The World In A Week - Hot summer and cold winter

Written by Cormac Nevin.

Markets continued to stage a broad-based recovery last week, as returns for June continue to be strong in what has been a challenging year to date. The MSCI All Country World Index returned +1.5% last week in GBP terms and was assisted by a rebound in global growth equities. Bonds also rallied as treasury yields fell, and even riskier high yield bonds rallied strongly.

While the debate regarding whether we will see a recession in the US this year is ongoing, it appears more likely that this will come to pass in Europe sooner rather than later. Measures of business confidence have fallen to lows not seen since the depths of the COVID-19 market selloff over 2 years ago. Germany in particular is being hit particularly hard by soaring energy costs due to its reliance on Russian natural gas. Inflation in Germany has risen to 8.2% in June, and is also putting a major squeeze on consumer incomes. In addition, the recent dry spell has reduced the water level on Germany’s main rivers which has caused shipping disruptions on the Rhine.

In Italy, the Eurozone’s third largest economy, the spectre of political uncertainty has returned. Mario Draghi resigned as the Prime Minister last Thursday which triggered the dissolution of parliament after three of the largest parties in parliament boycotted a confidence vote in his leadership. This led to a sell-off in Italian debt, and cost of borrowing vs German debt costs has been widening in what is a heavily indebted economy.

There is now a scramble across Europe to build up stores of energy in advance of winter, as it is not apparent how much energy Russia will be willing or able to provide given the ongoing war in Ukraine.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 25th July 2022.


The World In A Week - Point of impact

Written by Millan Chauhan.

Last week, we saw central banks implement another interest rate increase as they attempt to slow down inflation.  In theory, the effective implementation of a higher interest rate depends on how swiftly savers and spenders change their consumption behaviour.  Savers will now be financially compensated and spenders may reduce their consumption levels, especially at company level where borrowing becomes more expensive with higher interest rates. Reduced consumption and demand for goods and services will therefore begin to slow down inflation, but there is a time lag associated while consumer and producer behaviours adjust to the new information.

The Federal Reserve implemented a 0.75% rise, 0.25% above expectations. In the US, the likelihood of a 0.75% raise was priced in at 2% until last Monday when the Wall Street Journal reported that officials from the Federal Reserve were weighing up the possibility of a 0.75% rate rise. Higher mortgage rates are often a very direct consequence of rising interest rates and last week US mortgage rates surged to their highest levels in 35 years with the 30-year fixed rate jumping to 5.78%.  In the UK, the Bank of England raised rates by 0.25%.  As expected, we have begun to see banks and building societies raise their main fixed-rate mortgages as the market expect further rate rises beyond the current interest rates of 1.25%. The Bank of England also announced that it expects inflation to increase further beyond its current level towards 11%.

Global equity markets sold off last week, following the news of the Federal Reserve’s more aggressive stance on interest rate hikes, with MSCI ACWI returning -4.5% in GBP terms. Some sections of the global investment universe remain more sensitive to interest rates and it is most critical to hold a diversified portfolio as the macroeconomic landscape continues to change.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 20th June 2022.
© 2022 YOU Asset Management. All rights reserved.


The World In A Week - Walking the tight rope - Part II

Written by Shane Balkham

Economic data was mainly centred around the UK last week, with the latest inflation, confidence, and employment data being published for April.  The inflation rate for April came in at 9%, which was slightly below the market expectation of 9.1%, but still at a 40-year high, and it was the first month since the end of 2021 that inflation data has been lower than expected.  The monthly increase from March of 2.5% was primarily driven by the surge in energy prices as the domestic price cap was lifted by 54%.  Focus naturally moves to October, when the domestic price cap for energy is scheduled for a further rise.

To muddy the waters further, UK consumer confidence dropped to its lowest level in almost 50 years, driven down by the continuing rise in the cost of living.  The survey measures how people view the state of their personal finances and wider economic prospects, and certainly points to weaker consumer spending going forward.

It is ironic that official data showed UK unemployment falling to the lowest rates in almost 50 years to 3.7%.  In these circumstances, a strong labour market adds to the risk of higher inflation, as workers seek higher wages to combat the squeeze from the cost of living.

In the past, the Bank of England would have preferred to look through the supply shock in energy and commodity markets, however the strength of the labour market is at odds with this plan of action.  These data releases point to one conclusion and that is added pressure on the Bank of England to continue its plan of interest rate hikes in 2022.

The European Central Bank (ECB) is playing catch-up, due to not yet raising its interest rates.  Comments from François Villeroy, the Governor of the Bank of France, has created expectations of 100 basis points (1%) of interest rate hikes from the ECB for 2022.  His remarks about expecting “a decisive June meeting and an active summer” have led to the market’s conclusion.  The taming of inflation is the most significant risk to policymakers and next month’s meetings of the central banks will be closely monitored.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 23rd May 2022.
© 2022 YOU Asset Management. All rights reserved.


