The World In A Week - The New Boss, Same As The Old Boss?
It was a relatively sedate week in financial markets, as Sterling strengthened against most major global currencies. Equities were up slightly in GBP terms, while Fixed Income also rose by +0.25% in GBP hedged terms. Brexit related metrics were largely unchanged, as markets await the results of the forthcoming festive election. Global bonds maintained their gains vs Sterling bonds, as did domestically-focused UK equities vs their more international peers. The Dollar has begun to weaken against its main trading partners, which has given a nice boost to our local currency emerging market debt holdings.
One of the major developments in the world of finance was the changing of the guard at the European Central Bank. Christine Lagarde took over the position of President of the ECB from Mario Draghi. She begins her tenure at a time when storm clouds gather over the Eurozone economy and the monetary policy tools at her disposal are less and less effective at boosting economic growth. In that sense, Mr Draghi may have picked an opportune time to depart, as much of Madame Lagarde's political capital will likely be expended in trying to convince the creditor nations of the Eurozone (namely Germany) to enact a fiscal stimulus to pick up the reins from monetary policy. This is not a task many would envy…
The World In A Week - On, and On, and On...
Brexit shenanigans dominated the headlines last week as the UK's departure from the EU drags on, and on, and on. While Prime Minister Johnson eventually reached a majority agreement, it failed to go to a vote in the House of Commons over the weekend as MPs deemed the narrow window of, 3 days, too narrow. The EU will now decide on allowing a further delay beyond the deadline of 31st October. In the meantime, Johnson has called for elections to be held on 12th December, the last day that community halls and other social spaces are available before the festive period; a two-thirds majority would be required for the vote to go ahead.
Central banks held little surprises; in his last appearance as Chair of the ECB, Mario Draghi remained dovish in his final address. While Draghi will formally hand over the reins to his successor this week, we look back to his famous speech in 2012, where he promised to do whatever it takes to save the Euro and he will leave the ECB having achieved this. In the week ahead, the US Federal Reserve meets on 29th, consensus is that there will be a further cut to interest rates.
Economic data last week was mixed; the Eurozone edged marginally higher from a reading of 50.1 in September to 50.2 in October, hanging on the expansionary territory, however, underlying data showed that France had done better than expected while Germany continues to slow. In the US, PMI preliminary data moved up from 51 to 51.2, despite disappointing durable goods orders.
Results season in the US was more positive; with a third of companies' data now available, over 80% surprised to the upside pushing growth rates cautiously in to positive territory. It was a similar story in Europe, with more positive surprises than negative news, however, growth struggled and was marginally negative.
The World In A Week - Nine Lives
Another week where politics dominated the markets. It started with news that the US and China had reached a 'phase one' trade agreement, which boils down to being a truce. For the time being the US has agreed to suspend the increases in tariffs and China has agreed to increase their agricultural purchases. The key date is the Asia Pacific Economic Cooperation (APEC) summit in mid-November, where the deal is set to be concluded.
It is good news that the trade war is de-escalating, however we do expect further bumps along the way, especially as the US has just passed legislation supporting the pro-democracy protests in Hong Kong. Will this political disagreement complicate the delicate trade negotiations?
When it comes to complicated, the UK is building a monopoly. Having already lost eight commons votes since becoming Prime Minister, Boris Johnson made it nine with defeat on Saturday, a record not seen since Lord Rosebery in 1894.
Without the will of the politicians, any deal is doomed to failure. The addiction to avoid decision has become the modern malaise and with the narrow defeat on Saturday, Boris Johnson was forced to write to the EU to request an extension to Article 50. Even that simple task was laced with confusion and ulterior motives.
What we do know, is that geopolitics is not going to get any clearer any time soon. We know we have a US Presidential election next year, but the outcome is far from clear. While in the UK, we do not know what next year has in store; a referendum, a general election or some clarity over our exit from the EU?
That is why our investments continue to be appropriately diversified in these interesting times.
Ethical Investing On The Rise: 3 Investment Strategies To Consider
More people are considering ethical investing. If you're thinking about incorporating values, there are three key strategies that are used, read on to find out which one might be right for you.
The amount of assets that are invested whilst considering the impact it will have has increased. More investors than ever before are taking ESG (environmental, social and governance) factors into consideration to align their portfolio with their values. But what investment strategies are there that allow you to reflect this?
The 5th - 11th October marked Good Money Week, an awareness week that aims to showcase the sustainable and ethical options when it comes to banking, pension, savings and investments. If ethical investing is something you've been thinking about and you want to incorporate your values into financial decisions, now could be the perfect time to do so.
