The World In A Week - Under Pressure
As the mercury rises in the barometers of economic and political hallways, pressure builds across the globe. The rhetoric from policymakers at the beginning of the year has begun to wane and with it, sentiment has dropped. Investors and markets alike need to see significant improvement from a series of geopolitical concerns, which intensified last week.
We begin with the most erratic pressure point, President Trump. The escalating trade tensions between China and the US arguably worsened, with Trump admitting the ball currently sits in his side of the court. Trump wants to see further concessions from China, he also wants President Xi to arrange to meet with him at the G20 summit next week. If not, then he has threatened to impose tariffs of 25% or much higher.
China's woes do not end there. Tensions in Hong Kong overflowed, and government offices were forced to close due to the ferocity of the clashes between the police and protestors, over the proposed extradition law. The timing could not have been worse, as Hong Kong's economy has slowed to a pace not seen since the Global Financial Crisis.
Pressure continues to be added with the attacks on oil tankers in the Gulf of Oman, with suspicion and growing evidence of Iran's involvement. The unknown element is what will be the response? Response is key to all these pressure points, particularly when it comes to the health of the US economy.
Consumer prices in the US, a key measure of inflation for the Federal Reserve, was broadly flat for May, increasing pressure on the Federal Reserve to cut interest rates. Their next meeting to discuss monetary policy is this week, and with pressure building in the form of data reports and political tweeting, the odds of a rate cut are swelling. We think the Federal Open Market Committee will want to assess the employment data for June, to verify the slowdown in the US labour market before pulling the trigger. That would mean an interest rate cut being announced next month, which when can you consider 12 months ago we were looking at a continuing of tightening in monetary policy, sentiment has swung around completely.
It is worth adding that it is extremely rare for the US central bank to adjust interest rates during a Presidential Election year, so Jerome Powell has just six months to get interest rates to a level that he deems appropriate.
Different protagonists under pressure. Which of these will be resolved during the summer? The markets are looking for another measure of goodwill from the policymakers and hoping the politicians can avoid making matters worse. A nice break from the homegrown issues we currently have in the UK.
The World In A Week - The UK / US Alliance
Last week the US and UK commemorated and celebrated their historic alliance and friendship. The week included the rarity of both the D-Day commemorations of World War Two as well as the US President's State Visit.
Both occasions demonstrated the continuing bond between the two countries. One focused on humanity and the enormous courage and personal sacrifice made to defeat Nazi tyranny, and the other focused on their relationship and their bilateral approach going forward.
Much can be written about the importance and the success of both of these occasions. For the investment community though, there was one stand-out development.
At his press conference the President emphasised his keenness for a free trade deal with the UK. He claimed there could be '2 and 3 times of what we're doing right now'. This builds on his previous comments that his administration would 'work on it very, very quickly.'
This will be very welcomed by investors in the UK, especially at a time when many are concerned with Brexit, as this demonstrates the UK's trade appeal and thus the potential for such trade deals to be replicated globally too.
It should be noted; the UK and the US are the largest investors in each other's countries (as measured by total Foreign Direct Investment). For example, as at 2017, the UK had invested $541bn in the US and the US had invested $750bn in the UK.
Regarding trade, as at 2018, the UK had a $5.4bn goods deficit with the US and a $14.5bn services deficit too thus an overall trade deficit of $19.9bn with the US. This is likely to be something the UK will aim to address in any free trade agreement.
It was a successful and welcome week for both countries that also demonstrated the importance and enjoyment of good relations.
The World In A Week - Mexican Standoff
Markets faced a tough week as a risk-off environment prevailed. The Pound Sterling fell against all major global currencies. Bond markets rallied across the world, with the Bloomberg Barclays Global Aggregate Index (hedged to GBP) returning +0.63%, while Sterling Denominated Investment Grade Bonds returned +0.27%. Equities suffered across the globe. The MSCI ACWI Index of world markets returned -1.20% in GBP terms, this was led by the US market, which fell -1.91%. Value stocks underperformed growth stocks -1.54% vs -0.87%.
