The World In A Week - Seasons of Change
Following on from last week’s opening of some non-essential businesses, it is likely that Boris Johnson will announce a relaxation of the 2-metre social distancing rule tomorrow. This should pave the way for a potential reopening of the hospitality sector from the 4th July.
Whilst the recommencement of the Premier League has been met with mixed reviews, the lack of atmosphere may be more palatable while enjoying the spectacle with a cold beverage of your choice, in the reasonably close proximity of your friends.
The attraction of socialising once again may not be enough to help the beleaguered sector, that is why Chancellor Rishi Sunak is contemplating a move to potentially reduce VAT for the hospitality and tourism sectors, which would include pubs, restaurants and hotels, from as early as July.
However, in order to balance the books, it is likely that the summer of stimulus may give way to an autumn that contains deferred tax increases and spending cuts in order to stabilise public debt.
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 22nd June 2020.
The World In A Week - Interim Update
It appears to be more of the same for this mid-week update. The predictable cycle of forward guidance regarding more economic stimuli, in order to combat the fear of unemployment numbers, and the containment of COVID-19. The desired outcome being sufficient reassurance to consumers to help ignite the economic bounce back.
US sales data published earlier in the week was an early indication of the resilience of consumers, showing a positive surprise from the forced savings that have been accrued during lockdown. American consumers pushed May’s retail sales report to a record 17.7%, smashing through the expected rebound of 8.4%. This has seen over 60% of the loss accumulated through January to April recouped in May.
However, we must remember that the bounce was from a depressed seven-year low and the retail sales trend at an annual rate is still significantly in the red. Context is everything, especially during more volatile periods.
Monitoring the reaction of markets to the rising number of virus cases is critical, as straight-line extrapolation creates opportunities, especially when central banks and governments are willing to underwrite extreme volatility.
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 June 2020.
The World In A Week - The Doors Are Opening
It has been 84 days since lockdown in the UK was announced in which we have seen a period of great change and an immediate shift to our lifestyles. We have seen just over a quarter of the UK‘s working population supported by the Government’s furlough scheme with its estimated cost currently sitting at £19.6bn. As non-essential businesses begin to re-open their doors today, we appear to be getting closer to a state of normality. Boris Johnson has suggested that the two-metre social distancing rule could be relaxed as the hospitality sector prepares to reopen from 4th July.
In the last week, market volatility has been very high as the markets have tried to price in a quick return to normality. However, UK GDP fell by a record 20.4% in April as lockdown has paralysed the economy and halted businesses from functioning. The markets were quick to react to this data release as the FTSE All-Share fell 3.82% on Thursday, its biggest daily drop since the market sell-off, back in March. In simple economic terms, consumption has been the biggest component of GDP to be affected, with primary spending restricted to the groceries & e-commerce sectors.
Equity markets are typically driven by company fundamentals, forward cash flow estimates and forecasted earnings. In the current market, there is low visibility in these metrics, and so valuations are currently distorted. Previous recessions have followed a V-shaped recovery however, the markets continue to disseminate new economic data and the expectation is that we are likely to see more of a W-shaped recovery. Volatility is expected to continue in the interim as the market is displaying bunny-market characteristics as share prices hop up and down.
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 15th June 2020.
The Quick Guide To Bonds
When it comes to investing, it’s probably stock markets and shares that come to mind. Yet the average investment portfolio uses various asset classes to deliver returns and manage risk. One important part of your portfolio may be bonds.
Bonds can also be known as gilts, coupons and yields, which, along with other financial jargon, can make it difficult to understand how they fit into your financial plan. This quick guide can help get you up to speed.
What is a bond?
In simple terms, a bond can be thought of like an IOU that can be traded in the financial market.
Bonds are issued by governments and corporations when they want to raise money. When you purchase a bond you effectively become the issuer of a loan, receiving payments for the loan in the future. There are typically two ways that a bond pays out:
- A lump sum when the bond reaches maturity
- Smaller payments over the term, this is often a fixed percentage of the final maturity payment
If you’re viewing a bond as a loan, the lump sum at maturity would be like receiving your initial investment back whilst the small payments are equivalent to interest incurred. Bonds can be a useful asset to invest in if you’re focused on creating an income rather than growth.
