Market Conditions – 29th September 2020

After a week of noise, increased restrictions on the populations and revelations that someone with a vast business empire paid accountants and solicitors (and hairdressers) huge sums to reduce their tax bill, markets have continued to plod on.

To be clear this is not a ‘photoshopped’ image but is a genuine one of his >10,000 tweets – we checked. So, this week we look behind the noise and bring you:

-Don’t settle for average

-Would you like a £50 Amazon voucher?

-What to do if you are being made redundant

-The Second Wave

-Brovid/Skinny Brexit

-Forecasting vs Adapting

  • Don’t settle for average

Following last week’s announcement of across the board interest rate cuts from NS&I, we’ve been busy finding suitable alternatives for clients. Our standout pieces of advice:

  1. Don’t rush – NS&I rates won’t change until the 24th November
  2. Don’t accept less than you should – a recent survey found the average rates for instant access cash accounts are 0.07%pa gross rising to 0.44% pa gross for a 1-year fixed rate. However, with research instant access rates above 1% are available.
  3. Don’t forget FSCS protection – Financial Service Compensation Scheme. Whilst NS&I investments were 100% backed by the Government, most bank accounts have a personal limit of £85,000 protection (£170,000 for a couple). Remember this is per banking institution not per bank account, above these levels and your cash is 100% at risk.
  4. Don’t forget why you have cash. Hold it for the right reasons – peace of mind, short term security, emergency funds, liquidity, ready for a specific need/purchase in 2 years’ time. Not for the long term (5 years+). In real terms cash will lose you money over time versus inflation and the longer the time period the more certain and pronounced this effect becomes.
  • Would you like a £50 Amazon voucher?

September saw the Rightmove House Price Index rise another 0.2%, meaning it has risen 5.0% over the last 12 months. The housing market at first glance appears to be defying gravity, but when you consider the number of transactions that have been delayed due to the pandemic, the tax break of a stamp duty holiday, the Help to Buy scheme and the desire to move after months of lockdown it begins to make sense. Then add into the mix all time low interest rates and the reason is clear: Broadly, it has never been cheaper for the average person to borrow money to buy a house.

Likewise, for those with existing mortgages it’s a good time to review the interest rate you are paying. Typical mortgage lender standard variable interest rates are around 4% depending on the lender. Whereas a new 5-year fixed rate can be secured at 1.42% depending on your personal circumstances. As an example, a £100,000 mortgage that benefited from a 2% reduction in interest rate would see savings of £2,000 a year.

What does this have to do with an Amazon voucher? Well, we reward anybody who refers anyone to us who completes a mortgage or remortgage with us with a £50 voucher. You win and they win.

  • What to do if you are being made redundant

The latest data from the Office of National Statistics (ONS) suggests that around three million workers – around 12% of the workforce – were still on furlough or partial furlough in early September. Whilst Rishi Sunak has announced a new support scheme to enable companies to save viable jobs, he has acknowledged that he cannot save every job. Indeed, looking at the details of the new scheme it is difficult to see many jobs being saved and whole industries seem to have been left behind – events, sports & nightclubs being the most obvious.

It will be no surprise if there are substantial redundancies nationwide over the coming weeks and months. If you or someone you know is affected by this it can be a stressful time and there are some key pitfalls to watch out for:

  • Loss of Child benefit payments – if your taxable income increases because of a taxable redundancy payment above £50,000 you will begin to lose this benefit – with it fully unavailable if your taxable income increases above £60,000.
  • Loss of Personal Allowance – If your taxable income increases above £100,000 you will lose £1 of your personal allowance for every £2 of additional income creating an effective 60% rate of income tax.
  • MPAA – the Money Purchase Annual Allowance – If you are made redundant and are over the age of 55 it could be tempting to raid your pensions savings. However, apart from meaning you’d have less saved for your retirement, taking an income from your pension could dramatically reduce your ability to fund a pension in the future. If you trigger the MPAA you may only be able to contribute £4,000 a year into your pension regardless of future earnings or allowances you may have accrued. If withdrawing money from your pension is the only option there are different ways of doing this and it’s important to take advice as you may be able to avoid the MPAA restriction depending on your needs and circumstances.

Depending on your circumstances you may receive a redundancy package that includes an element of salary, bonus, pay in lieu of notice or holiday pay entitlement as well as the termination payment itself. Each of these constituents has its own tax treatment and therefore could affect your ongoing tax and benefit positions differently.

Pitfalls aside, whilst it may seem counter-intuitive, being made redundant can be an opportunity to maximise your tax efficiency and make any redundancy payment you receive work harder for you. Depending on your circumstances a pension contribution could reduce your taxable income for the tax year and mean you could reclaim your personal allowance or indeed entitlement to child benefit. It could also be an opportunity to use your pension annual allowance that would otherwise have been tapered away due to your higher level of earnings.

If you are considering making a pension contribution timing is also important. If it is made in the tax year after redundancy it may not have the same tax saving benefit and may be limited by changes in your income.

Over the last few weeks, we’ve seen various examples away from redundancy where a pension contribution has also been the right answer – whether it’s due to an unexpected profit in a business, long term protection from creditors, income/corporation/inheritance tax efficiency, or indeed simply to boost retirement savings effectively.

It’s led to without doubt our favourite quote from a client this week – “I’d better stuff it in a pension then!”.

  • The Second Wave

When an earthquake hits it is not clear if it is ‘The Big One’ or if there will be aftershocks. Earthquakes reflect the tectonic plates of Earth colliding with huge force and are a good analogy for what is happening in investment markets, as the force of an economic collapse collides with unprecedented fiscal and monetary stimulus. March certainly did experience earthquakes in markets, and we are all keen to understand if the current second wave of CoVid infections will be an aftershock or ‘The Big One’.

Like earthquake watchers, Royal London know nothing about the future with any real certainty. They do however think this is more likely to be an aftershock than ‘The Big One’, which they belive happened in March. The main reason they think this will prove to be an aftershock for markets, relates to their belief that the only risks that really matter in investing are the ones no one knows about. As soon as something is known as a risk (like an aftershock) behaviours and expectations adjust to accept and then minimise the impact of that risk: This provides a natural buffer should the risk occur.

This is what has happened with respect to a second CoVid wave. We have all been aware this was a highly likely event and societies and healthcare systems have adapted. We are in a much better position to manage the second wave than the first. Equally investor expectations have already discounted a second wave, through falling share prices in those industries most affected by CoVid. As a result, they and others think the second wave will be something of a brake on the economic recovery, but not as serious as in March, and that equity markets have already discounted this.

Brewin Dolphin added to this by commenting this week that CoVid has clearly had a devastating effect on the profits of many companies and 2020 and 2021 are expected to be heavily impacted. But the difference between March and now is that the volatility which took place earlier in the year occurred because investors suddenly had to recognise the loss of the next few years’ earnings. Furthermore, policymakers were at the time trying to tighten monetary policy, whereas now they recognise they need to loosen it. It was what Donald Rumsfeld would call an unknown unknown – the significance of which dawned on investors very rapidly indeed. That kind of abrupt adjustment is hopefully behind us.

  • BroVid/Skinny Brexit

Time appears to be running out on a Free Trade Agreement (FTA) between Britain and the EU. However, there is rumoured political will on both sides to ensure unnecessary economic damage is not done to either side in the midst of the pandemic. It’s for that reason Michael Gove has been dispatched to Brussels to try and form some agreement.

Given the time scales involved and the work required it is almost impossible to see a full deal being hammered out before the transition period ends. However, it now wouldn’t be a surprise to see a Brexit/CoVid (BroVid or Thin Brexit) compromise that allows key trade to continue without agreement on some of the thornier issues. Nonetheless, to even get to this skinny position, compromises will need to be made by both sides.

  • Forecasting vs Adapting – the Future

There are two schools of thought with respect to investing. The first, traditional school of thought is that investing is about forecasting. It is about looking at all the variables in front of us, taking a view as to how the future looks and investing behind it. There is another view however, that markets and economies are so complex and dynamic that forecasting is almost impossible and often damaging to attempt. As UBS put it in their marketing “the future … is hard to predict, especially when it comes to risk”. This year, of all years, has demonstrated that. Consequently, investing must also be about adapting.

So, we favour investment companies that are adapting and engaging with initiatives such as the UN’s Principle of Responsible Investment and we see this as a core corporate driver that is already impacting markets and alongside the UN Sustainable Development Goals and regulatory frameworks across the EU, Canada and even China, will force all companies to adapt over time.

Whilst there are many examples of companies adapting their products to new circumstances, such as Apple removing the need for FaceID authorisation on contactless device payments on TfL (thus stopping the need to remove a mask in a crowded tube station), or Quantas managing to sell out a flight to nowhere in 10 minutes (seats on the 7 hour round trip including flyovers of Uluru, the Great Barrier Reef and other landmarks costed between £445 and £2,145). This transition to sustainability of decision making across all business decisions will drive fundamental change.

This doesn’t mean ripping investments up and starting again, but it does focus the mind on which companies are embracing change and which aren’t. This week Baillie Gifford echoed our thoughts reminding us that investing isn’t about speculating over the short term, it’s about understanding the long-term opportunities for companies and investing in the ones prepared to adapt, evolve, and thrive. And they should know, ignoring the fortune they have made from investing in Tesla, they also invested in (amongst others) Tencent in 2003, Hermes in 2001, Rightmove in 2006 and Amazon in 2004.

As always, please do not hesitate to contact one of our Financial Advisers at our Leamington Spa or Coventry offices if you wish to discuss this in further detail.

Market Conditions – 24th September 2020

After a week that has seen some return to expected market volatility, the science laid bare, a return to more restrictions and shock above shocks, international banking institutions partially turning a blind eye as long as enough money was involved, we continue to wade through the noise on your behalf.

Whilst on the face of it the FinCEN leaks are dramatic news we suspect that there will be little real fall out (other than the knowledge that the US view the UK as a higher risk territory in line with Cyprus). Fines may be levied, but these are now budgeted and accounted for and the individuals named will wait for it to pass whilst hiding behind other news stories.

So today we focus on:

-National Savings & Investments (NS&I)

-CoVidiocy – how we got here

-An Actual CoVid Update – what the markets expect

-Brexit & The UK Stock Market Paradox

-Technology Stock Valuations

-Changing Investment Landscape

National Savings & Investments (NS&I)

While banks made the major press headlines yesterday the biggest news from a financial planning perspective was reserved for NS&I. Government backed NS&I savings have recently been one of the best homes for safe deposit savings above the normal FSCS (Financial Services Compensation Scheme) protection limits. However, a cull of interest rates yesterday saw that change with the evergreen ERNIE (Electronic Random Number Indicator Equipment) led Premium Bonds being one of the few accounts to still offer any competitive value going forward.

Changes to all NS&Is flexible savings rates will occur from the 24th November and include the following changes:

Premium Bonds tax-free average return will drop from 1.4%pa to 1%pa

Income Bonds taxable monthly interest rate will drop from 1.15%pa to 0.01%pa

Direct Saver taxable annual interest rate will drop from 0.9%pa to 0.15%pa

The issue here is simple, above the £50,000 per person maximum contribution limit to Premium Bonds, NS&I are not going to offer even market competitive cash rates. The only reason to hold them is for enhanced FSCS protection, but safe in the knowledge that your money is not only losing around 2.5% a year (against medium term inflation estimates), but also losing money against other cash accounts.