This downside volatility was driven by a number of events, most of which stemmed from the Oval Office. The continuing trade tensions between China and the United States spurred a move out of Equities and into perceived safe assets. The German 10 year Bund yield traded at -0.16% on Tuesday, with the 10 year US Treasury yield touching a fresh two-year low on Friday. In what Bloomberg described as a true black swan event, President Trump suddenly threatened to slap a five percent tariff on all Mexican imports unless it stepped up efforts to stop illegal migration. Tariffs are increasingly being employed by the President as a weapon of policy, across multiple fronts.
In spite of the bluster from 1600 Pennsylvania Ave, US stocks remain very much in favour on a global basis. The gap between the valuation of US Equity markets and the rest of the world is at record highs. As a result, many investors are looking for ways to protect against a falling dollar and/or falls in the value of the Equity market itself. Local Currency Emerging Market bonds may offer such protection and are becoming increasingly popular with GBP based investors.
The World In A Week - All By Myself
We have seen an uptick in volatility. Hostilities between the US and China show no signs of abating. The US Federal Reserve minutes indicate that it is unlikely there will be rate moves of any kind for some time and, the UK have no leader, following the tearful resignation of Prime Minister, Theresa May, on Friday. It would be an understatement to say that last week was anything less than eventful with the Bank Holiday weekend in the UK providing some welcome respite for all.
On Friday, Theresa May resigned as the Prime Minister after failing to deliver her Brexit deal in her 3-year tenure. Mrs May's departure will now lead to a chaotic Conservative race, where staunch 'no-deal' Boris Johnson is the clear favourite to succeed her; a new Prime Minister will be in situ by the end of July. Further compounding May's sadness was the Conservatives defeat in the European Elections, which were held in the UK last Thursday. It was expected that the results would be disastrous for the Conservatives and they did not disappoint; Nigel Farage Brexit Party secured the majority vote of c.31% followed by the Liberal Democrats and Labour with c.20% and c.14% respectively. Conservatives limped in to 5th, behind the Green Party, with c.9% of votes. The UK, politically, will remain in an uncomfortable limbo.
Turning to trade wars, the question is; who is really winning? There is only one measure that shows if Trump is 'winning' and that is the bilateral trade balance, and while the global superpower that is the US is still lagging by a huge margin, to March this year, the trade deficit has narrowed. While all equity markets suffered last year, Chinese equity markets tumbled by fourfold that of the S&P 500 in 2018 by more than 25%, this had a knock-on effect to the Chinese economy, which slowed more notably than that of the US. However, it's not all bad news for China; import tariffs imposed by Trump do not affect the Chinese consumer, as many are a tax on industrial inputs and not end-use products, whereas the opposite is true for the US. The US are also missing out on investment from China with foreign direct investment slumping by more than 80% between 2017 and 2018; in the US, investment in China fell marginally by c.7.5%. We will call this a draw.
One thing that is for certain; is that markets do not like uncertainty and while there is political limbo in the UK, UK equity markets will continue to be hindered and uncertainty over trade wars is likely to be more costly than trade tariffs themselves.
The World In A Week - Making your mind up
Trump has asked the US trade department to begin the process of raising tariffs on essentially all remaining imports from China, which have an estimated value of $300 billion. This final myriad of goods will place pressure firmly on the US consumer, a timely reminder that the importer pays the tariff in the shape of higher prices.
The consultation period for the next set of tariffs takes us neatly to late June, coinciding with the G20 meeting in Japan, where we would expect a meeting between President Trump and President Xi.
Trump is confident that a deal will be struck when the time is right. However, is that when the time is right for the country or for him? The 2020 election must be on his mind and opinion polls suggest that playing tough with China seems to be going down well with voters. A dangerous balancing act between hubris and Presidential position; doing what is best for Donald or doing what is best for the US, might not necessarily be wholly compatible.
In the UK we have the announcement that we all expected: Theresa May will be stepping down as Prime Minister. Bored with Brexit and seemingly lacking a sense of purpose, the Conservative party is arguably on the floor, forcing May to offer her resignation. A poor showing at the recent local elections and the threat of a similar defeat in next week's European Parliament elections has opened the door to ex-foreign secretary Boris Johnson.
Ironically, according to a YouGov survey in March, Boris Johnson was the most popular Conservative politician, as well as the most disliked. That perfectly sums up where we are with UK politics and why the people behind Johnson's bid do not want a lengthy campaign. If only it were that simple; it would seem to be time for politicians across both sides of the Atlantic to start making their minds up.
