The World In A Week - Drawing the path for interest rates
Written by Shane Balkham.
Markets remain focused on the war in Ukraine and, although there were tentative signs of progress and positivity over the peace talks in Turkey, the fighting continues unabated. The Ukrainian Government has refused Russia’s demands that the port of Mariupol be surrendered. Development in talks is welcome, however it seems impossible that Europe can return to how things stood before the invasion. Sanctions against Russia will linger and spending on energy security and defence will likely take on greater importance and significance for many countries.
Before Russia had invaded Ukraine and inflicted a terrible toll on human life, the markets were fully focused on the rotation to an interest rising environment and how quickly rates would be hiked in order to combat the rising levels of inflation. Last week, we had the committee meetings from the central banks of the US and UK to give guidance on how they will enact interest rate policy.
The Federal Reserve raised interest rates by 0.25% and gave a generally buoyant outlook, citing the strong employment numbers in the US. This was arguably expected, and the key element was always going to be the forward guidance for the path of rate rises in 2022. The projections from the Fed showed that six additional rate hikes are now priced in for the remainder of the year, putting year end interest rates at 1.75%.
The Bank of England also raised rates by 0.25%, making it three consecutive meetings of rising interest rates by a quarter percent. However, the accompanying rhetoric was more subdued than its US counterpart, noting the risks to the growth stemming from the war in Ukraine.
The war has undoubtedly made the decision making of the central banks more difficult. The effect on the supply of food and energy has increased the pressures on inflation, where prices have already been rising sharply. This could dent consumer confidence and the policymakers will not want to compound the problem by raising rates too quickly, a sentiment that was echoed in the Bank of England’s minutes.
The backdrop continues to be challenging and uncertain and will be for some time. The markets will remain focused on the central banks, even beyond the hopeful cessation of the conflict. Having appropriately diversified investments during times of stress continues to be a successful strategy.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 21st March 2022.
© 2022 YOU Asset Management. All rights reserved.
The World In A Week - Commodities & Inflationary conundrum
Written by Richard Warne.
After enduring the COVID-19 pandemic for the last few years and seemingly coming through the other side, I think most would have assumed that the flight path looking forward was going to be a positive one. However, Vladimir Putin’s decision to invade Ukraine certainly has thrown that proposition to the wall. The question is, how long it will last and what will the human cost be. Truly a tragic situation. This has further implications for assessing inflation, growth, and global stability. As geopolitical tensions continue to send shock waves across global markets, many questions about the prospect of stagflation (higher inflation and slowing economic growth) and recession have begun to emerge.
Last week the US banned Russian oil imports, temporarily sending Brent crude oil over $128/barrel before settling down around $110/barrel. US inflation hit a whopping 7.9%, the highest level since 1982, and the Fed signalled a 25bps rate hike at its next meeting, while German CPI touched 5.1%. Last Thursday, the European Central Bank announced that it will scale back its bond-buying stimulus programme faster than previously expected, in response to higher inflation risks. In the US, the 10-year Treasury yield rose 15bps to 1.99%, while the UK 10-year Gilt and German 10-year Bund yields rose 22bps and 25bps to 1.52% and 0.27% respectively, over the week.
On a positive note, many European banks disclosed their direct exposure to Russia with management teams reiterating that exposures are manageable, helping bank stocks and subordinated bonds such as AT1s to recover. Equity markets were generally in negative territory last week, with the MSCI All Country World Index -1.3% in Sterling terms, though we did see a relief rally in the UK with the FTSE All Share up +3.0% and the MSCI Europe ex-UK up+4.1%. We maintain a neutral stance on equities across our portfolios, with all the uncertainty that currently exists. Being tactically overweight, UK equities positively contributed to performance.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 14th March 2022.
© 2022 YOU Asset Management. All rights reserved.
Get your finances in shape before the end of the tax year
The end of the tax year is just around the corner. This year’s deadline is 5 April – and there’s no better time to prepare for it than now.
There’s often a rush to get one’s finances in shape in March. For most people, the end of the tax year is nothing to worry about, but it’s still always good to check your allowances – you may be able to find more tax relief on your savings and investments.
With less than a month to go, here is everything you need to do before the deadline.
- Top up your ISA allowance
You have a limit of £20,000 for your savings and investments to be put securely in an ISA account, which is a tax-free wrapper.
Crucially, if you haven’t already used your annual ISA allowance by the end of the tax year, the remaining allowance doesn’t roll over – you lose it forever.
With stocks and shares ISAs and the Lifetime ISA (LISA), there is no tax to pay on income or capital gains from your investments. With a cash ISA, the interest is tax-free.
