The World in a Week - Quarterly Earnings Season for US Banks
The biggest US banks reported their second quarter earnings of 2019 last week and it was generally a robust quarter for them all, although Morgan Stanley and Goldman Sachs disappointed a bit by being the only major US banks to have revenues, net income and earnings-per-share all fall compared to a year earlier.
JP Morgan has the highest revenue at USD 29.6 billion although this is to be expected as it is the largest US bank. It also achieved the best year-on-year growth in revenue at 4%. JP Morgan's year-on-year growth in Net Income was up 16% too which was only surpassed by Wells Fargo at 20%.
Morgan Stanley disappointed with its year-on-year revenues down 3.5%, net income down 9.7% and earnings-per-share down 5.4%.
Goldman Sachs also disappointed with its year-on-year revenues down 1.8%, net income down 5.6% and earnings-per-share down 2.8%.
Share prices did not move much on their respective reporting days. However, Wells Fargo's share price fell 3.2% on Tuesday despite achieving the best year-on-year Net Income growth. The reason for this is that all banks rely heavily on Net Interest Income (essentially their lending rates minus their deposit rates) and Wells Fargo's Net Interest Income was down USD 216 million from the first quarter of 2019 and this predominantly caused its share price to fall 3.2%.
Decreased Net Interest Income is likely to be an issue for all US banks going forward though as the Fed is likely to reduce the Fed Funds Rate on July 31st 2019. If this occurs, the lower rates will directly squeeze the banks' Net Interest Income and thus their total Net Income too.
At the time of writing, using the Fed Fund Futures market, there is a 75.5% chance of a 0.25% cut in the Fed Funds Rate on July 31st. If a cut occurs it would prompt investors to be more cautious about US banking stocks, but it would be beneficial for US equities in general though.
One last bank to mention is the Bank of England as they announced on Monday that Alan Turing, the Bletchley Park mathematical genius, will be the face of the new £50 bank note in 2021.
The World In A Week - Fact & Fiction in the Far East
Markets were quite sedate last week, with global equities as measured by the MSCI ACWI Index falling -0.2% in GBP terms. UK shares were down -0.6%, while Europe Ex-UK was down -1.1% and the S&P 500 in the US bucked the global trend by being up +0.4%. Emerging Market equities were down -1.2%, led by the Asia Pacific Region. Global Investment Grade Bonds in GBP (hedged) fell -0.4%, while High Yield fell -0.2%. Emerging Market Local Currency Bonds continued their strong run this year and are now up 11.6% for the year to date in GBP terms.
The main item to hit the newswires this Monday morning was the release of Chinese GDP data for the second quarter. The reading of 6.2% annualised growth was the lowest such result for the last three decades. Consensus is that these numbers were impacted by the ongoing trade war with the US, while strong domestic consumption averted an even deeper slowdown. This growth figure was in line with Analyst expectations. While it is good news that Chinese growth is less reliant on exports and more reliant on domestic demand, Chinese GDP statistics in the abstract are highly dubious and need to be treated with due scepticism. The numbers are liable to political manipulation, in order to allow the Communist party to meet its target of doubling the size of its economy in 2020 relative to 2010.
Nonetheless, the slowdown in China coupled with wider global growth concerns is impacting the path of global central bank activity. Chairman Powell at the Federal Reserve affirmed the path of easier monetary policy in front of Congress last week. This enhances our view that one should remain invested, but cautiously positioned.
The World In A Week - When less is more (Italy's income tax)
Is it possible for a government to increase its total tax receipt by cutting taxes?
Italy's government believes this is the case and they risked incurring a EUR 3 billion fine from the EU last Tuesday for pursuing it. In the end, the EU abandoned the fine but it remains sceptical of Italy's approach.
The issue is that Italy's debt-to-GDP ratio is 132% and this is an infringement of the EU's 60% limit. As well as this, the EU projects Italy's 2.1% budget deficit to surpass its 3% limit thus exacerbating the debt problem.
With Italy's economy at near recessionary levels (for example it edged into recession in the last half of 2018 and had a limp 0.1% growth in the first quarter of 2019) it is very difficult for Italy to generate the tax receipts needed to reduce its debt. The Italian government argues a fresh, dynamic approach is needed.
Italy is run by the coalition of Northern League (Lega Nord) and the Five Star Movement. The government advocates a flat income tax rate of 15% for those earning less than EUR 50,000. As reported by the Daily Telegraph, the Lega leader, Matteo Salvini, said 'If Italians had more money in their pockets to spend, the economy would receive a kick-start and the national debt would be reduced.'
In 1974 the economist Arthur Laffer proposed that it is possible for income tax rates to be reduced and still increase overall tax revenue. He suggested that reducing income tax rates to an optimal level incentivises spending and investment, creates more jobs and taxpayers and thus increases total tax revenue. It has worked before, for example the UK government in the 1980s adopted this proposal and slashed income tax rates and total tax revenue grew.
The most important thing though is the optimal rate as cutting tax rates below the optimal rate will have the undesired effect of decreasing total tax revenue. It will be extremely interesting to see if cutting income tax rates to 15% for the masses works for Italy.
Ten tips for boosting mental wellbeing
When we think about improving health, it's often the physical that springs to mind, but mental wellbeing is just as important. Luckily, it's rising up the list of priorities for many people. Whether you're feeling stressed about a certain area of your life or you want to be able to relax more, these tips can help boost your mental health and cultivate a positive mindset.
