Beaufort Analysis 278 - Indian Summer
Just over a week ago we experienced low temperatures and monsoon-like weather; fast-forward and the UK experienced the hottest May Bank Holiday on record, with temperatures soaring close to 30C. An Indian Summer is a period of unseasonably warm weather and a reference we feel appropriate to apply to the warming relations between North and South Korea.
Last week, we wrote about North and South Korea who continue to build on their union. Further integration came on Saturday when North Korea moved their clocks forward by 30-minutes to bring them in line with South Korea. Integration also extended on the sporting front, with North and South Korea sending a unified team to the World Table Tennis championships over the weekend. These are small, in the case of Table Tennis, but significant steps, in the case of aligning time zones. Sport has a history of bringing people together and we continue to monitor ongoing negotiations with interest.
Last Tuesday marked the official second longest US economic expansion in history, comprising over 160 years of data and 34 business cycles. If the current momentum continues in to 2019 and passes July, it will mark the longest expansion in US history. Whilst March was a trying month for markets, April was markedly better, with positive earnings data coming from most sectors although technology and financials very much continue to lead the way. Commodities surprised to the upside; wheat was the best performer returning +13%. Brent Crude rose +8.5% and West Texas Intermediate, +5.6% in April, breaching new multi-year highs as the demand/supply dynamics in the oil market approached a more level position.
Brexit negotiations continue to receive push back from the EU regarding the Irish border. The UK's Brexit Secretary, David Davis, told Parliament that it could take years to put practical measures in place to resolve border issues. Despite this, Davis does want a very substantive agreement on future relations with the EU by October, leaving him five months to thrash out further detail.
The week ahead is relatively quiet in terms of data releases, however, there will be several addresses from key economic leaders throughout the week.
Beaufort Analysis 277 - The art of the deal
How times change. Six months ago, you may have expected our weekly missive to be focused around Donald Trump and Kim Jong Un, as the two leaders jousted and postured in what seemed an unlikely series of threats. Since then, we have moved away from mutually assured destruction to something that seemed as equally far removed from the probable: the declaration of the end of war between North and South Korea.
On Friday, the North Korean leader Kim Jong Un walked across the military demarcation line which divides the Korean peninsula and was greeted by South Korean president Moon Jae-in. The summit marks the start to the end of the ceasefire that has plagued the two countries since the end of the Korean war in 1953. More importantly, it reaffirms both countries commitment to complete denuclearisation and establish a new peace regime.
Although lacking in any detail, the pledge has already seen North Korea promising to close its nuclear test site next month and permit foreign inspections of the facility. As the two sides look to build on the momentum of their historic summit, there is optimism around further talks, in particular the significant meeting between Donald Trump and Kim Jong Un.
Although hugely momentous, the markets are unlikely to be that interested, such is the nature of investing. Of more importance to the stock market is the hopeful end to another war: the Trade War. There is a risk that President Trump will change his mind on taxing US consumers of European aluminium and steel, which saw German Chancellor Angela Merkel hurriedly jet off for a meeting at the White House. Re-imposing taxes on aluminium and steel matters to both US and European markets. While welcoming European guests to discuss trade, President Trump is sending his own delegation to China to negotiate on tariffs.
One deal that has already been agreed before anyone knew it was happening, is the proposed merger between UK grocers Sainsbury's and Asda. The combined entity will create the UK's largest grocer and although both brands will be maintained, the economies of scale of the increased pact will mean improved purchasing power and the potential of Argos branches inside Asda. This is expected to generate in the region of £500 million of synergies, with the collective capturing more than 31% of the market. Nothing is certain though until the competition watchdog has pawed over the details of the deal, however there is recent precedent with the Tesco's takeover of Booker, which was not blocked. Both Tesco's acquisition and the merger between Sainsbury's and Asda could be seem as a defensive move against both the discount German supermarkets and the global disruptor that is Amazon.
Beaufort Analysis 276 - It's all in the numbers
Markets were resilient last week despite a chemical weapons attack on Syrian civilians over the weekend prior. The co-ordinated efforts of the US, the UK and France, who jointly targeted Syria, in response to an alleged chemical weapons attack on Syrian civilians had little impact on global equity markets with the majority closing in positive territory.
