Weekly Market Commentary 28 June 19

World Leaders arrive in Osaka for G20 Summit
All eyes are on both the G20 and OPEC this week. And while 82% of the worlds proven oil reserves are located in OPEC member states, the G20 summit will be more closely watched in a time where political risk has heightened. President Trump has already dialled up the temperature, taking time away from criticising Federal Reserve Chairman Jerome Powell and Iran to have a pop at India and Japan. Trump is unhappy with India’s imposition of tariffs on US goods even though it was an act of retaliation and questions Japan’s loyalty.

G20 meetings have long been criticised as a “talking shop” were little is achieved, and disputes magnified. Nevertheless, investors will be waiting to see if there is progress on trade talks that has slowed global growth this year. The last G20 summit saw China and the US agree to a 90-day truce. A similar outcome looks unlikely this time but expect trade talks and Iran to dominate the agenda.

Oil: Iran /US Conflict Drives Oil Prices Upwards
The four-year standoff between Iran and the US threatened to spill into war recently following the former’s efficient attempt at shooting down a $110m US drone. While a similar event occurred in 2011, President Trump’s combative nature almost resulted in a retaliation that could have impacted civilian lives. Instead, sanctions against Iran have been tightened. Unsurprisingly, curbing Iran’s oil exports have sparked shortage fears leading to prices gaining 10 per cent since last week.

Threats by Trump of “obliterating” Iran will be keenly watched by the oil cartel OPEC who convene next week to discuss supply levels. They will be wary of getting wrongfooted again by the White House as last time, sanctions against Iranian oil were waived for key importers at the last minute. This led to a glut in supply and a slide in oil prices. Ironically, for all of Donald’s protestation at OPEC to boost production and thus reduce high prices, sanctions against OPEC members Venezuela and to some extent Iran have inadvertently cut supplies by an extra 1.3m barrels per day.

M&A: Abbvie hopes allergan will smooth out wrinkles
Abbvie the seller of popular arthritis medication “Humira” this week offered to buy into Botox maker Allergan for $63bn in stock and cash. In general, pharmaceutical companies heavily invest in research and development to create drugs that they can patent and subsequently sell at a high price. But these patents don’t run indefinitely and once their shelf life expires, generic versions flood the market. Abbvie’s Humira drug which generated 60 per cent of its $20bn revenue last year only has four years left before the patent expires, so it would make sense for the company to expand its portfolio. Allergan’s dominance the Botox market will help provide immediate and consistent cash flows.

Another potential benefit of the mooted acquisition is the instant cost cutting benefits. Combining the companies will see an estimated savings of $2bn a year. However, it is far from a done deal as approval checks have yet to take place. But given the limited overlap between the products, there won’t be anti-competition concerns.

Eurozone: Economic Data ends on a weak note for this quarter
At the risk of sounding like a broken record, Eurozone data once again remained weak this month. Economic sentiment fell from 105.3 to 103.3 rounding of a weak quarter for the block. What this will most likely mean is that the European Central Bank will roll out fresh stimulus in a months’ time, but which tool President Draghi uses may that be restarting bond buying, delaying rate hike further or reducing an already negative deposit rate remains yet to be seen. Meanwhile the dichotomy between services and manufacturing grows as domestic demand picks up while exports face downward pressure due to the trade war.

Elsewhere, Spain has come a long way since the Great Recession. The economy has been expanding at a quicker pace than the Eurozone average, in turn attracting immigrants to the region. Population grew by 276,000 people last year. Spain is less reliant on international trade than its European peers and subsequently was less affected by US-Sino dispute’s. However, it still has a long road of recovery ahead. Unemployment rate is the second highest in the Eurozone, and tourism growth is expected to cool as rivals like Turkey recover.