Unlike stocks, you don’t have any ownership rights when you purchase a bond. As a result, you won’t benefit if a company performs well and you’ll be somewhat shielded from short-term stock market volatility too. Whilst all investments carry some risk, bonds are usually classed as a lower-risk asset than traditional stocks and shares.
That being said, it is possible to lose money when investing in bonds. This may occur if the issuer defaults on payments or you sell a bond for less than you paid. You should consider investment time frames, goals and risk before you decide to purchase government or corporate bonds.
Buying and selling bonds
Individual investors can purchase bonds, usually through a broker, as can professional investors, such as pension funds, banks and insurance companies. Initially, government bonds are often sold at auctions to financial institutions with bonds then being resold on the markets.
If you buy a bond, you have two options: hold or trade.
If you choose to hold a bond, you simply collect the regular repayments and wait until it reaches maturity, when you’ll receive a lump sum.
However, there is also a secondary market for selling bonds to other investors. If this is your plan, the fluctuations in price are important to consider as well as the value the bonds offer other investors. If you intend to sell, it’s important to understand the maturity and duration of the bond, as well as understanding the demand in the secondary market.
Whilst we’ve mentioned above that bonds can shield you from some of the stock market volatility, that doesn’t mean bond prices don’t change. Numerous factors can affect the value of bonds, from the interest rate and other Government policies to the demand for bonds. These movements can affect the expected yield, which can end up negative meaning the repayments add up to less than what you paid.
How do bonds fit into your investment portfolio?
Bonds are just one of the assets that are used to create an investment portfolio that suits you.
If you’re investing for income, rather than growth, choosing bonds to make up a portion of your portfolio can deliver a relatively reliable income stream.
One of the key things to consider when investing is your risk profile. Typically, bonds are considered less risky and experience less volatility when compared to traditional stocks. As a result, they can be used effectively to help manage investment risk. The lower your risk profile, the more likely it is that your portfolio will include a higher portion of bonds. Of course, other assets can be used to adjust and manage your risk profile too and not all bonds have the same level of risk.
The most important factor when creating an investment portfolio is that it matches your risk profile and goals. If you’d like to chat to us about how bonds are used to balance your portfolio, please get in touch.
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 Danger Of Holding Too Much Cash
How much of your wealth do you hold in cash? Whilst it’s often viewed as the ‘safe’ option, there is a danger of your assets losing value in the long term and holding too much in cash too.
It’s easy to see why people choose to hold large sums in cash. As it’s something we handle every day, whether physically or digitally, it can seem more tangible than other assets. The Financial Services Compensation Scheme (FSCS) also protects up to £85,000 should a bank or building society fail per individual. The combination of these factors may mean you view cash as the most appropriate way to hold wealth.
However, cash does lose value and this is particularly true in the current low-interest climate.
Interest rates have been at an historic low for more than a decade following the 2008 financial crisis. The Bank of England has recently cut rates even further. In March, as it became apparent Covid-19 would have an economic impact, the central bank slashed the base interest rate to just 0.1%, the lowest level on record.
Whilst potentially good news for borrowers, the rate cut isn’t positive for savers. It means your savings aren’t likely going to deliver the returns they once were, especially if you compare the current rates to the pre-2008 ones. Before the financial crisis, you could expect to enjoy interest rates of around 5%.
At first glance, lower interest rates can seem frustrating but don’t mean there’s any need to change how you hold assets. After all, your money is secure and whilst it might not be growing very fast, it’s not going down, right? This is true if you’re just looking at the amount that’s in your account. However, in real terms, the value of your savings will be falling.
Inflation: Affecting the value of savings
The reason the value of cash savings falls in real terms is inflation. Each year the cost of living rises and if interest rates fail to keep pace with this, your savings are gradually able to purchase less and less.
The Consumer Price Inflation (CPI), one of the measures for calculating inflation, for April 2020 suggests the inflation rate was 0.9%. This figure was down on long-term averages due to coronavirus restrictions, however, it’s still higher than the base interest rate. As a result, the spending power of cash savings will have fallen.
Year-to-year, the impact of inflation can seem relatively small. Yet, when you look at the impact over a longer period, it highlights the danger of holding too much in cash.