There was a myriad of data releases last week. Key releases were US retails sales, China GDP data and UK inflation.
US retail sales rebounded in March following three consecutive monthly declines, buoyed by big ticket purchases such as motor vehicles. Whilst US consumers, who account for two-thirds of economic activity, continue to support the economy, business confidence has started to show some fragility in the light of recent market volatility.
China's GDP data for the first quarter of the year surprised to the upside, growing at 6.8% year-on-year, 0.3% ahead of the Government's target of 6.5%. Whilst this is positive news, the future growth of GDP will be dependent on China's ability to continue to trade globally; should trade tensions between China and the US escalate, both economies will face harsher business environments.
UK inflation data was the focus of last week dropping to a one-year low of 2.5%. The surprise fall will take the pressure off the Bank of England to raise interest rates in May. UK inflation has been as high as 3.1% in January of this year, with the International Monetary Fund warning governments to get a handle on their finances as global debt levels have now surpassed those of the financial crisis.
Looking forward to the week ahead, there will be several key economy data releases with the highlight being the ECB meeting on Thursday.
Beaufort Analysis 275 - Tension Ascension
Geopolitical developments took a potential turn for the worse at the end of the week as tensions heightened between the US and Russia in the wake of the US-led missile strikes on Syria and the latest round of US sanctions. President Trump had warned the Assad regime and its allies earlier in the week that they would pay a 'big price' following the suspected chemical attack in Syria which left over 70 people dead. Russia, which had already seen its main index fell 11% following the US' sanctions on oligarchs and companies linked to Vladimir Putin, urged the US to avoid military action. The rising tensions lifted the price of oil to over US$70/barrel; a 50% increase from last June and a level not seen for three years.
Global trade grew at its fastest rate for 6 years in 2017, according to the World Trade Organisation (WTO), and the outlook is positive, but only if tensions between major economies do not escalate into a full-blown trade war. The tariffs imposed by Donald Trump on aluminum and steel from China kicked off a chain of retaliatory measures leading to China recently responding with its own tariffs on 128 US imports, which included soybeans, pork and fruits, aimed at crippling the US agricultural sector. In an attempt to put pressure on China, the President is now considering rejoining the Trans-Pacific Partnership (TPP), the organisation he withdrew from when he came to office, which resulted in US farmers being deprived of preferential duty rates with other members. The 11 members of the TPP would welcome back the US but only on their terms. In the meantime, analysts believe that China could use monetary policy to devalue its currency, thus making Chinese exports cheaper for Americans and mitigating the effect of the tariffs.
Needless to say, markets have seen continued volatility over the last few days but ended the week more than 1% higher. So far this year, the S&P 500 Index has either risen or fallen more than 1% in one day no less than 28 times. There were just eight similar sessions during the whole of 2017. The last time such volatility was witnessed at this point of the year was in 2009. The FTSE 100 Index has already recorded 15 daily movements of more than 1% compared to a total of 16 for 2017. Contributing to the weaker performance of the FTSE 100 has been the strength of sterling to the US dollar which currently stands at its highest level since the result of the EU referendum.
UK homeowners more financially stable than other countries
UK adults who own their home are less vulnerable to financial shocks than those in other countries, according to HSBC.
Financial resilience
The UK has the second lowest number of people who would struggle to cope if mortgage interest rates increased by 2%; worldwide, 22% of people would face instability should interest rates rise, in Britain, it is just 16%.
Even a 5% rate rise would only negatively affect 35% of the UK's homeowners, compared to almost half (47%) of the global population.
Big spenders, bad savers
The study also shows that, on average, UK mortgage holders spend 34% of their monthly income on repayments, 4% below the global average. However, despite the tendency to spend large amounts on housing, many people looking to buy a house will struggle to save a large enough deposit. Globally, 80% of prospective homebuyers find saving a deposit to be difficult, compared to 84% of people getting ready to buy in the UK.
Despite this, current UK homeowners take an average of just four years to accumulate their deposit. While the worldwide average is a year longer, and French buyers spend around seven years saving.
One of the reasons behind the length of time people spend saving is growing deposit aspirations; 69% are planning to put a 20% deposit down. The main source of this money is regular savings at 78%.