Also, don’t forget about investing in a Lifetime ISA if you’re looking to invest in a property or in your pension. People aged 18 to 40 can invest money in a Lifetime ISA, which benefits from a 25% government bonus. For example, a maximum saving of £4,000 a year into a LISA will become £5,000 with the bonus.
- Use your pension allowance
It may be useful to consider topping up your pension to increase your savings for retirement.
You can claim income tax relief on pension contributions up to a limit of £40,000 a year according to HMRC, but the exact amount depends on your personal circumstances.
You can also claim unused allowances from three previous years if you were a member of a registered pension scheme during that time.
- Capital gains allowance – for 2021/2022
The Capital Gains Tax (CGT) allowance , or ‘Annual Exempt Amount’, is £12,300 in the 2021/22 tax year. This means you won’t be taxed on profits below £12,300 if you sell your assets such as property or stocks and shares.
It’s worthwhile considering using as much of this allowance as possible each year if you have a large portfolio of shares outside an ISA, for example, by selling assets that have risen in value, or you could be storing up a large exposure to capital gains tax for the future.
- Inheritance tax planning
Don’t leave inheritance tax planning until it’s too late – it’s always good to have your finances in check in preparation for life’s unfortunate events.
Inheritance tax planning is not just for elders. Families should focus on not letting excess income build up in their accounts if they don’t need it.
The money can be gifted to dependents or through a trust. You can give away £3,000 each year or as many gifts of up to £250 per person as you like without being subject to IHT. Parents can also give £5,000 to each of their children as a wedding gift, while grandparents can give £2,500.
- Dividends
If you own investments that pay a dividend, you will be exempt from paying tax on those dividends up to the level of the income tax personal allowance, which is currently £12,570. This could however be eaten up by salaried income if you are still in work.
Beyond this, taxpayers can reduce their dividend allowance by using tax efficient wrappers and tax allowances. For example, basic-rate taxpayers can gain interest of up to £1,000 in their savings allowance while not paying income tax. Taxpayers on a higher rate can earn up to £100 interest tax-free.
Be wary that dividend tax is also set to rise from 6 April. The higher rate of dividend tax will go from 32.5% to 33.75%. This will mean that for every £1,000 dividend received, an extra £12.50 will need to be paid.
- Think about the children
If you have children, a good idea is to start saving money as soon as possible. This way, by the time they turn 18, the children can enjoy a larger pot of money to accomplish their next objectives, whether that be heading off to university or even saving up for a deposit on a property.
Parents and guardians can open a Junior ISA (JISA) on behalf of their children, and they can only access the money after they turn 18.
The returns on money made within a Junior ISA are free of UK tax. However, there’s a limit to how much you can put into a JISA of only £9000 per year in 2021/22.
Does ‘Isa season’ still matter?
ISA season is the period just before the end of each tax year when time is running out to use up tax-free allowances.
Each year, much is made of the final few weeks before the deadline, which this year is 5 April. But how do the various benefits stack up in the current high-inflation climate, and which allowances are most effective?
Allowances
ISA allowances have changed in the past, but in the last few years they have been set at one level both for normal cash and for stocks and shares ISAs.
Unlike other types of account such as the Lifetime ISA (discussed below), the limit is pretty generous, relative to the average working income.
Anyone looking to save into one of these accounts has an annual allowance of £20,000. Prior to this, the limit was £11,800 before it rose to £15,000 in July 2014. It was then boosted to the £20,000 level three years later.
This means that the level hasn’t changed since 2017, which some critics describe as a form of stealth tax. As with income tax rates, if the bands don’t rise with inflation, then effectively the Government is benefitting at the top end from any money an individual can’t put into the allowance.
And with inflation currently above 5%, this effect will be stronger now than at any time under the current allowance.
Achievable?
That being said, the major criticism levelled at ‘ISA season’ is that actually, although the allowance hasn’t moved for a few years, realistically it isn’t relevant because most people won’t be able to fill it each year anyway.
Were you to meet your allowance each year by making monthly contributions, you’d have to put away around £1,667 a month. This is indeed unlikely to be met by most people, when average wages are still around £31,000 a year before tax, according to the Office for National Statistics.
Nevertheless, it remains relevant for anyone dealing with larger sums, which may occur through work bonuses, inheritances, or other such windfalls.
Rates
There is also evidence that cash ISA rates do increase in the run up to the end of the tax year, according to Moneyfacts.
This means that if you’re looking to take advantage of a cash account then it could be the best time to start shopping around.
