The World In A Week

The World In A Week - Big Headlines, Small Details

Geopolitics continued to grab headlines last week. The US-Iran conflict is currently the biggest source of instability for investors, although tensions showed signs of abating as the week progressed, with both sides relaying that retaliation was over. Despite the White House making noises regarding further economic sanctions, we do not expect further escalation around this specific situation. The cynic in us however believes that should Trump's ratings deteriorate; we could see these tensions rekindled.

There was good news in the UK; following several days of debate, the Commons approved Boris Johnson's agreement on how the UK would leave the European Union on 31st January 2020. This decision is now waiting for approval from the House of Lords. In what has been a long-awaited step forward, we are now set for intense discussion between the UK and Brussels, who cannot agree on how long discussions over the future relationship should last, with the chair of the European Commission voicing her concerns that it will be impossible to reach an agreement by the end of 2020. We think that it is highly likely that Boris Johnson will ask for an extension to the transition period by the end of the deadline, 30th June 2020, and that UK equity markets will subsequently rise.

Markets were buoyant last week, despite the tensions between Iran and the US. The most likely explanation for this is that Trump is due to sign the Phase I agreement with China in Washington on Wednesday, which will cement the foundations for the next phase of negotiations. While the downward pressure on global growth for the year ahead has relented, we must remind ourselves that the agreement has limitations, as most of the tariffs will remain in place.


The World In A Week

The World In A Week - New Decade, Old Problems

We welcome not only a new year, but also a new decade.

At the start of last year, we stated that in our opinion, the main risks were Trade, Brexit and Central Banks. Last year was arguably dominated by Central Banks, with a synchronised easing around the globe, most notably in the US, where Jerome Powell executed a complete U-turn, neutralising the previous rate hikes under his tenure.

The baton has now been dramatically passed to politics, which in general behaved quite sensibly in 2019: the elongated drama surrounding trade with China and the US eventually got to Phase 1 and, in the UK, Brexit progressed up the next rung of the ladder.

However, 2020 has brought political uncertainty back to the fore. The hangover had barely dissipated when news that a drone strike by the US had killed one of Iran's most powerful generals. The obvious fear is the assassination will ignite another major conflict in the Middle East, after Iranian Supreme Leader Ali Khamenei promised: severe retaliation. What form this will take is again, uncertain, but some sort of cyber-attack looks the most likely, particularly as we enter the US Presidential Election year.

Will Iran be the protagonist in this year's election, as Russia allegedly became in 2016? The US Election was already high on the list of risks for 2020, along with many other political situations around the world, however this has certainly been escalated in our views.

Experience has taught us not to make knee-jerk reactions. This becomes increasingly difficult for the investor, with the media's continued use of more volatile headlines, which are hard to ignore. Their remit is to get you to click on the article; our remit is to ensure you have a robust investment process as your foundation.


5 Tips For Helping Your Children Get On The Property Ladder In 2020

Aspiring homeowners often face a struggle to secure a deposit. It's a challenge that may be affecting your children and grandchildren. But there are things you can do to help them get on the property ladder in 2020 and improve their financial security in the future.

The good news is that research from Post Office Money suggests first-time buyers are saving a deposit quicker. Yet, it's still taking an average of 3.6 years to save the lump sum required to act as a deposit. When you look at the sums involved, it's not surprising that first-time buyers are taking years to save. The average deposit for a first home in the UK now stands at £43,585. This varies significantly between regions. The lowest average deposit for first-time buyers is £21,696 in Blackpool. This compared to £170,003 in London.

First-time buyer households are putting away £843 a month when building up a deposit. This is the equivalent of 21% of their combined income. They're taking a number of steps to achieve their goal, including:

∑ Working overtime (33%)

∑ Selling items online (25%)

∑ Finding a new, higher paying job (18%)

∑ Using credit cards to cover everyday expenses (15%)

However, just 29% of first-time buyers did so without financial support. With huge growth in property prices over the last couple of decades and more stringent checks from mortgage providers, more people are turning to the Bank of Mum and Dad (or even grandparents).