The World In A Week - Walking the tight rope

Written by Shane Balkham

Inflation concerns are still the hot topic for investors, politicians, and policymakers.  The US published its inflation data last week for April and it was a mixture of good and bad news.  The relatively good news was that the headline Consumer Price Index (CPI) fell from an annual rate of 8.5% to 8.3% and that core inflation, a measure that excludes certain volatile and seasonal prices such as energy and food, fell from 6.5% to 6.2%.

The bad news was that these data points were still higher than markets had expected.  The decline in used vehicle prices helped the reduction in core inflation, however services inflation picked up, showing demand shifting from goods to services.  It is the uptick in the stickier parts of the inflation basket that will be of greatest concern to the policymakers within central banks.  With the next policy meetings for the Federal Reserve and the Bank of England just four weeks away, one month’s worth of data showing a slight downturn will not be sufficient for policymakers to change their current course of interest rate hikes.

In the UK, the Bank of England Governor Andrew Bailey will be meeting the Commons treasury committee today, ahead of the UK’s inflation data which is due to be published on Wednesday.  Expectations are for April’s inflation data to show another sharp increase in prices and add pressure on the Government to help ease the spiralling rise in the cost of living.

Inflation has become a political hot potato and Governor Bailey can expect a hostile reception from MPs, who will want some reassurance that the independent central bank has control over the path of prices.  The Bank of England considers inflation to be less entrenched than in the US and that price rises will slow as the economy contracts later in the year.  That is a difficult narrative to promote when they also think that this temporary level of inflation has yet to reach its height of 10% in the coming months.

One country that does not have a rampant inflation problem is China, with headline CPI @2.1%, year-on-year for April 2022.  China’s core inflation dropped to 0.9%, evidence of weaker demand as China continues its zero-tolerance policy for COVID-19.  Retail sales have dropped over 11%, year-on-year in April, highlighting the toll that lockdowns are having on Chinese growth.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 16th May 2022.
© 2022 YOU Asset Management. All rights reserved.


The World In A Week - Not all doom and gloom

Written by Richard Warne.

It has been a gruelling start to the year for both equities and bonds, and it would be very easy to get despondent with all the negativity that persists. Topics that have and will continue to generate headlines have become familiar to us all; continued supply chain issues, inflation, rates, and the human cost of the Ukraine war. Amongst all this, there are some bright spots, though you would probably not have known it from recent share price actions. Globally, the Q1 earnings season has been remarkably strong, with 80% of US companies reporting and beating expectations. Unfortunately, even companies beating expectations and raising forward guidance have not been able to escape negative share price moves.

We did see good signs from companies like Airbnb and Booking Holdings, beating expectations into what is expected to be a busy summer for the travel sector. Though it is clearly not all plain sailing. From a macro perspective, it was concerning that the Zillow (US real estate company) forward guidance was weaker than expected on broader concerns for the housing market. Inventory levels have significantly fallen year on year, interest rates are surging, and housing affordability remains under considerable pressure with no signs of letting up.

Though we are clearly on the rate tightening path from central banks on both sides of the pond, it was encouraging to see Jerome Powell, Chairman of the US Federal Reserve, potentially ruling out a 75bps rate hike in the future and remain committed to a flexible yet well-telegraphed plan for tightening.

Investing is certainly never easy; time and patience tend to be your only friends in times of shifting sands for markets. Through all the noise and volatility we are currently witnessing, this often creates good opportunities. To quote the wizard of Omaha, Warren Buffett “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 9th May 2022.
© 2022 YOU Asset Management. All rights reserved.


The World In A Week - Fowl play

Written by Shane Balkham.

The release of October’s US consumer price index (CPI) data showed that prices rose at their fastest pace since 1990. This figure was above expectations and reflects the ongoing impact of supply shortages. US inflation now sits at 6.2% year-on-year and is looking less transitory with each monthly reading, while political pressure is building for policymakers to act more aggressively.

Not wanting to miss an opportunity to increase his beleaguered approval rating, President Biden used the sharp tick up in inflation to add pressure on Congress to pass his $1.75 trillion spending bill. Biden’s claim is that 17 Nobel Prize winners in economics have said that his plan will ease inflationary pressures. This has been countered by some Republicans who see a huge injection of spending will make matters worse. The partisan politics of the US are not getting any better, which adds further pressure on the President for his nomination for the next Chair of the Federal Reserve.

Earlier in the summer, Jerome Powell looked to have a second term secured, however some unpalatable trading from two senior officials has weakened his position. We know that he has had his discussion with the President, but last week Joe Biden also met with Lael Brainard, an incumbent Governor of the Federal Reserve. This is important, as a new head of the Federal Reserve is an unknown quantity and will affect the market expectations for interest rate rises next year.