The challenges of balancing different goal time frames
When you think about financial and lifestyle goals, there are probably several, each with a different timeframe. Juggling them and weighing up your priorities can be challenging. Should you focus on paying off your mortgage quickly now, or saving into a pension for retirement that's still many years away?
With conflicting goals, it can be difficult to have confidence in your finances and long-term financial stability. When you start thinking about goals, it's likely there's several with different time scales, and it can be tempting to focus on those that are closer at the expense of the long term. For instance, someone in their 40s may have goals that include:
- Building up a financial safety net
- Paying school fees or supporting children through university
- Paying off the mortgage
- Using investments and savings to go travelling in ten years' time
- Contributing enough to a pension that it's possible to retire at 65
So, how do you balance these?
Owning your home can mean a greater sense of security, lower monthly repayments and an asset to pass on to loved ones when you die. As a result, you may consider cutting pension contributions to make overpayments. However, pensions often benefit from tax relief and employer contributions, effectively giving you free money. Add in potential investment returns, compound growth and the annual allowance, which limits contributions you'll receive tax relief on, and you could find yourself worse off in the long term.
But, with so many influential factors, understanding which goals to focus your attention on and how to split up your assets or income can be challenging.
The first thing to do here is to define what your goals are and when you want to achieve them. We often think about the immediate future when saving; perhaps you're looking forward to a family holiday or your child will be heading to university in September. But the medium and long-term goals are just as crucial and shouldn't be overlooked in favour of the short term.
Understanding the impact of your decisions
One of the key challenges of balancing different goals is understanding the long-term impact different decisions will have. This is where effective financial planning can help. One tool we use in particular, cashflow planning, can give you a visual representation of your wealth.
By inputting details about your current wealth and projected income, cashflow modelling can give you an idea of how your wealth will change over time based on your current lifestyle. However, it offers greater value than this. You can use the tool to show how your wealth will change based on decisions, giving you the information needed to base them on.
For example, you may be thinking about voluntarily increasing pension contributions but would the short-term sacrifice in disposable income be worth it? Or would you be better off directing that spare money to savings, investment or reducing mortgage debt? Often, there's no clear right or wrong answer, but cashflow modelling can help you understand how a choice will affect medium and long-term goals that you may have.
Combined with a financial plan that focuses on your goals, cashflow planning can give you real confidence in the progress you're making. You'll know that you have a blueprint in places that takes into account all your different aspirations, from those that are just around the corner to the ones that are still a few decades away.
One key thing to remember is that cashflow planning is restricted by the data that's input. As a result, you need to regularly update the information, reflecting both positive and negative changes. This allows you to respond effectively to these changes and make adjustments where necessary. For instance, an unexpected salary increase may mean you may be able to retire two years earlier than anticipated if you choose to. On the other hand, poorly performing investments could mean it's wise to delay your plan, allowing time for the markets to recover.
When it comes to financial planning, we're here to provide you with support. Using a range of tools and techniques, we'll help you see how the decisions you make now will have an impact in the near, medium and long term.
Longer lives and retirement plans
Retirement is a huge milestone and one that's lasting longer for many people. You now have more choice around when you want to retire, how to take an income, and what you want to do after you've given up work. Whilst more flexibility has certainly been welcomed, it can present you with some challenging decisions too.
Retirement used to be associated with kicking back and taking it easy. That might still be an important part of what you're looking forward to. But, today, retirement is just as likely to be associated with new experiences. It's not just the retirement lifestyle that's been transferred over the last few decades either. As life expectancy has increased, our time after working lives has gotten longer too. It's not uncommon for people to spend 30 or even 40 years in retirement.
On top of these two key factors, the way we take an income in retirement has changed as well. The introduction of Pension Freedoms in 2015 gave retirees far greater flexibility when they decided to access the money saved into a pension. It means retirement no longer follows a fairly similar path for most; retirement can be what you make it.
Financing a longer retirement
When you think about retirement planning, it's often the financial side that first springs to mind. That's natural, after all, it's your finances that will allow you to achieve aspirations you may have.
Spending longer in retirement will clearly have an impact on finances, as they'll need to stretch further. As a result, you'll need to think carefully about how you'll access the provisions in your pension and how you'll use other assets. Purchasing an Annuity, which provides a guaranteed income for life, can offer security, but it may not suit your lifestyle.