Divorce reforms

As reported in the wider press, the Ministry of Justice has announced ground-breaking changes to our current 50-year-old divorce laws. Proposals for changes to the law are intended to reduce hostility for the family involved. They will include:
Retaining the irretrievable breakdown of a marriage as the sole ground for divorce
Replacing the requirement to provide evidence of a ‘fact’ around behaviour or separation with a requirement to provide a statement of irretrievable breakdown
Retaining the two-stage legal process currently referred to as decree nisi and decree absolute
Creating the option of a joint application for divorce, alongside retaining the option for one party to initiate the process
Removing the ability to contest a divorce
Introducing a minimum timeframe of 6 months, from petition stage to final divorce (20 weeks from petition stage to decree nisi; 6 weeks from decree nisi to decree absolute).
Lifetime ISA and other retirement considerations
One of the first things you should do if you’re serious about saving for retirement is open a tax-efficient savings/investment account that’s designed for retirement saving. This kind of account will help you grow your retirement money far more effectively. Some of the best accounts to consider are the SIPP (Self-Invested Personal Pension), the Stocks & Shares ISA (Individual Savings Account), and the Lifetime ISA. All of these accounts enable you to hold a broad range of investments including stocks, funds, and ETFs while sheltering capital gains and income from the tax man. I’d forget about a Cash ISA as this is pretty much useless for retirement saving due to the fact that interest rates are so low. Any money in a Cash ISA is going to lose money over time.
Even if you have a workplace pension in place, opening a SIPP or an ISA to save a little more for retirement could turn out to be a great move in the long run. Next, look to take advantage of the generous bonuses that the government is handing out to those who are willing to save for retirement. So, for example, the SIPP comes with 20% tax relief for basic-rate taxpayers. This means if you pay in £800, your contribution will be topped up by HMRC to £1,000. Similarly, the Lifetime ISA also comes with attractive bonuses. Pay in £1,000 and your account will be topped up to £1,250. Finally, spend some time thinking about your asset allocation. This is the mix of different assets in your portfolio. This step is really important as it will have a big impact on your overall returns. For example, if 90% of your money is sitting in cash earning 1%, your wealth isn’t going to grow at a high rate.

Probate rule change will see death tax on AIM shares

Shares that investors believed to be completely tax-free on death will be hit with effective death duties under controversial new rules to increase probate fees by 3,770%. The change will mean the cost of applying for legal permission to wind up someone’s estate will increase from the current flat fee of £250, or £155 with the help of a solicitor, to £6,000 for the largest estates. Smaller estates will pay less, based on a sliding scale, and estates worth less than £50,000 will pay nothing. The changes were expected to be introduced in the new tax year, but have been delayed. They will be brought in as soon as time is found to introduce them formally in the House of Commons.

A higher rate threshold to £80,000

Boris Johnson’s proposes raising the higher rate threshold to £80,000.
It has been suggested that the change is necessary to counter the effect of fiscal drag, i.e. the tendency of governments (of all hues) to raise tax bands and allowances at a sub-inflation rate. As the graph shows, fiscal drag was the order of the day in the aftermath of the financial crisis. In real terms, today’s higher rate threshold is still about £3,000 below where it would be if it had been revalued in line with RPI over the last 15 years. However, in CPI terms – the current basis of indexation – it is about £2,000 above the 2014/15 level.
The Daily Telegraph, where Johnson launched his tax proposals, estimates their cost to the Treasury at £9.6bn. Johnson says this would be funded partly by increasing the national insurance upper earnings threshold in line with the new higher rate threshold and partly from money set aside by the Treasury for a no deal Brexit. The IFS is reported to have put the cost at around £9bn – about the same tax loss as reducing the basic rate to 18.4%.The latest HMRC stats show that there were 4.114m taxpayers with income of at least £50,000 in 2018/19, of which 3.13m were in the £50,000-£100,000 band. Thus the full benefit of Mr Johnson’s idea would be felt by perhaps 1.5m people at the top end of the income scale.An £80,000 higher rate tax threshold would have the largest benefit for wealthy pensioners, who would save 20% tax (25% for dividends) on £30,000, but not pay the corresponding extra national insurance contributions of up to 10% on the same amount. That is a small demographic, although probably not amongst the electorate of the next head of the Conservative party

Weekly Market Commentary 21 June 2019

Trump Reverses Course on Iran

This week tensions between the US and Iran almost boiled over into full blown conflict; President Trump launched strikes against Iranian radar and missile installations, only to call them back at the last moment. Whilst overt hostility was avoided this time, it seems inevitable that the cold war turns hot eventually. The Trump administration, led by national security adviser John Bolton who was instrumental in the Iraq war, is pursuing a policy of trying to crush Iran economically to force regime change; the regime is unlikely to go willingly.

Although regional spats are hardly uncommon, this could be different. Obviously, Iran is no match for the US militarily, however the nature of warfare is changing; with economic, cyber and terrorist attacks now a key way for small nations to level the playing field against a larger opponent. With half the world’s oil supply in the vicinity, along with Iran’s support for a wide network of terrorist organisations, a minor military conflict could become a major global disruption.