Let’s say you placed £30,000 in a savings account in 2000. Following almost two decades of average inflation of 2.8% a year, your savings in 2019 would need to be £50,876.75 to boast the same spending power. With low-interest rates for more than half of this period, it’s unlikely a typical savings account would help you bridge this gap.
When is cash right?
Whilst inflation does affect the spending power of cash savings, there are times when it’s appropriate.
If you need ready access to savings cash accounts are often suitable, for example, if you have an emergency fund. When you’re saving for short-term goals (those less than five years), a savings account should also be considered. Over short saving periods, inflation won’t have as much of an impact and can preserve your wealth for when you need it.
However, when setting money aside for long-term goals, investing may be a better option that’s worth considering.
Investing: When should it be considered?
Investing savings means you have an opportunity to beat the pace of inflation with returns, therefore, preserving or growing your spending power.
However, investment returns can’t be guaranteed and short-term volatility can reduce values. For this reason, investing as an alternative to cash should only be considered if your goals are more than five years away. This provides an opportunity for investments to recover from potential dips in the market.
If you’d like to talk to one of our financial planners about the balance of your assets, please contact us. Our goal is to align aspirations with financial decisions, helping you to strike the right balance.
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.
Cashflow Planning: Helping To Answer ‘What if…’ Questions
When you begin making a financial plan, you could be looking several decades ahead, and we all know the unexpected can derail even the best-laid plans. So, as you’re setting out goals, it’s not uncommon to wonder if you’d still be able to meet them if things outside of your control have an impact.
When you start putting together a financial plan one of the valuable tools that can put your mind at ease is cashflow planning.
What is cashflow planning?
Cashflow planning is a tool that helps forecast how your wealth will change over time. We can use this to show how your assets will change in value in a range of circumstances, such as average investment performance or income withdrawn from a pension. It’s a step that can help you have confidence in the lifestyle and financial decisions you make.
However, the variables can be changed to highlight the impact of what would happen if things don’t quite go according to plan. Whether it’s down to a decision you make or something out of your control, cashflow planning can highlight the short, medium and long-term consequences on your finances and goals. As a result, it can be a useful way of answering ‘what if’ questions that may be causing concern.
Answering ‘what if’ questions
If you’re asking ‘what if’ questions relating to your financial plan, they can be split into two categories: the ones you have control over and those that you don’t.
Those that you do have control over often stem from wanting to take a certain action but being unsure if your finances match your plans. These types of questions could include:
- What if I retire 10 years early?
- What if I provide a financial gift to children or grandchildren?
- What if I take a lump sum from investments to fund a once in a lifetime experience?
Often with these questions, there’s something you want to do, or at least thinking about, but you’re hesitant to do so because you’re worried about the long-term impact. You may need to consider the effects decades from now, which can be challenging. Cashflow planning can help provide a visual representation of the impact a decision would have.
We often find that clients’ finances are in better shape than they believe, allowing them to move forward with plans with confidence.
The second type of ‘what if’ questions, those you don’t have control over, often stem from worries about the future. These could include:
- What if investments returns are lower than expected?
- What if I passed away, would my partner be financially secure?
- What if I needed care in my later years?
Cashflow modelling can help you understand how these scenarios would have an impact on your short, medium and long-term goals. It can highlight that you already have the necessary measures in place, allowing you to focus on meeting goals.
Alternatively, you may find there’s a ‘gap’ in your financial plan. However, by identifying this, you’re in a position to take steps to put a safety net in place. If you’re worried about the financial security of loved ones if you were to pass away, for example, this could include purchasing a joint Annuity, providing a partner with a guaranteed income for life, or taking out a life insurance policy.
Confronting concerns about your future can be difficult, but it’s a step that can lead to a more robust financial plan that you have complete confidence in.
The limitations of cashflow planning
Whilst cashflow planning can be incredibly useful, there are limitations to weigh up too.
First of all, how useful the forecasts are will be dependent on the data that’s input. This is why it’s important to consider assets and goals when gathering information, as well as keeping the data up to date.
Second, cashflow planning will have to make certain assumptions. This may include your income over an extended period or investment performance, which can’t be guaranteed. This is combatted by modelling different scenarios and stress testing plans, helping to give you an idea of how your financial plan would perform under different conditions.