On the other hand, your pension can remain invested and accessed flexibly using Flexi-Access Drawdown. But you'll need to ensure you're accessing your pension in a way that's sustainable and considers life expectancy. If you only plan to make withdrawals for 20 years but end up living for another decade, it could place you in a financially vulnerable position.
Your life expectancy is a crucial part of calculating a retirement income and setting out your goals. However, it's not just finances that should be considered in a longer retirement.
When and how to give up work
Have you thought about when you'd like to give up work? You may have a firm plan or a rough idea in your head, but if you've not considered life expectancy, you're missing a crucial factor. If retiring at 60 means you'll have four decades of not working, would it still appeal to you? For some, that will sound like a dream, but for others, it will give a reason to rethink.
In addition, you should think about how you'll retire. More workers are attracted to giving up work gradually. Whether it's cutting down current working commitments or launching a business, blending retirement and work is becoming more common. You may even decide to give up work entirely for a set period of time, before returning to the world of work further down the line. When you think about longer retirements, it makes sense that some will want to continue employment in some way once they pass traditional retirement age.
Filling your time in retirement
How do you plan to fill your days when you've retired? What one-off experiences do you want?
Answering these questions is important to create a retirement lifestyle that suits you. Perhaps you're looking forward to spending more time with grandchildren, have grand plans to travel, or want to invest your free time in a hobby that's been neglected.
However, whilst retirement is a time to look forward to, will you still be happy and fulfilled a few years into it? This is where planning your lifestyle is important. Retirement can promise much, but leave something to be desired if you don't think about what's important to you and set out priorities. Keep in mind how long you're likely to spend in retirement as you set out making plans that will fill your time.
Of course, the above considerations are still linked to finance too. If you'd like help understanding what your retirement provisions could offer you and how to achieve your goals after giving up work, please contact us.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
Why it's important to revisit your financial plan
Once you've set out a financial plan, you might think all the hard work has been done. But keeping on top of the progress you're making and ensuring it's still suitable is essential for getting the most out of your assets.
When was the last time you revisited your financial plan? It's a task that you might be tempted to put off or believe there's no need to complete. Perhaps you have reviewed your finances, but how in-depth did you go? It should be considered just as important and worthwhile as the initial work you did when setting out a financial plan.
Think back just ten years ago, your lifestyle, priorities, wealth and aspirations have probably changed at least to some degree during that time. As a result, the financial plan you created a decade ago may no longer be what's right for you. Coming back to your financial plan is a key way of making sure you're still on track financially.
Why review your financial plan?
1. Reflect personal changes: As we've mentioned above, your own situation can change significantly. Perhaps you've celebrated a pay rise over the last few months, welcomed a new family member or have invested in a second home. These can have an impact on your finances now as well as the best way to save and invest. A regular, full financial review gives you a chance to build these life events into your plan. Even seemingly small changes in your personal life may mean there's a better route for reaching your goals.
2. Review your goals: This one links with personal changes. Whilst your life may be similar to last year in terms of work and family, you may find that your aspirations have changed significantly. Perhaps you've decided you'd like to retire from work in a few years, which may mean you should start increasing pension contributions or reducing investment risk, for example. Taking some time to think about what you want to achieve in life and the role money will play in helping you reach goals can ensure your financial plan is aligned to you.
3. Keep track of progress: Even if your goals remain the same, you should take steps to measure your progress. From saving to purchase your first home to making retirement plans. Despite efforts, even the best-laid plans can face bumps along the way, some of which may be outside of your control. Reviewing how you're progressing is crucial for ensuring reality and expectations are in line.
4. Highlight potential risk and opportunities: New opportunities and risk are always emerging. A financial review is a perfect time to take a look at these and respond where necessary. You should also take the time to review your current exposure to risk is still right for you. It's a factor that should be influenced by many different areas, from your goals to capacity for loss, which may also change over time.
5. Take regulatory changes into account: As well as changes to your life, you also need to consider regulatory changes. These can be hard to keep track of, as some will barely be mentioned in the press. From changes to Inheritance Tax thresholds to the Lifetime Allowance for pensions, keeping on top of regulations can be time-consuming. View your financial review as an opportunity to discuss what's changed and how it affects you with your financial adviser.