Our view – cash is the cornerstone of all financial planning and every plan will fall over without a sufficient cash buffer. However, the landscape for cash as an investment has changed beyond recognition over the past 20 years. Whilst we wouldn’t advocate a mass switch from cash to invested assets it may be an opportune time to reconsider what the purpose of that rainy-day money is. If it’s a real need for short term security, short term income, flexibility, or a particular purchase in the next 5 years then it needs to stay. If it is for longer term security the simple act of holding cash will ultimately in all probability, diminish your long-term wealth.

As always, if you would like to discuss your options surrounding suitable cash reserves please not hesitate to contact me.

CoVidiocy – how we got here

Given the reports in the press it’s no surprise that the government felt the need to explain the rationale behind the rules they are introducing. Highlights (?) include:

-Reports that in some areas of the country around 20% of those asked to self-isolate did in August with predictable results.

-A club bus trip from Wales to Doncaster races stopping at several pubs on the way being linked to, you guessed it, multiple outbreaks on route and at home.

-A lack of CoVid testing capacity at labs due to the entirely unpredictable return of the PhD students doing the tests, to their courses in September.

-But our personal favourite must be Transport for Greater Madchester having to confirm that a snake was not a valid face covering!

The mind boggles, anyway, we guess our planned client event ‘The Great HB&O Financial Services Bus Trip and Pub Crawl’ will have to wait for next year….

An Actual CoVid Update – what the markets expect

CoVidiocy rant and bankers aside, yesterday was an insightful day on the markets. Those who had speculated on an extreme upside outcome will have lost money as those stocks most exposed to the virus naturally lost value (think hotels & travel), whilst those that are increasingly seen as resilient and core (anti-fragile) regardless of the talk of increased restrictions held their own much better.

The point being the markets know that the virus is here to stay and are broadly content with valuations based on reasonable long-term assumptions.

Yesterday Sir Patrick Valance eluded to expecting a vaccine of some sort to be available for the most vulnerable in society around March 2021. Across the pond (ignoring the President’s electioneering bullish statements) the ‘Superforecasters’ at the Good Judgement Project believe there is a 93% probability that there will be 25m doses of an approved, effective vaccine available in the US by this time next year.

(Interestingly ‘Superforecasting’ sounds a little immodest, but the book Superforecasting was the required reading prior to a ministerial and staff away day organised by Dominic Cummings earlier in the year and the principles are set to drive policy making.)

The point being, markets know that vaccines are not in themselves silver bullets. Not everyone in the At-Risk groups will take them and they will not be 100% effective. With this known, markets expect an extended period of semi-lockdown over the colder months, before a summer that will probably look a bit like this summer, before a winter where those most at risk could be protected and life can ease slightly. In all likelihood though it will be 2022 before anything classed as a return to normal will exist.

This may sound like a depressing outlook, but we are resilient as a species and we can pull together and adapt. From a financial and investment point of view, it should actually provide solace as this is the base case current valuations are built on. Anything better and there is scope for surprise upside returns.

The cliché about climbing the ‘wall of worry’ describes the way in which markets are often resilient in the face of known risks. It assumes investors gradually become resigned to the fact that these issues will be resolved in due course and reflects the way in which the overly cautious gradually get sucked into the improving narrative.

Brexit & The UK Stock Market Paradox

The developments over the last week or so have suggested an increased risk of a no-deal departure. And just as in previous bouts of Brexit-related stress, the worse things go, the greater the pressure is on the pound. The fortunate thing from an investment perspective is that this tends to be supportive of UK bonds (which perform inversely to the UK economy), and UK equities, because of their inverse sensitivity to the level of the pound.

In other words when the pound falls, all other things being equal, most UK equities rise. This might seem counterintuitive, but the reality is that the sensitivity of even UK equities to the UK economy is generally low and mostly limited to a small number of sectors, such as retail, real estate, home construction and banks. More broadly, the overall market tends to be more exposed to the overseas currencies in which its revenues are denominated.

Around 75% of the earnings for companies in the FTSE100 come from overseas and so are denominated in foreign currencies. Therefore, when the pound falls, these earnings are worth more in sterling terms and this helps UK equities.

All of which means that Brewin Dolphin don’t see Brexit as a material investment risk. Paradoxically, the greater risk for them is how to protect wealth when Brexit risks subside because, under those circumstances, they would expect to see the pound rise and UK bonds (and possibly UK equities) fall. Which is why they continue to hold a balance of global assets with shares and earnings denominated in various currencies.

Their view is that the government wants to ensure it can do everything it can to support strategically sensitive industries such as technology and renewables. This idea of a “Made in UK” strategy to match the “Made in China 2025” strategy is what the European’s are afraid of.

Technology Stock Valuations

So far this year the mainstream runaway investment outperformers have been the US anti-fragile and sustainable technology stocks, sometimes referred to as growth stocks. Recent weeks have seen some volatility and profit taking, but nonetheless their returns have been stellar.

In many cases it’s easy to see why. Companies like Amazon have effectively had 5 years expected growth in market share delivered in 6 months. It’s difficult to see this share being given up and therefore a higher valuation makes sense.

But this isn’t the case for all high performing growth stocks, so why have their shares risen in value as well? According to JP Morgan, growth stocks are expected to make a greater proportion of their earnings further in the future, and so are likely to benefit more when those earnings are discounted less due to lower expected interest rates.

What is clear is that this is a very different environment from when the Tech bubble burst in the year 2000. The following chart shows that unlike in 2000 when meaningful earnings didn’t exist from Tech companies and were merely projections in the future, the current breed of tech stocks are generating income today as well as projecting strongly into the future.

One risk that is more of a concern now than in the year 2000 is that there is the dominance of a small number of companies that now represent a substantial proportion of the US stock market. This brings into play single company risk and will need careful oversight over coming years to ensure portfolios don’t simply track the fortunes of 4 or 5 companies when they are seeking reduced risk through global diversification. History is littered with investments that ride the fortunes of a small number of companies with the exaggerated underlying risk not exposed until the investment winds change.

A core part of our investment committee’s work is to ensure this type of analysis is included, your investment managers challenged, and appropriate investments selected relevant to your personal needs.

Changing Investment Landscape

This week we were reminded by LGT Vestra that traditional geographically or industry sector led investment styles are not always helpful. Some stock markets have thrived or suffered during the pandemic without mirroring the fortunes of the local economy, and that disconnect will continue reflecting the globalised nature of companies. Likewise, some stocks have suffered due to their sector exposure. However, it makes no sense to assess a company like Booking.com in line with the Hilton Group or PayPal with Barclays. Whilst they serve the same industries the drivers of each business are fundamentally different as are their prospects.

What is key is to look under each sector and businesses skin and see what has happened to the material prospects for that company or industry. Good businesses will come back, but those with materially changed opportunities may not.

This has always been the case, but the pandemic has brough a stark re-assessment and it’s not just the impact of the pandemic that needs considering. Sustainability trends, the end of the commodity super-cycle, the carbon economy and a fundamentally different fiscal and monetary policy outlook also need scrutiny.

Unmanaged investments that made sense 5 years ago may now not reflect current conditions. This is why ongoing financial management is key through any saver or investor’s journey. Consider that a typical investment journey may well last more than 40 years, it is therefore inevitable that stocks held at outset will not offer the same future value by the end – and that is before you factor in your changing needs as an investor.

As always, please do not hesitate to contact one of our Financial Advisers at our Leamington Spa or Coventry offices if you wish to discuss this in further detail.

Market Conditions – 15th September 2020

As we wait for the latest distraction (Operation Moon Shoot) to arrive, we reflect back on a week that has seen more profit taking from technology stocks, noise upon noise surrounding Brexit, but that was broadly neutral for world markets.

This week’s reflections include:

-International Tensions

-Data Update

-Change

-CoVid-19 Update

International Tensions

CoVid-19 aside, this week has been dominated by international tensions. A week of Brexit talks concluded with the EU telling Britain that it should scrap a plan to break the divorce treaty, but Boris Johnson’s government have refused and continued with a draft law that could collapse four years of negotiations.

Reports suggest that the UK is willing to walk away from Brexit negotiations in mid-October, if a free trade agreement hasn’t been agreed upon. On the face of it at least in the short-term a no-deal scenario is an economic lose-lose scenario for both the UK and Europe.

It will be fascinating to see the implications on future negotiations of our deciding that we no longer like the deal we agreed and encouraging our MPs to vote in a law to break the law (in a specific and limited way)… Without wanting to start a conversation on the BBC or the Proms, perhaps rather than Britain rules the waves, is it now Britain waives the rules? Certainly, noises from the States indicate that they would not appreciate dealing with a country that could not be trusted to keep its word. But then again, trust is a two-way street and is that just their opening negotiating strategy for a trade deal?

The one bright spark on our global relations radar this week was the (world-beating?) successful conclusion of a trade deal with Japan, estimated to grow UK GDP by 0.07% a year.

Across the pond or away to the East depending on your perspective, comments from Donald Trump that he may seek to ‘decouple the US economy from China’ suggest that the trade war between the two nations is far from over. In more tit for tat moves the US has revoked visas for over 1,000 Chinese students on grounds of ‘national security’. Whilst the Chinese state has reviewed its export rules in an attempt (seemingly) to make it harder for Microsoft or Oracle to complete the purchase of TikTok. Both moves will undoubtedly be well received by their domestic audiences, but do not benefit the global economy.

We remain detached from the politics. As with all political events taking a politically biased investment stance usually simply adds risk rather than remove it. We have been encouraged again this week by Brewin Dolphin’s lack of knee jerk reactions to political events. They remain well invested for long-term growth, keeping a little powder dry to buy on any market weakness.

Data Update

-House prices rose again by 1.6% in August from July’s level. The annual increase in house prices accelerated to 5.2% according to the Halifax House Price Index.

-UK Gross Domestic Product (GDP) rose for the third month in a row in July, up 6.6%, although this is still 11.8% below January’s level.

-The British Retail Consortium’s figures report that year-on-year growth in retail sales rose 3.9% in August.

-Insee, the national statistics institute of France, forecasts that the economy will contract by 9% this year, down from earlier predictions of an 11% drop.

-China reports its largest jump in exports in 18 months, rising 9.5% in August compared to a year prior.

Change

It’s fair to say the above list is welcome given the seemingly endless stream of negative noise that can bombard us. It’s also a timely reminder that the global population is still growing and whilst there is huge short-term uncertainty, they all still need to eat and want to lead fulfilling lives.

What is clear is that change has happened and is happening at a previously unseen pace. Businesses are adapting or not. The successful ones arguably are now stealing a valuable first mover advantage over their peers.

In Wales, unlike the English push to get everyone back in the office or factory, the National Assembly have announced that it is a reasonable long term aim to have 30% of the population working from home. They have done this based on environmentally sustainable factors and work/life balance changes improving quality of life. Whether individuals in the population desire this or not, it is likely that these changes will become more and more common over time and the roles of those in the family home will evolve accordingly. The future man-scape has rightly changed from the image of male breadwinner and dutiful 1950s housewife complete with ribbon in hair, to that of an equal domestic partnership.