So, whilst buying a house in the UK might be tough, it is comparably easier than in many other countries.
How interest rate rises affect homeowners
Tracie Pearce, HSBC UK's Head of Retail Products says:
Interest rates have been at historic lows for many years, and many people who got onto the property ladder in the last decade have never experienced anything else. In fact, the recent increase in the UK's Bank of England Base Rate would be the first time they have seen one.
Many home owners are heading into uncharted territory having entered the housing market with record low mortgage rates. They may have taken out a fixed rate that is due to come to an end or are on a Tracker rate and will possibly see their rate creep up over time.
While it is positive to see UK homeowners' resilience and confidence in their finances, it's important they are conscious of potential interest rate rises and how they might affect household budgets.
Preparing for a financial shock
The research shows that 41% of people are willing to stretch themselves financially to buy a better home. Consequently, leaving a larger safety net in place is sensible, because without it, the smallest financial shock could leave you in danger of:
- Being unable to make mortgage payments and potentially losing your home
- Falling behind on essential costs, such as household bills
- Falling into debt and negatively impacting your credit score
- Needing to borrow from friends and family to make ends meet
There are two forms of financial protection which can make riding out an income shock, or interest rate rise much more manageable:
1. An emergency fund
Emergency funds can be used for all kinds of financial trouble, from a broken-down car, to home repairs, or even to cover the costs of medical equipment after an accident.
Put simply, an emergency fund is money which can be used if your income cannot cover an essential expense. It is recommended that this fund is equal to three-to-six months of living costs just in case your household unexpectedly loses an income.
This will also provide a buffer if your interest rates rise more sharply than expected.
2. Insurance
The purpose of insurance is to pay out when something goes wrong. It is something that you never want to need, but you always need to have. There are three types of insurance to consider, which will protect you and yours from the financial implications of ill health or death:
- Life Insurance: Pays out a lump sum if you die of an illness which is covered within the terms of the policy
- Critical Illness Cover: Pays a lump sum or income upon diagnosis of a serious illness
- Income Protection: Replaces a portion of your income if you are unable to work due to illness or injury
The importance of financial planning
Taking financial advice and having a clear plan of action surrounding your finances can keep you financially confident and stable, no matter what trouble you may face. A good financial plan will include safeguards to protect you and your family, should the unexpected become reality.
To talk about the best ways to reinforce your family's financial stability, get in touch.
Are you in a financially compatible relationship? And does it matter?
Almost two thirds (60%) of people believe that financial compatibility is one of the most important factors in a successful relationship, according to Scottish Widows.
But what is financial compatibility?
Like any part of a relationship, financial compatibility is multi-faceted and will look different for every couple. However, the research states that incompatibility includes a lack of shared financial aspirations and different attitudes to spending and saving.
Signs of financial incompatibility
You may be in a financially mismatched relationship if:
- You wish your partner was better at saving
20% of people feel this way and it could be a sign of differing priorities where money is involved. It may also signify that you see the future differently to one another, if one of you values spending over saving, you're likely to feel the friction.
- You feel like your savings have been impacted by your partner's spending
Being unable to reach your financial targets can be frustrating, especially if the reason is your significant other. This feeling is shared by more than a quarter (27%) of people and rises to 41% for couples who are working toward living together.
- You have a lack of shared financial goals
The feeling of taking different approaches to finances can easily put a wedge between partners. 17% of people have felt that they and their partner have different financial goals and that their relationship has been strained as a result.
Communication could be the key
A lack of communication and shared planning could be the main reason why so many people feel that their partner's attitude towards finances is so different from their own.
The research shows that people who form relationships in later life are more likely to discuss finances from the beginning, with 34% of over-55s doing so, compared to just 8% of 18-to-34-year-olds. Furthermore:
- 11% of people do not tell their partner how much they earn
- 57% of people don't know how much their partner has in the bank
- 25% of married people admit to keeping money separate from their spouse's
So, more communication is necessary.
Should financial incompatibility be a deal breaker?
Not necessarily.
However, it may simply be down to a need to talk more openly and communicate with one another. It is nonsensical to expect your financial aspirations to be perfectly aligned if you have never sat down and discussed how you think money should be treated.