Why Help First-Time Buyers With A Property Deposit?

Where possible, lending a helping hand with a property deposit can get loved ones on track for financial security.

In many cases, mortgage payments are lower than rental costs. Providing support to help children or grandchildren get on the property ladder that bit quicker can improve their finances immediately. It's a step that can improve their financial security in the long term too. Being able to start paying off a mortgage sooner can help free up income later in life.

Helping The Next Generation Secure Their Deposit

Do you want to help the next generation get on the property ladder? There is more than one way to do it.

1. Gift Loved Ones A Deposit

The most common way parents and grandparents are helping the next generation is by gifting a deposit.

According to Legal and General, the average contribution towards a deposit is £24,100. In total, the Bank of Mum and Dad is estimated to have lent up to £6.3 billion in 2019 alone. It's a gift that can make the dream of homeownership a reality.

But you need to assess the impact on your own finances here too. How would taking a lump sum out of your current wealth affect you in the short, medium and long term? Could it mean that retirement aspirations are no longer feasible? Speaking to a financial adviser can help you understand the impact of gifting a home deposit. It's a step that can give you peace of mind as you help loved ones purchase their home.

2. Loan The Money Needed

When gifting isn't an option, loaning a deposit can be an alternative. If the money isn't needed now but will be in the future, it's an option that may be right for both you and your loved ones.

It's important you take both financial and legal advice if this is an option you're considering. Remember, circumstances can change and having a formal contract in place can provide both parties with security.

3. Research Family Mortgages

It is possible to secure 100% mortgages, meaning homebuyers don't need any deposit at all. However, these are often offset mortgages that need support from family.

For instance, some family mortgages allow you to deposit savings into an account earning interest which then acts as security if repayments aren't made. Others will allow loved ones to take out a 100% mortgage if your own home is used as security.

These options can seem like a simple way to lend a hand. But it's important to keep the risks in mind. If your child or grandchild doesn't keep up with repayments, it's possible you'll lose your savings or even your own home. It's wise to discuss with the homebuyer about what's affordable and what financial safety nets they have before proceeding with a family mortgage.

4. Point Them In The Direction Of Government Schemes

There are several government schemes that can boost efforts to save a deposit that may be right for your children and grandchildren.

First, the Lifetime ISA (LISA) can give a 25% bonus on contributions. A LISA can be opened by individuals between the ages of 18 and 40, and deposits can continue to be added until account holders are 50. Each tax year, £4,000 can be deposited, leading to a maximum bonus of £1,000 a year. Deposits can either be held in cash or invested. The drawback here is that withdrawals before the age of 60 for a purpose other than buying a home will lose the bonus and incur an additional penalty.

Second, a Help to Buy equity loan is also an option. Aspiring homeowners can purchase a new build home with just a 5% deposit, with the equity loan providing a further 20% boost (40% in London). As a result, a 75% mortgage will be needed to make up the rest. It's a scheme that can help first-time buyers secure a property with a lower deposit and one that may have been out of reach otherwise.

However, it's important to keep in mind that the loan will have to be repaid. This can be repaid when the house is sold or the mortgage term ends, whichever is first. Homebuyers that use the Help to Buy scheme should also be mindful of changing house prices. The amount owed is tied to the amount of equity the loan helped you buy. So, if house prices have increased, so will the amount that needs to be repaid. Interest also starts to be added to the equity loan after five years.

5. Speak To Them About The Process

The process of saving a deposit and buying a house can seem complex if you've not done it before. Simply, speaking to children and grandchildren can help get them on the right track.

When calculating how much was needed for a deposit, for example, 23% of first-time buyers took advice from an independent financial adviser. A further 10% asked a parent for help. Having someone to talk to about goals and where extra savings can be made could help first-time buyers achieve their aim that bit sooner.

If you'd like to help children and grandchildren get on the property ladder, it's natural to have some concerns. You may be worried about how taking a lump sum out of your wealth would have an impact or want to ensure those not yet ready to purchase have some help if you're no longer here. Please get in touch with us to discuss how you could help and the short, medium and long-term impact.


