Beaufort Analysis 266 - Letting the air out of the balloon
Investors have grown accustomed to global equity markets climbing to new highs, but last week was the first time, in a long time, that we witnessed a true return to market volatility.
Driven by rising inflation and an increase in bond yields, the VIX, a measure of market volatility, saw its biggest ever daily jump. In percentage terms, the index leapt +116% from +20.00 to +37.32; the last time we observed a significant jump in the VIX was when China devalued its currency in August 2015, this caused the Shanghai Composite to fall c.8.5% and a spike, albeit brief, in volatility. This increase in volatility remained elevated throughout the week with the VIX hitting an intra-day level of 50.30 midweek, before collapsing to low 20's and spiking again towards the end of last week, on the back of heightened market sensitivity to macro data.
Moving over to politics, Angela Merkel and the SPD have reached agreement to form a coalition government. Whilst this is good news for Europe and a result that could foster deeper EU integration, SPD members are required to approve the deal, which may not be as simple as it first seems. The US remains in partial shutdown, although progress has been made; the Senate have announced a 2-year budget deal and an extension of the debt ceiling until 23rd March. The deal was approved by the Senate and now requires approval from the House, again, this may not seem as simple as it first seems. Immigration remains a contentious issue in the US and some members are unlikely to back the bill unless open dialogue can be held around this thorny topic. Brexit negotiations remain muddled. The next key event will be a speech from Theresa May, in which she will outline the future relationship Britain wants to have with the EU.
We have continually highlighted over the last 6 months that the market will not move higher in perpetuity and that there is likely to be a pullback at some stage. We view the current volatility in the market as 'normal' and remind clients that inflation and rising bond yields are typical catalysts for markets to recede. However, we view recent market moves as healthy and believe letting the air out will allow markets to consolidate their gains, before moving higher, albeit at a lower pace.
Looking out to the week ahead, the main focus will be on US inflation data, which, should this show signs of softening, will provide a support level for markets. If not, we are likely to see further market volatility as markets adjust to a more normalised environment.
Beaufort Analysis 265 - A Bad Moon Rising?
Last week we witnessed a phenomenon not seen for 152 years; a Super Blue-Blood Moon Lunar Eclipse! The second full moon of January was not only larger than normal, it was a certain hue owing to the total eclipse as seen by some in North America, Australia and Asia.
It marked a week which saw most stock markets lose ground after their strong start to the year, with indices in Asia recording their worst falls since 2016. Both UK and US main indices fell around 4% over the week, with the Dow losing 666 points on Friday. The 10-year Treasury yield, which sets the cost of money for the world, has risen to 2.8%, it's highest level for 4 years, as US earnings grew at their fastest rate since 2009, driving speculation that the Federal Reserve will lift interest rates more aggressively. Rising bond yields are unsettling equity markets as returns from stocks look relatively less attractive due to their risk.
Manufacturing and construction in the UK has slowed since the start of the year. The Purchasing Managers' Index (PMI) showed lower readings and prices rising their fastest for 25 years, with car manufacturing in the UK falling for the first time since 2009. Construction activity reduced in 2017 as commercial and infrastructure projects came to an end and in January, housebuilding fell due to muted demand and supply, with approved mortgages by lenders now at a three-year low following the interest rate hike last November. The shortage of properties helped push house prices up 0.6% over the month. Consumer confidence, however, jumped by its largest margin in a year in January, although it is still lower than a year ago as with job security remaining a concern.
Meanwhile, Theresa May, while on a trip to China securing £9bn worth of new trade deals, had to rebuff criticism of her leadership and Brexit negotiations saying she is not a quitter. The Prime Minister insisted that European nationals arriving during the post-Brexit transition period will not have the same rights as those who arrive before, contrary to EU's insistence, and that she is committed to taking Britain out of the EU customs union.
Beaufort Analysis 264 - Now in 3D!