Catherine Stewart, retirement expert at Scottish Widows, said:
It's important that couples - at any age - have open and honest conversations about their finances to make sure they have an understanding of their individual longer term financial goals.
Some people may be more inclined to focus financial conversations on big life events like buying a house, having a family, or taking time out from work to travel together. Life after retirement should also be on this list; having a good understanding - early on - of each other's retirement goals will help to ensure couples can work towards a realistic joint financial plan.
A meeting of minds
Creating a joint financial plan is an important step in any relationship. It could be signal of commitment, or that big changes are planned. Either way, the simple act of talking about your finances, both as individuals and as a couple, will strengthen your bond and give you the opportunity to address any differences of opinion.
Speaking to a financial planner or adviser as a couple will give you the opportunity to combine your goals with professional insight into the strategies and methods available to help you to achieve them.
For more information, or to speak to a financial planner or adviser, get in touch.
Beaufort Analysis 274 - "Seeing The Wood For The Trees"
The S&P 500 took a small hit at the end of last week, following China's refusal to negotiate with the US to try to ease trade tensions. There are currently 1,500 items on a list that could be affected by the tariffs, including soybeans and cars. Soybeans are particularly important to worldwide agriculture, as they are crushed and used as livestock feed; but the global supply is not enough without the US, so China would struggle without this crucial import. Whilst the movements in the markets are small, the continuing bickering between the US and China could escalate leading to increased volatility. China's President, Xi Jinping, is expected to deliver a speech this week at the Bo'ao Forum for Asia regarding economic reforms in his country.
The US and North Korea have been holding talks in preparation for a summit to converse about the possible denuclearisation of the isolated nation. However, North Korea does have a history of backtracking and it is not clear what The Democratic People's Republic aims to achieve with the denuclearisation and talks with the US; and neither has a date or location been set for the discussion.
Last week was the deadline for companies with over 250 employees to publish their wage data for all staff, to show the difference in hourly pay between men and women. The average UK pay gap for these 10,000 companies that reported their pay data is 9.7%, with the worst industries including construction, finance and education. The data shows, at a top-level view, that there are more men in the workplace, and those men tend to be paid more often because of their more senior roles at work.
Despite the negativity around the media reports on the above, these events offer the opportunity for green shoots of growth and development globally.
Beaufort Analysis 273 - Too big to fail?
The book written by Andrew Ross Sorkin, Too Big To Fail, in 2010 and later adapted for a film of the same name, was the inside story of how Wall Street and Washington fought to save the financial system during the Global Financial Crisis. One of the lessons from the Crisis was that some banks proved too big to fail and the fears of systemic collapse pushed both regulators and governments into bailing out hundreds of failing financial institutions.
Not quite the same, but still in the mindset of too big to fail, we have Big Tech. Technology companies were the darlings of the stock market last year, with the FANGs* in the US and the BATs** in Asia, commanding the largest share of global returns. Some of these companies have become so large that investors have become fearful of a growing political backlash, with threats of increased regulation and taxes, which until now, did not seem to have a meaningful catalyst. Until now.
The trigger for the backlash that has spread through the leading tech stocks and been firmly laid at the feet of the trade tantrum between the US and China, leaving investors facing an uncomfortable, albeit familiar story: nothing is forever and the invincibility of Big Tech can no longer be taken for granted.
The current political climate has not helped matters: there are fears of a White House personal vendetta against Amazon, and a massive leak of personal data from Facebook, has led to Big Tech being on the receiving end of huge losses. Amazon tumbled almost 6% on the back of the latest Trump tweet, this time focusing on their agreement with the US Postal Service and threatening to level the playing the field with an increase in tariffs. Why pick on Amazon? Jeff Bezos, the president and founder of Amazon also owns the Washington Post, which has led much of the reporting about the recent chaos in the White House.
Another FANG member, Facebook, has seen its value drop almost $75 billion as a result of the data of 50 million users being leaked to a data analysis firm, which was allegedly used to help the Trump presidential campaign. This has created a wave of annoyance among investors, peers and politicians, with other Big Tech companies distancing themselves from the Zuckerberg brand. In particular, Apple's chief executive was openly critical of Facebook's monetisation of its customers and Google's artificial intelligence expert, François Chollet, tweeted about their use of digital information as a psychological control vector and totalitarian panopticon. In plain English, he sees Facebook as 'Big Brother' in the way they capture and manipulate personal data.
