) proposed one of the largest auto tie-ups with Renault worth $37bn. The new group’s combined annual revenues of $189bn and $8.9bn net profit makes it one of the largest groups in the sector. FCA vowed not to close any plants a fact that could help the deal be approved by both Italian and French governments the latter which has a significant stake in Renault.

Commodities: Arcelormittal Announces Further Steel Cuts

ArcelorMittal announced a second round of cuts in steel production this month as persistent market weakness and surging imports into Europe have impacted the firm. Shares in the company fell seven per cent after the announcement. Steel lies at the heart of trade wars with costly tariffs applied by President Trump last year. With escalating trade tensions between China and the US, European steel makers fear the bloc will become a dumping ground for material destined for the US if further tariffs are applied.

In addition, steel makers continue to struggle in the UK. In its heyday (1970) the industry employed over 300,000 people but this has dwindled to 31,900 with just two operating blast furnaces left. Steel contracts, like most commodities, are typically agreed well in advance of delivery. With Brexit uncertainty continuing until October, overseas buyers are reluctant to place orders as tariff rates could be subject to change. This uncertainty has brought previously struggling British Steel to its knees last week. The government continues to prop up the steelmaker as it searches for a buyer.



Fully automated system for registering lasting powers of attorney

The Office of the Public Guardian for England and Wales (OPG) has included developing an online service for the register of lasting powers of attorney in their six year plan.
The role of the OPG is to protect individuals who do not have the capacity to do so themselves. Their duties are to:
• supervise deputies appointed by the court of protection;
• register lasting and enduring powers of attorney (LPAs and EPAs);
• keep a register of LPAs, EPAs and deputy court orders;
• deal with concerns about deputies and registered attorneys.

The register of LPAs, EPAs, and deputy court orders is now searchable by the general public, and the OPG says one of the aims of its new strategy is to help people do this. In particular, it plans to work closely with safeguarding partners in the NHS and local authorities, so that doctors, nurses and social workers can check that LPAs, EPAs, and deputy court orders are valid.
Part of its six year plan is to improve its online services and make applying to register for an LPA easier.
A partial solution was introduced in 2015, with an online application form that can be completed and checked electronically, but still has to be printed out before being physically signed and posted to the OPG. A change in legislation is needed before a fully online LPA can be introduced with digital authentication; without the need for a so-called ‘wet’ signature.

The OPG’s strategy aims to:
• increase awareness among safeguarding partners of its role and responsibilities;
• work more closely with safeguarding partners to prevent concerns arising;
• use a ‘no wrong door’ approach to deal with all concerns that are reported to it;
• encourage a working culture which puts the user first;
• provide greater support for its users.

The OPG says it is still continuing its discussions with the Ministry of Justice and other interested parties on a way forward that will ease the process. Any improvement on the application and register of LPAs will be welcome by the public.

The cost of living alone

As the number of one-person households continues to rise, recent Office for National Statistics (ONS) analysis reveals the financial situation and personal well-being of those living alone:

People living alone are more likely to be renting, and feel less financially secure than couples without children, with fewer reporting they have money left over at the end of the week or month.  People living on their own spend an average of 92% of their disposable income, compared with two-adult households who spend only 83% of theirs.

And the costs are not just financial: when it comes to well-being, those living on their own report lower levels of happiness and higher levels of anxiety than those living together with a partner and no children.

Weekly Market Commentary: 24th May 2019

Theresa May Confirms Resignation

This week we witnessed another Conservative Prime Minister reduced to rubble over Brexit, whoever ends up replacing her in Number 10 will likely suffer the same fate. Ultimately, she was undone by refusing to acknowledge a simple truth; leaving the EU will be complicated, lengthy and painful.  Until that truth is confronted, we’re doomed to repeat the same pattern; construct a fantasy, have it blown apart by reality, fail, resign. All the while allowing the anger and betrayal vote to swell making the country ever harder to govern.

This isn’t an argument for remain, but for realism. If leaving the EU is truly desirable, then confronting these hurdles is the only way to deliver it. Either by convincing people it’s worth it and having a credible plan to minimise the impact or decide it’s not worth the bother and move on to something else.  Unless events force it upon us, this revelation may still be two or three prime ministers away. For now, we get to watch Tory hopefuls compete for who next gets to have their reputation demolished by Brexit.

UK: Pret has a bite to eat

This week, it emerged that sandwich chain Pret a Manger has agreed to buy all of Eat’s 94 stores. As both companies are privately owned, the fee size wasn’t disclosed.  The move will instantly turbocharge Pret’s expansion plans for vegetarian only stores, which first started three years ago in Soho. Vegan and vegetarian diets are gaining in popularity, in 2018, one in six new products launched were vegan helping to propel the UK above Germany as the world’s leader for vegan food launches.