US: Federal Reserves Holds Rates

The US Federal Reserve left rates unchanged but signalled it was ready to lower rates for the first time since 2008, citing an uncertain economic outlook amid a backdrop of slowing growth and rising trade tensions. The US central bank exhibited a shift in language away from its “patient” approach and said it would “act as appropriate to sustain the expansion”. Fed officials downgraded its stance on the US economy, saying activity was rising at a moderate rather than a strong pace and acknowledged inflation was running below its two percent target.

US Treasury yields headed towards multi-year lows with the policy-sensitive two-year Treasury yield, reaching its lowest level since December 2017. The market is now pricing in a 100% chance of at least a 25-basis point rate cut at the Fed’s July meeting. The S&P 500 rallied significantly, closing at a record high on Thursday, but before cheering, investors may want to remind themselves that the Fed’s willingness to lower rates is a signal that the economy is slowing, which is traditionally a bad sign for stock markets.

Retail Funds: Next in line for a hard landing

The suspension in mid-2018 of one of GAM’s star absolute-return fund managers and the more recent suspension of the Woodford Equity Income fund has brought the issue of liquidity to the forefront of investors’ minds. This week Morningstar suspended their Bronze rating of the Nataxis owned H2O Allegro Fund as similar question marks were raised regarding the fund’s illiquid exposure. Concerns were prompted by the naming of H2O’s CEO Bruno Crastes as a member of the advisory board of Tennor Holdings, owned by Lars Windhorst, famous for his teenage entrepreneurship, multiple company insolvencies, personal bankruptcy, and jail sentencing. Crastes’ acceptance of this position would be acceptable were it not for the fact that H2O has had significant exposure to the illiquid bonds issued by Windhorst’s businesses including Sapinda and now Tennor, thus creating a very likely conflict of interest.

The naming of Crastes on Tennor’s advisory board in May 2019 and Morningstar’s suspension of its rating this week sent the share price of Natixis plummeting. Time will tell if this will prompt yet another mass exodus of flows from one of the industry’s largest asset managers.

Tech: Slack in the Market

Silicon Valley’s latest market debut, Slack, went public on Thursday. The decision to go public via a direct listing means no new shares and no money raised. The benefit to this type of listing is that on top of being cheaper it allows venture capitalist firms and employees to sell out straight away. The resulting risk is that investors will sell too many shares too quickly, increasing supply beyond demand. Slack haven’t set any rules limiting investors to hold the shares for at least six months, meaning the stock could be in for a bumpy ride initially.

Another example of this type of listing is Spotify, which jumped around before settling in a narrower range. Slack position themselves as a replacement to email, but for the most part web chat is being used alongside traditional email. A headwind for Slack is that Microsoft has now bundled its competitor, Teams, into the popular Office 365 package, so enthusiasm for a standalone chat app may weaken.

Planning for the Cost of Higher Education

Latest stats on the cost of higher education and implications for planning. Two worrying pieces of news recently emerged for parents and grandparents. Having a good higher education and “getting on the home ownership ladder” are two important aspirations for the young. These are usually equally shared by their parents and grandparents. Both aspirations are becoming harder to achieve.

It is relatively well known that the tuition fees for higher education at universities in England has increased to a maximum of £9,250 per annum. Using the University of Kent’s cost of living calculator for an undergraduate living off campus the annual cost of living, including books, food, clothes, travelling to and from college is between £11,742 and £21,570. That is between £35,935 and £66,013 for a three year course, assuming 2% a year inflation. This cost of living does not include the tuition fees that students are required to pay.

According to The Institute of Fiscal Studies an undergraduate from England is likely to accumulate student debt of up to £50,000 by the end of their course – regardless of whereabouts in the UK they study. This is almost twice as much as students from Scotland, Wales or Northern Ireland.

It seems that this is having its effect on university applications with students (even non economics and business would be undergraduates!) appearing to effectively being applying a “cost /benefit ” approach to making the decision on their future. With the cost increasing and reports of fewer graduates getting “graduate jobs” it’s not surprising.

The press have reported some pretty significant drops in applications, but in November UCAS took the unusual step of publishing early data on UCAS applications for 2012. This showed a 13–15% drop compared to the record year of 2011 entry, with a 15% drop for UK students applying to UK Universities. In the last three weeks the gap has narrowed to around 10% overall.