Outside of the FANGs we have an even more sobering story. Tesla is being investigated for a fatal crash involving one of its self-driving cars and their share price dropped more than 7% when markets opened in the US yesterday. March has been the worst month for Tesla in 7 years, with continued negative headlines around its finances and now the news of a fatal crash seeing the company fall more than 30% from last year's high; that translates to over $22 billion wiped from Tesla's value. In what many have seen as brash and offensive, chief executive Elon Musk posted an April Fool's joke, posing for a photograph with Bankwupt! scrolled on a piece of torn cardboard. Not what we would expect from someone who relies on investors to believe in the company's expansion plan without profits in the short-term; Tesla posted a loss of almost $2 billion last year.
This tide of bad news for the Big Tech is good news for short sellers, investors who sell shares they do not own (a form of derivative usage) in the hope that prices will fall, from which they profit. It can be a risky investment strategy, but that has not stopped the FANGs now appearing in the top ten of most shorted US stocks.
It is unnerving to see the market fall this fast on what seems to be news that is not going to change the global economic outlook. It is an example of having to hold your breath while the short-term sentiment passes, if your long-term view on the economy has not changed.
*Facebook, Amazon, Netflix and Google.
**Baidu, Alibaba and Tencent.
Spring Statement: An update for EIS and VCT investors
The recent Spring Statement included an announcement that the government will consult on how venture capital investments in start-up companies can be structured.
Venture capital schemes, including Venture Capital Trusts (VCTs), Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS) deliver capital to start-up and small businesses while, subject to certain rules, investors qualify for tax-relief on their investments.
Patent Capital Review
The announcement comes after the government published the Patent Capital Review, aimed at unlocking £20 billion of long-term investment in innovative UK businesses, via venture capital schemes.
The new consultation is primarily aimed at understanding the funding requirements of innovative, knowledge-intensive companies, as well as how a new way of structuring Enterprise Investment Schemes (EIS) might work.
The 'Financing growth in innovative firms: Enterprise Investment Scheme knowledge-intensive fund consultation' document issued by HM Treasury said: The government sees the venture capital schemes as being increasingly focused on growth and innovation in the future. Evidence gathered during the consultation suggested that knowledge-intensive firms - which have high growth potential but are R&D - and capital intensive - have the most difficulty obtaining the capital they need to scale up. The EIS and VCT schemes are therefore being significantly expanded for knowledge-intensive companies. The government also announced that it would consult on a new EIS fund structure aimed at improving the supply of capital to such companies.
One of the ideas under consideration is to provide additional incentives to investors, including the possibility of exempting, rather than deferring, the gains on other assets when investments are made into an EIS.
However, it is understood that the government is not considering introducing a new EIS structure, reducing the three-year minimum holding period for EIS investments, or increasing the tax-relief available to investors.
VCT and EIS Tax-relief
Subject to certain criteria VCT, EIS and SEIS investments attract tax-relief, making them popular with those investors prepared to accept the significantly higher levels of risk associated with this type of investment.
VCT investments qualify for upfront tax relief equal to 30% of investments made in to new shares. If the investment is sold within five years, the tax-relief must be repaid.
EIS and SEIS investments qualify for tax-relief of 30% and 50% respectively. However, they must be held for at least three years, otherwise the tax-relief will be withdrawn.
Furthermore, gains on VCT, EIS and SEIS investments are exempt from Capital Gains Tax (CGT) and further relief is available if the investment is ultimately sold at a loss.
There are limits on the maximum tax-relief that can be claimed on VCT, EIS and SEIS investments.
Speak to us
The consultation closes on 11th May 2018, and more information can be found by clicking here.
If you would like to know more about the government's consultation or the tax benefits of investing in a VCT, EIS or SEIS please contact us, we'll be glad to help.
Divorce: Why you might be paying the price for decades to come
Getting divorced is an expensive process.
It can also take years, or even decades to fully be free of the effects.