Elsewhere, Jamie Oliver’s restaurant chain collapsed putting 1000 jobs across the country at risk. The Italian food chain narrowly avoided administration last year after significant restructuring and a cash injection by Oliver of £12.6m. However rising costs, increasing popularity of home delivery and a desire for a more premium experience when eating out have all crippled the company. The same headwinds have also affected the mid-market casual dining sector with Carluccio’s, Gourmet Burger Kitchen and Strada all shutting down stores last year.

Global: Technological Curtain Tightens as Trade Tensions Mount

Markets have already priced in no changes to interest rates this year so there was little movement following the Federal Reserve minutes published this week. The Fed reaffirmed a patient approach despite ultra-low unemployment rates (3.6 per cent as at April). In theory, tight labour markets should help push prices up thus lifting inflation.  However, inflation has retreated further from the Fed’s two per cent target. Global growth concerns have yet to subside although conditions are improving.

Chinese Game of Thrones fans were the latest casualty of the trade war as streamers who use Tencent Video were unable to access the last episode. While this seems incredibly trivial, it signals an escalating technological cold war with political spats now trumping global business. In turn, multi nationals like Google and Apple are reviewing their Chinese supply chains which are at risk of being severed. In China, Huawei would be a beneficiary of rising nationalism with users switching from the likes of Apple. As the battle for supremacy continues, private companies will be forced to choose sides, much to the detriment of consumers.

Eurozone: Services grow as Manufacturing Struggles

PMI indicators, keenly watched by the European Central Bank due to its use as precursor for GDP growth, provided contrasting viewpoints on services and manufacturing sectors this week. On the one hand, manufacturing continued to contract indicating that intensifying trade tensions along with sluggish global growth continues to affect producers. Potential tariffs from the US on the European auto sector will likely cause further drag on PMI figures. The gauge dropped by 0.2 to 47.7 for the month of May.

On the other hand, the services sector which accounts for 73 per cent of the European economy continues to prop up the domestic economy. Stronger wage growth coupled with low unemployment levels has seen the indicator rise to 52.5. It will be interesting to see how long this divergence continues before manufacturing woes start to eat into the services sector.

The financial situation of those living alone

ONS analysis around the financial situation of those living alone.  As the number of one-person households continues to rise, recent Office for National Statistics (ONS) analysis reveals the financial situation and personal well-being of those living alone.

People living alone are more likely to be renting, and feel less financially secure than couples without children, with fewer reporting they have money left over at the end of the week or month.  People living on their own spend an average of 92% of their disposable income, compared with two-adult households who spend only 83% of theirs.

And the costs are not just financial: when it comes to well-being, those living on their own report lower levels of happiness and higher levels of anxiety than those living together with a partner and no children.

More and more of people in the UK are living alone. The number of people living on their own went up by 16% to 7.7 million between 1997 and 2017, while the UK population increased by only 13%. By 2039, the number of one-person households is projected to rise to 10.7 million.

The rise in the number of people living alone is largely concentrated in older age groups.  While the number of people aged 25 to 44 living alone has fallen by 16% between 1997 and 2017, the number of 45 to 64-year-olds living on their own has increased by 53% over the same period.

The 53% increase is partly due to the large number of children born in the 1960s reaching this age, but may also be down to a change in our relationships; more people in this age group are divorced or single than there were 15 years ago.  The full report can be found here.

Avoidance Evasion Planning

The differences between tax evasion, tax avoidance and tax planning explained
Most people know that tax evasion is wrong. Not so long ago, tax avoidance used to be thought of as “acceptable” and so we could be forgiven for being at least a little uncertain, these days, as to whether “avoidance” can ever represent the “acceptable face” of tax reduction.

Uncertainty (confusion even) will certainly have been influenced by the fact that over the past few years “avoidance” has arguably had more (negative) publicity than evasion. So much so that for some, even many, “tax avoidance” is synonymous with tax evasion.  In the light of all of this, our impression is that there is still confusion over what is and isn’t “acceptable” and some may shun even the most permissible planning through fear of HMRC challenge. If you take action (with or without advice) and as a result you end up paying less tax, have you not “avoided” tax – regardless of how you avoided it? Well, at a simplistic level, yes you have. But the determination of whether what you have done is likely to be challenged by HMRC is dependent on whether the means of avoidance was contemplated by Parliament. Did the planning that you carried out (even if it was within the “letter of the law”) defeat the established intention of Parliament? If so, it will be (probably successfully) challenged. In extreme cases, the assistance of the General Anti Abuse Rule (GAAR) may be enlisted in support of HMRC. If not, then you are likely to be ok, regardless of the tax you have saved (avoided).