The centre of the economic and financial world was temporarily relocated to the Swiss Alps last week. The annual World Economic Forum (WEF), held in the alpine town of Davos, brings together the good and the great of politicians, economists and central bankers. For the first time in a decade, the mood and rhetoric emanating from Davos was cautiously optimistic. The International Monetary Fund (IMF) upgraded its forecast for world economic growth to 3.9% for this year and next, noting the ongoing strength of both Asia and Europe as key momenta for global growth. While the US tax changes will likely provide a boost over the short-term, the IMF warned that risks to growth remain over the medium-term.
One notable exception from last year's meeting in Davos was the then newly inaugurated US President. This year was different as Donald Trump decided to honour the proceedings with his presence. It was an uneasy encounter as under his supervision, the US is questioning the benefits of international co-operation and proclaimed its intentions of looking after its own interests. So while the WEF promotes international collaboration on security treaties, open markets and attempts to address such challenges as climate change, Donald, sets out to look after number one, even at the expense of longstanding allies.
Another hallmark of Trump's disordered administration has been the weakness of the Dollar. The negative sentiment towards the reserve currency of the world has been stubbornly persistent since the turn of the year. The recent US government shutdown, as written about in Beaufort Analysis 263, has clearly not helped matters, while the breakthrough in Germany's coalition talks adds more pressure from the Euro. This was compounded at Davos with the following comment from Treasury Secretary Steven Mnuchin: A weaker Dollar is good for us as it relates to trade and opportunities. It is extremely unusual for a Treasury official to make such a blatant a comment aimed at weakening their currency; the down side of this verbal coercion of currency depreciation, is a currency or trade war erupting.
The good news about Dollar weakness is that it loosens global financial conditions, so equity markets have been a main beneficiary. To think this weakness will continue indefinitely is dangerous. The yield on short-term US Treasuries now exceeds that on US equities and with the hunt for yielding assets continuing unabated, the demand for US dollar backed assets could reverse.
Beaufort Analysis 263 - Not open all hours...
The key story from last week was the partial shutdown of US government. Now in it's third day, the Senate was in session over the weekend and have proposed a short term fix which will extend government funding until 8th February; on the assurance that there will be a separate vote on legislations to protect child immigrants brought to the US. The Senate is likely to vote on this later today. There have been 18 government shutdowns in history, with the longest shutdown lasting 21 days. Historically, this has had little impact on markets and the latest S&P data is testament to this; the index has now passed it's longest period without a 5% pull back since 1928.
Whilst the US faces uncertainties, the same cannot be said for Europe. In Germany, Merkel has moved a little closer towards forming a coalition with the SPD with delegates voting 56% in favourof pursuing formal talks. It is thought that talks could start as soon as today and, if negotiations run smoothly, could be complete by early February. Horst Seehofer, leader of the CSU party stated that a new government could be sworn in by the first half of March.
Looking forward to the week ahead, the Bank of Japan (BoJ) and the European Central Bank (ECB) meet on Tuesday and Thursday, respectively. We do not believe there will be any change to policy but reiterate how central banks continue to impact upon the investment landscape.
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Seven changes you need to know about in 2018
As we head into 2018, with a new financial year a few months away, the government is preparing to introduce several changes. These will come into effect in April, and it is likely that you will be affected by at least one of them. Being prepared is the key to making the most of the changes and deadlines that are approaching.
To ensure that you are informed about the upcoming changes to allowances, savings and pensions, here are the seven biggest things you need to know about.
- Higher Lifetime Allowance
As inflation hit 3% in the second half of 2017, Philip Hammond announced in the Autumn Budget that the Lifetime Allowance would rise accordingly, from £1 million to £1.03 million.
The Lifetime Allowance dictates how much you can hold in your pension before tax charges are potentially applied. For example;
- 25% lifetime allowance charge applies to funds in excess of the Lifetime Allowance if they are placed in drawdown or used for annuity purchase
- 55% Lifetime Allowance charge applies to excess funds if they are withdrawn as lump sums
- Increased Personal Allowance
The Personal Allowance is the income you can receive each year before starting to pay Income Tax. It's currently £11,500 but will be increasing to £11,850 in April. That means that, during the financial year 2018/19, you can benefit from an extra £350 tax-free income.