Universities are reporting informally that a 25–30% drop of four weeks ago has narrowed significantly and while there are some concerning subject related patterns in the early application stats (creative arts, social sciences and business showed above average decreases) the overall picture is not as gloomy as the media would suggest. A fall in applications is expected but it may actually be relatively small if the gap continues to narrow. Many students are also being more realistic in their choices if specific university entry requirements are way beyond the reach of their predictions.

As well as influencing applications, such is the increase in the maximum tuition fee that it has apparently exerted considerable upward pressure on inflation pushing the CPI rate above 2.5%. Those faced with the fees (parents or students) will be less concerned with the “macro” effect of the fee hike on inflation and more concerned with the impact on their own financial position. Student loans help and should perhaps be considered more as a commitment (by the student) to increased deferred taxation payable (at 9%) on income in excess of £25,725.

Even with this view of what the loan in practice is, parents (and grandparents) with a “never a borrower or lender be” mentality may still wish to help with or fully fund this cost.  In which case the earlier they start the better and the more you can minimise tax outflow the greater the likelihood that the objective can be achieved.

The same goes for funding the increasingly demanding amount required as a deposit fore first home purchase.  Halifax’s “Generation Rent” report reveals that the average (yes, average!) deposit required for a first time purchase in London is over £57,000 and £27,000 for the whole country. And if living in Camden is your bag (man) then you are looking at £145,000!

The need for family (usually parent/grandparental) help is overwhelming. And it’s something that many parents would want to help with. So, based on the country average, for those parents looking to fund a deposit and a university course, we are looking at a present value of around £70,000 and more like £100,000 for Londoners.

In doing your sums you need to build in inflation of course – running at over 2.5% at the moment – fuelled by the very increase in tuition fees you might be funding for.

And don’t forget, parents, it might not end with the deposit, there’s also the strong likelihood of needing to be guarantors or joint mortgagees to access the borrowing that will inevitably be needed.

“It was all a lot easier in our day” say the parents and grandparents of today – and they are right.

There is, however, a real role for the financial adviser to play here.

Goal setting, investment selection, tax minimisation and the resulting creation of a bespoke, suitable plan for those parents and grandparents prepared to make the commitment will all be better achieved with the benefit of informed and experienced financial advice.  Building a tax effective higher education and first home purchase fund is not something that most consumers can easily do themselves – on-line or otherwise.

Understanding the High Income Child Benefit Charge

HMRC commissioned research into claimants’ understanding of the High Income Child Benefit Charge (HICBC).  The research entitled, “High Income Child Benefit Charge: awareness, understanding and decision-making processes” was carried out by IFF Research and comprised 42 face-to-face and three phone interviews with parents of children aged under 16 (or under 20 if in full time education), who were in a household where at least one adult had an annual income of at least £50,000.  The research considers aspects such as what are the benefits of claiming Child Benefit and the reasons as to why some people don’t claim.

It was found that while most had a good understanding of most aspects of Child Benefit there was lower knowledge of the charge itself and very limited awareness of the other benefits of claiming, namely: the ability to qualify for National Insurance credits which count towards the State Pension; the ability to qualify for other benefits, such as Guardian’s Allowance; and juvenile registration, that is, the process whereby children are automatically allocated a National Insurance number shortly before their 16th birthday.

While some paid via self-assessment, a minority did not even realise they were liable for the charge and thought it was HMRC’s responsibility to inform them.  In looking at the group who chose to opt-out, many did so as they did not want to be faced with the administration burden of having to complete a tax return.  Surprising to us, the most common misconception held by respondents was that individuals are not eligible to claim Child Benefit if their income is over the £50,000 HICBC threshold. Given that there are planning opportunities available to reduce a claimants’ income for the purposes of the charge, advisers are well equipped to advise relevant client to whom this applies.

Wealth Design Limited Achieves Chartered Firm Status

What our Chartered status means for you?
What do you look for in your firm of financial advisers? That it is ethical and puts your interests first? That its people are competent, knowledgeable and committed to maintaining their professional capability?  Those are precisely the qualities embodied by Chartered status – the reason we are proud to have achieved the title Chartered Financial Planners.

Chartered status is a public commitment to professional standards. It is awarded to firms who demonstrate development of knowledge, enhanced capability and maintain ethical standards.  The title Chartered Financial Planners is granted by the Chartered Insurance Institute, the professional body for insurance and personal finance.