Cashflow modelling is just one of the tools that can support your financial plans and it can be an incredibly useful way of giving you a potential snapshot of the future and easing concerns. If you’d like to discuss your aspirations and the steps you could take to ensure you’re on the right track, please get in touch.
Accessing your pension: Annuity vs Flexi-Access Drawdown
In the past, the majority of people saved for retirement over their working life, gave up work on a set date and used their pension savings to purchase an Annuity. However, as retirement lifestyles have changed, so too have the options you’re faced with as you approach the milestone. If you’re nearing retirement, you may be wondering if an Annuity or Flexi-Access Drawdown is the right option for you.
Since 2015, retirees have had more choice in how they access a Defined Contribution pension. If you want your pension to deliver a regular income, there are two main options – an Annuity or Flexi-Access Drawdown – to weigh up. So, what are they?
Annuity: An Annuity is a product you purchase using your pension savings. In return for the lump sum, you’ll receive a regular income that is guaranteed for life. In some cases, this can be linked to inflation, helping to maintain your spending power throughout retirement. As the income is guaranteed, an Annuity provides a sense of financial security but doesn’t offer flexibility.
Flexi-Access Drawdown: With this option, your pension savings will usually remain invested and you’re able to take a flexible income, increasing, decreasing or pausing withdrawals as needed. Flexi-Access Drawdown provides the flexibility that many modern retirees want. However, as savings remain invested they can be exposed to short-term volatility and individuals have to take responsibility for ensuring savings last for the rest of their life.
There are pros and cons to both options, and there’s no solution that suits everyone when considering which option should be used. It’s essential to think about your situation and goals at retirement and beyond when deciding.
It’s worth noting, that pension holders can choose both an Annuity and Flexi-Access Drawdown when accessing their pension. For example, you may decide to purchase an Annuity to create a base income that covers essential outgoings, then using Flexi-Access Drawdown to supplement it when needed. It’s important to strike the right balance and other options could affect your decision too, such as the ability to take a 25% tax-free lump sum.
5 questions to ask before accessing your pension
- What reliable income will you have in retirement?
Having some guaranteed income in retirement can provide peace of mind and ensure essential outgoings are covered. But this doesn’t have to come from an Annuity. Other options may include the State Pension or a Defined Benefit pension.
Calculating your guaranteed income can help you decide if you need to build a reliable income stream or are in a position to invest your Defined Contribution pension savings throughout retirement. If you decide Flexi-Access Drawdown is an appropriate option for you, it’s a calculation that can also inform your investment risk profile.
- What lifestyle do you want in retirement?
When we think of retirement planning, it’s often pensions and savings that spring to mind. However, the lifestyle you hope to achieve is just as important. Do you hope to spend more time on hobbies, with grandchildren or exploring new destinations, for instance? Thinking about where your income will go, from the big-ticket items to the day-to-day costs, can help you understand what income level you need.
- Do you expect income needs to change throughout retirement?
This question should give you an idea of how your income will change throughout retirement. Traditionally, retirees see higher levels of spending during the first few years before outgoings settled, with spending rising in later years again if care or support was needed.
However, your retirement goals may mean your retirement outgoings don’t follow this route. If you decide to take a phased approach to retirement, gradually reducing working hours, you may find that a lower income from pensions is required initially. Considering income needs at different points of retirement can help you see where flexibility can be useful.
- Are you comfortable with investing?
Flexi-Access Drawdown has become a popular way for retirees to access their savings. There are benefits to the option but you should keep in mind that savings are invested. As a result, they will be exposed to some level of investment risk and may experience short-term volatility. Before choosing Flexi-Access Drawdown, it’s important to understand and be comfortable with the basics of investing.
Investment performance should also play a role in your withdrawal rate. During a period of downturn, it may be wise to reduce withdrawals to preserve long-term sustainability, for instance. This is an area financial advice can help with.
- Do you have other assets to use in retirement?
Whilst pensions are probably among the most important retirement asset you have, other assets can be used to create an income too. Reviewing these, from investments to property, and understanding if they could provide an income too can help you decide how to access your pension.
We know that retirement planning involves many decisions that can have a long-term impact. We’re here to offer you support throughout, including assessing your options when accessing a pension. If you have any questions, please get in touch.