Even so, cash ISA rates are extremely low at the moment – much below levels of inflation. This means that generally speaking, unless you’re looking to put money in an easy-access account for rainy-day reserves, then it is generally better off invested for the long term in stocks, bonds and other investments.
Lifetime ISA
There is, however, one account where ISA season really does matter. That is in the Lifetime ISA (LISA).
Unlike typical ISAs, the LISA has a limit of just £4,000 per year for you to contribute. Anyone between the ages of 18 and 39 can open one and it comes with an extremely generous 25% bonus from the Government.
This means that if you put the maximum of £4,000 in, you’ll get a bonus of £1,000. That is on top of any interest you accrue through a cash LISA or a stocks and shares LISA.
There is an important caveat with the LISA, though: you have to use the money for a deposit on a house, strictly as a first-time buyer; otherwise, the money must stay in the account until you turn 60 – on pain of a hefty withdrawal penalty, similar to a pension.
If you’re considering which accounts might be best, or whether you should try to top up your ISAs before the end of the tax year, don’t hesitate to get in touch with your financial adviser.
Storm Eunice has shown the importance of robust insurance protection
At a time when finances are strained and climate-related events threaten to make things worse, not having the right insurance cover could lead to major setbacks.
Storm Eunice was a timely reminder for us all that we need insurance cover to help protect us against a range of aspects we encounter in our daily lives. Being financially resilient is more important than ever, and insurance plays a key role in helping us build that resilience.
Here are a few key areas to consider.
Home and buildings
Not only is having buildings and contents insurance typically a condition of most UK mortgage offers, but it is also absolutely critical to protect your home against a range of possible risks.
These include extreme weather events such as Eunice, but even more everyday issues such as burst pipes, burglary, or fires.
Really basic issues can invalidate your home insurance, so it is important to keep on top of your policy. Leaving a home unoccupied for a length of time (often around 30 days), not updating your provider when you make alterations to the property, or not using an intruder alarm are all things which can invalidate your cover.
Another major one, which has become more prevalent during the pandemic, is using your home for business purposes. ‘Working from home’ if you have an office job is typically not a problem, but it can become an issue for occupations which involve selling products online from your house, or having customers come to your property for any reason.
The value of your contents should also be scrupulously accounted for. Overestimating the value of the content of your home can lead to policies being invalidated. Items of specific high value such as collectibles, jewellery or electronic equipment should be explicitly accounted for.
Travel
Storm Eunice caused the cancellation of hundreds of flights in the UK, underpinning the importance of travel insurance.
But the need for it to protect your holidays is much broader than just foul weather, and the pandemic has made getting the right policy more important than ever. With travel ramping back up in the wake of government restrictions being lifted, it is essential to ensure you’re fully covered from the moment you leave your house, to stepping off the plane in your destination and back again.
The most important thing to be mindful of is travel advice warnings. During the pandemic major issues arose for travellers where the Foreign, Commonwealth & Development Office (FCDO) would issue travel warnings for certain countries, but flights would still be operating to those regions.
If the FCDO advises against all but essential travel to a region and you still go – it can invalidate your insurance. But if the airline is still operating the flight you’re booked on and you don’t have insurance – they are under no obligation to refund you.
Many airlines improved their booking and flight change policies as a result of the pandemic, but some are now returning to their less flexible pre-pandemic state.
Life and illness
Life and serious illness protection is a major policy that many people unfortunately forget.
Life insurance is essential when you have dependents such as children, or co-own property and have a mortgage in place. Were something to happen to you, without cover in place, your partner would be liable to cover the mortgage payments despite losing your income.
Some workplaces offer types of cover as a part of employment contracts, but this is not always guaranteed. Life and serious illness cover is therefore essential to protect against the most tragic of unexpected events.
Because these kinds of policies typically deal with such high levels of pay-outs, insurance firms can be extremely particular about the details of policies and information.
Failure to disclose information such as pre-existing medical conditions, missing premium payments, trying to claim too soon, and some types of death are reasons why an insurer may refuse to pay out.
The most common issue however is failing to purchase cover far enough in advance. Not only will you get a better premium the younger you are, but also the longer you hold a policy for, the less likely it will be turned down in the event of a serious, terminal illness or for other pre-existing conditions that might lead to your death.
Student loan changes increase pressure on The Bank of Mum and Dad
From 2023 future graduates will start to repay student loans sooner, putting more pressure on young people at a time when cost pressures are rising exponentially.
The threshold for repaying student loans will drop from £27,275 to £25,000 and graduates will continue to pay them back for much longer – up to 40 years.