2022 already looks to be a difficult year without the weight of a new Chair at the Federal Reserve. There is significant political tension for President Biden, coupled with the Midterm elections less than a year away, suggesting the decision is not as clear as it was a few months ago. Thanksgiving is next week, and the decision over the Chair of the world’s most important central bank was promised to have been delivered before then. At this point, Biden cannot afford to look like a Turkey.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 15th November 2021.
© 2021 YOU Asset Management. All rights reserved.

Rishi Sunak’s Autumn Budget: what it means for your money

The Chancellor, Rishi Sunak, has delivered the government’s Autumn Budget.

The measures contained within it set the tone of the UK’s finances for the next 12 months. And while there are some fresh measures in there, it is the distinct lack of action on many issues that may have the biggest effect on household finances.

Here are some of the big changes, and several things that weren’t touched, but will affect your finances.

National Insurance and dividend tax hike

Not announced in the Budget per se, but perhaps the biggest shift in government taxation in many years, National Insurance and dividend taxes face a 1.25% hike to help pay for health and social care.

The hike will add £130 a year to someone on an income of £20,000, while those on a higher income of £50,000 will see an extra £505 come out in taxes.

With the dividend tax hike there’s no tax to pay on the first £2,000 of earnings, but beyond that you’ll pay an extra 1.25% on top of the current rates. That means 8.75% for basic rate payers, 33.75% for higher rate payers and 39.35% for additional rate payers.

There were a raft of other personal finance-related measures including:

  • A hike in the living wage to £9.50 per hour
  • A cut to the Universal Credit taper rate to 55%
  • An alcohol duty reform to simplify the way beer, wine and other drinks are taxed
  • Fuel duty being frozen for a 12th year

But perhaps more noticeable was the absence of certain provisions.

What was missing from the Budget?

Sunak avoided making certain changes that are in and of themselves a form of taxation. There was also a distinct lack of help in regard to economic issues that are plaguing households at the moment.

Perhaps the biggest aspect of the tax system that Sunak left untouched was allowances. This has the effect of creating a form of stealth tax. But how does that work?

By leaving an allowance for say, Income Tax, at the same level for multiple years isn’t an out and out tax rise. But as the general earnings of the working population increase over time – be that from becoming more productive or purely to keep pace with inflation – it means progressively more and more people fall into the higher bands for tax purposes.

Take the example of Inheritance Tax (IHT). The banding of IHT has remained static at £325,000 for years. The Office for Budget Responsibility (OBR) predicts 6.5% of estates will be liable to pay the duty by 2026 – up from 3.7% in 2020. By simply ‘doing nothing’ the government is increasing its tax take over time.

The same is true for a raft of other allowances which remain static – from pensions annual allowances to ISA limits, capital gains tax and others. The more they stay the same, the more the government rakes in.

This is all more pressing than ever in the current economic climate, which is accelerating the issue, namely inflation. In order to keep up with inflation, households are having to seek higher earnings or cut their costs. Sunak did nothing to assuage inflation fears, despite hints he might cut the VAT rate on energy bills.

Overall, the impact of squeezing allowances and rising inflation could leave household incomes stretched for the foreseeable future.


NS&I Green Bonds – what are they, and is there a better alternative?

National Savings & Investments (NS&I), the government-backed savings provider, has launched its first ever green bonds.

So, what is the deal with these brand-new ethical savings accounts?

Anyone saving via the bond will receive 0.65% AER, fixed for three years. You can save a maximum of £100,000 but start with as little as £100 if you like. The money is locked away for a three-year minimum. Because it is a bond rather than an ISA, interest on the savings is taxable when the bond matures.

What’s green about them?

The bonds are the first directly offered to the public with a ‘green’ focus. The government, with climate change high on the agenda, has begun issuing green gilts to institutional investors, but saw the opportunity for private citizens to get involved as well.

The money raised for the green bonds will go directly towards investments in government green projects and initiatives. Any money the bonds raise will be matched by HM Treasury too.

At the time of writing, there is no further detail on exactly what projects this includes. But the government says it intends to update on this in due course.

How it compares

Savings rates are poor across the board at the moment. But even by these standards, ethical considerations aside, the NS&I green bond is an awful offer.

For a three-year bond the current top offer comes from JN Bank, which offers 1.81% interest over three years. This is followed by Zenith Bank at 1.78% and United Trust Bank at 1.75%.

Ultimately, then, the only reason why you should consider investing in the green bonds is if you are highly motivated to lend your money to the government to aid green projects.

What you should do instead

In reality, even the aforementioned savings rates are poor. The Bank of England recently warned that inflation is headed to 5% by the Spring, which means that any money growing by these rates is still losing value in real terms.

Instead, money that isn’t needed in the near future should be fully invested in markets. While the returns aren’t guaranteed, generally speaking, it is a better long-term approach to wealth growth.

