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3rd October 2017 - The Markets and Economy


You cannot have missed the direct impact that Mark Carney's sabre-rattling had upon the FTSE. His overt goal has always been to keep inflation within outdated parameters and he has consistently failed to do so. This is a greater criticism of the goals than it is of Mr Carney, but his secondary objective is to look after Sterling.

The pound has been on a steady decline for several years and the decision to paddle our own economic canoe accelerated the process. Initially of the view that this was a temporary market over-reaction, the MPC decided to sit back and watch. Faced with the reality that international investors do not share their peachy view of the economic future for Britain he decided to go nuclear.

Reinstating the post-Brexit quarter point cut and raising bank rate to 0.5% really should be neither here nor there but it provided sufficient excitement for international investors to ignore the facts and gamble on the hope that his will be the first of many rises in quite quick succession. With the currency buoyed by that increased demand the FTSE naturally fell, for the identical reasons that investors had so recently profited through the weakness of Sterling.

Oscar Wilde famously wrote that ‘the only way to get rid of temptation is to yield to it' in what was supposed to be a waspish aside. The last ten years though has seen the world tying to cure its addiction to debt by yielding to the temptation of taking on even more, whether through QE or any other means. Rising interest rates must be worrying.

On the one hand, the BoE has to raise interest rates to give it some options other than QE to manage its affairs because there is virtually nowhere for them to go at the moment. Conversely, even a small rise in the interest rate cycle might tip this palpably fragile economy back into recession.

Closer study of the latest MPC Minutes revealed that they believe a lack of business confidence has led to underinvestment in capacity in the economy, with the result that even the low growth of late is rapidly taking up the available spare. This is a legitimate view but it is hard to see how raising interest rates will deal with both the expected inflation and perceived underinvestment. The economic brains on the MPC are amongst the best in the country but it does seem more likely that their voiced solution is only going to make everything worse. With any luck it will prove to be nothing but a bluff.

The Governor had hitherto been at pains to stress that the unwarranted weakness of Sterling was the sole cause of above target inflation. With the currency now at a post-Brexit high and approaching pre-referendum levels against the US dollar, that argument starts to run out of steam. A more probably bogeyman is less tangible and therefore much scarier: the output gap or, more accurately, the lack of one. Only political intervention from an astute Chancellor could address this and his Autumn Budget should have that topic as its focus. On a positive note, Hammond does not have the distraction suffered by the rest of the government: those all-consuming and angst-ridden but fruitless Brexit talks.

To the surprise of almost no-one Angela Merkel secured election for a fourth time and that political continuity is a very positive thing for our brave Brexiteers. Some common sense and deal making might now prevail, but it might prove a disaster from Germany's point of view that they did not find a replacement. Evidence from the UK suggests that the repetitive election of a Premier tends to be a bad thing for anyone, whether that was Thatcher, Blair or anyone else. The Founding Fathers deduced this more than 250 years ago and even the Russians adopted a constraining policy to prevent it - until Putin rewrote the rules.

Super Mario faces a diametrically opposite problem and it will come to a head this week at the meeting of the European Central Bank. In their case the temptation will be to hint that it is time to reduce the extent of QE and stop buying quite so many bonds. Last month's Eurozone Flash PMI data saw manufacturers' confidence hit a dizzying 56.7%, but the euro is floating ever-higher on the expectation of just that step. With the Euro currently buying just under $1.20 or £0.90, the most since early 2015, he will be damned either way.

The shabby behaviour of Ryanair and demise of Monarch Airlines in the budget flight world were nasty surprises but of little consequence for investors. Footage from Spain though brought another dimension entirely. What sort of democracy is it where you get a sound thrashing from the police for voting within the EU? While stock markets have shrugged the episode off it is hard to see how the Catalan situation is going to end well.

October is the month when the Federal Reserve switches from Quantitative Easing to Quantitative Tightening. Despite this certainty, markets appear not to care one iota. The message seems to be that they do not believe that the Fed will see it through when the economy slows again and QE resumes. The recent years of easy, risk-free money is an unsustainable fantasy which essentially discourages risk-taking and so something has to change.