Estate Rent Charges: The Charge To Look Out For When Buying Freehold

The potential charges you could face when buying a leasehold property have been covered in the press. We all know that leaseholders are likely to face ground rent, as well as service and maintenance charges, that could rise rapidly. But you might overlook estate rent charges when purchasing a freehold.

When you purchase a leasehold property, you own the property for a fixed period but not the land it stands on. It's often used for flats. As a result, extra charges on top of mortgage payments are to be expected. However, when purchasing a freehold property, you own the house and land with no time limit on the ownership. Usually, this means there aren't any further charges. But some freeholders are finding they have to pay estate rent charges.

What Are Estate Rent Charges?

Usually, when private developers build homes, the local council will 'adopt' the estate. This means taking responsibility for the upkeep of public spaces, maintaining roads and paying for other costs. But the local council aren't forced to do this. With budgets coming under pressure some authorities won't 'adopt' new developments. It's becoming more common for this to happen.

The services a local council would usually provide need to be paid for in some way. As a result, developers establish a way to cover this; estate rent charges.

Paying for the service you'll be benefitting from as a freeholder may sound fair. But estate rent charges are criticised for two key reasons:

1. Freeholders have typically little say in the process and the charges. Often, what they are paying for and whether the decisions made offer good value for money are not transparent.

2. Legally, developers or management companies can take possession of a property if homeowners fall just 40 days behind on their payments. Whilst used rarely, it could mean homeowners effectively lose thousands of pounds due to forgetting to pay a relatively small bill.

If you're considering buying a property with estate rent charges, it's something that should be picked up by your solicitor. During the purchase transaction, your conveyancer should inform you of the charges and how these could change.

3 Problems Estate Rent Charges Can Cause

Even if you're happy to pay rent charges on a property, it's important to consider where it may cause problems in the future.

1. Securing A Mortgage

There have been instances of mortgage applications being declined due to rent charges. Often, it's related to the fact that developers or management firms could take possession of a property, rather than the cost.

If you'll be using a mortgage to purchase your home, it's worth understanding if it'll be a problem for lenders. Checking the criteria of lenders can help you pick a provider that's right for you and the home you want. A mortgage application being declined, for any reason, could have a negative impact on your credit score.

This may not be an issue for you. For instance, you may be a cash buyer or have already spoken to your mortgage provider about the issue. However, you should consider what will happen if you want to sell in the future. Sales could fall through if the interested party is unable to secure a mortgage. This doesn't necessarily mean you shouldn't buy the property but it's something to keep in mind.

2. Selling The Property

Whilst you may be happy to pay rent charges, remember other people may not be. When selling the property, you may find that the pool of potential buyers is smaller. As a result, it's wise to anticipate that it'll take longer to sell your home when the time comes.

An additional cost that they don't have control over could put some prospective buyers off. Being transparent about what you pay, how it's changed over time, and potential increase can help ensure time isn't wasted on those that will be put off. It's a step that can also highlight how it differs from the fast-rising costs that have become associated with leasehold properties.

3. Escalating Estate Rent Charges

Compared to the overall cost of running a home, estate rent charges are usually nominal. However, you should always check how long they'll be payable for and how they could increase in the future. This allows you to make an informed decision about whether purchasing the property is right for you and make allowances for potential costs that may arise long term.

Whilst transparency is an issue, with rent charges some management companies offer freeholders more insight. Being able to see how your money is spent and voice concerns can give you peace of mind about the future.


The Value Of Financial Advice

When we think about the value of financial advice, it can be hard to quantify it. After all, you often can't be sure how your fortunes would have fared, or if your circumstances would be different if you hadn't worked with a financial adviser. But research has shown that it does have real, tangible benefits for clients, as well as being valuable in other areas too.

Despite evidence demonstrating that financial advice can be valuable, nearly half (48%) of adults in the UK have never taken advice. Whilst the cost of advice may be a factor for some, this isn't always the key factor. A third believe that they can manage their finances perfectly well themselves, with this rising to 57% of over-65s.

