The World In A Week - Following the leader
Written by Shane Balkham.
The tightening of monetary conditions continued last week with the Federal Reserve hiking rates by 0.75%, repeating the size of the hike that was made last month. The Fed has raised rates by 2% over the past three meetings, intensifying the efforts to combat inflation and recover some level of credibility. However, during the press conference Fed Chair Jerome Powell alluded to a slowing in the pace of tightening at future meetings, to allow for an assessment on the effect that the rate hikes are having on the US economy. Powell confirmed that future decisions will be wholly data dependent and made on a meeting-by-meeting basis.
This adds pressure to the Bank of England to follow the lead set by the Federal Reserve last week and the European Central Bank the week before. The Monetary Policy Committee has been consistent in raising interest rates by 0.25% for each meeting since December 2021 and has acknowledged that it may need to act more forcefully in response to what they see as persistent inflationary pressures.
Governor Andrew Bailey has made it clear that a hike of 0.5% is one of many options currently on the table for discussion on Thursday. Not only does the Committee have to consider a slowing UK economy, but they also need to be cognisant of political promises being made in the Conservative leadership race. Pledges of tax-cuts could lead to interest rates being hiked further.
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 1st August 2022.
© 2022 YOU Asset Management. All rights reserved.
The World In A Week - Earnings Call
Written by Millan Chauhan.
Last week kickstarted another earnings season in the US as companies disclose their financial performance over the last quarter. The big banks were the first set of companies to report and should provide insight into the strength of the economy. JP Morgan saw a 28% fall in net income as investment banking and IPO revenues dried up. Earnings expectations have been strong thus far despite having faced soaring inflation, restricted supply chains and dampening consumer sentiment surveys. However, there is a diminishing outlook for earnings upgrades as we haven’t seen reports on earnings be truly impacted by the challenging macroeconomic climate.
US inflation data saw a further increase as Consumer Price Index (CPI) reached 9.1% with gas prices up 11.2% during the month of June. Elsewhere, America’s five-year inflation expectations declined to 2.8%, its lowest level over the last year which has prompted the Federal Reserve to raise rates less aggressively with a 0.75% increase expected at the Fed’s meeting next week.
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 18th July 2022.
© 2022 YOU Asset Management. All rights reserved.
State Pension set to rise by up to 11% - here’s what you need to know
The State Pension is set to rise by around 11% next year, as the Government has committed to the much-debated triple lock.
The State Pension triple lock guarantees that the benefit for retirees will rise by inflation, wage growth or 2.5% – whichever is higher at the time of the update. This is set to be decided by the data in September, with the rise implemented from the new tax year, 6 April 2023. This will affect around six million retirees in receipt of the benefit.
11% rise?
On the basis of those three inputs, the State Pension is likely to rise by up to 11%. This is not guaranteed, but what is forecasted by the latest inflation expectations from the Bank of England.
This has been known for some time, but the Government cancelled the triple lock last year. It did this because wage data at the time in 2021 was abnormally high.
But unlike inflation, which is high for particular economic reasons, the wage data was unusually high thanks to problems with the Office for National Statistics (ONS) information collection during the pandemic.
That wage data has now normalised, but inflation is at record levels. Despite this, the Government has now reaffirmed its commitment to the rule, leaving State Pension recipients in line for a bumper benefit increase.
The Government has come in for criticism over its decision to uplift the State Pension in line with inflation, particularly because workers aren’t receiving such generous pay increases, per ONS data, nor is it hiking other benefits such as Universal Credit by equivalent amounts.
Cash terms
Those who receive the full new State Pension currently receive £185.15 per week. If you defer taking the State Pension, this weekly payment can be larger once you do start claiming.
Those who reached State Pension age before 6 April 2016 will get a different amount which depends on the basic State Pension rules.
In cash terms for those who are eligible for the full new State Pension, an 11% uplift would be around £20.60 per week extra, or an extra £1,071.20 per year. This would take the State Pension payment over £10,000 for the first time ever to around £10,699 per year.
While this is a relatively small amount compared to other areas of wealth and income, it does form an often-essential part of many retirees income, especially in later years of life.
For those with ample income from wealth, or even those who are happy to continue working later in life, deferring the State Pension can be a really effective way to build up extra earnings for later in life.
Despite popular imagination, the State Pension isn’t accessed from a pot of money someone works towards over their adult life. Contributions are measured through National Insurance payments by qualifying year. The more of these you build, the more State Pension you’ll accrue for retirement, until you reach the ‘full’ amount.
If you spend any time out of the workforce, for reasons such as caring for a relative, or perhaps if you care for your children full time, it’s really important to claim National Insurance Credits (NICs) to ensure when you get to retirement age you have the full quantity you need.
If you’d like to discuss this, or anything else regarding your wealth journey, don’t hesitate to get in touch.