6. Consider long-term wealth projections: As part of your original financial plan, you may have projected how your wealth will change over the year through cashflow planning tools. This can provide an invaluable insight that you can base financial decisions on. However, the output is only as good as the information the tool has used to reach conclusions. As a result, the core data needs to be updated and reviewed frequently to continue getting the best out of it.
7. Have confidence in your plan: Finances can seem complex and a cause for concern. But you should have confidence in the decisions you make and the direction that you're heading in. Reviewing your finances can give you a greater sense of control and you know you're basing decisions on information that's up to date.
When should you review your financial plan?
With so many reasons for reviewing your financial plan, you may be wondering when and how often you should undertake the task. Ideally, we advise clients to thoroughly review their finances every year. This makes it far easier for you to keep on top of potential changes and ensure that your financial plan suits your current situation. On top of this, it's a good idea to review your finances following big life events too, from buying a home or getting married to celebrating retirement.
If you're ready to look over your financial plan, please contact us.
The World In A Week - The reign in Spain
Politics, it would seem, does not like being out of the spotlight. On a quieter week for Brexit and Trump, the vacuum was filled by the eager Europeans. In echoes of last year's Italian election, where the scars of the Eurozone crisis from a decade ago are still inflamed, the tension of populist politics spread to Spain, where they held a general election last night.
The current ruling party, PSOE (Partido SocialisTheta Obrero Español, or 'Spanish Socialist Workers' Party'), which only came to power last year after ousting the reigning People's Party in a confidence vote, won the majority of votes. Celebrating a decisive victory, Pedro Sánchez's party increased their percentage of the overall vote to 28.7%, up from 22.6% in the last general election in 2016.
Much of the success of PSOE can be found in the implosion of their opposition, which saw Spain's right-wing parties split into three distinct entities, diluting their influence over voters. The campaigning from right-wing parties was equally disastrous and played into the hands of the low-key strategy employed by PSOE.
Mirroring the UK, the likely option is for Mr S√°nchez to form a coalition with moderate regional parties to form a majority government. However, in a radio interview this morning, it seems the PSOE has not ruled out reigning as a minority government; Spain is the only country among the largest EU states not to have had a coalition government in the past 40 years.
The markets' biggest fear would have been the emergence of the anti-establishment party Vox taking a grip on Hispanic politics. Political polarisation is becoming the new normal, as western politics move away from the centre.
The World In A Week - Taking matters in to your own hands...
In what was a short week, owing to the bank holiday weekend, Brexit news was light; cross-party talks between Conservatives and Labour continue to progress, reducing angst over a Brexit deadlock. There was a variety of data releases last week from the UK and the Eurozone; the UK continued to show a 44-year low in unemployment in February while wages are at a decade high thanks to an upward revision to January's data. The picture in Europe, as we have mentioned previously, is mixed; the ZEW economic sentiment survey moved in to optimist territory, hitting a 1-year high while opinion on the blocs' current economic conditions continued to decline.
The title of this week's note is aimed at Russia, who have passed a bill to allow the country to create an autonomous internet. Known as Runet (Russian Internet), the bill will allow Russia to keep its domestic internet running even when disconnected from non-Russian root servers. The premise is that Russia believes their national security to be at stake and the bill is aimed at countering aggressive character of the US strategy on national cybersecurity. Over 300 lawmakers in the lower house voted for the bill, with 68 voting against the bill. To become law, the Federation Council, the upper house of Parliament, must approve the bill, which would come into effect on 1st November 2019. This move has been met by anti-isolation protests in Russian cities.
Chinese GDP data surprised last week as figures showed that the economy continues to grow by 6.4% year-on-year in the first quarter of 2019; although it is important to treat Chinese GDP data with caution. This figure seems particularly impressive when compared to G10 countries; a group of 10 advanced economies, which, over the same period, showed growth of c.1.7%. While annual growth in excess of 6% seems high, by historic standards, this is certainly not the case; looking back to as recently as 2006, Chinese GDP growth was in excess of 15%, one of the highest levels in the country's history. The 'surprise' however is that 6.4% beat the consensus forecast of 6.2% and was due to a jump in industrial production; jumping to 8.5% in March from 5.7% in February. This exceptional increase came from infrastructure projects and 5G production, a trend we expect to continue.