The English push to return to the office is driven by the short-term effects of changes in behaviour. Anecdotally central London hotels normally full of tourists and workers alike are available from £60 a night instead of the £200 a night they charged last year, because of a lack of demand. Footfall across all city centres has reduced with a corresponding decrease in travel.

BP this week issued their latest forecasts for peak oil demand consumption and included 3 scenarios. All of them as you would expect predict deceases in oil usage over the next 50 years, but what was stark is their base case scenario predicts a sharp rebound in the next 12-18 months and then plateaus early in the 2020s before declining. This is a substantial change from last year’s projections indicating peak oil occurring sometime in the 2030s. BP have made clear as we have previously mentioned that they see their future as a leading provider of sustainable energy.

They are not alone in changing. This week the crisp brand Pringles have announced a redesign of their iconic packaging due to the original design being a recycler’s nightmare. With 3 million Pringles cans/tubes produced each day across Europe, this will have a significant impact.

Why have both BP and Pringles taken this action? Simple, to increase long-term profitability and shareholder return. The evidence is clear, oil sales will not sustain BP indefinitely and Pringles have not participated in the 55% sales growth packaged products marketed as sustainable have seen between 2015 and 2019.

Our view, it’s yet more compelling evidence for the need to review investments regularly to ensure they remain fit for purpose and your individual needs.

We regularly see new clients who bought investments in the past that performed well for many years, but over the last 2-3 years, without the benefit of professional oversight, have drifted away from market themes and are not well set for the future.

CoVid-19 Update

Having taken the time to digest the latest government guidance on controlling the virus we think it is best summed up as:

Which is what will best serve the economy over the next decade. However, joking aside, it’s clear that freedoms need to be curtailed and individuals must be prepared to see past their own bubbles for successful suppression of this pandemic. Current R number estimates at 1.7 would indicate a doubling of new daily cases roughly every week prior to this latest intervention and mandated change in public behaviours.

Across the world home grown sciolists (the technical term for the stereotyped non-expert ‘Karen from Facebook’ – apologies to any Karen’s!), footballers and social media influencers are providing false optimism, mis-information and confusion. Although a quick Twitter search reveals that Jedward (irritating Irish pop brothers John and Edward) actually now talk relative sense.

There are however, some bits of good news. The virus itself appears to be causing fewer deaths at present. A study of German cases shows the average case fatality rates falling for people aged over 80 from 29% (end of April) to 11% from mid-July. An even more encouraging fall in fatality rates has been seen in those aged 60-79, moving from 9% as of the end of April to currently 2%. Whilst treatment has improved with experience and more drugs are proving effective, as yet there is no clear evidence to suggest that this is anything other than a seasonal variance. An as yet unproven American study has indicated that wearing face masks may be a contributor to the decline in fatal cases, with the thought that lower doses of the virus are being passed, so milder infections result. If this is true it’s certainly welcome, as, apparently, even mild doses of CoVid-19 cause an immune system response as effective as any vaccine in development.

More potential good news, England and Wales have now swallowed their pride and are launching (24th September) a new track and trace app that is based on Apple and Google technology, which promises ease of use, commonality across the community and faster more accurate contacting of those at highest risk. Of course, it’s not perfect and will only work if people use it, but it’s better than the currently sporadic and overloaded existing system.

However, it is now also clear that a dose of reality also needs to be taken with any vaccine solution. The fact that a vaccine, alongside effective treatments, is our only true exit strategy remains unchanged. The speed and scale of vaccine development has been remarkable, but it’s important to avoid false hope. The vaccines in test currently have provoked an immune response (therefore are expected to work to a greater or lesser degree), but may only prove effective for 12-18 months. They will also only prove effective in terms of unlocking the population and ultimately the economy if taken by the majority.

Currently around 71% of adults over 65 and 46% of those with a long-term health issue have the annual flu jab. Given that CoVid-19 appears to be around 30-40 times more deadly than the Flu and substantially more contagious to a population with little natural immunity, these numbers will have to rise significantly to have a material effect on the ability for people to feel confident mingling in society.

The UK is in a good position with regard to vaccine options, with different types of vaccines available as soon as testing is complete to provide best coverage for our population. Looking at the logistics of distributing the vaccine across the globe provides a welcome boost to the airline industry with an estimated 8,000 Boeing 747’s required to ship sufficient supplies to the world. These planes may also need to be modified as transporting a vaccine requires more care than transporting people, something immediately apparent if you’ve ever had cause to complain to a budget airline…

And finally hot off the presses our latest edition of our digital magazine Limitless is available for download.

As always, please do not hesitate to contact one of our Financial Advisers at our Leamington Spa or Coventry offices if you wish to discuss this in further detail.

 

Market Conditions – 7th September 2020

After a week that has seen a return of expected market volatility, some profit taking, Brexit brinksmanship and renewed fears of a second wave we bring you:

-CoVid update & second wave perspective

-Brexit slowly building to the next brink

-US update

-The Splinternet

-Minimum pension age change from 55 to 57 in 2028

-Lighting the way

-Australia

CoVid update & second wave perspective

This week it was reported that the virus has gone full circle and infected the Batman (or at least the actor playing the Batman in the latest Hollywood blockbuster, causing filming to be paused). To be fair though, this was inevitable – I mean just look at how he wears his mask…

 

… So far there is no news on the fate of his arch nemesis the Pangolin (alright, we know this is stretching the puns a bit far!).

In all seriousness though as the summer ends and the children return to school, it’ll be important that the UK remains vigilant. Many businesses reliant on footfall that have reopened profitably through the relative warmth of the summer must now come up with revised battle plans for the shorter days and colder temperatures that Autumn and Winter will bring. Whilst Downing Street are keen to get everyone back to work in an office – buying lunches, travel tickets and filling the car up – it’s clear that for many this is not an appealing option. Months of working from home have evidenced for many that productivity in a lot of cases is not affected and the positive shift in life balances this has created are difficult to give up. It’s likely that at least in the short term the Prime Minister is fighting an uphill battle regardless of the ‘CoVid Secure’ workplaces on offer. Even the aim of having 80% of civil servants working from an office one day a week shows just how far and how quickly society has shifted.

And it’s this juxtaposition to the reality of the situation in mid-March that provides most reassurance with regards to a second wave. If we cast our minds back there were days in April where daily CoVid hospital admissions exceeded 3,000. But 2 weeks before when this wave was generated we (as a nation) were packed into the Tube, Cheltenham racecourse, welcoming 3,000 fans from Madrid to Liverpool and three hundred Italian dogs and their owners to Crufts. The thought of having to wear a mask or not hug granny was entirely alien to us. We’d be fine as long as we washed our hands and sang Happy Birthday – quietly!

It’s also important to ignore the official number of cases that were tested as positive in the early stages, as they were substantially different to the reality, primarily due to the lack of testing. Many estimates put the theoretical number of daily cases in April at around the 100,000 figure, and this would certainly chime with the strain seen on the NHS.

 

Life as we know is very different now and in theory so should the rise of any second wave – Slower, more easily identified and easier to control. Although of course it won’t need much complacency for this to change. The impact of children going back to school in bubbles of up to 240 is not definitively known. We’d naturally continue to urge caution and can imagine plenty of nervous grandparents not as keen to see the little ones quite so often, now they’re back at school.

Brexit slowly building to the next brink

This week has seen the real re-emergence of Brexit as a hot topic and as we would expect in any negotiation the noise levels are high. Reports of plans for the UK to undermine the Withdrawal Deal and bold public statements around No Deal being a good outcome are to be expected. Whether or not the EU call our bluff again remains to be seen.

Whether you read it as propaganda or preparations, things are well underway with (amongst other measures) the U.K. Housing Secretary Robert Jenrick giving himself powers to build truck parks across various parts of England to avoid chaotic queues at ports. The government will be able to start construction in 29 different council areas without the approval of local officials from Devon and Somerset to Warwickshire and Suffolk.

We know Brexit is a divisive topic and we would expect to see this division and noise continue to ramp up over the coming weeks. Neither side would benefit from a substantively disruptive long term split and so we would expect movement from both sides from their current polar opposite stand points – although probably not before the 11th hour (or more likely just after).

US update

More noise, this time in the State’s, with President Trump asking voters to vote twice to prove how open to election fraud mail in votes are. Although the accusations of dead servicemen being called ‘Losers’ and ‘Suckers’ by their President might prove to be a step too far for some voters, however, partisan.

Perhaps more pertinent to our remit is the market data from the States that has been strong with US Durable goods orders up 11.2% in July vs expectations of 4.8%. Durable goods orders are a proxy for business investment demand and it has now risen for a third consecutive month – a sign things are normalising.

Likewise US housing data, which is vital in supporting economic growth, has been really encouraging. July new home sales came in significantly above expectations, surging to the highest level since the 2009 financial crisis. The median house price rose to 8.5% on an annualised basis, the highest since April 2015. Pending home sales also rose 5.9% in July compared to June, after a huge 16.6% increase in June over May.

As we flagged some weeks ago Jerome Powell (US Federal Reserve Chair) confirmed the move to target average inflation which will allow the US Economy to expand unchecked for an extended period. The following chart shows that the Personal Consumption Expenditure (PCE) price index, which is the Fed’s favoured inflation measure, has been running well below the 2%pa target for some time.

According to Brewin Dolphin the implication is that the Fed wants to let the economy run “a little hotter”, with faster-rising prices, without the need to raise interest rates or tighten monetary policy when inflation is above 2%. They also believe this means it’s likely that US interest rates will stay at, or near, 0% for a long time, which should be a positive for investment assets. Indeed, many think that the US will need to return to near-full employment and inflation of at least 2% before the Fed will consider raising rates again.

The Splinternet

President Trump has banned Chinese firms TikTok and WeChat from the US, claiming they represent a threat to economic and national security. It’s the latest in a number of steps that looks set to seal the divide between two separate global internet systems for good. We take a look at what insiders call the ‘bifurcation’ of the world wide web, as the splinternet becomes embedded.

The guiding vision of the internet, that a common network of shared information could unite the world, never quite matched the reality. In fact, two distinct global internet systems have always been in operation. One is dominated by apps and services created in the US. The other sits behind what has been called the ‘Great Firewall of China’. Access to services freely available outside this wall are typically controlled.

So, while US or European shoppers might choose Amazon for their online transactions, their Chinese counterparts shop on Alibaba. Google’s success as a search engine is such, that it’s become a verb in its own right. Google is what you ‘do’, not simply where you go to find information. But in China the search engine of choice is Baidu and Google is excluded from the Chinese internet.

Sensing a vast untapped market, Google set up the Dragonfly project. Their attempt was to create a search engine acceptable to the Chinese administration. But they discovered that the ideological split between the US and China, covering government, regulation and privacy, runs too deep. The difficulties proved insurmountable, and the Dragonfly project was abandoned in the summer of 2019.

So which side drives the development of the internet from here? The US is still ahead in some areas of research, but China is leading in 5G and ‘the internet of things’. Combining the expertise of these tech superpowers seems unlikely under President Trump. Indeed, recent sanctions on Huawei aim to exclude the telecoms giant from future 5G technology.