9th June 2017 - UK Election 2017

It has taken a mere twenty eight years for there to be a less predictable outcome than when Sutton United took on Coventry City FC on 7th January 1989 and they emerged victors 2:1.  Nineteen months after winning the FA Cup, Coventry were still riding high in the Premiere League when the non-League amateurs beat them “at their own game”.  Now that was embarrassing and in this context the Conservative victory is OK really. 

Irrespective of the quality of the debate or campaigns the reality is that there is a hung Parliament in Britain and that shock brings more volatility to investment markets in the short term.  Sterling always loses international value in such conditions and while that means your overseas holidays become more expensive, it is good for the FTSE 100 because more than three-quarters of FTSE 100 profits are made overseas.  When those overseas profits get converted back into Sterling the dividend is higher and that pushes the share price up too.

Several positives have emerged from the result though:


  • A softer, less combative stance towards the EU is likely to help Sterling and reduce market uncertainty,

  • The nation voted overwhelmingly for the two parties that accept the “Leave” vote and so there won’t be another vote on whether the deal negotiated is wanted or not – GB is leaving the EU,

  • Our fellow citizens in Scotland do not want another referendum about possible independence from Britain any time soon, and

  • British businesses are even more attractive to overseas investors and so the pace of takeovers and mergers is likely to accelerate.


Political necessity will shape what happens next and so no changes should be made to your portfolio just now.  Whether Mrs May soldiers on with or without the DUP or is politically despatched in favour of another Leader, a Conservative led government seems certain.  Back in 2010 very similar things happened and over the ensuing year the short-term volatility had made no material impact upon investment markets.  There are no grounds to expect a different outcome on this occasion.

The UK already uses World Trade Organisation terms to great effect with much of the world and progress has already been made in expanding those relationships.  In the twenty-months or so left to conclude the terms of the GB departure from the EU any improvement beyond the WTO standard – which simply cannot be denied – constitutes a win for Britain. 

House prices and supercars are likely to get pushed higher still with the influx of foreign cash into the “bargain basement” of Britain if the Sterling weakness endures, but the message for Fixed Interest Securities is that there is even less likelihood of a Bank of England rate rise soon.  The summary position is that rates will “stay lower for longer” and so the possibility of falls in those asset values has diminished.

Please remember that your investment strategy has not changed overnight.  Brief storms do not determine the valuation of buildings, currencies or companies but rather the fundamentals of management.  The short-term noise is nothing more than a distraction and the best managers – each of whom have been hand-picked for your portfolios – will exploit the temporary distortions in market prices to your long-term advantage.








8th March 2017 Spring Statement from Philip Hammond



The last in the current series of Spring Budgets was no sombre affair, with our Chancellor displaying unexpected comedic talents.  Coming so swiftly after his first Budget, last Autumn, little had changed and so the content was necessarily limited to some light pruning as his focus shifted from one part of the economy to another.
 

All politicians colour their messages to their own liking and this was no exception.  The Office for Budgetary Responsibility (OBR) revised its forecasts of changes in the nation's Gross Domestic Product (what the country "earns") to show annual increases of 2% in 2018, 1.6% in 2019, 1.7% in 2020, 1.9% in 2021 and 2% again in 2022.  Sadly the same august organ also forecasts increases in the Retail Prices Index of 3% this year, 2.3% in 2018 and 2% in 2018 i.e. the nation is going backwards rather than growing, but this was portrayed as being a success story.

 

Hopes of balancing the budget during this Parliament also faded away, but at least the OBR confirmed its hope that the national debt will "only" rise from 86.6% of GDP this year to 88.8% in 2018 before falling progressively to 79.8% by the end of 2022.  Just forty more years of austerity to go then and the public sector debt will have been paid off.  Maybe.

 

Previous tax announcements were repeated but there was a sting in the tail as far as the self-employed and dividend recipients are concerned.  Over the next two years the self-employed will pay 22% more National Insurance Contributions on the same profits as the rate rises from 9% to 11% and the tax-exemption on dividend income was cut by 60% from £5,000 per year to £2,000 instead.  The change to NICs has fuelled a great deal of adverse comment from the government back benches, let alone other sources, but the logic of the argument put forward by the Chancellor is hard to argue with even if it does fly in the face of their last Manifesto.