Given the importance of clarity over what is and isn’t permissible when it comes to actions taken to reduce taxation any official guidance that can be relied on must be seen as helpful. Such help is at hand in the shape of an important part of the HMRC / Treasury report entitled “Tackling tax avoidance, evasion, and other forms of non-compliance” published in March this year.

On pages 6 and 7 of that document, tax evasion, tax avoidance, tax non-compliance and tax planning are all clearly defined along with a clear statement of the consequences of each.
Here are some definitions and consequences.

Tax evasion is always illegal. It is when people or businesses deliberately do not declare or account for what they owe. It includes the hidden economy, which is when someone hides taxable activity from HMRC completely.

Tax avoidance involves bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter, but not the spirit, of the law. Most tax avoidance schemes simply do not work, and those who use them may end up having to pay much more than the tax they tried to avoid, including penalties.

Tax non-compliance is not getting your tax right the first time, for any reason. It includes evasion, avoidance and other behaviours, such as making careless errors or mistakes on your tax return. Tax planning involves using tax reliefs for the purpose for which they were intended – it is not tax avoidance. For example, claiming relief on capital investment, saving in a tax-exempt ISA or saving for retirement by contributing to a pension scheme are all legitimate forms of tax planning.
So that’s all clear then.

Tax plan all you want but don’t defeat the intent of Parliament. Basically, use tried and tested strategies that are effectively contemplated by the legislation or otherwise have been clearly and reliably “accepted” as “non-confrontational” by HMRC. So, does all of this clarify and to some extent limit or diminish the importance of the financial adviser in relation to that taxation part of the financial planning process? Absolutely not.

The value of advice
To conclude that if you rule out aggressive or “edgy” tax avoidance arrangements planning is then reduced to the “easy stuff” would be a grave misjudgement. There are so many hard choices to make in all aspects of the financial planning process. And the consequences of making the wrong choices can be serious and financially detrimental – and therein is the value of expert advice. Knowing that choices exist, knowing the consequences of those choices and then making the choices that will have the most positive impact on the achievement of the client’s objectives.

For example, which tax wrapper (after the tax “no brainers” of pension + ISA) will deliver the optimum after tax outcome – UK or offshore collective and if offshore, reporting fund or non reporting fund? And then would a UK investment bond deliver a better outcome? Even more important to know the nuances given that the same underlying investment portfolio could, broadly speaking, underpin all of them.

EIS or VCT? Which trust to use for estate planning? Corporate investment – what are all of the tax implications? More than you might think at first glance.  The list (of choices – with consequences) goes on. clients aware of those choices and telling compelling stories that illustrate the (financial) difference between taking the wrong or right choices for people like their clients is a key part of the process that leads to engagement and better outcomes. In the current era of disclosure of “costs and charges” this level of clarity will also be a strong contributor to proving the value of advice.

Equity release surge

There has been a double digit rise in the number of people releasing cash from their property through equity release, new figures have shown. According to the Equity Release Council’s spring 2019 market report, demand for equity release continued to grow across all UK regions and lifetime mortgages in particular saw a rise of 25% from 2017 to 2018.

Lifetime mortgages are now estimated to account for about a third of all mortgages taken out by homeowners from their mid-50s onward compared to less than a fifth ten years ago, according to the ERC, which based its analysis on FCA product sales data. Product innovation continued to broaden the appeal of equity release and the range of options to those wishing to unlock cash from their property doubled to 221 in the space of the past year, according to the ERC.

Weekly Market Commentary – 17 May 2019

Markets Remain Unusually Calm Amidst Escalating Tensions
This week, despite the escalating trade war with China and a growing possibility of an actual war with Iran, US markets largely shrugged off rising uncertainty. While we are advocates for ignoring the noise and focusing on the long term, this still seems unusually zen. While it’s possible that the erratic behaviour of President Trump is now fully priced in, it could also be that the market has now become complacent and is too heavily discounting anything serious happening. The latter is more likely, which means a violent reaction to these events could still be on the cards if expectations shift.

Elsewhere the markets had no illusion about the direction of Brexit talks between the government and opposition, as the pound hit a three month low against the dollar. Reports are that the whole exercise has been futile, with May refusing to acknowledge the realities of the Irish boarder and Corbyn refusing to acknowledge what decade it is. While most are now expecting Theresa May to be gone in July, we still think she has a plan to cling to power. Expect some convoluted parliamentary shenanigans when she brings her bill back to the commons next month.