However, good news came last week as both the US and China affirmed their willingness to progress with trade talks. This was welcomed by markets.

Minimum pension age change from 55 to 57 in 2028

This week the government have confirmed that it will raise the minimum age at which people can access their private pension from 55 to 57 in 2028 reflecting trends in longevity and in their words encouraging individuals to remain in work while also helping to ensure pension savings provide for later life.

If you are impacted by this change we will discuss at your next review meeting and ensure that your long term plan is not derailed by having to wait to access this portion of your wealth.

Lighting the way

As the world’s population continues to grow, more than 80 per cent of humanity is expected to live in cities by 2050. In theory, cities have the potential to be much more resource efficient and provide better livelihoods than dispersed rural settlements – but the challenge remains in realizing this through smart and sustainable city planning.

An example of a company taking on this challenge is Signify. On the simplest level, Signify provides energy efficient lighting technologies, such as connected LEDs, which are up to 80% more energy efficient than the conventional technologies that they replace. But they are also innovating the simple light product into providing various other societal benefits. For example, their UV-C lighting disinfects air and surfaces from bacteria and their Li-Fi solutions provide internet connections through lighting, reducing the need for other infrastructure.

They have also introduced ‘light as a service’, meaning city councils or business owners no longer own the devices, Signify does, providing full servicing, updating and reducing landfill through circular re-use of resources.

Given that lighting currently consumes 13% of electricity globally, the potential for energy saving solutions is massive.

Australia

After a weekend that included an exciting (!) Grand Prix, the undoubted sporting highlight was Australia collapsing in the cricket, twice. Muted apologies to any Aussies reading this, but we don’t often get to gloat… Anyway the point of mentioning Australia isn’t to poke fun it’s actually to highlight that having avoided a recession even during the financial crisis of 2008/09 (thanks to huge demand from China for its iron ore and other commodities), the world’s longest economic expansion has finally ended. After almost 30 years of uninterrupted growth, Australia’s economy contracted by 7% in the June quarter, following a 0.3% contraction in the first three months of the year. Confirming again that nowhere is out of reach of CoVid.

As always, please do not hesitate to contact one of our Financial Advisers at our Leamington Spa or Coventry offices if you wish to discuss this in further detail.

Market Conditions – 2nd September 2020

Following a week that has seen the resignation of the Japanese Prime Minister (for the second time on ill health grounds), the 25th anniversary of the revolutionary (if not always loved!) Windows 95 and David Davis remind us that the last 3 months of the Brexit negotiations will be more important than the last 3 years, the markets have plodded along just like they invariably do. This week we thought we’d try something new and experiment by getting a mutant algorithm to write this update. But, after testing it, not everyone would have received what they wanted, so we reverted to type, using actual humans with experience to bring you:

-Market valuations in general

-An inheritance tax reprieve for clients in ill health who transfer their pension

-Inflation, Cash and the lizard

Market valuations in general

A common theme in market rises and falls is the disparity of performance between different industries, seemingly this has never been truer. The US markets are back to all-time highs (a mere 148 days to recover from a 34% decline – the second fastest US market recovery after the 83 days it took to recover 20% in 1982) with Apple becoming the first US $2trn company (c7% smaller than the entire FTSE100 combined) and Amazon not far behind it.

Pharmaceutical companies’ fortunes are made and lost with news of vaccine developments, or indeed presidential interest. AstraZeneca was the latest to benefit after it was reported the US government was considering fast-tracking the vaccine the pharmaceutical giant is developing with Oxford University. Just a coincidence that a vaccine ahead of the US presidential elections would almost certainly give Trump’s campaign and popularity a huge boost?

But ignoring the politics there are some sectors that have been structurally down valued because of the pandemic with travel and oil firms being the most obvious. Perhaps the most surprising sector to suffer substantially is the banking sector, which as the Bank of England noted last week is resilient and profitable.

So why in the midst of a global pandemic are we seeing new highs and such disparity? This week Royal London have reminded us to consider:

-Equity markets always make their lows when the news about the future is at its darkest. The best example of this was World War Two, when equity markets bottomed at a time when it was widely believed the UK and its Allies would lose the war. Markets are forward, not current looking and are judging how the world will look a year or more from now.

-The value of many companies has increased as a result of the pandemic. This may seem odd, but some trends in the economy, such as digitisation and sustainability, have accelerated. For companies operating in these areas the pandemic is a positive for their future prospects. In the second quarter of 2020, the worst for lockdown, Apple grew revenues by 11% and Amazon by 41%. These growth rates were much better than expected at the start of the year. So, for every cruise line and restaurant that is being negatively impacted, there are much larger companies benefiting.

-The returns available in other asset classes are very low. Apple issued a 10-year bond in August with an annual return of 1.25%. If that’s what a good quality credit is offering then it is no surprise many investors find that inadequate for their requirements. At this interest rate it would take an investor 56 years to double their money.

Their point is not to say equity markets cannot go down (or up!) from here. It is more to say that having a simple view that markets are overvalued or have gone too far perhaps doesn’t reflect some of the structural changes occurring underneath. It seems to Royal London that after Covid-19 has gone (and they are with Bill Gates on this, by late 2021), we will be left with a more valuable, higher returning group of companies to invest in than in the past and their investment returns will be attractive from current levels. This may take time to come through of course.

They also feel that traditionally strong sectors like banking, oil and traditional energy, had strong stable long-term values precisely because they had a relatively resilient perceived inherent value. However, pandemic aside, due to technological and societal disruption the inherent value of these businesses is becoming increasingly unstable. So, the piece of elastic between the loved and unloved sectors is getting increasingly stretched for very justifiable reasons. Has it gone too far though? This is hard to judge and there are risks in both camps. Time will tell, but Royal London think overpaying for a great company is less problematic than investing in a company which does not exist in the future.

We can see the value in what Royal London is saying, but as you would expect we retain a balanced long-term outlook and favour diverse portfolios. And it’s what we ask our investment managers (including Royal London) to do on your behalf – to buy investments based on sensible relative long-term returns.

 An inheritance tax reprieve for clients in ill health who transfer their pension

One tax break that has been won after several epic court battles is the ruling that pensions transferred will not be liable for inheritance tax should the owner die within 2 years of the transfer. This is really positive news for those with health concerns who are simply trying to put their affairs in order and realise reasonable long-term value for themselves.

There are still some circumstances where the revenue could challenge this ruling, but in general what was considered an unfair and penal claim has been put to bed.

Inflation, Cash and the lizard

First it was loo roll, now it’s cash… When threatened with harm, humans have a natural reactive state designed to allow them to act quickly and get out of bad situations. Our lizard brain – the primordial part of us that governs this reaction, served us well 10,000 years ago, but its loss-averse tendencies can assert themselves during a financial crisis to our detriment.

As humans, our lizard brains have been alive and well during the Covid-19 crisis. In the last six months, households have been saving up much more cash than usual. In any other period, the UK would, on average, be putting aside around £4bn a month. But in March alone, the UK saved a whopping £14bn. In April, we saved £16bn. In May, we saved an even more staggering £25bn. At a household level, this represents an increase in the monthly £140 we normally save, to almost £900 per household in May this year.

One of the reasons for this phenomenon is that the pandemic has created a lack of things for people to spend money on. We did not go to the cinema, we could not go on short weekend breaks, and we certainly could not eat out. Restaurants, bars and cinemas are open again, but the saving trend is likely to continue at a level well above pre-crisis levels. That is because Covid-19 has not only impacted our ability to spend, but the way we think about spending money.

The near-constant reminders of the difficult situation we are all in have multiplied people’s sense of uncertainty. When everyone is talking about how worried they are, this makes us more worried. This kind of hoarding reaction was very obvious in the early days of the lockdown. We saw loo roll, pasta and tinned products all in short supply as demand for the essentials sky-rocketed. Now we are seeing this across the broader economy, and people are putting a little more cash than usual aside as a result.

Indeed, the hoarding of cash is not just a reaction to something that has happened, but a preventative measure for the hard times that might be ahead.

However, a good long-term financial plan will include a proportionate level of cash set aside for your specific needs. Therefore, changing long-term savings goals, or indeed investment plans based on a short-term event that has already been considered as part of the original plan, is nearly always counter-productive.

That’s not to say saving is bad – indeed for many it is essential, but stockpiling cash over the long term is rarely the best solution.

As always, please do not hesitate to contact one of our Financial Advisers at our Leamington Spa or Coventry offices if you wish to discuss this in further detail.

Market Conditions – 26th August 2020

After 2 weeks since the last update a lot seems to have happened politically (it doesn’t seem to be a great time to be in charge), the pandemic has progressed and yet on aggregate global markets remain roughly where they were. There remain key differences between regions with the US market returning to pre-CoVid highs on strong macroeconomic data despite further escalation in trade tensions with China, while European data disappointed.

In this week’s missive we offer:

-An update from the Bank of England

-The State Pension and UK politics

-The States & Benefits of Diversity in decision making 

  • An update from the Bank of England (BoE)

OK so we’re afraid this bit is a little data heavy, but please bear with us as it’s interesting (we think) and directly from the horse’s mouth. Though before we start, the BoE are keen to point out that whilst their projections are robust and allow for a variety of scenarios there are several known unknowns that could materially alter them.

The two most obvious assumptions that could affect things are that there will be no further nationwide lockdowns and that there will be an orderly Brexit. As a rough guide in the charts below the central darker area would imply a free trade with the EU, anything else e.g. barriers to trade, tariffs/quotas, WTO terms, etc. would reduce their expected outlook. They do however feel that the potential structural market risks inherent in Brexit have been addressed so markets will be able to function efficiently whatever the outcome of the negotiations.

So broadly GDP (total economic activity in the UK) down 5% on a rolling basis by the end of the year which equates to a normal recession. Unemployment is expected to return to the historically low pre-crisis levels by 2023 and inflation should be back on track at 2% in 2021.

Shorter term they think that the UK is more exposed to social spending than most other countries and this explains the UK’s relative under-performance. Retail sales are now 3% above those seen in February. The makeup of these sales has changed substantially since February with online sales down 7% in July, but still 50.4% higher than in February.

Lockdown is now having little direct impact on individuals’ consumption although as we eluded to some weeks ago most of the population still feel uncomfortable or very uncomfortable eating out (except perhaps on Monday, Tuesday or Wednesday when I can’t seem to book a table anywhere..). Whilst consumption was restricted during lockdown savings have only been built by those households with an income above £35,000pa.

The jobs market is one of many current hot potatoes that need careful handling and it will be interesting to see if the government intervene further to help. Simply, the BoE are predicting a mismatch of jobs and skills. With substantial job losses in sectors like accommodation and food (typically industries that have used the furlough scheme extensively) and job vacancies in industries like IT and professional services.

Whilst the BoE are concerned with corporate confidence as firms’ investment in their own businesses is down 30% from pre-crisis levels, they are pleased with corporate stability (generally weak companies have and will continue to fail – others are adapting appropriately).

During the crisis, financial markets have remained liquid and the financial system has responded well to support businesses. The BoE expect UK corporates cash flow to have a deficit of nearly £200bn this year, of which 50% can be met by aggregate business cash balances nationally and the rest, c£90bn, has been borrowed through debt issuance (share and bonds) on the markets, bank loans or the various government backed loan schemes.