The Financial Benefits Of Advice

Research completed by the International Longevity Centre highlights how financial advice can help your wealth grow:

∑ Those that received professional financial advice between 2001 and 2006, on average, saw their pensions and financial assets grow by £47,706 in 2014/16

∑ Pension savers classed as 'just getting by' saw a 24% boost to their pension fund, compared to 11% of those considered affluent

∑ Focussing on financial assets, the benefit of financial advice was £16,715 in 2014/16 compared to £13,888 in 2012/14, with a greater impact for 'affluent' groups

Whilst the cost of financial advice may be a prohibiting factor for some, the results show that the benefits can outweigh the initial and ongoing costs.

Whether you choose to receive ongoing advice, with regular reviews, or advice at key moments in your life, both can be useful. For example, you may choose to review your finances with a professional when you start a family or as you approach retirement. However, the research found that individuals who saw a financial adviser several times throughout the research period had nearly 50% more pension wealth on average than those that seek advice only once.

Financial advice can help you make the most of your wealth and put you on the right path for achieving aspirations.

The Non-Financial Benefits Of Advice

The research clearly highlights why financial advice can be useful in terms of growing your assets and pensions. But it's far harder to measure the non-financial benefits. Often, these are intangible, but they can be just as important as the increased value of assets.

Among these benefits are:

Time-Saving: Ensuring you're getting the most out of your money can be time-consuming. You may not have the time or inclination to keep track of your investment performance, forecast your pension income or find the best place to put cash savings. Working with a financial planner can take these responsibilities out of your hands. Your time is valuable and by handing over some of the financial decisions and research to an adviser, you're able to focus on what's most important to you, whether that's your career, family or something else.

Confidence: Financial decisions can have long-term impacts. As a result, it's not surprising that some people can feel apprehensive about their decisions or worry that they've made the wrong choice. Having someone to talk through your decisions and the different options can provide peace of mind. Knowing that a professional has looked at the pros and cons can give you confidence, knowing you've picked a path that's right for you and your goals.

Security: Often when we make financial plans ourselves, we forget to look at what will happen if something doesn't go to plan. Would you still be on track if your income were to stop for six months? Could you still leave an inheritance if care were needed? As part of the financial planning process, we'll help you consider what kind of safety net can provide you with security. For some, this may be holding a greater portion of liquid assets, for others, it could include taking out some form of financial protection.

Keeping Up To Date With Changes: Legislation and regulation are constantly changing. If this isn't part of your job, it can feel impossible to keep up with these and know how to incorporate them into your financial plan. Working with a financial planner can take this weight off your shoulders. As part of your annual review, we'll explain how change has had an impact on your initial plan. You'll also be able to access advice if you have concerns following changes too.

If you'd like to review your financial plan or learn more about how advice can benefit you, please get in touch. Our goal is to create bespoke financial solutions that reflect your aspirations.


Bank Of England Base Rate: Why Does It Matter To You?

When it changes, the Bank of England base rate is something that's featured heavily in the news. But why is it important and when does it matter to you?

The base rate is the interest rate that the Bank of England sets, in turn, it affects the interest rates that banks, building societies and other financial services offer. The base rate changes depending on economic conditions and influences the way consumers behave:

  • Low interest rates mean that borrowing is more affordable, encouraging consumers to spend more. When interest rates are low, we're more likely to consider buying a car using finance or take out a larger mortgage
  • In contrast, high interest rates mean you'll earn more on savings and pay more when borrowing. As a result, it encourages people to save rather than spend

The Bank of England's monetary policy committee sets the base rate, with members voting to leave base rates as they are or change them.

How Has The Base Rate Changed Over Time?

In recent times, we've become used to low-interest rates, but this hasn't always been the case.

The current Bank of England base rate is 0.75%. It's been low for over a decade, following the 2008 financial crisis. In April 2008 the base rate was 5%. However, this was slashed several times over the course of a year in an effort to improve the economy and encourage consumers to spend and support businesses. In August 2016, it was cut even further, to 0.25%, taking it to a historic low. Over the last two years, it has increased but at a very slow pace.