The government has previously announced that they are aiming to raise personal allowance to £12,500 by 2020.
- Dividend Allowance decrease
Although the change was announced in early 2017, the dividend tax-free allowance will fall from £5,000 to £2,000 at the beginning of the next tax year. This means that business owners and contractors who work for a limited company structure will pay tax on annual dividends of more than £2,000.
- Auto-enrolment contributions increase
Automatic enrolment for all eligible employees into workplace pensions reaches its final stages for existing employers this year. In addition, the minimum contributions made by both employees and employers will rise.
Currently, both parties are required to contribute 1% of qualified earnings. However, from April, this will increase to a minimum of 2% from the employer and 3% from the employee. And will rise once again in April 2019 to 3% for employers and 8% in total.
- Help to Buy ISA / Lifetime ISA transfer deadline
Any deposits made into a Help to Buy ISA before April 2017 can be transferred into a Lifetime ISA (LISA), without impacting the annual Lifetime ISA allowance until 5th April 2018. This could give you a double bonus. You can put twice as much into your LISA this year, and still receive the 25% bonus when you buy a house or retire.
- Basic State Pension increase
Each year, the Basic State Pension increases in line with whichever is higher out of:
- The rate of Inflation
- Average Earnings growth
- 5%
This is known as the triple lock system.
In October 2017, inflation reached 3% and set the bar for the State Pension's 2018 rise.
If you already receive a State Pension, this is good news. Those people entitled to a full basic State Pension will now receive an extra £4.80 per week.
- Higher Income Tax rates in Scotland.
In the 2017/18 tax year, Scottish Income Tax rates for earned income are:
- Up to £11,500: Tax-free Personal Allowance
- £11,501 to £43,000: 20%
- £43,001 to £150,000: 40%
- over £150,000: 45%
However, from April 2018, proposals have been made to change them to:
- Up to £11,850: Tax-free Personal Allowance
- £11,850-£13,850: 19%
- £13,850-£24,000: 20%
- £24,000-£44,273: 21%
- £44,273-£150,000: 41%
- Above £150,000: 46%
This is quite a difference which will affect Scottish taxpayers at all income levels.
Making the most of the 2018/19 financial year
A lot of changes are happening at the beginning of the new financial year. So, make sure that you are informed and able to maintain your financial security when they come into effect. The three main ways to stay on top of your finances are:
- Staying informed
- Knowing how the changes affect you
- Seeking advice
For more information about how the new financial year could affect you, contact us.
2018: A big year for auto-enrolment
2018 marks 10 years since auto-enrolment was first debated in 2008. As the new financial year approaches, we look at what April 2018 has in store for workplace pensions.
What is auto-enrolment?
Introduced into law in 2011, auto-enrolment will be in its final roll-out phase this year. This means that, from April, eligible employees from all sizes of business should be included in a workplace pension (unless they have chosen to opt out).
Eligible workers are those who:
- Are aged between 22 and the current State Pension Age (which you can check here)
- Meet or exceed the earnings limit. This is currently £10,000 or more each year/£833 per month/£192 per week, but this is reviewed yearly and may to change
- Have a contract of employment (i.e. subcontractors and non-contracted partners will not count)
Employees who do not fit these criteria can ask to join the workplace pension on an individual basis.
The end of the five-year phase-in period
Since auto-enrolment came into effect, nine million people have been enrolled; one million of whom joined during 2017. (Source: Department for Work and Pensions (DWP)) During the first few months of 2018, small businesses will be joining the ranks as part of the final stage of auto-enrolment's introduction.
February 1st is the final phase-in deadline. After which, all employers will be under immediate duty to enrol new staff members who are eligible.