With interest rates at historic lows and expected to remain low for some time this lending has not yet pinched many businesses, but a significant portion of these loans may never be repaid. It will be a political decision to see if some industries or indeed larger companies would be supported further to ride out this pandemic.

The priced in market assumptions for interest rates imply negative UK interest rates until 2023, however, the BoE are not convinced of their benefit, as in Europe, the policy has had limited effectiveness. Where negative interest rates have occurred, individual banks have been wary of charging customers to deposit money and have also been reticent to lend money as their own profit margins on the loans have evaporated.

This is something the BoE is very keen to avoid as bank lending is seen as a virtuous circle. If banks lend money some of the loans will fail (but at an acceptable rate), but most will not, business can continue to secure finance and will over time on aggregate grow. However, if lending dries up as happened in 2008 business can’t grow and the economy stagnates, and everyone becomes worse off.

The BoE is comfortable that UK high street banks have sufficient capital to absorb losses and we would need to see market conditions twice as poor as forecasts for high street banks to face difficulties. As a guide bank reserves totalled 4% of assets in 2007 and are currently now above 15%, in the words of the BoE “if it had still been at 4%, we’d be facing another Global Financial Crisis as well as a pandemic!”.

This week Morningstar also produced similar analysis for the major European banks indicating most had substantial reserves and resilience to further shocks.

So, in summary, given what we’ve been through we’re reasonably well set and there are no structural issues (aside from Brexit or the pandemic) that the BoE see materially affecting our financial stability.

  • The State Pension and UK politics

After a bit of a horror show with the exam results fiasco over the last couple of weeks Private Pike (Gavin Williamson –  named after his gaffe prone tenure at the Ministry of Defence) would probably love to keep a low profile and we’re a little sorry to poke fun at someone trying their best….

But at least in the UK we can be reasonably sure it’s a genuine error unlike some of the truly opaque happenings elsewhere – Alexei Navalny’s poisoning in Russia, where the Kremlin have “Wished him a speedy recovery”, or the election fiasco and fall out in Belarus.

What’s happening in Russia and Belarus is a good reminder of how fortunate we are to live in one of those free and fair democracies, which is so easy to take for granted. Winston Churchill once described democracy as the “worst form of government except for all those other forms” which feels as relevant today as ever before.

However, whether Boris Johnson currently feels fortunate is another issue. With national debt now topping £2trn a show down with the treasury was inevitable, and reportedly the most likely first casualty will be the manifesto promise of retaining the triple lock on the State Pension (the triple lock guarantees that the State Pension will increase each year by the higher of 2.5%, the average increase in annual earnings or inflation).

The problem and the message being pushed by Rishi Sunak and the Treasury is that whilst this year will be a poor year nationally and national earnings will fall substantially, pensioners will be protected and see their incomes rise by 2.5%. And then following the expected substantial recovery in wages will see their income rise even more substantially in 2021 and 2022. Whilst the triple lock costs around £2.5bn a year at present, should the predicted rise in wages occur over the period to 2022 this could rise to as much as £20bn according to AJ Bell estimates.

Of course, who wins this tug-of-war will influence where else savings can be made given Johnson’s other manifesto pledges to not raise income tax, national insurance, or VAT. And all of this serves as a reminder to make sensible use of any tax allowances you have whilst they still exist.

  • The States & Benefits of Diversity in decision making

Following recent polls in the States, President Trump might be sitting a little less comfortably than before, with 73% of modelled outcomes predicting a Biden win.

Our advice, look for the positives, his seat is hot, but at least he wasn’t in Death Valley where a temperature of 54.4°C was recorded. Likewise, at least he doesn’t eat dinner over possibly one of the most diverse but awkward family dining tables in America – the Conway household. Sharing dinner the diverse views of Kellyanne Conway, coiner of the phase “alternative facts”, the mum, has been a long-term senior adviser to President Trump (although is now resigning to spend time with her family – “more mama less drama”) and her husband George a long time out-spoken critic of the President who is actively working to prevent his re-election. So far so awkward. Unfortunately, they also have a teenage daughter, Claudia, who appears to be caught in the middle and has tweeted that her mother was selfish and that this job had ruined her life…

On the other side of the political spectrum is Joe Biden who aside from doing his best not to do anything daft is also embracing diversity but this time constructively as part of his campaign. Biden’s announcement last week that Kamala Harris is to be his running mate for the 2020 US presidential election shows this well. Together there are numerous lived experiences that Harris brings to the table that Biden will never have had, which – if they win the election – have the potential to make their decision making better for a wider range of people.

The concept of lived experiences is important for all politicians and influencers, but it is also relevant to investments. It’s why in our investment governance committees we seek differing views and engage expertise outside of our own experiences. It’s also why before we recommend any investment, we’ll understand who is running that investment and how they reach their decisions, rather than simply recommending or discounting based on past investment performance or charges – both of which could be seriously misleading. Having this diversity and ongoing due diligence helps us deliver robust long-term solutions for you.

As always, please do not hesitate to contact one of our Financial Advisers at our Leamington Spa or Coventry offices if you wish to discuss this in further detail.

 

 

 

Market Conditions – 12th August 2020

After a modestly up and down week on the markets, temperatures have soared and the holiday season seems to be kicking into full swing across the UK. As a heads up because of holidays in the office there won’t be a Market Conditions update next week, but we’ll be back sharing our thoughts in two weeks. In this update we’ll look at:

-The importance of checking your state pension

-The latest Bank of England economic projections

-BP, Apple & Google showing the way

-Beirut, conspiracy theories and the dangers of social media

-A week in politics & the B word

-Updated CoVid risk guidance following feedback

  • The importance of checking your state pension

Following the latest ‘mal-administration’ from the Department for Work and Pensions it has come to light that many women may have had their state pension substantially underpaid.

The problem stems from a promise under the old state pension system to pay married women a basic state pension at 60 per cent of the full rate based on their husband’s contributions if it is worth more than their own.

Before March 2008, women had to claim this uplift, which few realised, and the claim form was often sent to their husbands, not them. As a result, tens of thousands of women are estimated to have missed out on these payments for the last 12 years. After March 2008, the process changed so that the uplift should have happened automatically, but it didn’t always kick in.

According to research by Steve Webb the average refund is worth just under £10,000.

There are several distinct groups of women who may have been affected by the catalogue of errors surrounding this uplift: widows whose pension was not increased when their husband died; widows whose pension is now correct, but who think they may have been underpaid while their late husband was still alive; divorced women; the over 80s, and in some cases; the heirs of married women who have died.

As always if you are concerned that you may be affected please contact us and we will help with any claim.

  • The latest Bank of England economic projections

The Bank of England has joined the holiday mood with a revised estimate for UK GDP for the full year well ahead of its expectations in May (a 9.5% contraction rather than 14%).

However, this good news was also tapered by more modest growth figures for 2021 and 2022 and the expectation that unemployment would double to around 7.5% as the furlough scheme draws to an end as the following graph shows:

As is normal in times of high unemployment, average earnings are also expected to fall. With the corresponding drop in demand for goods and services and the reductions in VAT on various hospitality and entertainment industries the cost of living is not expected to rise this year. Something that could put increased pressure on one of the hottest political potatoes – the state pension triple lock.

Possibly the most sobering part of the bank’s forecasts are that the underlying assumptions rely on no meaningful second wave of the virus through autumn and winter and a smooth transition to a new EU free trade arrangement at the start of 2021.

Whilst this all sounds troubling it must be remembered that these social shocks are already priced into investment markets around the world. Anything other than 12 months of news reports detailing another major employer restructuring, streamlining or simply cutting jobs would be unexpected.

So, we and our investment managers look to the future.

  • BP, Apple & Google showing the way

This week saw one of the clearest examples to date of the direction of travel for all investable companies. BP the archetypal ‘rip stuff out the ground and burn it’ fossil fuel giant cut its dividend in half and yet saw its share price rise 6.5% the same day.

This follows Shell’s historic dividend cut last month that was its first since World War II. BP was the FTSE 100’s biggest dividend distributor and represents more bad news for direct investors seeking a natural income strategy from a traditional source. Like Shell it is a rare dividend cut for BP and the first since the Deepwater Horizon oil spill cost them billions of dollars a decade ago.

As part of this announcement, BP have laid bare the impact of the coronavirus outbreak by reporting a record loss of $16.8bn (£12.8bn) for the second quarter, compared with a profit of $1.8bn for the same period last year.

So how have BP pulled a rabbit out of the hat and seen such an immediate positive market reaction? Simple, they have embraced the new future. The following slide from an investor briefing shows the scope of their ambition to move towards a sustainable future:

To be clear this is a fossil fuel company promising to be carbon neutral by 2050. Smaller steps along the way include 8-fold increase in low-carbon (solar and wind) technology by 2025 and by 2030 having nearly a third of all its spending on renewables and cutting its fossil fuel output by 40%.

According to Mark van Baal, of the green shareholder group Follow This, BP is “the first oil major that walks the walk instead of just offering ambitions for 2050, like its peers”, “BP shows [a] sense of urgency and imagination beyond oil and gas. It seems that other oil majors want to stay oil and gas companies, only [not] look like one,”.

What is so telling about this change of strategy is the continued focus is not simply about being kind to the planet, but on delivering a return on shareholders’ investments. Sustainable investing is not a fad or a hippy trend, it is now a core part of nearly every board level decision across the globe. Those companies that do not embrace this shift now will be the dinosaurs of tomorrow.

It’s not just BP leading the way, Apple recently reported on its new technologies and carbon free smelting processes allowing its entire iPad supply chain to be carbon neutral by 2030. In the words of Google “A responsible supply chain isn’t just the right thing to do for people and the planet — it’s also good for business.”

Google themselves proudly boast that despite the vast energy uses of their data centres (even though they are 50% more efficient than most) they matched 100% of their energy consumption with purchases of renewable energy for the third consecutive year. Even this though pales into insignificance compared to their ultimate goal: to source enough carbon-free energy for their operations in all places, at all times. Let’s not forget that Google, ever forward thinking, were one of the first major corporations on this journey, signing their first renewable energy deal with a 114-megawatt wind farm in Iowa, in 2010.

By 2017, Google were the world’s largest corporate buyer of renewable power, with commitments reaching 2.6 gigawatts (2,600 megawatts) of wind and solar energy. And in typically Google language that’s more than twice as much as the 1.21 gigawatts it took to send Marty McFly back in time.

  • Beirut, conspiracy theories and the dangers of social media

The scale of the Beirut explosion is difficult to comprehend with it being heard hundreds of miles away and few who have seen the video footage of it will ever forget it.

The tragic true story here is one of negligent responsibility shirking, corruption and malaise in a system failing its people. But, the reason for mentioning this explosion in this update is not to pick at corrupt local politics but to highlight the immediate wave of (mis-)information that shot around the globe just as the truth was putting its shoes on.