UK: CVA’S Rise as High Street Retailers Struggle
Weakening demand, rising ecommerce growth and political headwinds all affected the retail sector in 2018 and the narrative remains unchanged this year. Large high street firms such as the likes of Arcadia group (Topman, Topshop) and Debenhams having either undergone a compulsory voluntary arrangement (CVA) or are thinking of going down this route. A CVA essentially offers struggling companies a partial rental reprieve much to the chagrin of commercial landlords.

One of the biggest landlords, British Land, posted losses of £319m for this year with most of its five percent drop in property value driven by declining retail assets. Similarly, Landsec’s portfolio
value dropped by £557m. Meanwhile in a bid to revitalise the retail sector, the government will implement a new register to allow potential tenants to easily check-up ownership thus speeding up the letting process. While increasing transparency is helpful, the bigger challenge will be aligning the interests of a diverse set of landlords including investment trusts, the public sector and overseas investors.

Banks: Metro Bank Raises Additonal Funding
Metro Bank, one of the better known up and coming retail banks, this week was forced to quash “fake news” rumours on social media surrounding its financial health as customers rushed to withdraw savings. In January the bank admitted an accounting blunder which gave incorrect risk banding to some of its risky commercial property loans. As a result, the amount of money the company needs to put aside to act as a buffer significantly increased. This week Metro Bank finally managed to plug the £350m gap in reserves.

The mistake came at inopportune time for the bank, a poor first quarter saw profits before tax fall by half to £4.3m. Coupled with some of its business customers withdrawing funds this has led to share price plummeting 70 per cent since the turn of this year. The bank isn’t doomed quite yet however, new customer growth continues to increase and it is pressing ahead with its plans to expand.

Eurozone: EU records positive quarterly growth
Germany’s economy rebounded with GDP expanding 0.4 per cent in the first quarter of 2019, temporarily quelling recession fears. Private consumption, construction and increased government spending all boosted growth, while government spending on the other hand declined. Expectations for economic development over the medium term however, is down for the month of May. The Zew indicator which captures economic sentiment, dropped to -2.1 points from 3.1 for the month prior and was miles off analysts’ expectations of 7.1.

Wider Eurozone growth also matched Germany’s growth rate with all key member states recording an expansion in economic activity. Current growth rates are far from resilient and will most certainly be tested as headwinds intensify. After last week’s trade talks broke down between China and the US, European firms are bracing themselves as the try and avoid getting caught in the cross fire.

8% pensions snafu

A rule change brought in with the new tax year means that millions of people will start to save more into their pensions – but thanks to a quirk of the system, an average worker will miss out on £40,000 over their career. Under the final phase of the Government’s flagship savings policy, “automatic enrolment”, the amount put into your pot each month will rise to 8% of earnings.

Except it won’t. The rules state that contributions need to be taken only on a portion or “band” of salary. Both low and high earners are affected. The first £6,136 of income is excluded. And any salary over £50,000 – the new threshold for higher-rate tax – is likewise left out of the calculations. Meanwhile, just days ahead of the changes, more than one in four workers had no idea that their automatic work pension contributions were going to increase.

Working Longer and Older – National Statistics Labour Market Figures

The National Statistics Labour Market figures, for the December 2018 to February 2019 period, showed the employment rate for those aged 16-64 was 76.1%, up 0.7% year-on-year and the joint-highest figure on record. A closer look at the figures shows that the total number employed rose by 457,000 between December 2017-February 2018 and December 2018-February 2019. Of this increase, 320,000 (70%) were aged 50 and over. In the subset of those aged 65 and over, the employment numbers increased by 82,000 (6.8%) to 1,282,000.

Drill further into the data and, as the graph above shows, the increase in workers aged 50 and over is being driven by a growth in the number of women working for longer. At the start of the millennium, the employment rate for women aged 50-64 was 52.6% and for those aged 65+, 3.6%. The latest figures are 68.1% and 7.9% respectively. In just over 14 years, the proportion of women aged 65 and over in work has doubled.

The graph shows a clear upward drift for both sexes from the start of the millennium, with women outpacing men. The ratcheting up of State Pension Age (now at least 65¼ for both sexes) is undoubtedly one reason, as is the fading coverage of defined benefit pension schemes. The skew towards higher employment rates at older ages may even be part of the explanation of why productivity growth has been so slow, despite such a low unemployment rate (3.9%) and rising wages (3.5% including bonuses).