Weekly Market Commentary 14 June 2019

One Country, Two Systems
This week, while Tory party hopefuls all clamour for the chance to sit in the captain’s chair on the Titanic, another democracy is also on the brink of collapse. Protests in Hong Kong over changes to the Island’s governance structure saw thousands hit the streets, despite a violent clampdown from Chinese authorities. The “one country, two systems” arrangement, that has allowed a form of democracy to exist in Hong Kong since the British handed control back to the Chinese in 1997, looks to have come to an end. While China has been undermining this system for years, new rules allowing Honkongers to be arrested and extradited by mainland Chinese police has finally killed off its quasi-independence.

Elsewhere markets are on alert after two oil tankers came under attack in the Gulf of Oman. Unconfirmed reports suggest Iran is stepping up its confrontation with the Arab states and is focusing on compromising their oil exporting infrastructure. The cold war between Iran and Saudi Arabia and its allies looks to be heating up with a possible dramatic effect on global oil supplies.

UK: South Korea Agrees Post-Brexit Deal with UK
The UK moved towards improving global trade relations by agreeing to sign a freetrade deal with South Korea. The in-principle agreement aims to maintain stability after the UK leaves the EU in the event of a no-deal Brexit. Both countries will formally sign the deal by October 31 and implement it in November. This means that businesses will be able to carry on trading on preferential terms with South Korea for at least two years. However, the agreement is not a permanent trade deal, rather a continuity deal to avoid entering a regulatory void after October 31.

According to the UN Comtrade, South Korea represented 1.7% of UK’s total export pool, and UK imports from South Korea represented a mere 0.8% of all UK imports in 2017. The EU is the UK’s largest trading partner, representing 44% of UK’s total export pool and UK imports from the EU represented 53% of all UK imports in 2017. While the news is positive, a sound trade deal between the UK and EU would be better touted as a proper victory.

US: United Technologies and Raytheon to Merge
United Technologies and Raytheon agreed to an all-share merger, which would create a new aerospace and defence giant, making it the second-largest defence contractor by revenue. The deal is expected to close in the first half of 2020, after United Technologies completes the previously announced spin-off of its Otis Elevator and Carrier building-systems businesses. The deal will provide both companies with scale and diversification across commercial aerospace and defence and could help to counter any slowdown. The deal is yet to be approved by Department of Justice or the Federal Trade Commission.

Activist investor Bill Ackman who has a 0.7% stake in United Technologies through his hedge fund, Pershing Square, has come out against the merger. He referred to Raytheon as “a large business of inferior quality” and said he “cannot comprehend the strategic logic behind such a transaction.” US President Donald Trump also weighed his opinion behind the merger and suggested the deal could result in less competition in the sector, potentially increasing costs for the US military.

Oil: Markets unnerved by attacks in the strait of Hormuz
Two oil tankers were severely damaged by attacks in the Strait of Hormuz. The ships, a Japanese and a Norwegian vessel, were hit by unknown weapons and abandoned by their crews in the Gulf of Oman, one of the world’s busiest shipping routes. Those attacks coincided with the visit of Japanese PM Abe in Iran. Both US and Iran places the responsibility of these incidents on each other.

Oil traders do not appear to be betting on a serious or prolonged disruption emerging. Although oil prices jumped up by 4.5 per cent immediately after the second attack, they fell back and remained below the level they traded at in mid-April, when they reached $75 a barrel. Oil traders are paying more attention to the rising supplies of crude from the US shale industry as well as a slowing global economy which could leave the market in surplus this year.

HMRC questioned over IR35

MPs have warned the UK government to pay close attention to the effect IR35 tax reforms will have on the private sector and questioned the efficacy of HMRC’s status-checking tool. Amid much controversy, the government rolled out changes to IR35 – or off-payroll working – rules in the public sector in 2017 and plans to do the same for the private sector in 2020. It shifts responsibility for determining tax status from the contractor to the business that hired them.

The aim is to close loopholes that allow people working through personal service companies to avoid tax contributions, which the government says will cost some £1.3bn by 2023-24. However, the regulations has been widely criticised for being confusing, hard to implement effectively and linked to people leaving contracting jobs in the public sector. And in a debate in Parliament late last week, MPs said the government didn’t appear to have learnt lessons ahead of the private sector rollout and had failed to incorporate them into an ongoing consultation. MPs warned that people were unlikely to go to HMRC for extra guidance, that poor application of the rules could damage contractors and the UK economy, and that it placed an extra burden on businesses recovering from the credit crunch and racing to prepare for Brexit.