To be clear the Lebanon and Israeli authorities almost immediately dismissed suggestions that Israel had anything to do with the incident, but conspiracy theorists, started sharing false claims regardless. Surprisingly a major casualty of the war on truth, in this case, was President Trump, who described the explosion as “a terrible attack” at a White House press conference. Which was in turn misquoted as “a terrible terrorist attack”, which provided fuel to conspiracy and disinformation communities globally. A clear demonstration of the risks of inaccurate language and communications during crisis moments.

The irony of Trump’s mis-representation over the Beirut explosion can’t be lost on anyone who has seen the Axios reporter Jonathan Swan’s interview with the Donald this week. When defending the US CoVid response and how the US has a “world-leading” fatality rate for CoVid cases, Trump was met with:

Swan – “… I’m talking about death as a proportion of population. That’s where the U.S. is really bad. Much worse than South Korea, Germany, etc.”

Trump – “You can’t do that.”

Swan – “Why can’t I do that?”

Whilst it’s easy to poke fun, simply now more than ever it is important to check sources and in the words of the President:

  • A week in politics & the B word

Where to start? The last week or so has seen an almost unprecedented amount of noise and politically spun hot air distracting from what is actually going on. Ignoring the usual honours wranglings and hints of corruption the top two stories of the week are the prioritisation of schooling, which must go down as a decent humane act prioritising mental well-being and young people’s futures against business objectives, and secondly Brexit.

Brexit is back on the agenda in a big way with time running out in the ultimate game of brinksmanship. Following the politically expediated reading of the EU Withdrawal Agreement back in October (“To Get Brexit Done”), it’s come to light that we should have read the fine print with potentially significant costs built in that were not appreciated at the time. Many politicians are now demanding a reopening of this Agreement.

The outcome of Brexit is important as per the Bank of England’s projections above, but not everyone is prepared to make their same assumptions at this stage. Indeed, Vanguard’s in-house Investment Strategy Group put the likely outcomes as follows:

  • 55% Hard “Canada-style” Agreement – trade deal by the year end with a long implementation phase. This would involve tariffs and quotas on various perishable goods.
  • 5% Extension to the Transition Period
  • 40% No Deal Brexit – default to WTO rules

More examples of the current uncertainty this week include the stories around stockpiling 6 weeks of medicine in the NHS and the likely costs for all 425,000 lorries that travel to and from Northern Ireland each year requiring extra paperwork.

Time will tell how our collective domestic and continental futures will play out, but ultimately from a global investment perspective Brexit is interesting, but small fry.

  • Updated CoVid risk guidance following feedback

And finally, following a number of queries about the last CoVid activity based risk chart that have been fed back to us, and given the national holiday vibe, we’ve decided to share the latest in typically irreverent CoVid/non-CoVid risk matrices from www.xkcd.com. Please continue to take care!

As always, please do not hesitate to contact one of our Financial Advisers at our Leamington Spa or Coventry offices if you wish to discuss this in further detail.

Market Conditions – 4th August 2020

A mixed week on the world markets that saw Technology giants fly, Sterling up, correspondingly UK Companies with global sales down, HSBC down, TikTok up, down, up ,down, etc… With so much new data, this instalment of our market update has a numbers themes. So before peeking down, see if you can deduce the relevance of the following:

-75%, 0%, 3%

-511,000, 90 minutes, 10/14 days & 50 years

-40 years, The 8th Wonder of the World, 9.2*1018

-$350m, 1.3 million documents, 530 companies

-$8-13bn, -65%, -33%, -12%, 1600%

In the UK, arguably the most significant development this week was Prof Chris Witty confirming that we are either at, or very nearly at, the limit of what we can open up without seeing exponential increases in virus transmission. With the Leicester lockdown easing and new rules in the North of England, we are very definitely in the dance phase of the Hammer and the Dance – as described by Tomas Pueyo back in March.

In the States a similar picture is emerging, albeit some way behind our own. The Federal Reserve has extended most pandemic emergency lending programs to the end of the year. They have, however, passed the baton to their September meeting for a shift to average inflation targets that would allow them to run a more loose fiscal program for even longer. A policy that should help boost consumption and aid economic recovery, something that can’t come soon enough for the 18 million Americans currently out of work.

So onto the numbers:

75%, 0%, 3%

Last month Rightmove announced that they have seen an increase of 75% in home buyer enquiries compared to this time last year. Clearly for many, lockdown has confirmed that the itch that was a mild desire to move must now be scratched. Likewise many parents have decided it’s time to help the little ones fly the nest and (as a happy by-product) reclaim their homes for themselves. Aside from domestic pent up tension, a major driver of this demand is the stamp duty holiday for all properties valued under £500,000. Even those looking at second homes are relishing the discounted transactional cost of only having to pay 3% stamp duty up to the £500,000 threshold. This demand for residential properties is in stark contrast to that for some commercial properties, where sector by sector, the future needs of different types of businesses are becoming clearer.

511,000, 90 minutes, 10/14 days & 50 years

Rather predictably we now move onto Covid-19 stats. 511,000 is the number of global deaths from Covid-19 up to the end of June. The following graph shows how this compares to other semi-recent epidemics. These numbers are based on the John Hopkins data and we’d expect them to be revised upwards in due course, as true excess mortality figures become more visible (as per the revelations about the numbers in Iran this week).

In 90 minutes the latest LamPORE and DNA testing kit can tell you if you have flu or coronavirus, even if you are showing no symptoms. Whilst there is not yet any public data on the accuracy of these tests and with the DNA test not set to go live to the public until September, this is still a very encouraging development. Clearly being able to quickly identify where the virus is (and isn’t) will allow many more settings and particularly schools, more freedom to open up.

Politically it was confirmed that schools are more important than pubs, although that truth may be driven by the fact that it probably won’t be that pleasant sitting in a beer garden in November compared to now. Hopefully the governments Eat Out to Help Out scheme will provide a much needed cash injection in the relatively safe summer months for hospitality businesses concerned about whether they will be able to open at all through the autumn and winter.

This week the self-isolation periods have evolved in line with WHO recommendations, and for clarity:

-If you have symptoms or a positive test you must self-isolate for at least 10 days and until you feel well, or 48 hours after.

-If you live with someone who has symptoms or has tested positive, you must self-isolate for at least 14 days (even if you receive a negative test in this time period).

-If you are told to self-isolate by NHS Test and Trace – you must self-isolate for 14 days

Now for possibly the scariest number for 2 of our directors this year (no names disclosed) – according to the Sunday Times, those aged 50 or over may be placed into lockdown should cases escalate rapidly, in an effort to control spread and keep businesses ticking over (though the backlash may be too great a political price to pay). After fresh reports of pubs in Salcombe and elsewhere refusing to allow anyone onto the premises under the age of 25 unless with an adult/family, we wonder how much this has to do with the risk of transmission and more to do with the ability to do what you are told. But then again that might be our age making us cranky…

40 years, The 8th Wonder of the World, 9.2*1018

For all you Potterheads out there 40 years doesn’t reference the age of JK Rowling’s most famous wizard, but the average life expectancy of a 46 year old male in the UK today (coincidentally about the average age of our advisers).

40 years is also the life expectancy of 25% of all UK males aged 55 and roughly 10% of all 60 year old males. The point is that for most people, financial planning should be based on very long term needs and not materially influenced by short term noise. Yes, it’s important to adapt and adjust as appropriate, but not to lose faith or take dramatic remedial action where it is not required.

For most people a sensible cash balance, good tax management and a flexible income policy, alongside well monitored risk appropriate investments, will provide the necessary buffer from any market short term volatility.

The point here becomes what is a sensible cash buffer? Well, it’s individual, and likely outgoings need to be considered. However, excess cash would be expected to lose value against inflation over time so the balance between saving and hoarding becomes important, especially when you consider the rising costs of later life expenditure.

Where the long term is involved the power of compounding is well known and not the friend of the saver. The story first written down by Ibn Khallikan in 1256 is an extreme example of compounding and talks of grains of wheat doubling up on each square of a chess board, with one grain on the first square, two on the second, four on the third and so on. The final square in this story would hold 9.2*1018 grains (we’re in the world of quintillions!), or more than all the available grain in the world. Whilst investing is unlikely to provide you more grain than the world supply, the 8th wonder of the world (compound interest – according to Albert Einstein) is your friend when investing with time as your ally.

In a simple example £1,000 saved in the building society earning 1% interest per year would be worth £1,220 in 20 years’ time, but after allowing for inflation at 2.5% a year this reduces to a real value of £739. By contrast an investment yielding a net 4% a year would be worth £1,347 after accounting for the same level of inflation (82% more).

Deciding to save or invest is a personal decision and one best taken with personal advice – please contact us if you would like to discuss your situation further.

$350m, 1.3 million documents, 530 companies

This week 4 technology giants (Apple, Facebook, Amazon & Google) have been grilled for 6 hours by an Anti-Trust Congressional hearing. Clearly having political influence is important to these 4, as combined they have spent $350m in the last 10 years lobbying congress, but even this has not been enough to stop over 1.3 million documents being subpoenaed as part of an analysis of anti-competitive behaviour.

Why has this come to a head now? Well between Apple, Facebook, Amazon and Google they have bought 530 companies that may have been considered competition to them. Google have been the most acquisitive of the four with 241 companies bought at a rate of almost one a month since Google launched.

This behaviour is not limited to the above 4 companies with Microsoft currently in on/off talks to purchase TikTok. With the Trump administration now making it clear that TikTok will be banned in the US unless Microsoft buy them and remove any risk surrounding the claims of TikTok’s current information harvesting for Beijing.

The fact that the largest technology companies now routinely buy the competition is an irony that can’t be lost on them given the following timeline:

March 1998 – “How Yahoo! Won the Search Wars” (Fortune)

September 1998 – Google Founded

February 2004 – Facebook Founded

February 2007 – “Will MySpace ever lose its monopoly?” (Guardian)

June 2007 – iPhone Released

November 2007 – “Nokia: One Billion Customers – Can Anyone Catch the Cell Phone King?” (Forbes)

The last point seems especially relevant now given that much to the US’s chagrin Huawei has become the world’s largest mobile phone seller ahead of Samsung, with 55 million units sold in Q2 this year.

Whether they have been acting in an anti-competitive way or not, their growth during what is undoubtedly a goldilocks period for technology companies, has been at odds with more traditional sections of the markets. A simple look at their market capitalisation shows how they now represent around a quarter of the US market.

Almost inevitably the market was pleasantly surprised by the earnings figures of Apple, Facebook, Amazon and Google released last week and again their share prices rose.

We remain positively sceptical and maintain a balanced position in relation to these stocks. As noted last week, a regime change in November could trigger partial break up of the monopolies these companies enjoy and would impact the sector valuations.

$8-13bn, -65%, -33%, 18million, -12%, 1600%

Unlike the modern antifragile technology companies (of the future?) the old world has been declaring numbers that at the start of the year would have seemed inconceivable. US GDP down 33%, EU GDP down 12%, HSBC setting aside $8-13bn as a reserve to cover bad debts and a 65% reduction in profits. All previously unthinkable, but now a reality and priced in, alongside reasonable future expectations.

The following chart shows the overall market falls, subsequent rises and net position (purple line) for the first half of the year for major equity markets ranked by net return for a UK investor.