Nationwide now offering 5% interest– is cash back?
Nationwide has launched a new offer of 5% interest on current account cash.
The building society has ratcheted up its interest rate on the FlexDirect current account to entice more customers through its doors.
The increase takes interest on the current account from 2% to 5%. However, the rate is only available for up to £1,500 for 12 months. At the end of the 12 months the rate falls to 0.25% AER.
You’ll also have to pay in at least £1,000 a month. Anyone who doesn’t already have a current account with Nationwide can switch using the Current Account Switching Service (CASS) and will receive a £100 bonus for doing so.
This combined with the interest will earn you £200 over 12 months with the account.
Best place for cash?
The Nationwide account will only take care of a small amount of money for you and isn’t practical for anything like larger savings amounts.
That being said, with the Bank of England hiking interest rates, cash is becoming more attractive.
The top rate on an easy access cash ISA is with Marcus by Goldman Sachs offering 1.3%. This is however still lower than the 1.5% rate that Marcus offered when it first launched in 2018.
For a one-year fixed cash ISA you can get 1.6% from Aldermore, two years 2.45% from Charter Savings Bank, or for five years 2.6% from Hampshire Trust Bank.
These rates are moving up regularly with the base rate rising but are still well behind the current level of inflation, which stands at 9.1% on the Consumer Prices Index (CPI) measure from the Office for National Statistics (ONS).
Is cash king yet?
With investment markets struggling this year it may be tempting to assign more wealth to cash, but ultimately this is still dooming money to devaluation, with such a big discrepancy between rates on offer and inflation levels.
The reality is that investments are still the best long-term method for growing wealth.
Cash is useful for an emergency fund. Holding some cash is also useful if you rely on wealth for your income, as having a pot of cash to draw upon in the short term is a good way of preventing the crystallisation of losses when markets are down.
But beyond this, cash really isn’t yet king. In fact, interest rate rises have a long way to run before cash savings become a viable method of storing long-term wealth again.
Note all rates quoted correct at the time of writing but subject to change.
RPI inflation change could cost pension schemes “billions”
Changes to the way that inflation is officially calculated could cost some pension holders “billions”, a challenge in the High Court has warned.
The challenge comes from representatives of the pension schemes of BT, Marks & Spencer and Ford UK and is attempting to block efforts by the Government to alter the way the Retail Prices Index (RPI) measure of inflation works.
What is RPI?
The Retail Prices Index – or RPI – is one of the oldest existing measures of inflation used by the UK Statistics Authority (UKSA) and Office for National Statistics (ONS) to calculate price changes in the economy.
It is however widely seen as an inferior measure, having since been superseded firstly by the Consumer Prices Index (CPI) and now Consumer Prices Index including Housing costs (CPIH).
CPI is often the most quoted measure in the media when we see news stories about rising inflation and such. But CPIH is generally perceived by statisticians as the most accurate measure of prices and the impact on households as it includes housing costs which form a large part of many people’s budgets.
Despite this, RPI is still used by many organisations to calculate price changes. This includes everything from student loan interest payments to rail fares, mobile phone, and broadband contract prices.
Why is the Government changing RPI?
RPI is widely seen as an inaccurate measure, often overestimating the true level of price inflation in the economy.
The impact of current high inflation levels is being exacerbated by RPI inaccuracy. For instance, in June the Government announced it would be capping student loan interest rate rises, as the RPI measure was leaving students facing a 12% rate on their debts. Instead, it is capping the rate at 7.3% to protect graduate incomes from greater financial pressure.
Instead of simply abolishing it, which would be a complicated process with many organisations reliant on the index, the Government intends to change the way it is calculated to align it with CPIH.
This would have the effect of softening the impact of the measure while not getting rid of it entirely. The change is set to take effect by February 2030.
High Court challenge
Now however, this decision is being challenged through the courts by the above-mentioned pension schemes.
Those schemes argue that changing RPI to match CPIH will costs the schemes, and their members, billions in lower returns.
These schemes see their values uprated by the rate of RPI each year and could wipe out valuable rises for members. For the BT scheme, for instance, some 82,000 members will see around £2.8 billion in value wiped out by the change, costing each member around £34,000.
The case also argues that the holders of £90 billion-worth of Government RPI-linked gilts will lose out in rises as a result. Pension schemes would be affected as these RPI-linked gilts form a large proportion of their holdings. The Government says it doesn’t intend to offer any compensation to such gilt holders.
Overall, the case argues, RPI-linked pension holders will see 4-9% of their pension values wiped out by the change.
How could it affect me?
While it is uncommon for most pension schemes to have RPI-linked increases, it is still possible and worth checking. It is also worth ensuring that portfolio holdings aren’t overly exposed to RPI-linked assets such as gilts, although the readjustment in value for these will have largely already taken place.