Contribution changes
Perhaps the biggest change we'll see, is the change to the minimum contribution levels. Currently they are:
- 1% employer contribution
- 2% total contribution (meaning at least 1% employee contributions if the employer pays 1%)
From April, the minimum contribution levels will rise to:
- 2% employer contribution
- 5% total contribution (meaning at least 3% staff contribution if the employer pays 2%)
12 months later, in April 2019, these minimum contributions will increase once again to:
- 3% employer contribution
- 8% total contribution (meaning at least 5% employee contribution if the employer pays 3%)
Many companies and experts have expressed concern that raising the minimum contribution amounts will encourage employees to opt out of their workplace pension.
Currently 10% of people opt out, but experts have warned that the number could rise to 21.7% in 2018 and 27.5% in 2019 (source: Your Money).
However, it appears that those worries may be unfounded, as just 4% of people have made up their mind to leave their workplace pension when the increase comes into effect. Fortunately, half of employees are committed to their scheme:
- 50% will definitely stay in their workplace pension
- 34% are unsure what path they will take
- 12% will consider leaving their scheme
- 4% will definitely opt out
(Source: Aviva)
What's almost certain, though, is that those who opt out will face a financially difficult retirement.
Other potential changes
In late 2017, the Government indicated that they would extend auto-enrolment to those aged 18 and over. However, this won't happen until the mid-2020s. Currently, employees who are under the age of 22 must request to join their employer's workplace pension. While those under the age of 18 will not usually be eligible for employer contributions to their scheme.
It is estimated that lowering the minimum age threshold will mean that 900,000 more people will be automatically enrolled into a workplace pension.
If you are a business owner, employer or employee, to discuss how the pension changes might affect you, feel free to get in touch.
Pension Freedoms: Ignorance isn't bliss
Real knowledge is to know the extent of one's ignorance.
Attributed to Chinese philosopher Confucius, this timeless phrase has never been more apt than when applied to the topic of Pension Freedoms.
A new report, from Old Mutual Wealth has revealed that many 50-60-year olds are uninformed about Pension Freedoms, with:
- 45% not knowing about Pension Freedoms at all, or not knowing how the new rules affect them
- 37% not knowing how or when they should access Pension Freedoms
Why is knowledge important?
Pension Freedoms are perhaps the biggest revolution to take place in the retirement arena in the past 20 years. Used well, the reform means that you can retire early, in a way which is more flexible and suits your lifestyle.
That freedom has given many people more control over their finances. It means that you can take lump sums from your pension pot for big purchases, or to help loved ones financially, as well as planning ahead to leave larger legacies to your loved ones.
However, the new-found freedoms come with potential dangers and pitfalls. For example, withdrawing too much, too soon could leave you facing financial difficulties later in life.
Current concerns
Research from AJ Bell has shown that some pensioners may run out of money within 12 years, due to three factors:
- Withdrawing too much each year
- Underestimating how long they will live
- Spending money frivolously
44% of over-50s choose to withdraw over 10%, a figure usually considered to be unsustainable, of their pension savings annually. Worryingly, the biggest group of people doing so (57%) are aged 55 to 59. As well as over-withdrawing, more people are taking money without planning for the future, as:
- 47% take ad-hoc lump sums
- 35% rely on an income of regular withdrawals
In addition, the same age group (55-59) severely underestimate how long their pension will need to last, with:
- 51% estimating that their pension will need to last for 20 years or less
- 24% believing that they will need to make their pension last for less than 10 years
The combination of large withdrawals and a lack of planning for the future means that many people are at risk of running out of money part way through their retirement. According to the Office for National Statistics (ONS), the life expectancy for someone who is currently 55 is:
- 81 for men
- 85 for women
That means that pensions may need to last for more than 25 years for both sexes.
Another concern is the reasons behind the withdrawals. Whilst Pension Freedoms means that you can access the whole pension fund for any reason; it doesn't necessarily mean that you should.
AJ Bell's research shows that 40% of 55-59-year olds make withdrawals for day-to-day living costs (a pension's intended purpose). Meanwhile, a quarter (25%) have used Pension Freedoms to make luxury purchases, including holidays and cars.