 

One very positive tax hike was the imposition of a 25% levy on all pension funds being moved into any non-EU QROP - an offshore type of pension that has become popular amongst those "advisers" involved in illegal pension liberation scams.

 

Most of the window-dressing was quite ephemeral, with £113m going to Midlands and "the North" of England to be spent on road "pinch-points" (even though the potholes cost many times more than that to fix every year) and £216m over the next three years to repair existing school buildings in England: a sum that would barely cover the outstanding work for Warwickshire let alone the country as a whole.

 

With the nation desperately short of GPs it was also good to discover that £110m of capital has been earmarked for the next six months to employ more GPs in triage units at the A&E departments of hospitals.  No mention was made of where they might be coming from, but immigration seems the only possible solution.

 

A welcome announcement though was that the April NS&I bond will pay 2.2% interest on balances up to £3,000: a highly competitive rate that should become part of everyone's cash resources.

 




24th November 2016

 

Autumn Statement 2016 from Philip Hammond

 

A budget by any other name, the November speech delivered both bitter and sweet news for the nation.  Much of the content was eminently sensible and to be applauded whilst other elements appear at odds with his stated aims of addressing the:

- Poor productivity record that Britain has become famous for,

- Gap between demand and supply of housing, and

- Growing imbalance in prosperity from one region to another.

 

Bringing the annual Budget forward to the Autumn from 2017 is welcome news, giving everyone time to consider how best to organise their affairs before the tax system changes the following April.  Responding each March to the Budget feedback generated by the Office for Budgetary Responsibility is also a good idea, keeping the financial plans all within the same tax-year; so full marks for originality of thought.

 

Much of the content simply repeated previous annoucements although his confirmation that the current tax road-map for business would remain in place for the remainder of this Parliament bring the stability and reassurance that all businesses need.

 

Several spending initiatives were created or enhanced, including:-

- A £23bn budget over the next five years for the National Productivity Investment Fund, which is partly earmarked for -

   - Research, Development and Innovation using £2bn to grow our brightest ideas into valuable businesses rather than allow them to be snapped-up by overseas investors,

   - An extra £0.9bn for the existing Homebuilders' Fund to acclerate the construction of 100,000 homes in areas of highest demand (that is just £9,000 per property and so seems likely to allow developers to make an extra £9,000 profit,

   - Another £1.4bn into the Homebuilders' Fund to get 40,000 more affordable homes built (£35,000 apiece in this instance, so the assumption is that these units will be flats),

- Unspecified extra funds to encourage tenants to exercise their Right to Buy from Housing Associations,

- Unspecified support for the Help To Buy mortgage loan schemes and also the Help tp Buy ISA for first time buyers,

- £220m to address traffic pinch-points in England,

- £450m for digital railway signals and £80m for smart ticketing in England,

- £390m to encourage the purchase and use of low-emission vehicles in England, renewaable fuels and Connected & Autonomous Vehicles (CAVs).

 

His wish to make the UK the "5G world-leader" is a aludable one, but Japan and many other developed countries already have 5G-specification fibre optic connections into their homes and wirelessly across their entire territory: not just 4G to a box somewhere nearby, as is the case for over 85% of the UK.  Many had hoped for a vast increase in the capital devoted to improved Internet speeds and capacity, but the £500m (if matched by the same amount of private capital) committed over the next five years falls far short of those dreams.

 

Our Chancellor highlighted the huge disparity in wealth between the South and the North of our Kingdom - he said it was the most extreme divergance in any developed country - before stating his intention to address it.  Whilst the Northern Powerhouse continues to be a topic for discussion, hopes for a Midlands Engine strategy were announced just after confirming funding of £27m and the go-ahead for the Oxford to Milton Keynes to Cambridge Expressway.  Presumably the wealth imbalance can wait a little longer.

 

Changes to the Barnet Formula see more money flowing to the local authorities responsible for the extremeties of our Kingdom: £250m to Northern Ireland, £400M to Wales and £800m to Scotland.