Choosing investments for reasons other than financial gain has been a trend that's gradually gaining traction. Of course, this doesn't mean that you disregard returns, it's about taking multiple factors into account. As a result, ethical investing is sometimes referred to as having a 'double bottom line'; the return it delivers to you and the positive benefit.
According to research:
- Just three in ten men with investments only care if they make money, this figure drops to 15% for women
- However, there is a lack of awareness, just 69% said they had no idea they can request investments that have a 'positive social impact'
So, if you do want to invest with ethics in mind, what are your options? There are three key strategies to be aware of:
- Negative screening
When people talk about ethical investing, this is often the first strategy that springs to mind. It involves divesting and avoiding investing in companies that don't align with your values.
For example, if you're seeking to ensure your portfolio has a positive impact on climate change efforts, you may decide to no longer want to invest in companies with activities in fossil fuels. Alternatively, if human rights are a key concern, you may decide to avoid retailers that have exploitative practices within their supply chain.
When you see 'ethical funds' this is usually the top strategy they'll use, although the criteria can vary significantly between funds. One of the issues with this strategy is that large, multinational companies will often derive profits from multiple industries, particularly when you consider subsidiaries. As a result, funds will often allocate some leeway, for instance, avoiding companies that derive more than 5% of their profits for certain activities.
In terms of your investment and returns, negative screening will potentially mean cutting out entire industries. As always, it's important to keep in mind how balanced your portfolio is and how it aligns with your financial goals.
- Positive screening
In contrast to the above, you don't avoid investing in certain companies when using a positive screening strategy, but actively seek to invest in certain firms. It means investing in businesses that are championing the values you have.
Going back to the climate change example, with a positive screening strategy, it may mean investing in companies that are operating in renewables or researching new technologies that could help. Often, investors will allocate a portion of their investment portfolio to supporting their values.
This has both pros and cons. One advantage is that it means you don't miss out on potential investment opportunities, as you may with a negative screening process. On the other hand, it may mean investing in companies that don't align with your values.
- Engagement
Finally, an engagement strategy is about using shareholder power to encourage change within a company. Due to needing significant shareholder power to influence, this strategy is more commonly used by institutional investors, such as pension funds. However, that doesn't mean it's irrelevant to you. It's still possible to engage with your pension provider, for example, to encourage them to use their influence.
Which strategy is right for you?
It's important to keep in mind that there's no right or wrong answer here.
You may have a preference about which strategy you'd prefer, or maybe you want to blend them. However, it's just as important to look at your wider financial circumstances and how investment decisions will affect your goals. This is an area we can help with. Looking at your existing assets and how these can be adapted to reflect ethical views, can lead to a portfolio that supports both your ethics and aspirations.
Setting out your values
If you're beginning to consider incorporating ethical investing in some way, the first step is to consider your values. What's important to you?
One of the challenges with ethical investing is that it's a highly subjective area. What you may consider unethical, may be acceptable to others. This can make it difficult to find funds that align with your views. Setting out what your priorities are can give you a starting point. According to research from Triodos Bank, the top five industries investors would want to avoid are:
- Manufacturing or selling of arms and weapons (38%)
- Worker/supply chain exploitation (37%)
- Environmental negligence (36%)
- Tobacco (30%)
- Gambling (29%)
Do you agree with these? Before investing your money through an ethical fund, take some time to look at the criteria. There may be instances where you need to compromise, so you should also think about how comfortable you'll be with this.
If you'd like to discuss your current investment portfolio, please get in touch. We'll help you understand how it's currently invested and potential changes that could be made, reflecting your views and financial position.
Please note: The value of your investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
7 Things To Review When Looking At Your Pension
Regularly reviewing your pension is important for ensuring you're on the right track. We've got a checklist of seven things you should know or check about your pension.
Research suggests thousands could be missing out on investment returns in their pension because they haven't updated their retirement age. Remaining engaged with your pension can help you create a retirement income that meets expectations. So, what should you review when looking at your pension?
- What fund are you invested in?
Typically, a Defined Contribution pension will offer several different fund options for you to choose from. When you first join the scheme, you'll automatically be enrolled into one and this will remain so unless you change it.
There are a few reasons why you may want to change which fund your pension is invested in. Often, they will have varying levels of risk, allowing you to choose one that suits your attitude and goals. In addition, many pension providers also offer an 'ethical' fund if you want your pension to be invested in a way that reflects your values.
It's usually easy to change which fund your pension is invested in, either by updating it through an online portal or contacting the pension provider.