With student loan changes in the UK set to exclude many young people from receiving financial support, The Bank of Mum and Dad will feel heightened pressure to support their children.
Here are some ways you can help your children financially in higher education and beyond.
- Look further than Student Finance
There are plenty of opportunities out there at the grasp of ambitious children. If you believe your child has the potential to apply for extra funding – such as a scholarship – why not encourage them to do it?
Postgraduate Search has a comprehensive list of bursaries and scholarships: don’t assume these are only for low incomes, top grades, or new starters – there are incentives for everything from subject choice and sporting talent to gender and nationality.
You can also search for hardship funds and advice for emergencies or managing debt at the university, too. University welfare teams, lecturers or simply a student adviser can be the best place to start.
- Be careful how you give
Most UK students don’t have to pay tuition costs until after graduation. After that, 9% will be taken monthly from their salaries.
Most won’t ever pay back their entire loans, and some will never pay anything at all if they don’t reach the income threshold. Student debt doesn’t function like normal debt such as a credit card or mortgage. You only pay if you can.
As a parent, you might be wondering how you can help your children financially, but using a lump sum to pay down student debt is not an effective solution. It would be more sensible to put that towards a child’s deposit on a house.
Alternatively, if you have extra monthly income you think can help, giving them money to deposit in a Lifetime ISA (LISA) can be an effective way to help them financially in the long term.
- Help them become organised
Good financial habits come naturally to some, but for your graduate child, they might not be the best with their money despite several years at university learning how to get by.
Helping them develop good financial habits and teaching them about important financial tools such as credit cards, savings accounts and insurance can be a really good way to help them without necessarily just giving them money.
Good financial habits will help them enter their new careers on a really strong footing and prevent disasters in the future.
- Use your Junior ISA (JISA) allowance
If you still have a few good years to wait for your children to go to university, try looking into opening a Junior ISA account.
That way, when they turn 18, your children can use a bigger pot of money to go to university, accomplish their dreams or even use it as a deposit for a house.
This account can also be a useful tool to help to educate your children about finance, as it offers the option to continue saving and investing the money after they turn 18.
Junior ISA subscriptions see their limit maintained at £9,000 per year. The JISA limit was last changed in early 2020, when it was doubled from £4,500 to its current level. So, there are plenty of resources.
The World In A Week - The Return of History
Written by Cormac Nevin.
As the war in Ukraine entered its second week, the impact of a prolonged conflict began to take its toll on markets. The MSCI All Country World Index of global equities was down -1.3% last week, however the sell-off was intensely concentrated in Europe as the MSCI Europe Ex-UK Index returned -8.9%, while the FTSE All Share Index of UK stocks was down -6.7%. Other markets such as Japanese and US equities were assisted by a weakening GBP and recorded a small positive return. Yet again, these events highlight the critical importance of diversification.
The second and third order effects of the conflict are now becoming evident in international commodity markets and will soon become painfully so to consumers. As of today, oil has surged to roughly $130 per barrel while UK natural gas futures have gone parabolic and have far exceeded the price spike in December of last year. Another troubling dimension is the impact on food and fertiliser prices, given Russia and Ukraine’s global importance in the production and export of both. Wheat futures have surged to an all-time high, and the geopolitical tail risk of food insecurity in the developing world is becoming more pronounced. The Roman poet Juvenal recognised the importance of bread and circuses to maintain civil order, and the emperors would no doubt be surprised to learn that Egypt and North Africa are now major importers of grain from the Eurasian Steppe. The 2011 Arab Spring uprisings were preceded by a spike in the price of food which led to regime change across the region.
These developments likely give more room to run for two of the investment theses which we have had sympathy with over the last two years. One being, that inflation would likely be less transitory than many central bankers might have hoped, and that markets may not be able to rely on monetary support to the same extent in future. Secondly, that there has been a structural underinvestment in the old economy (commodity production & supply chains) and too much capital allocated to flashy tech stocks. As a result, our commodity-focused value equities, inflation-linked bonds, commodities, and absolute return strategies, have been strong performers recently.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 7th March 2022.
© 2022 YOU Asset Management. All rights reserved.
The World In A Week - Russian Invasion
Written by Millan Chauhan.
Following Russia’s invasion of Ukraine, volatility in markets reached two-year highs which has since seen Russia hit with several sanctions, aimed to restrict its global exports and punish its wealthiest individuals. Western Allies also agreed to block Russia’s access to the Swift international banking payment system. S&P Global has also downgraded Russia’s credit rating to junk status with the sanctions set to reduce the capabilities of their financial markets. Continental Europe is very dependent on Russian Gas, with Germany buying 49% of its gas supply from Russia.