 

An additional £400m of Income Tax Relief for investors into Venture Capital Funds will translate into an extra £1bn of finance for new technology companies - an act aimed squarely at "patient capital" needs.  This was accompanied by another £50m per year to help FinTech specialist businesses to aid growth and £13m per year for businesses who wish to train their Board and management "the Sir Charlie Mayfield way" to improve productivity.  Hopefully great oaks my grow from these tiny financial acorns.

 

Largesse amounting to £542m will be spread amongst the Midlands Local Enterprise Partnerships to financially prime businesses with the potenential to generate growth, bringing access to extra capital where and when it is needed most.  The South got a further £683m in the same way.

 

The austerity measures imposed upon most Government Departments is not being watered down, but those which succeed in finding the desired efficiences will be rewarded from a pot of £1bn for targeted areas of expenditure that were not announced.  Excused from these financial exigencies is the Ministry of Justice, whose immediate goal is to cope with the burgeoning prison population in order to bring safely for both inmates and staff.

 

An existing commitment to preserve the "triple-lock" on the State Pension to April 2020 was ratified, as indeed was the plan to reduce Corporation Tax by anothr 1% to 17% by 2020.  Other taxation announcements included:

- Discounts for business Rates,

- Harmonising the starting point for National Insurance Contributions at £157 per week: adding £8 per year per qualifying employee to the costs for every business,

- Insurance Premium Tax being increased by 20% from next June to 12% in all - please talk to your insurance adviser about the change Corrigans can offer you to reduce the growing impact this tax has upon your business,

- Salary Sacrifice confirmed as being approved for pension contributions and advice, childcare, cycle to work schemes and ulta-low emission vehicles but worthless for aggressive tax-avoidance schemes such as cars, accommodation, school fees, Private Medical Insurance or Life Assurance premiums and the like from next April or April 2018.

- Cutting the annual pension contributions allowed from £10,000 to just £4,000 for anyone using Flexi Access Drawdown Accounts (FADA).  This does not apply if you have only taken "tax-free-cash" from your pension but please contact your adviser about your circumstances, and

- Increasing the ISA allowance next April from £15,240 to £20,000 per person.

 

Increases in Personal Allowances against Income Tax remain as currently planned: £11,500 each from next April and rising to £12,500 by April 2020, at which point the 40% threshold will be £50,000.

 

Next April sees the National Living Wage rise from £7.20 to £7.50 per hour and free childcare for working families doubles from 15 to 30 hours per week progressively in 2017.  At the same time the rules on Universal Credit change to allow claimaints to keep 37% rather than the current 35% of their Benefits whilst working - a direct measure to financially incentivise work as a culture.

 

Savers were also rewarded with news of a new Bond to be issued by National Savings next April, offering 2.2% pa gross for a three-year deposit.

 

All in all it appears to be a very sensible Budget (sorry, Autumn Statement) but quite how it meets his stated aims of improving productivity, bridging the housing gap and reducing the diverence in prosperty from South to North is unclear.  

 

9th November 2016

America has shown that it is not immune to reactionary politics in making their latest choice of President. Widespread disillusionment at the gulf between those who have done well out of the latest Banking Crisis and the vast majority has stoked the appetite for change in Britain, Germany and now in America too. The die seems to be cast for France, Spain and Italy as their Referenda and elections take place in the coming months. For investors there will be the same knee-jerk reaction seen post-Brexit, with a sharp sell-off in Equity Markets and a weakening of the US Dollar. That shock will not last though because there are constraining measures to limit the ambitions of any President which have been in place since the first Independence Day.

Although there is likely to be a clean-sweep of Republicans from the Oval Office through to the Senate and House of Representatives, the views of the next President are not universally shared by his party. He will find progress frustratingly slow when compared against the outcomes he is accustomed to through the nimble team that helps him to run his business empire. With no experience of how the organs of government work there will be heavy reliance upon an extended chain of bureaucrats who, in a real-life parody of "Yes Minister", will accelerate or hinder policies according to their collective, unwritten but very-long-term, agenda. In short, little will change in practice.