If you’re unsure of whether your pension, or any other assets, might be affected by the changes, don’t hesitate to get in touch with us to discuss.
Annuity rates hit eight-year high - are they worth considering again?
Annuity rates have reached their highest level in eight years. But is it time to consider this former staple of retirement income again?
Inflation is reaching multi-decade highs at the moment, and looks set to stay higher for longer. The upward spike in price rises caught many central banks, including the Bank of England, off guard.
As a result, the bank is hiking its core interest rate to combat those price rises. The organisation is mandated by the Government to keep inflation levels at around 2% – and it is currently nowhere near achieving this, with inflation measured by the Consumer Prices Index (CPI) at around 9.1% according to the Office for National Statistics (ONS).
For this reason, the Bank of England is intent on hiking rates, which currently stand at 1.25% – the highest level since 2009. This is where the rise in annuity rates comes in.
What are annuities?
Annuities are a form of retirement income product. Before 2015 when pension freedoms were introduced, they were a much more common product to opt for at retirement than today.
But a decade of low rates, and changes in the rules for accessing pension cash effectively killed the market.
When you purchase an annuity, you exchange cash in your pension for a product that pays you a guaranteed income, generally for the rest of your life. You can get different types of annuities – including level annuities which pay the same amount every year, escalating annuities which rise at a fixed rate each year or inflation-linked annuities which rise (or fall) with inflation.
The length of an annuity also varies, with short, fixed term or lifetime annuities. Impaired annuities also exist, which pay out at a higher level if you have any pre-existing conditions such as obesity or diabetes, or if you are a smoker. Protection can also be built into an annuity in the form of spouse’s income, guarantee payment period or value protection. Each of these options will affect the rate of annuity you can achieve.
Depending on the product you pick, you exchange the cash in your pension for a regular income.
Why are annuity rates hitting new highs?
Providers of annuities will typically take your money and invest in low-risk assets such as bonds. As bond yields have risen this year thanks to adverse investment market conditions, so annuity rates have also moved upwards.
Annuity rates are also rising because the bank rate is rising. These rates move in the same way as cash savings, rising with interest rates. Annuity rates are increasing at the quickest pace in 30 years currently.
Is it time to buy?
Annuities are looking like a more attractive option, and could feasibly be considered as part of a wider portfolio of investments. It could be an especially attractive option if your long-term life expectancy is short thanks to medical conditions, lifestyle or age.
As is the case for all wealth solutions, it makes sense not to put all your eggs in one basket. Annuities can provide some income peace of mind, but are also not very flexible, unlike investments that produce an income from other assets such as bonds or equities.
Pension freedoms, when introduced, were very popular for a good reason – giving retirees much more choice over what happens to their lifetime of wealth growth.
Annuity rates will also change again over time – it’s impossible to say whether they will continue to climb, or will reverse as markets normalise and inflation peaks.
If you would like to discuss your options, or for any queries in general, don’t hesitate to get in touch with your financial adviser.
The World In A Week - A dreadful week for politics
Written by Shane Balkham.
Shinzo Abe, the former Japanese Prime Minister, was assassinated last week. He was shot twice while giving a campaign speech on Friday, in the run up to elections in Japan’s Upper House on Sunday. In the wake of the assassination, voter turnout was boosted and has given Fumio Kishida’s ruling coalition a landslide victory. The coalition won 93 of the 125 seats in the Upper House that were up for election, well above the two-thirds majority that is needed to revise the Japanese constitution.
However, the impact of Abe’s death will be significant for Japanese politics. Shinzo Abe was arguably the most influential leader that Japan has seen in decades, cleverly bringing people together. Although he stood down as Prime Minister due to health concerns, he still remained a dominant force in Japanese politics. The incident has naturally shocked Japan, where political violence has been rare and few people actually own firearms.
Less shocked were the population of the UK, which saw Boris Johnson quit as leader of the Conservative Party but confirmed he would be staying on as Prime Minister until a successor was elected. It has been a chaotic three years for Boris Johnson, which saw him steer the Conservative Party to its biggest victory in more than four decades at the 2019 general election, but ultimately it was his inability to tell the truth that has undermined his tenure.
It looks like it will be an ugly leadership contest to find the next Conservative Party leader and by default, the next Prime Minister. While Rishi Sunak has become the favourite amongst bookmakers, close allies of Boris Johnson are accusing the former Chancellor of being the catalyst of Johnson’s downfall. Loyalists of Boris Johnson will ensure they make the leadership contest as uncomfortable as possible for Sunak, despite his polished three-minute video extolling the virtues that he can bring to the UK as the next Prime Minister.
What the country needs is an honest, competent, and quick contest to find the next leader. However, there will be too many players in this race that will seek to gain an advantage any way they can. Let us hope it is a short race.
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 11th July 2022.
© 2022 YOU Asset Management. All rights reserved.