- What does it assume your age of retirement is?
Pensions are usually invested. Traditionally, the level of risk these investments take decreases as you approach retirement age automatically. However, if the assumed retirement age doesn't align with your plans, you could miss out on returns.
According to analysis from Aviva, an average earner in an automatic enrolment scheme could miss out on more than £4,000 in their person by sticking with a default retirement age of 65, when they intend to retire at 68. If the default retirement age is set at 60, this rises to almost £10,000. With retirements becoming more flexible, this could be a growing issue.
It's also worth noting that, depending on your assets and retirement plans, de-risking investments as retirement approaches may not be the best option.
- Are you receiving the correct level of tax relief?
Tax relief is one of the aspects that makes saving into a pension valuable. It's a helpful way to boost your contributions. The amount of tax relief you receive on pension contributions is linked to the highest rate of Income Tax you pay.
The basic-rate of 20% tax relief is automatically applied. However, if you're a higher or additional-rate taxpayer, you will need to claim the additional tax relief through tax returns. It can seem like a chore, but it's one that's well worth doing. To increase your pension by £100, you'd need to add £80 if you're a basic-rate taxpayer. However, this falls to just £60 and £55 for higher and additional-rate taxpayers respectively.
- How much are you contributing?
If you're not sure, it's a good idea to look at how much you're paying into your pension each month. Under auto-enrolment, this will be a minimum of 5% of pensionable earnings. However, you can increase this. Even a small increase can have a big impact over the long term, particularly when you factor in tax relief and investment returns.
- What is your employer contributing?
Your employer will also be making contributions to your pension. As a minimum, this will be 3% of pensionable earnings. However, some employers do pay in more or will increase their contributions if you do. It's worth checking what your company policy is on this as employer contributions are essentially 'free money' that could boost your future income.
- What returns are investments delivering?
As stated above, pensions are usually invested. The returns these investments deliver can help your contributions grow over your working life. As a result, taking a look at how investments are performing at part of a regular review can help you see whether the investments are right for your goals.
It's important to look at the bigger picture here. Investments are often volatile when looking at just a snapshot of figures. Instead, you should look at how your investments have performed over the long term to gain a more accurate understanding.
In addition to returns, take some time to look at the fees you're paying, as these will eat into the returns.
- What is the projected value at retirement?
Finally, how much will your pension be worth when you want to access it? Your pension provider should give you an estimate of this figure, although it's important to keep in mind that this can't be guaranteed.
Understanding what your pension is projected to be worth gives you an opportunity to see if expectations align with reality. If there's a shortfall, the earlier you spot it, the better the position you're in to make necessary changes. Alternatively, you may find you're in a position to retire earlier than expected if you want to.
If you have any questions about your pension or other assets that will be used to fund retirement, please get in touch. Our goal is to help you get the most out of your finances and have confidence in your financial future.
Please note: A pension is a long-term investment. The fund value may fluctuate, and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Your pension income could also be affected by the interest rates at the time you take your benefits. Levels, bases of and reliefs from taxation may be subject to change in the future.
Bonds: How Do They Fit Into Your Investment Portfolio?
Bonds are often an integral part of an investment portfolio; here we take a closer look at what they are and what you should consider when creating a balanced investment proposition.
Bonds are a common feature in many investment portfolios, alongside stocks, shares and cash assets. But how do they fit into your investment portfolio and what percentage should be allocated to bonds?
What is a bond?
Before diving into purchasing bonds, it's important to understand exactly what they are and, therefore, how they can be beneficial to you.
A bond is essentially a loan made by an investor to a borrower, which may be a government or business, as a way to raise money. As a result, bonds are sometimes thought of like an IOU. There are two ways that a bond can pay out:
- Final payment is made when the bond matures
- Or smaller payments are made during the term
By the end of the maturity date on a bond, the original loan amount must be paid back or risk defaulting. When you purchase a bond think of it as buying the right to future payments, whether this is a lump sum or smaller amounts. The yield on bonds depends on these amounts in comparison to how much you paid. Typically, bonds that have a longer maturity date will pay a higher interest rate.
Bonds are linked to interest rates too. When interest rates are low, bond prices tend to be higher. As a result, the current economic climate of low-interest rates means you can expect to pay more for bonds.
Many corporate and government bonds are traded publicly and give you a chance to sell bonds within your investment portfolio before they reach maturity. However, this isn't always the case and the secondary market will vary depending on the borrower.
How do bonds fit into your investment portfolio?
Investment portfolios should be diversified to spread risk. This includes the types of assets you hold.