The common factors in each of these votes has been increasing isolationism and a desire for self-protection, neither of which might be considered positive factors for the UK as it seeks to renew its outward-looking business relationship with the rest of the world. Thankfully though the dead-hand of the civil service in each country will limit the progress that their political leaders can make towards these extreme policies. Business as usual beckons.

In America the stock-market was pushing towards the top end of its value-range in October and so the short-term sell-off represents an opportunity to buy the market. Much had been made in the campaign of the wish to redirect the US military budget back into America rather than protecting the rest of the world, on the basis that local problems should be resolved locally. Of all the countries that want to do business with America the UK is therefore in the best possible place, having played a full part in all the US fields of military battle.

Two months of negotiation now ensues as a new team is identified by Mr Trump to support him over the next four years. Their identity and credentials will be scrutinised closely by many, of course, but the growing military, computing and political confidence within Russia and China may take this signal as an opportunity to "grab territory" or renegotiate trade terms with weaker nations.

Interesting times such as these are best faced with a portfolio of investments that are actively managed and have the right asset allocation for you. The short-term turbulence that follows another unexpected political outcome is just a distraction in the long-term journey towards your goals, but please contact your adviser if you have specific concerns.




7th October 2016

After any period of sustained market rises there is an inevitable moment of the jitters and that is no bad thing. It often feels though that the fate of the financial world rests in the hands of a tiny clutch of politically appointed bureaucrats. The leaders of the central banks posess extraordinary powers to set the trajectory for the global economy and its stock markets. Not underlike the Democratic system at play in the UK, leaving important stuff to long-term and un-elected workers is probably better than entrusting such things to short-term but elected politicians of any hue.

Over the Summer there were several rumblings from the Mandarins that market volatility was lower than expected post-Brexit.  The Conservative Government has got off to a marvellous start under Mrs May though and that has given investors greater confidence: uncertainty being the worst thing possible for investment markets.  To make matters even better for British investors though the UK has achieved what every developed nation has yearned for since the most recent Banking Crisis - devaluation.  A 13% drop in value relative to all major currencies since that surprise vote is no mean feat and that translates directly into higher share prices in the UK.  This is because London and Switzerland are unusual stock markets.  The rest are all "domestic", with the constituent businesses being local to that stock market and earning their profits in the same market.  One benefit of our former Empire is that 85% or more of the profits made by UK listed companies arise overseas.  When those foreign profits are brought back to the UK to be paid out as Dividends they are worth more in Sterling than they used to be because of that devaluation.  Those higher Dividends lead directly to higher share prices without any smoke or mirrors.

Japan has stated that it is targetting zero "interest" on its borrowings for the next ten years: something they can achieve through Quantitative Easing, and this volume of purchases forces the price of all national debt higher with the terrible result that the "interest" paid on it gets lower and lower.  Investors are therefore flocking into other assets because high-quality companies that pay 3.4% dividends year-in and year-out offer a more compelling solution to anyone looking for an income in life beyond work.

Meanwhile on the other side of the Atlantic a frightening game of bluff and counter-bluff is under way.  One of the two least-loved Candidates in a long time will become President though and in the meantime Syria, rather than Rome, burns.  It puts all this into perspective really.



14th April 2016


The economic situation in China continues to influence the UK Stock Market.  China has thankfully lowered its GDP growth target range for the year to 6.5%-7%, but what does that mean?  At the bottom of this range it would amount to an extra $706bn: the same amount as 9.4% growth would have created in 2012.  It is also the equivalent to the annual GDP of Switzerland, or half that of Spain, or even a third of the GDP of Italy - the 8th largest economy in the world. 

It is a massive sum and it screams confirmation that China is not imploding.  The United States is growing nicely and deflation is currently an exclusive phenomenon of the geopolitics associated with the engergy industry.  Negative bond yields are an abberation of seemingly misguided and outdated monetary policy with the result that the world is a much more normal place than is commonly portrayed. 

Brent crude oil spent part of the month above $40 per barrel and other commodity prices rushed up in adoration. 

Inflation is a-coming and markets are terriby happy again. 

 

 

 

 




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