Using your pension wisely
Pension Freedoms are in place to give you more control over the way you use your pension savings. However, it has never been more important to plan ahead and make sure that you are using them in a way which benefits you both now and in the future.
It might be tempting to withdraw large amounts and go on a spending spree; but that could potentially leave you exposed to financial danger for the rest of your life.
So, how can you use the Pension Freedoms reform to meet your needs?
There are four key points to remember:
- Have an open mind: Old Mutual's research revealed concerns that consumers may be choosing the "path of least resistance" by accepting the drawdown option offered by their pension provider without shopping around.It can be all too easy to stick to what you know and reject any new options out of comfort. But a little research could go a long way toward making the most of your pension savings.
- Avoid the threats: Unfortunately, the new rules have inspired a range of new scams and fraud attempts. Stay vigilant and never accept an unsolicited offer. Always verify companies through the Financial Conduct Authority (FCA). Secondly, remember that your pension pot may have to last for 20, 30 or 40 years. Spending too much, too soon could cause you financial difficulty in the future.
- Take advantage of the opportunities: taking advantage of pension freedoms could help you retire early, or more flexibly, in a way which suits your preferred lifestyle. It can also help you leave a legacy to younger generations.
- Seek advice: Research from Unbiased has shown that people who take financial advice save an average of £98 more each month, which leads to an additional £3,654 in annual retirement income.
For more information on Pension Freedoms and how your retirement could be affected, feel free to contact us.
The effects of inflation - and how to combat the latest rise
November 2017 saw inflation hit 3.1%; the highest it has been since 2012, as reported through the Consumer Price Index (CPI).
As 2018 gets underway, thousands of households will be feeling the squeeze and looking for ways to combat the shrinking value of their income or capital.
What is inflation?
According to the Office of National Statistics (ONS), inflation is The rate at which the cost of goods and services rises year on year.
Over time, goods and services increase in price, if income and capital fails to grow at the same rate, household budgets can feel tighter as a result.
Inflation cannot be avoided, it is a necessary factor in any successful economy. The resulting increase in demand for products and services drives production and manufacturing, which ensures that there are enough jobs and that people can afford to live.
As individuals, we can't impact the rate of inflation. However, it is necessary to monitor the rate at which it is increasing, as this is what will affect our living standards.
The Consumer Price Index (CPI) measures and reports the rate of inflation. It does so through fluctuations in the price of everyday products. It does not show the effects on individual markets, but it does offer a great overview of the cost of living for an average person or household.
Consider everything you buy throughout the year; from food staples, to clothing, holidays and hobbies. The CPI works by comparing the total cost of the products and services year-on-year.
The effects of inflation
As inflation rises:
- The cost of living increases
- Interest rates could potentially rise
- Capital is de-valued; and so is your income
- It becomes more difficult to make big purchases
- The value of your savings is eroded
When inflation rates are high, almost everyone is affected in some way. However, different groups see different outcomes, for example:
- Savers: If the interest rate is lower than the rate of inflation, the real value of savings will decrease. Therefore, savers, who are more risk averse by definition, could very well experience the one thing they are trying to avoid; a loss of capital value.
- Annuity holders: An Annuity provides a guaranteed income for the rest of your life, and potentially, your spouse or partner's. When bought, the consumer is able to choose between a level or Index-linked product. Level Annuities are the most commonly purchased. As the cost of living rises, a pensioner receiving a flat pension income may find it harder to meet their financial needs over time.
- Employees: If your pay rises are not in line with inflation, the buying power of your income is diminished. This, combined with the rise in interest rates, designed to offset the effects of inflation, can put a squeeze on household budgets.
Offsetting the effects
Combatting the effects of inflation is an ongoing battle. However, with careful planning and by staying informed, you can remain financially stable. Nine things you can do to help yourself are:
- Shopping around for the best savings account: putting in the effort now could save you a lot in the long term, as well as helping you to maintain the value of your capital.