Bonds can provide your investment portfolio with a balance in terms of risk. Generally speaking, bonds are considered to pose a lower risk to investors than stocks and shares, though higher than cash assets.
Of course, bonds aren't entirely risk-free. There is a chance that the borrower will default on the payments and you won't receive your initial investment back. Whilst bonds are generally considered lower in risk to stocks and shares, it's important to check the reliability of the borrower when conducting research.
Creating an investment portfolio that suits you
Whilst bonds are often an important building block when creating a suitable investment portfolio, the allocation level should consider your financial situation. For some people, a higher portion of investments in bonds can help create stability and reduce volatility. For others, a high portion of bonds won't offer the potential to create the returns they're looking for. The allocation of your investment portfolio should always be tailored to suit you.
When creating or reviewing your investments in terms of allocations, some of the areas to consider are:
- What are your investment goals?
- How long do you intend to remain invested for?
- What is your capacity for loss and overall attitude to risk?
- How comfortable are you with investment volatility?
- What other assets do you hold and what risk level are they?
These types of questions can help you gain an understanding of your current financial circumstances and the level of risk that's right for you. This can be challenging to calculate with so many different factors playing a role. However, it's a critical step towards assessing how bonds will play a role in your portfolio.
If you'd like to discuss your investment portfolio, please contact us. Our goal is to help you build an investment proposition that matches your aspirations and financial situation.
Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
What To Consider When Investing For A Child's Future
If you're thinking about investing for your child's future, you may be worried about how to go about it. These five questions can help you identify the level of risk and the product that's right for your goals.
Children born today have a one in four chance of celebrating their 100th birthday. It's progress that should certainly be celebrated but one that also leads to financial questions. How do you prepare for a life that could span ten decades?
Many parents choose to put some money aside for children to give them a helping hand when they reach adulthood. Whether you'll be making regular payments or adding money on Christmas and birthdays, you'll want to ensure you get the most out of your deposits. But choosing how to build up a nest egg for a child can feel more complex than making decisions about your own financial future.
One question to answer first is: Should you place the money in a cash account or invest?
Why consider investing your child's savings?
It's natural to want to protect the money you're putting aside for your child's future by choosing a cash account with little debate. However, there are reasons why investing may prove to be more efficient.
Even on a competitive child current account, interest rates are low. This means once you factor in inflation, savings lose value in real terms over the long term. If you begin saving whilst your child is very young, this can have a significant impact on the spending power of the money.
Investing provides an alternative, with returns potentially higher than interest rates. However, it's not as simple as that. Investing does come with some risks, as there's no guarantee how investments rise and fall. But investing is something you should consider when you're planning for your child's future.
If you're unsure whether a cash account or investing is right for your goals and circumstances, please get in touch.
Should you decide to invest money earmarked for your child's future, there are some questions that can help you pick out the right vehicle and investment opportunities.
- How long will it be invested for?
When you start saving, it's important to have a deadline in mind. If this deadline is below five years, it's usually advisable that you choose a cash account. This is because investments typically experience volatility in the short term and, as a result, values can fall. This may be an issue if you're investing for a short period of time.
However, should you have a time frame that is longer than five years, investments may provide you with a way to potentially achieve returns that outpace inflation. This is one of the factors that link to investment risk. As a general rule of thumb, the longer you're investing for, the higher the level of risk you can take. Of course, other factors influence appropriate risk levels too.
- What is the money intended for?
You probably have an idea of what the money will be used for. Perhaps you hope it will be used to purchase their first car or support them through further education. You may be looking even further ahead to your child purchasing their first home. What the money is intended for will have an impact on the time frame. But it will also influence how comfortable you are with taking investment risk.
It's important to remember that if you're saving the money in the name of the child, they may be able to take control of the account when they reach 16. Whilst you might have an idea of what you're saving for, they could have very different goals. As a result, speaking with them about the savings and how it might be used can help align your views.
- How comfortable are you with investment risk?
It's also important to think about how comfortable you are with investment risks when it comes to your child's savings. This may be very different to your views on taking investment risks for your own nest egg.
Whilst you need to feel comfortable with risk and the level of volatility you can expect investments to experience, you also need to ensure it's a measured decision. Our bias can mean we take too much or too little risk when financial circumstances are factored in. Speaking to a financial planner can help you understand what your risk tolerance is. Getting to grips with what level of risk is appropriate can boost your confidence.
- Do you have other savings for your child?
Do you have multiple saving accounts for your child? Or are other loved ones also building up a nest egg for their future?