The World In A Week - The Three “R” ‘s
Written by Richard Warne.
It was only six months ago when the S&P 500 in the US reached all-time highs, in a world where lingering supply chain pressures and potential COVID-19 outbreaks seemed to be the most pressing risks to equities. While those two risks have largely abated throughout the year, the refreshed slate of macro-overhangs may be more daunting than ever. From the heart-breaking war in Ukraine to unprecedented levels of inflation around the world, it is safe to say few could have imagined this is how 2022 would play out.
Rates, Recession and Refinance – the Three “R”’ ‘s. There is a lot to talk about within markets at large and credit in particular. We are now in an interesting part of the economic cycle, which we have not seen in almost 15 years. Rates and spreads (yields on corporate bonds are increasing) with both moving wider. Ultimately, this is now leading to much higher all-in financing rates for corporates, despite the fact there is not a massive wall of maturities (refinance risk) this year. As an example, if one priced today a typical “benchmark” high yield bond in Europe, the implied cost would be over 6.8%. However, at the start of 2022 the implied cost would have been closer to 2%, assuming one was pricing over the 5-year German government bond. Great in the medium term for bond investors, however higher all-in yields leads to a more difficult/expensive primary market, and we are seeing this play out now.
Russia is on the verge of defaulting on its external sovereign bonds for the first time in a century, the culmination of global sanctions over its invasion of Ukraine. Because of the soaring price of energy, the Kremlin does have the means to pay its debt, just not the route, and any path forward remains uncertain.
In corporate news – Apple is planning an overhaul of some of its products which will set the stage for its next slate of devices and potentially an ambitious era for the Company. They include four iPhone 14 models, several Macs with M2 and M3 chips and the Company’s first mixed-reality headset, whatever that means!
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 4th July 2022.
© 2022 YOU Asset Management. All rights reserved.
The World In A Week - The Bear of Recession
Written by Ilaria Massei.
Last week’s focus was once again on Central Banks. Despite the Federal Reserve’s largest interest rate increase since 1994, the Fed’s Chair Jay Powell warned that a US recession is “certainly a possibility”. He argued that the US has been resilient to action a tougher monetary policy trying to avoid a downturn. However, this depends on factors that can no longer be controlled, such as rising commodity prices following Russia’s invasion of Ukraine and further disruptions to supply chains.
The European Central Bank (ECB) warned the Eurozone that food prices will keep rising at near-record rates for at least another year. The Economic bulletin published by the ECB on the 23rd June stressed the fact that “already existing price pressures in the food sector have intensified following the Russian invasion of Ukraine”. One of the main points to be considered is that Russia exports more than a quarter of the fertiliser of the Eurozone’s consumption, however the Eurozone’s direct dependence on the region involved in the war is overall limited. Additionally, reduced supply from Russia and Ukraine can be compensated by greater supply from other countries. However, this solution could lead to higher prices and will likely increase inflation pressures in the upcoming months.
Elsewhere, the Bank of Japan (BoJ) is sticking with its ultra-loose policy which consequently is weakening the yen against the dollar. However, the BoJ made it clear that its policy is not going to change, but it will pay attention in case of further developments. Russia is now at risk of default as the deadline for payment on Russia’s foreign debt has passed. Russia has reserves, thanks to oil exports, but many sanctions are excluding Russia from the global financial system, and this could possibly lead the country to default.
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 27th June 2022.
© 2022 YOU Asset Management. All rights reserved.
The World In A Week - Narrowing the gap
Written by Millan Chauhan.
Last week, the Bank of England (BoE) announced it had raised interest rates by 0.50%, the biggest increase in 27 years. UK interest rates now sit at 1.75% which is still way below the current inflation rate of 8.2%. The BoE has only increased rates in increments of 0.25% thus far since the pandemic, but has now opted for a more aggressive stance following similar moves by both the European Central Bank and the US Federal Reserve. Previous forecasts made by the BoE stated it could expect inflation to reach 11%. However, it has since revised this figure to 13%, as the cost of energy is expected to increase in the autumn. The effect of higher interest rates will increase the cost of borrowing and in theory encourage a consumer behaviour shift from higher spending to higher savings. This would then slow down the demand for goods and services and alleviate the pricing pressures we have seen over the last 12 months.
The BoE also released guidance on its economic forecasts which signalled that the UK would fall into a recession later in 2022 as shrinking demand begins to be priced into the economic data. It also stated the severity of the recession may be longer than its initial forecast.
Elsewhere, we saw the US unexpectedly add 528,000 jobs to the labour market as their unemployment rate fell to 3.5%. Treasury yields rallied strongly following the release of the economic data, in particular the 2-year Treasury which is often regarded as a proxy for interest rate expectations.
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 8th August 2022.
© 2022 YOU Asset Management. All rights reserved.