- Hold savings tax efficiently: utilising products which allow you to collect the returns tax free, will mean that you see more of your returns than if you had to pass some of the interest on to the taxman. Cash ISAs are the best example of these. Use your Personal Savings Allowance (Up to £1,000 of interest tax free for basic-rate taxpayers and £500 for higher rate).
- Consider investing rather than saving: Over a longer term, investing has the potential to produce higher returns than saving. Of course, this comes with a risk to your capital and the value can fluctuate over time. However, currently saving accounts are almost guaranteed a real-term loss of value for your money. So, now might be the time to consider becoming an investor.
- Retiring: Fewer people are buying an Annuity when they retire, due to Pension Freedoms. However, if you do decide to purchase an Annuity, think long and hard about the effects of inflation.
- Budgeting: While inflation may not be having an immediate effect on your budget, if the gap between price rises continues for a long period, you will notice it. Therefore, preparing now will pay off in the long term. The price of living may be going up, but the best way to stay financially secure is to plan your finances in advance.
- Increase your income: Put yourself in as good a position as possible for pay rises, bonuses and other financial incentives which may be available from work.
- Build a safety net: Most experts advise having an emergency fund which could cover three months to one year's living expenses. Having this in place gives you an added layer of financial security which will be extremely useful in the event of an emergency, illness or unexpected rise in the cost of living.
- Mortgage: Mortgage rates should be monitored constantly to ensure that you have the most competitive rate available. Interest rate rises are common when inflation is high, and that means a rise in monthly payments for tracker and variable rate products. Make sure that you can afford repayments if interest rates rise and your budget is squeezed further.
- Seeking advice: An Independent Financial Adviser will help you to make the most of your income. By getting to know you and your circumstances, they can point you toward the best products, methods, and budgets for you and your family.
For more information about inflation, or to discuss ways to protect your finances, contact us.
Beaufort Analysis 262 - Cost of living squeeze
High street spending in the run-up to Christmas increased at its slowest rate for five years due to escalating prices forcing shoppers to spend more on food and other essential items. The news from the British Retail Consortium (BRC) sent a worrying signal to non-food retailers at a time of crucial trading updates for the sector and this has been borne out by those companies reporting thus far. For the three months to December, food sales were up 2.6% while non-food items fell 4.4%, prompting the BRC chief executive to declare that the divergence had never been so stark.
Due to continued high inflation and low wage growth, there has been a rise in consumer debt, but according to the Bank of England (BoE) and Financial Conduct Authority (FCA), this is due to the most credit-worthy borrowers taking advantage of cheap car finance deals and interest-free credit card offers. Consumer borrowing has increased at its fastest rate for more than 11 years and BoE Governor, Mark Carney, has warned that continued unsecured lending at the current rate could destabilise the financial system.
Strong economic growth has pushed the price of Brent crude oil to a three-year high of almost $70 a barrel, assisted by falling inventories. Additionally, the Organisation of the Petroleum Exporting Countries (OPEC) and non-OPEC members have ratified their agreement to curb production until the end of 2018, and there are fears that Donald Trump will hit Iran with fresh sanctions, constraining oil supply. With consumer spending already declining, drivers could be forced to pay more at the pump this year.
More positively, UK manufacturing output expanded at 0.4% in November; its seventh monthly increase in a row and its fastest rate since 2008, according to the Office for National Statistics (ONS). The growth in manufacturing helped Britain's trade deficit narrow by £2.1bn as exports outweighed imports. The construction industry, however, contracted at its fastest rate for five years, falling 2% year-on-year, amid fears over Brexit though it had risen around 30% from mid-2013 to its peak in March 2017.
The markets nevertheless, continue to provide investors with some financial comfort as all four major UK and US indices, as well as most European and Asian bourses, hit fresh highs. According to the European Commission, the strength of the industrial sector has lifted UK economic confidence to a six-month high with Eurozone industrial confidence at its highest since 1985, but for how long will this continue?