Whilst we've experienced low interest rates for over a decade, this isn't the historic norm.

During the late 80s, the base rate was far higher. In fact, the interest rate reached 15% in 1989. There are many factors that led to this decision but one of the key reasons was that it was seen as a way to reduce inflation.

The current interest rate and that of the late 80s are extremes. Looking at the historical average, interest rates have usually fallen between 4% and 6%.

But how will the Bank of England base rate change in the future? It's impossible to say with certainty, but economic turbulence caused by ongoing Brexit uncertainty could mean that interest rates will fall even further; good news for borrowers but bad news for savers.

At the last monetary policy committee meeting in November, the base rate was held. However, it was the first time since June 2018 that this wasn't a unanimous decision. It could signal that the base rate will be cut further if the UK leaves the EU in a bid to support the economy.

The Impact On Your Finances

The base rate set by the Bank of England affects the interest rate commercial banks will lend money. It's used as a benchmark when lending to businesses and individuals.

Saving

You've no doubt noticed that savings have been benefitting from poorer interest rates over the last decade. If, since the financial crisis, you've been a saver rather than a borrower, you're probably worse off.

For much of the last decade cash savings are likely to have grown by only small amounts. In fact, once you factor in inflation, your savings have probably declined in real terms. This means the spending power of your savings has been reduced.

In the past, cash savings may have offered you a way to grow your wealth safely over the long term. But lower interest rates may now mean it's more appropriate to invest in order to outpace inflation.

Borrowing

In contrast, borrowers have benefitted from the low interest environment. It's cheaper than ever before to borrow money. The interest rates for credit cards, loans and other forms of borrowing are competitive.

One of the areas you may have noticed this in is your mortgage. Our mortgage is often the largest loan we'll ever take out and interest payments can be significant. If you had a tracker mortgage, which tracks the Bank of England base rate, at the time of the financial crisis, you'll have noticed minimum payments fell.

Lower interest rates make borrowing more affordable. They also present the opportunity to overpay and reduce debt quicker, whilst paying less interest.

The Bank of England base rate may affect the best way to use your money. At some point, it's wise to quickly pay off debt but in others, it can be more prudent to save or invest your capital. If you'd like to discuss how to get the most out of your wealth in the current low interest environment, please contact us.


The World In A Week

The World In A Week - Santa Claus, Here We Come...

Last week the sole focus for UK citizens and investors was the UK election. The Conservatives sealed a landslide victory, their largest in decades, which saw the Pound jump and the UK equity market rally; smaller and mid-sized companies were notable beneficiaries. In what has felt like an age of political stalemate, Boris will now have 100 days to deliver his budget; tax breaks for workers via a change in National Insurance have been promised and are expected to be confirmed in the first budget. The relationship the UK will have with Europe, however, is still unclear.

It was also a good week for US equity markets, which closed on a strong note following the announcement that President Trump wouldagree to a limited, dubbed Phase 1, trade deal with China, which would mean a hold on new tariffs that were due to take effect on 15th December. Most sectors rallied, the S&P 500 returned more than 0.5% while the Nasdaq edged up in excess of 0.75%.

As always, there is still much more information required around Brexit and the US-China trade negotiations, but markets typically like certainty and were generally more buoyant last week; with broad felt optimism we wish for a sustained Santa Claus rally.

It has been a great year for Beaufort Investment; we broke through £1bn in assets under management, we were the recipient of the coveted Money Marketing Best Discretionary Manager Award and our Active Model Portfolio service reached it's 15-year anniversary. In terms of performance, our Model Portfolios performed well, despite a difficult global geopolitical backdrop.

We would like to take this opportunity to thank our clients for their ongoing support of the Model Portfolios and the recently launched funds and wish you a happy festive period.

We will be taking a break from penning The World In A Week and will return on 6th January 2020.