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.
The World In A Week – Interim Update
Two important publications have been produced since our update on Monday. Firstly, we had the OECD’s (Organisation for Economic Co-operation and Development) Economic Outlook, which was predictably gloomy.
As part of our macroeconomic monitoring, we track the OECD’s Composite Leading Indicators on a monthly basis which gives us a broad-based indication of where each economy sits in the business cycle. As expected, we have seen a sharp slowdown in economic activity with the data for the UK looking particularly poor. The recent surprise unemployment numbers in the US has shown however, that it is currently extraordinarily difficult to measure or forecast the impact of the Coronavirus shutdown.
Secondly, we had the latest meeting of the Federal Open Market Committee, the group within the Federal Reserve who decide on US monetary policy. As we fully expected there were no surprises, however, Jerome Powell has erased all doubt around the short-term future of US interest rates. In the projections that accompany their statement, the consensus amongst the committee members is for rates to remain between zero and ¼ percent until the end of 2022.
So, the markets are faced with a dire warning of an historic 6% decline in world GDP, which is not a surprise to anyone, and conversely being told that central banks will be in accommodative mode for the foreseeable future.
Markets are reacting to the ambiguous outlook, reflecting the current macroeconomic uncertainty and unclear guidance on the next phase of combating the virus. Our own investment positioning, of being globally diversified and neutral on equities, reflects the risk of this rise in volatility.
The World In A Week - The Sky's The Limit
Risk assets enjoyed another strong week at Friday’s close, led by US equities. It is almost incomprehensible to think that the S&P 500 and the US dollar are almost back to the same levels seen at the beginning of 2020. Positive data helped spur the rally; US non-farm payrolls surprised to the upside, climbing 2.5 million in May, a very different outcome to the 7.5 million loss that analysts had forecast, unemployment also fell to 13.3%, defying expectations of a rise to 19%.
The ECB continue to do ‘whatever it takes’ to support the Eurozone; following the announcement that Germany had agreed a stimulus package of €130 billion. Christine Lagarde, Chairwoman of the ECB, announced that they would raise the Pandemic Emergency Purchase Programme or, PEPP for short, by a further €600 billion, taking the programme to €1.35 trillion in total. The programme has also been extended and will run out in June 2021 at the earliest.
In the UK, there has been a step change in the Government’s view on the hospitality industry, specifically pubs, restaurants and hotels. Previously, the sector was due to open in July at the earliest, but a new plan outlined by the government, means that pub gardens could be open as soon as 22nd June. The ‘Save Summer Six’ led by Chancellor, Rishi Sunak, has a clear mission to get the economy up and running after being warned by Business Secretary, Alok Sharma, that 3.5 million jobs are at risk.
The World In A Week - Interim Update
They just keep on coming. The latest in stimulus packages, at a modest €130 billion, comes courtesy of Germany. This is for Germany rather than the Eurozone and was much larger than expected, with the emphasis firmly on increasing demand. It will include a cut to their VAT, several infrastructure projects and €300 for every child. This should make the meeting of the European Central Bank today a happier place and will help underscore the need for both fiscal and monetary support to continue unabated during this time.
While the headlines about COVID-19 start to diminish, the void is quickly replaced with political upheaval. The reigniting of the US vs China battleground has taken to the skies, with the proposed suspension of passenger flights arriving from China. China currently operates flights to the US but only with four domestic airlines. The friction comes from their continued ban of allowing US airlines to operate the route and the latest move adds pressure to release that ban, keeping the political leverage of tensions between the two countries firmly in place.
Another airline that is feeling the pressure of the lockdown is EasyJet, having been demoted to the FTSE 250 during the quarterly shake-up of the UK equity indices. Yesterday’s reshuffle saw airlines and travel companies among the sectors being relegated from the FTSE 100. Promotions to the FTSE 100 were companies with a digital focus, such as gaming company GVC Holdings, cyber-security firm Avast and home improvements business HomeServe. The FTSE 250 also had a similar focus for its promotions, with gaming firm 888 Holdings and online electrical retailer AO.com.
Is this an indication of what we have all been up to during the lockdown? Stockpiling frozen goods, DIY and playing online bingo.