As can be seen amidst the volatility, the UK has been one of the hardest hit global markets due to its reliance on fossil fuels and finance. Whilst the whole world is suffering, this is why we typically diversify our investments globally to better protect your assets during times of stress.

Of course it’s not all bad news. Kodak, the poster boy for all stick in the mud analogue players in a digital world, have recently seen their share price rise 1600% on news they are adapting their factories to produce vital chemicals to fight the pandemic.

As Heraclitus put it “Change is the only constant.”. It certainly is if you wish to survive and thrive as a global business. And it’s why we are leaning towards those investments where companies are showing they are changing toward a more adaptable sustainable approach to the future.

As always, please do not hesitate to contact one of our Financial Advisers at our Leamington Spa or Coventry offices if you wish to discuss this in further detail.

Market Conditions – 30th July 2020

This week global markets have struggled to hold on to their recent gains as tensions between the US and China have escalated with tit-for-tat consulate closures in Houston and Chengdu. Increasing coronavirus cases in numerous countries that have also added to worries.

In this update we’ll cover:

-Re-mortgaging to save money and a shameless plug for our services

-Wills by Zoom

-Tourism and the cobra effect

-Virus progress in the States

-Dispersion of market returns

-What to gamble on when there is no sport?

-UK outlook and Brexit

-The latest US electioneering

<Shameless Self Promotion Klaxon> With long term interest rates at historic lows now might be the right time to consider a re-mortgage. Re-mortgaging is simply the process of switching your existing mortgage to a new deal. Switching now might allow you to lock in a lower rate and reduce the cost of your monthly mortgage repayments. On a typical £200,000 mortgage with a 25 year term, reducing your mortgage interest rate from 2.5% (a competitive rate in recent years) to 1.5% (a typical rate now – depending on your circumstances!), could reduce your monthly repayments by almost £100, or almost £30,000 over the term of the mortgage.

Whether you’re looking to lock into a lower rate, or release extra funds for home improvements or debt consolidation or know someone else who is, now is a good time to speak to our fully independent mortgage specialist. Call 01926 422292, or email ian.chetwynd@hbofs.co.uk to arrange a meeting.

Ian was shortlisted (top 3 nationally) for Mortgage and Protection Adviser of the Year at the latest PFS Awards ceremony for his knowledge of the market and commitment to saving his clients’ money.

Alongside Ian’s recognition, 7 of our staff including all our Chartered Financial Planners have recently had their Pension Transfer Gold Standard reaccredited. Meaning we continue to be able to offer the highest standard of advice and service in the most technical and often substantial area of financial planning. This level of resource is unusual in a company our size and allows us to plan effective retirement strategies for new and existing clients – so please continue to refer anyone you feel may benefit from our services.

From 3rd August we are reopening our offices for clients that would like to attend a face to face meeting. We will continue to offer telephone or video meetings if this would be preferable. If you are considering attending a face to face meeting appointment it is essential that you read and agree to adhere to the guidelines set out here – https://www.hbofs.co.uk/hbosafetycovid.pdf.

Right, that’s our plug over, so returning to our normal update….

In one of the biggest small changes in legal process for 200 years it is now possible to have a Will witnessed virtually. Will planning is a cornerstone of any decent long-term financial plan and not something best done on the fly. The concern is making sure a valid Will is in place to minimise confusion, upset and delay when the worst happens. We like the modernity of this rule change, but as always the devil will be in the detail and having it done properly will be crucial.

Our advice remains simple: ensure your Will is up to date and if you don’t have one, get one drawn up with a qualified legal professional. If you don’t know who to turn to locally ask us and we can recommend someone suitable based on our clients’ collective experience.

This week travel companies have shouldered the worst of the mild losses on the back of the government decision to impose a two-week quarantine on travellers returning from Spain and its islands. With Madrid being closer to London than Lanzarote and the lure of sunshine and golden beaches rather than the same view of a drizzly garden it’s easy to see why this blanket strategy has created such ire in the papers.

It has also had a knock-on effect as many travellers to other destinations have cancelled their holidays fearing a similar last-minute change to the rules. But the UK was not alone; France amongst others also warned against citizens travelling to Catalonia and said those returning from a list of 16 countries outside the EU would be subject to mandatory testing at the border on arrival.

Hopefully the desire to open travel options and protect the tourist industry’s jobs and individuals livelihoods won’t be a classic example of the Cobra Effect – where good intentions lead to unintended consequences, e.g. opening countries up for holidays leading to importing more CoVid-19 cases, more disruption at home with local lockdowns, more holiday cancellations and more disruption to the travel industry.

While global case numbers continue to rise, driven largely by emerging economies, there have been renewed spikes in numerous locations including Japan, Hong Kong, France, Canada, Germany and, of course, Spain. However, it is the progress of the virus and policy response in the US that will have the greatest impact on the global economy.

In that sense at least, there were hopeful signs in the US that new infections were peaking and cases such as the 30-year-old who died after attending ‘CoVid party’ in Texas are mercifully rare. This particular genius and potential nominee for a Darwin Award attended the “CoVid party”, believing the virus to be a hoax, a Texas medical official has said. “Just before the patient died, they looked at their nurse and said, ‘I think I made a mistake, I thought this was a hoax, but it’s not,’”.

The ridiculous aside there are several factors which suggest that the economic impact of the virus in the coming months won’t be as severe as it has been in the past.

Firstly, without wanting to state the obvious the rise in cases in the US is partly explained by the increase in testing. That means the headline case number is less worrying and it also means more people who know they are infected can self-isolate and be treated. Likewise, hospitalisation rates have been lower and are falling. That means more minor cases are being identified and people are self-isolating, and it also suggests that high-risk groups are isolating to keep out of harm’s way.  Additionally, those who are hospitalised are getting better faster. Treatments have improved and the ICU mortality rate has declined. All these factors suggest that repeating the total lockdowns seen earlier in the year is not a viable option.

This is obviously good news for markets which are always forward-looking and well ahead of the real economy. They are currently priced indicating a sharp recovery in corporate profits explaining valuations that look elevated when comparing stock prices to today’s depressed earnings levels. This turning point in the earnings cycle is already visible in the incipient divergence between forward and trailing earnings. Backward looking earnings are still falling, while 12-month forward expected earnings have begun to pick up. Analysts currently estimate U.S. quarterly profits will hit new highs in around two years. According to JP Morgan that may be too optimistic, but we could well see a faster-than-usual earnings recovery.

Despite roughly flat index-level returns for MSCI World year-to-date, there has been a massive variation in the returns across industry sectors. If certainty around a vaccine solidifies it may remove a significant headwind facing some of the worst-hit industries. This could act as the catalyst for a rotation into underperforming sectors as investors seek to take advantage of the return to normality. The challenge for investors will be to differentiate between companies that are experiencing cyclical headwinds or tailwinds, versus those where valuations reflect structural trends.

MSCI World total return year-to-date in USD, %

There has been some talk that some of this dispersion has been driven by speculators at home gambling on short term returns. Indeed, most direct share brokerages have reported huge numbers of new accounts being opened. The implied truth here is that with no sport to bet on, punters have taken to betting on shares. A great example of this and the greater fool theory (if I buy it now, I can find a greater fool to sell it to later) can be seen with what has happened to Hertz.

To recap the rental car company Hertz filed for bankruptcy a few weeks ago, so you wouldn’t expect this to be a popular time to invest. It was therefore a surprise then when retail investors in the US began frantically buying shares in Hertz through the investing app Robinhood.

Over a period of about 3 days, the number of Robinhood users that owned shares in Hertz jumped by about 90,000 in total. That bizarre frenzy of buying activity sent the shares soaring to $5 a share despite the company’s fundamental situation remaining pretty much unchanged. Needless to say, the share price has remained depressed and currently sits at $1.49 a share. So, not many of those 90,000 lesser fools have made any money.

Returning to the general dispersion of returns across industry sectors, the implied future knock-on effects is something we’ve been challenging our investment managers on for some time. Generally, they are acutely aware of what Brewin Dolphin have described as the ‘frothy’ nature of some areas of the market and this is why we employ them, amongst others, to have a balanced long-term view and realign to find value on your behalf.

While recent economic data has generally been better than expected, that trend has been less pronounced in the UK than other regions. Don’t get us wrong the direction of travel is welcome, but there’s every reason to expect the UK recovery to be slow as the job retention scheme is unwound over the coming months. Comparing the Office of Budgetary Responsibility (OBR) and US Congressional Budget Office (CBO) forecasts for UK and US GDP respectively they anticipate that the US will reach its pre-COVID level of activity in 2021, a year ahead of the UK.

The current state of Brexit negotiations also implies a slower trajectory for the UK. Whilst opinions differ, the market views any frictions between the UK and EU as inhibiting UK economic activity. Last week the Telegraph reported that government insiders are resigned to the fact that they may be trading with the EU on WTO terms in 2021.  The FT reported that the government are equally resigned to the fact that a trade deal with the US will not happen ahead of the US elections this year (and therefore will be pushed back to the next congressional session starting in the new year).

The first of these stories is presumably part of the bargaining strategy and doesn’t necessarily change our view that a thin trade deal can be achieved later in the year but will likely still mean some economic disruption. The second weakens the UK hand in further negotiations but is not a surprise given that the US has typically been a tough partner for smaller countries to negotiate with. Both scenarios present some headwinds which could add to volatility.

Back in the US, President Trump, the arch PR master, has been actively intervening in opposition-controlled cities, sending in federal troops as Democrats can’t do Law and Order or as he would tweet “LAW AND ORDER”. We’ve also seen further meddling between the US and China although both sides seem content to just irritate each other rather than risk upsetting trade generally. One reason why China might be prepared to have a more aggressive stance with Hong Kong is following the handover Hong Kong represented about 20% of Chinese GDP, with the growth of the mainland China economy it now represents 2%.

History tells us that normally sitting presidents don’t lose elections unless there is a recession. Something that must be playing on Trump’s mind. This historic trend is currently reflected by polls and bookmakers alike that have ‘Sleepy Joe’ Biden and the Democrats well ahead in the race for the White House and there is also the realistic possibility they could take the senate as well. Although it’s important to remember that at this stage of the campaigns last time round Hillary was well ahead and there was no chance America would be dumb enough to elect the Donald…

The implications of a Democrats win and taking of both houses could include the break-up of some of the larger tech companies – for example Amazon being split into a retail company and a cloud computing company – tighter regulation of the pharmaceutical market and possibly higher taxes.

Either way we, like Brewin Dolphin, will not be exchanging robust planning and long-term views for short term speculation or taking extreme positions and risking your wealth.

As always, please do not hesitate to contact one of our Financial Advisers at our Leamington Spa or Coventry offices if you wish to discuss this in further detail.

 

Market Conditions – 21st July 2020

After last week’s brief hiatus, we return to markets continuing to trend upward and/or sideways and plenty more news (some of it new!). The Q2 company results season has begun in earnest with our focus firmly on the forward guidance issued as economies generally continue to reopen rather than the backward-looking damage done.

Chinese stocks have been flying of late with a 14% return over the first 8 days of July, following state media outlets waxing lyrical on the prospects for investors. For global investors suffering from FOMO (‘fear of missing out’), China now represents over 40% of the MSCI Emerging Markets Index, Emerging markets are up 7.6% over the past 5 days and are by far the best regional performer as we begin Q3. Away from Asia the tech heavy US Nasdaq index continues to be a bright spot.