The MOEX (Moscow Exchange) Index closed at -33% on Thursday with the index down -46% year-to-date. Shares in oil and gas stocks sold off sharply with Gazprom closing at -37%. The Russian Rouble also plummeted in value, falling 30% against the US Dollar. The price of Brent Crude Oil briefly surpassed $100 with the sanctions imposed set to distort global supply chains further. This is only expected to increase inflationary pressures and exacerbate the same problem policymakers are trying to address when the Federal Reserve are set to meet next on March 15th.
Global markets sold off sharply last Thursday with Global Emerging Markets & European Markets impacted most, MSCI Emerging Markets declined -3.7% and MSCI Europe ex-UK fell -1.5% in Sterling terms. The S&P 500 closed +2.1% in Sterling terms following significant intra-day trading on Thursday that saw the largest daily swing since March 2020. Volatility remains very high as markets price in new waves of information.
Russia is a very small component of our Global Emerging Markets Equity asset class exposure, but the event itself clearly resonates through global markets. We hope a resolution can be achieved quickly.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 28th February 2022.
© 2022 YOU Asset Management. All rights reserved.
The World In A Week - Storm before the calm?
Written by Shane Balkham.
The continued threat of a Russian invasion into Ukraine kept markets volatile last week. Tensions were heightened as Russian military exercises, together with their ally Belarus, saw shelling along the border with Ukraine. Inevitably, there were casualties on the Ukraine side of the border.
Fears rose that these exercises were the prelude to a full-scale invasion, as the number of troops amassed on the border reached 190,000. Mediation was given one final chance, with President Macron suggesting to Vladimir Putin, over a telephone call, of holding a Ukraine Summit to discuss security and strategic stability in Europe. This was on the condition that Russia does not invade Ukraine.
The situation does appear to be at an inflection point, one in which diplomacy could still end up being the winner, although there is much at stake and all out conflict is still a valid and likely scenario.
Another battle that is brewing is with the Federal Reserve and its fight with inflation. Promising to raise rates and start its quantitative tightening policy next month, the officials at the US Central Bank have a little over three weeks to set out their forward guidance, in order not to surprise markets.
Traditionally, before the Federal Reserve meets, its officials embark on a series of meetings to deliver the message of what can be expected from future monetary policy. It is an almost cast-iron certainty that rates will be raised by the Federal Reserve, but what is unknown is the pace and path of these future hikes.
Expectations have already violently swung this year, from three hikes in 2022 to six, as well as some Fed officials calling for a half-percent hike in March. Be prepared for plenty of rhetoric as the US Central Bank looks to dampen demand in order to tackle inflation.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 21st February 2022.
© 2022 YOU Asset Management. All rights reserved.
The World In A Week - Sunak’s Spring Statement
Written by Millan Chauhan.
Last week saw the UK’s Chancellor of the Exchequer, Rishi Sunak, unveil his spring statement update that, in an attempt to support individuals with the rising costs of living, saw a marginal cut in fuel duty and a rise in the minimum threshold of National insurance. On Wednesday last week, UK inflation hit a 30-year high, reaching 6.2% in the 12 months to February. Inflation was at 5.5% in the 12 months to January, but the Russia-Ukraine conflict saw energy prices move even higher due to supply constraints, which has only added to the spiralling increase in living costs. Inflation increased by 0.8% in the month of February, with transport costs being the major contributor. Transport costs have seen an increase of 11.5% in the 12 months to February, the biggest increase of all categories measured by the Office for National Statistics.
Breaking down inflation further, energy prices were a top contributor with the inflation rate of electricity at 19.2% and gas at 28.3% for the year in the 12 months to February. The average household energy bill in February 2022 reached £1,971, compared to the previous year of £1,138, a staggering 73% increase.
Raising interest rates is one of the key monetary policy methods of tackling inflation, with the intention of reducing consumption and promoting savings. Global Central Banks have started increasing rates, with the Federal Reserve raising rates by 0.25% for the first time in 3 years. The Federal Reserve Chair Jerome Powell announced that rate hikes of greater than 0.25% may occur if necessary. The Federal Reserve expect to raise rates at each of their remaining six meetings this year. The pace at which the Federal Reserve acts to raise rates is going to be crucial as they intend to combat inflation fears without crippling the global economy. The current environment remains challenging as central banks are having to control inflation without causing a recession.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 28th March 2022.
© 2022 YOU Asset Management. All rights reserved.