The World In A Week

The World In A Week - Entering The Final Furlong Of 2019

The sustained rise in the value of Sterling vs other major global currencies was the main story of the last week from the perspective of a UK-based investor, much as it has been for the year to date. The US Dollar was down -1.3% vs Sterling last week (-2.8% for the year to date) while the Euro was down -1.1% (-6.1% for the year to date).

Mr Market clearly likes the idea of a Tory majority capable of passing Johnson's Brexit deal. We have not just seen this in the currency market, Global Bonds have outperformed Sterling bonds since we launched our MAB Funds in July and domestically-focused UK Equity has strongly outperformed firms listed in London but with little UK economic exposure over the same period. This is a strong reversal of the trends we have seen over the last four years.

Across other Equity asset classes, Emerging Markets and Japanese Equity have been the only positive contributors over the last month, but we should take this opportunity to reflect on how strong returns have been this year across both Equity and Fixed Income. The MSCI ACWI Index of Global Equities is up +19.2% in GBP terms, while the Bloomberg Barclays Global Aggregate Bond Index is up +6.5% when hedged to GBP. As investors, it is probably wise to brace ourselves to the reality that these exceptional returns across asset classes are unlikely to be replicated in 2020.


The World In A Week

The World In A Week - Much Of The Same

Politics, trade wars and mixed data took up headlines last week.

Away from politics in the US and Europe, Hong Kong's pro-democracy party won 85% of seats at the local elections, more than trebling the number of seats that they won in 2015. Turnout was also significantly higher at 71%, up from 47% in 2015. According to sources in Hong Kong, 17 councils out of a total of 18 will now be controlled by pro-democracy councillors. Local elections are normally of little interest, but these polls were the first time people were able to express their opinion over how the crisis in Hong Kong has been handled.

Several days later, and never one to be out of the limelight for long, Trump defied China when he signed the Hong Kong Rights & Democracy Act into law; the agreement effectively supports demonstrators and was condemned by China's foreign ministry. In recent weeks, the US-China trade deal was on target to reach phase-1. However, Trump's latest move will likely strain relations, making it difficult to finalise a trade truce. Regardless, the US equity market hit another all-time high.

Data in China last week was broadly positive, providing a fillip to global equity markets; one pocket of disappointment was industrial profits, which fell to 9.9% on an annualised basis, the worst contraction since 2011. Retail sales in both Japan and the US showed signs of weakness; in Japan sales fell c.7% year-on-year following a VAT hike. European data bucked the trend; manufacturing showed signs of stabilisation and French consumer confidence was better than expected at 106.


The World In A Week

The World In A Week - Pavlov's Dogs

Last week gave us nothing new to ruminate on; it was a week of recycling the same political stories of trade deals, impeachments and elections.

The stock markets around the world reacted favourably to constructive discussions around the 'phase one' trade deal between the US and China. We find It interesting to note how the same piece of news can continue elicit positive stock market reactions. The two dark linings to this silver cloud are the proposed 15% tariff hike on $160 billion of imports from China, set for 15th December, and the bill passed by the US Senate that requires the US State Department to annually assess Hong Kong's autonomy.

The latter has drawn criticism from China, who have threatened retaliation if the bill becomes law, although they have not confirmed in what form the retaliation will take. The former does seem less of a stumbling block and could be used as an important distraction for President Trump, as the impeachment process continues unabated.

Two weeks of impeachment hearings have certainly been damaging for President Trump, with claims from witnesses that he pressured Ukraine to probe his potential political opponents. It is clear the Democrats are keen to impair the presidential election campaign for Trump, but it is also clear that this episode has solidified the Republican support for him.

In the UK, our own general election went up several gears, with televised debates between the main political parties and the launch of their manifestos. Now the dust has settled, not much has changed in the polls. According to YouGov Labour supporters favour Corbyn, while Conservative supporters favour Johnson. Those floating voters remain floating.

Experience has taught us not to make early conclusions, as with past elections and referendums, the polls have been a poor indicator of the actual outcome. We still have 17 campaigning days left until voting day and the doors behind this year's advent calendar are sure to have some surprises.