During the process, you are likely to be affected emotionally, physically and financially, but over time, the first two effects will lessen. Unfortunately, the financial effects are often the slowest to heal.
According to research from Prudential:
- The annual income for divorcees is £3,800 less than those who have never been divorced.
- 23% of retirees will take significant debts into retirement with them, compared to 16% of non-divorcees.
The good news is, whatever the circumstances surrounding your divorce, it is possible to get yourself into a financially stable position again.
Richard Collins, Charles Russell Speechlys Family Law Partner, says:
We are beginning to see many more people divorcing just prior to, or during retirement. These decisions can only be made easily if there is proper financial provision in place for both spouses' retirement.
The fact that divorcees tend to have lower debts than their married counterparts may be down to the courts encouraging a clean break between divorcing couples where a clean break is affordable.
This allows divorcing couples to regain control over their own finances and consider how they want to plan for their separate futures. Many divorced couples re-evaluate their spending and finances after divorce and take this opportunity to build a stable financial future for themselves including growing enough pension provision for their retirement.
I've seen people post-divorce relishing their independent financial status and seizing the opportunity to make financial decisions for themselves, knowing that they are building up wealth and securing their future.
Your first priorities should be:
- Housing
Having somewhere to live in the short and long term is the most vital thing to consider when separating or divorcing. If you are staying in a shared home, will you be able to afford the payments now you are alone?
You may be entitled to support or state benefits to help you to find affordable housing and stabilise your finances.
- A financial safety net
One of the best ways to improve your financial stability, is to build up a financial buffer or safety net. Ideally, this should be equal to three-to-six months household expenditure. Try to hold your emergency fund in an instant-access account, even if that means compromising on interest rates.
At this point, it is also worth updating your will, as divorce will render your current one invalid.
Top tips for maintaining your financial stability during divorce
1. Handle the process practically
Don't rush into decisions. It is understandable that your head will be ruled by your heart at a time like this. However, financial decisions can affect you for life, so it is vital that you allow your sense of logic to step in and override any rash commitments you may be tempted to make.
To give logic a fighting chance, it may be worth discussing your ideas and thought processes with a friend or family member you trust.
2. Get your paperwork in order
Take care of your current obligations first, whether that's cancelling payments, changing your address with your bank or updating your nominated beneficiaries on your life insurance. Most of these can be done over the phone or online and, whilst they are small tasks, they can often feel very important and will give you a sense of accomplishment and control.
3. Re-evaluate your goals
What you want out of life may have changed since you last thought about your finances. During a calm moment, you should think carefully about what you want your life to look like and your ideal financial situation. Make some notes as you rediscover your priorities and keep them in a safe place; you will need them again.
4. Prioritise financial protection and retirement
If you haven't already invested in insurance, now is the time to take out Life Insurance, Critical Illness Cover and Income Protection. If you are living alone, or have dependants, the peace of mind is worth it.
Once the immediate threat of emergency is covered, it's time to think more long-term. Research has shown annual income is less for divorcees, but how can you avoid letting that affect the quality of your retirement?
You have three options:
- Making up the shortfall with bigger pension contributions.
- Accepting that you will have less to live on and adjusting your lifestyle accordingly.
- Staying in work for longer to earn more money and continue to build your pension.
Of course, you may have had plans to grow old with your ex and gracefully mature together. Now you have the opportunity to rethink that plan and replace it with your own aims and desires. Think about what you want your retirement to look like, then use a retirement income calculator to determine how much you will need to save to achieve it.
5. Make a plan
Now that you know what you want and what you need to get there, you can begin to put a plan in place to make sure that you keep your finances on track. To do this, you will need to find ways to bridge the gap between your current circumstances and your desired lifestyle. Which may seem impossible, but there are many options to consider.
Of course, if you would prefer the hard work to be done for you, you could consult an independent financial planner…
6. Consult a professional
Independent financial advisers and planners are experts at finding the solutions and strategies to bring you closer to your financial goals.
The main benefit of talking to a professional is the knowledge that they are clued up on the many types of product available and will have access to knowledge that you will not. That means that you can be secure in the knowledge that the products and methods suggested are the most suitable for your circumstances.
To rebuild your financial stability and confidence, get in touch.