Ethical considerations in investing are an increasingly popular and sought-after approach. Please do get in touch with your adviser if you’d like to learn more.

 

 


Rishi’s rising tax burden makes good wealth management a top priority

With the new Budget delivered by Chancellor Rishi Sunak, the tax burden on ordinary citizens of the UK is now at its highest level in 70 years.

From frozen personal allowances to National Insurance and dividend hikes, at no other time since the 1950s have we paid so much of our livelihoods to the state.

The ethical, political, and moral arguments around this are for a different blog, but there is an important overarching theme to respond to such changes – how to make the most of what we’re left with after the state has taken its levies.

Good wealth management has always been about making the most of your money in any given situation. If that situation changes, so too it is an adviser’s job to help you adapt to those shifts.

Just because the burden is now higher on paper doesn’t mean you can’t continue to benefit from good planning for your wealth.

Tax planning

A critical aspect of this comes down to good tax planning. Tax planning is a catchall term that describes several activities.

First and foremost is ensuring all your personal allowances are properly used. This includes everything from ISA limits to pension contributions and dividend allowances. Maximising your allowances is extremely important. The ISA limit is relatively generous and everything inside this is extremely favourably treated in tax terms.

Likewise, your pension has major contribution benefits in the form of tax relief. The issue for pensions is that tax treatment can become complicated when drawing down from your pot, making advice and rigorous planning essential.

There are longer-term considerations too, such as inheritance tax (IHT) planning. IHT is a booming tax that ensnares more and more households every year. While ultimately not ‘avoidable’, there are a series of allowances such as gifting and seven-year limits that let you give away wealth tax free.

Where planning comes in is through careful forecasting and management of your income and outgoings. Careful projection of how much you’ll need at any given age will be key in ascertaining how much you can give away early.

Investment

The other key aspect of good wealth management, which ultimately feeds from the above tax planning considerations, is how to grow your wealth once it is correctly sheltered.

Inflation, transitory or not, is running away at the moment. And while it may return to more typical levels later in 2022, the long-term 20-year average is still around 2.8% according to the Bank of England.

What that means is that your money has to work harder to grow in value or return an income that stays ahead of rising prices. This is a key area where good wealth management comes in to protect and grow your money via the stock market, bonds, and other financial assets.

The truth is, doing nothing is a disastrous alternative. Be it through taxes or inflation (often called a tax on saving), the forces looking to erode your wealth are too strong to ignore.

 


Cost of living

Rising bills: here’s what to look out for to keep you on financial track this winter

With the economy roaring back to life as we emerge from the pandemic, household costs are rising fast to meet rising demand for certain goods and services.

Building wealth, while a long-term priority, can be hampered if a family’s budgeting gets off track. With inflation rising - 2.9% according to the most recent Office for National Statistics data – and expected to peak above 4%, now is the time to take stock of your finances and look again at where you can save money.

Inflation isn’t the only current worry. The tax burden, as set out by the Chancellor recently, is set to rise to a 70 year high.

So, what can you do to rein in spending, or cut costs where possible? Here are a few ideas.

Energy bills crisis

The hike in energy bills has perhaps been the highest profile issue for households in recent weeks. Rocketing gas prices has led to the collapse of a slew of energy providers, while surviving firms have pulled any cheap deals available.

The days of energy switching to get a better tariff, are for now at least, over. This makes heating and electricity one of the standout cost rises households now face.

While households are protected by the energy bills cap, currently £1,277 per year, that could also be set to rise to over £1,500 in the Spring. It is essential then instead to look at how to cut the actual costs of those bills.

Basic measures should be taken to ensure your house is as energy efficient as possible. Draft excluders, radiator foils and even just turning the thermostat down a few degrees and wearing woolly socks can make a big difference.

Of course, if you’re older or not in perfect health, it’s not advisable to leave your house cold. If you’re in this position, making sure you have access to the Winter Fuel Payment could be a big help.

Cut unnecessary costs

Now is the time to look at your spending habits and decide if anything can be cut out. Gym memberships you don’t use, streaming services you never watch, delivery subscriptions you don’t maximise, should all go.

While taken individually these costs may seem minor, collectively and annually they can add up to thousands of pounds.

Another area where costs are rising are weekly food shops and dining out. Lowering costs in this area can be challenging, but it’s important to be vigilant with changing costs. Food prices can swerve up and down one week to the next, so having a spending limit and trying to stick within it is key.

Make your savings work harder

The more long-term aspect of the issue of rising costs is ultimately how to maintain wealth growth while keeping your saving levels up. Working hard to keep your costs under control is the starting point for being able to maintain good habits with regards to savings and investing.

Over and above that, ensuring strong wealth growth is essential too. Inflation is eating away at more of our savings’ value, so keeping money in low interest savings accounts is essential. Thankfully with good wealth management in place, this is eminently achievable.