Assessing what other nest eggs they will receive when they reach adulthood may mean you're more comfortable taking investment risk. If, for example, you know grandparents are adding to a cash savings account, this may balance out the risk associated with investments. Answering this question can work in the same way as assessing your other assets when you consider your own investment portfolio.
- How hands-on do you want to be?
Finally, do you want to select which companies the money will be invested in? Or would you prefer to take a hands-off approach? There's no right or wrong answer here but thinking about it can help ensure you pick the right investment vehicle for you.
If you want to take steps to improve the financial future of your child, please get in touch. Whether investing is the right option or not, we'll work with you to create a plan that you can have confidence in.
Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
The World In A Week - Inching Towards A Deal
It was a rather lively week in financial markets, from the perspective of a UK-based investor. Sterling strengthened considerably against all major currencies, as markets anticipated a break-through in the long march to a Brexit deal. As Sterling strengthened, Global Equities as measured by MSCI ACWI were down -2.7% in GBP terms and the FTSE All Share index of UK Equities rose +1.61%. On the Fixed Income side of our portfolios, Global Bonds hedged to GBP returned -0.9% - but this considerably outperformed Sterling Bonds which returned -1.75% for the week.
Market developments were primarily driven by tentative advances in negotiations surrounding two prospective deals. Of major global importance, is the ongoing trade dispute between China and the US. Markets reacted favourably to news on Friday that the US had agreed a limited phase one trade deal with China which would delay tariff increases scheduled for this week. The agreement was positive, but light on detail and is widely seen as a truce in the ongoing trade war.
Closer to home, an outburst of optimism regarding the possibilities of a Brexit deal shot through financial markets towards the end of the week. The Irish Taoiseach, Leo Varadkar, met with Boris Johnson in 11th hour talks. Much was made of the reaffirmation of the possibility of a Brexit deal, even at this late stage. Sterling and UK assets rallied strongly on the news, and we expect volatility to persist into next week following the Queen's speech on Monday.
The World In A Week - Elephant In The Room
Last week, ISM data was released, this is a measure of new orders, production, employment, supplier deliveries and inventories; in essence, a measure of productivity. The key number to be cognisant of is 50, above 50 indicates an economy is in expansionary territory, below 50 indicates contraction and potential recession. Data for US and China did not make for happy reading, with German manufacturing data especially worrying, falling to 45.7 from 47.
While contraction has been evident for several months in bond markets, it has taken some time for this to filter through to equity markets, which had a negative week; in Sterling terms, most indices fell sharply midweek, limping back towards positive territory by Friday. In the US, ISM data plumbed the lowest depths in 3-years, heightening expectations of a further interest rate cut of 25bps this month, and a fourth rate cut probability of 50-50 by year-end.
On the tedium that is Brexit, there was little news. The next key date in the Brexit calendar is 19th October, when a deal must be agreed by Parliament; MP's are expected to agree to a no-deal Brexit, which we believe is highly unlikely and will result in the Benn Act being employed, which will anger hard-Brexiteers. The Benn Act was passed last month and requires the Prime Minister to ask for an extension to the Article 50 negotiating period, which would avoid a no-deal Brexit on 31st October.
Chinese equity markets reopen this week following celebrations marking the 70th anniversary of the Popular Republic. Investors will be keenly focussed on US-China statements ahead of their meeting on 10th-11th October in Washington, where trade talks will recommence.
The World In A Week - Getting Our Priorities Straight
The UK Supreme Court ruled that the prorogation of Parliament by Boris Johnson was unlawful, which resulted in a swift restarting of Parliament last week. It would appear the battling forces within British politics are becoming more entrenched and the cross-party support needed to strike a deal with the EU fading. A request to extend the deadline for Article 50 is now most likely, after which we can expect an election or fresh referendum.
Politics escalated even further in the US, with an announcement of the start of an impeachment enquiry into the actions of President Trump. This is centred around a telephone call with President Zelensky of Ukraine, in which it is alleged that Trump asked for an investigation into the activities of the son of Joe Biden, who just happens to be one of the front runners for next year's Presidential election.
The process is as much political as it is legal, with proceedings needing to pass through both the House and the Senate; the latter being controlled by the Republicans, with a two-thirds majority. It is worth remembering that a President has never actually been impeached; although it was a close shave for President Nixon, who resigned before Congress could vote him out of office.
So, with global data suggesting that growth is slowly dissipating and in much need of both fiscal and monetary stimulus, the governments either side of the Atlantic seem to currently prefer the distraction of playing politics.