Whilst in the UK (Leicester aside), wider Europe and across a lot of Asia, lockdowns are generally being eased and a sense of normality is returning. Cases in the US, South America and India continue to rise and further lockdowns have been announced in Melbourne, northern Spain and many other areas around the globe. It is clear Covid-19 will continue to torment society and economic activity for the immediate foreseeable future.

From an investment perspective we are keeping a careful watch on 3 areas of potential concern:

1- Equity markets are up significantly from their lows, but, in some cases, the limited recovery data seen so far does not justify the current valuation levels.

2 – Whilst progress is being made on a vaccine, we currently do not know everything about the potential progression of the virus.

3 – There is some execution risk of the fiscal support packages and consumer appetite. The money may not get to where it is needed the most or more money may be required than initially expected. We also need to watch closely to see if those who receive support spend money to stimulate growth.

Looking at these points in turn. Back in March markets had lost all confidence in the face of economic shutdowns across the developed world and a complete lack of clarity about economic prospects.  As economies have slowly begun to reopen, they have regained some composure.  However, it’s important to remember that they are still some way below their levels at the beginning of the year, with the benchmark UK Index, the FTSE 100, still down by more than 18% so far in 2020.  Other indices, notably the US, have fared better, but this is as much to do with the companies that are listed there than any economic outperformance.  As for the UK, a very “services” related economy was particularly vulnerable to a shutdown and uncertainty over future trade relations with the EU have further soured sentiment.

As ever, we think it is essential that we continue to focus on the quality of the investments that we hold and the longer-term prognoses for the industries that they operate in.  People will, ultimately, fly again, but will we need shopping centres and high streets in quite the way that we did?  Some companies that have seen sharp falls in their share prices will recover, but many, will not.

Equally, the economies of the Far East – perhaps because of their experiences during the SARS and other epidemics over the last twenty years – have not suffered in quite the same way as Europe and the US.  This marks another step in the transfer of economic and geopolitical power away from the “Old World” to the “New World”.  This is not to suggest that we should be writing the obituary of the “Old World” just yet.  Many of the companies that are at the vanguard of the changes we are going through – from Solar and Wind Power, from Cloud computing and teleconferencing, from New Media to Electric Cars, are all based in the Old World.  It is just that for every Amazon, the US retail giant, there is now an Alibaba, its Chinese equivalent.

An interesting twist on the rise of the Far-East “New World” was raised by the report in the Lancet this week about global fertility rates and the impact on global population. According to this, expect a global population peak in 2064 at 9.7bn falling to 6.3bn in 2100 with the biggest reductions occurring in China and India. Possibly not dramatic implications for us directly today but certainly food for thought on what life will look like for our children and grandchildren as they age.

More medium-term we continue to expect markets to recover and grow strongly, but we expect continued volatility. We continue to probe the investment managers we use to remain confident that they reduce these risks as much as possible for you.

Whilst it’s too late for tears if you held substantial Boohoo shares they illustrate a nice example of how investment managers can help control risk for you. To recap Boohoo have recently been on the receiving end of alleged illegal work practices of its supplier operations in Leicester. The claim is that textiles workers were being paid less than minimum wage, while having to work in cramped conditions, with no measures in place to help protect staff from being infected by Covid-19. In response Boohoo’s board have launched an independent enquiry to investigate the matter. So far there has been no evidence of any modern slavery offences, but that hasn’t stopped Next, Asos, Very.co.uk and Zalando from temporarily dropping Boohoo products from their websites. Nor has it stopped the share price from losing roughly a third of its value.

Away from the headlines there were several governance red flags, prior to the scandal, which stopped some sustainable investors including Aviva from buying the stock. In Aviva’s words “there was a concentration of power and a highly questionable culture of the leadership team.” Allied to this was dubious and unsustainable profit extraction by the owners and the insistence of staying off the FTSE 100 to allow for lower disclosure obligations and shareholder accountabilities (despite being eligible for the FTSE 100 as we suspect they could have been around the 77th largest company).

Now so far so good from Aviva, red flags seen and stocks not bought, tick. But sustainable investing can go a stage further, so whilst Aviva don’t currently hold Boohoo stocks in their sustainable portfolios they are looking to meet with Boohoo to drive the company in a better direction for staff and shareholders alike and will consider buying the stock only if they receive clear commitments from the board that governance and social practices will change in line with their recommendations. A great example of how a focus on Sustainable investing will continue to drive down individual investment risk and force companies to adopt ethical practises that make the world a better place.

Moving on to point 2 on our list and concerns about the potential progression of the virus. As Boris Johnson is quoted as saying, “who would have thought that taking away people’s liberty would be so easy, but giving it back so hard?” Ultimately, we will develop a vaccine, establish herd immunity, or simply learn to live with a new virus and deal with it accordingly.  Part of the success story of homo sapiens is its ability to adapt and to change.

What the future will look like is the six trillion-dollar question – back in March, the World Economic Forum thought that the slowdown in the global economy caused by the coronavirus outbreak was likely to cost $1 trillion.  By May, this figure had risen to around $3.8 trillion and recent estimates are around $6.3 trillion – now that’s inflation for you!

An article by the same World Economic Forum reported that Coronavirus could trigger the largest ever annual fall in CO2 emissions. Will it continue? The EU has pledged that its recovery package will focus on a Green recovery and it seems certain that some of the trends that were already happening will see their progress accelerated by the changes over the last few months.

Certainly, the trend to more home working does not look like one that will end abruptly.  This increased use of computer software for meetings has profound implications for a number of sectors – the airline or train companies carrying less passengers, the hotels putting up less guests, the Real Estate companies finding that their clients are looking for smaller offices.  It doesn’t stop there, of course.  You only have to see how city sandwich provider Pret has seen its demand collapse.

So, will councils have to employ tumbleweed clearers to keep their deserted city centres clean? This is probably overdoing it as well.  Effective and efficient as electronic communication is, it is hard for social animals like mankind to replace face-to-face contact.  Body language is, after all, a language in itself.  There will remain a demand for good quality property in good locations, just not as much as there was, perhaps.

Reverting back to the here and now, a significant improver of market sentiment over recent weeks has come from the US biotechnology company Moderna who announced that their COVID-19 vaccine produced antibodies in all of the patients tested in their early stage trial. According to the New England Journal of Medicine, antibody levels produced during the trials were equivalent to the upper half of what is seen in patients that have been infected with COVID-19 and then recovered. There were some side effects which the regulators will need to become comfortable with, but the vaccine is now set to proceed to the final Phase III trials.

Phase III trials for the Oxford/AstraZeneca trial started in the UK and Brazil at the latter end of June and the results are expected in August/September. This is the only vaccine currently in Phase III trials and if successful the first round of vaccinations could take place in October of this year. Until a vaccine is widely available it is highly likely that economic activity will remain disrupted and consumers will be wary of potential spikes in the virus and adjust behaviour accordingly. Incremental success in the various vaccine trials undoubtedly helps the market and provides some safety net for equities in case the Oxford/AZN vaccine fails during Phase III trials.

If the Oxford vaccine is approved for widespread use after their current phase of trials this is unambiguously positive for risk assets. Not only is this the vaccine furthest in its development cycle but AstraZeneca have already started production to provide the vaccine to key markets in the hope of a successful result.

A further glimmer of hope can be seen in the decline in Swedish cases, although this could be for any number of reasons (less testing, some more lockdown measures). Crucially, however, there was an important suggestion that immunity may have spread more widely than believed with herd immunity achievable with far lower infection rates of, say, 20% rather than the 60% suggested more commonly.

Our final third area of concern is based on how effective support packages are at getting help to those needing it most and is neatly exemplified by the EUs proposed stimulus package negotiations which have taken a laborious 4 day summit to reach agreement. The European Council’s €750bn EU recovery package, split between €390bn in grants (down from a proposed €500bn) and €360bn in loans (up from a proposed €250bn), was sweetened by a budget rebate for fiscally conservative states and the ability to audit and block other state spending projects. This latest step is an olive branch to the more fiscally conservative Northern EU member countries for whom the best part of half a trillion euros of non-repayable grants to other nations may still prove politically difficult to swallow domestically!

The summit chairman Charles Michel had described reaching agreement as “mission impossible”, with a significant risk remaining that the package ends up disappointing in both pace and scale. Clearly the amendments to the original proposal have made it less generous to the recipients and this could leave the EU as a relative underperformer against more ambitious and coordinated policy responses being delivered elsewhere in the world.

Away from our three focuses this week, in the US the weekly jobless claims were higher than the market expected. Whilst this continues a week-by-week improvement, the pace of that improvement has slowed. This raises the prospect that the US economy is already slowing because of the pickup in new cases. With the number of US cases now exceeding the levels seen in March and April, some economic impact was inevitable and regional variances are expected.

Possibly unsurprisingly considering the above, there was continued escalation in US/China tensions with the US reacting to the Chinese sanctions against several US lawmakers. This itself comes after the US placed sanctions on several Chinese officials last week over alleged human rights abuses in Xinjiang. Further to the latest Chinese move, Secretary of State, Michael Pompeo, weighed into China’s claim to the South China Sea saying that Chinese actions were ‘unlawful’ and amounted to ‘bullying’. Traditionally the US has chosen not to take sides over this politically sensitive region, so this is a further example of the US being willing to intervene in what China views as internal affairs.

The war of words between the US and China will inevitably escalate as the November election approaches but with the US being forced to reverse some of the lockdown easing, the economy would not welcome a return to tariffs. Brewin Dolphin continue to consider this as a potential risk rather than the inevitable conclusion of the dance, we remain vigilant.

The UK is also not backing down against China with the news that Huawei will not be part of our 5G infrastructure, and as a nation we’re happy to delay our 5G roll out to accommodate this – the cynic in us couldn’t help to notice the political wiggle room this gives domestically as to why the UK is behind other nations globally in 5G roll out… Aside from Huawei the UK looks likely to further antagonise the Chinese leadership by suspending extradition laws to protect Hong Kong residents who come to the UK as a result of the new Security Laws apparent breech of the 1984 Joint Declaration on the future of Hong Kong.

At the same time, tensions with Russia are re-surfacing over hacking and interference in the UK political system. Last week, ministers accused Russia of trying to hack the UK’s vaccine research. Today we’ve finally seen the report, which was meant to examine the broad range of ways in which Russia is alleged to have sought to use influence in the UK, including during the Brexit referendum and the 2014 Scottish independence referendum. However, to our considerable surprise, it merely confirms that everyone involved was actively looking the other way and had an attitude of nothing to see here, move along please. Well we guess that’s OK then… or not, we would expect this story to run further with evidence of interference in the Scottish IndyRef actually cited and “immediate action” from the government called for. Elsewhere the hacker group Anonymous again raised fears about the mobile app TikTok that they claim is a Chinese data collection tool.

Whilst a lot of the fears above are politically motivated it is clear liars and truth twisters abound globally and seeing past the noise has never been more important.

As always, please do not hesitate to contact one of our Financial Advisers at our Leamington Spa or Coventry offices if you wish to discuss this in further detail.