- Make time for the things you enjoy: When you're stressed, it's easy to focus on what's causing you concern and skipping the things you'd normally do. But having a break and some time to think about other things can be exactly what you need. Doing the things you enjoy can remind you of the things you should be grateful for and deliver a positive boost to your mental health.
- Be sociable: When we're worried some people have a tendency to shut themselves off from loved ones and avoid social situations. However, connecting with others has plenty of benefits, from improving your self-esteem to offering a support network if you need it. Making plans with family and friends gives you something to look forward to as well.
- Exercise: Exercising might be the last thing on your mind when you have concerns. Whilst it's associated with physical health, exercise is just as good for mental wellbeing too. Getting your blood pumping releases feel-good hormones that can improve your mood and focus. It doesn't have to be a lengthy gym session, a brisk walk can be just as beneficial.
- Get outdoors: With the British weather, getting outdoors isn't always attractive. But it's been linked to improving mental wellbeing. An activity outdoors can help alleviate some of the stress that you may be feeling. Where possible, try heading to a park or calm area to help you get away from it all.
- Practice mindfulness: Modern life often means our thoughts are distracted and we fail to focus on the present. This is where mindfulness can help. Focussing on what you're doing now, rather than concerns about something that has happened or may occur, can lead to a better state of mental wellbeing and help you appreciate life more.
- Understand your triggers: Do you know what leads to you feeling stressed? Understanding what triggers poor mental wellbeing can help you better manage low points. It's an area that's personal, keeping a written note of what's causing you to lose positivity, worry or just generally feel low can help you put together a plan to tackle it.
- Eat well: Everyone knows food is important for physical health, but ensuring you get a balanced diet is crucial for mental wellbeing. Foods that are packed with vitamins and minerals can help your body run at its best, giving you more energy, improving concentration, and leading to a better mood or outlook overall.
- Get plenty of sleep: Sleep is really important for mental wellbeing. However, if you're feeling stressed, it can make drifting off far more difficult, creating a vicious circle. If it's an issue, giving yourself plenty of time to unwind beforehand can help, others find that exercising in the evening can help them drift off too.
- Set goals: If you're stressed about something, in particular, it's often due to the scale of it. Perhaps a challenge seems too big to overcome or a solution feels impossible. Breaking down the steps you need to tick off into manageable chunks can make you feel far more positive. Being able to track your progress as you work towards a bigger goal can ease worries too.
- Don't be afraid to ask for help: We all need a helping hand sometimes, but asking for help when you're stressed can still be a difficult thing to do. Whether you simply turn to family and friends or seek professional help, it can greatly improve your mental wellbeing. As the saying goes: a problem shared is a problem halved.
Stress and your finances
There are many areas of life that can cause stress, but one of the most common is money. If you have concerns about your finances, you're not alone. In fact, according to research from Ceridian 42% of UK employees would describe themselves as feeling stressed about money issues on a regular basis.
Financial worry can occur no matter your wealth. Whilst you might be earning a comfortable income, concerns about what would happen if it stopped, whether you're saving enough for retirement, or how investments will perform are typical. Taking control of your money and building a financial plan that reflects your goals can improve overall wellbeing. If this is an area you'd like support in, please contact us.
Five benefits of estate planning
Planning how you'll pass your estate to loved ones can be challenging, both practically and emotionally. But taking some steps to understand how you can efficiently achieve your goals, can make them more likely to become a reality.
From writing a will to discussing potential inheritance with loved ones, estate planning is a task that many put off. However, it should be considered an essential part of your financial plan that's just as important as putting money into pensions or checking the performance of investments.
There are many benefits of estate planning, among them:
- Understand the value of your estate better
Financial planning should help you understand the value of your estate and how this might change in the future. Taking a look at what assets you have to leave behind for loved ones and considering how they'd be distributed can help with this. Cashflow modelling can show you how wealth and assets will be depleted over time. This can help give you an understanding of the inheritance that you can leave or where you may want to make lifestyle changes in light of this.
- Minimise potential Inheritance Tax
Is your estate likely to be liable for Inheritance Tax (IHT)? If the total value of all your assets exceeds £325,000 IHT may be due, reducing the amount loved ones will receive from your estate. However, there are often things you can do to reduce or eliminate an IHT bill. However, this requires a proactive approach and you should take steps to do so as soon as possible. From setting up a trust for some assets to gifting to charity, an effective estate plan can mean leaving more behind for loved ones.
- Calculate the sustainability of your income
You might have a clear idea of what you'd like to leave behind for family and friends. If so, how does this correlate with the income you're already taking or plan to take? Estate planning can help you reconcile your income with legacy plans. It's also an opportunity to assess how sustainable your income is over the long term. If your expenditure remains the same, how much would you leave behind if you lived ten years beyond the average life expectancy, for example?
- Help loved ones plan for the future
Research from Royal London suggests that almost 6.5 million adults refuse to discuss their will with loved ones. Whilst it can be difficult to talk about your estate plan, it can help loved ones prepare for the future. Letting beneficiaries know how much they can expect to receive through inheritance can improve their personal financial security. Without a discussion, they could make inaccurate assumptions that affect them long term. It's a step that can give you peace of mind about their future too.
- Support loved ones now
As you look at what you're likely to leave behind for loved ones, you may realise you're in a position to offer financial support now rather than leave an inheritance. As life expectancy rises, some beneficiaries are finding that inheritance is coming too late to help them tick off financial milestones, such as paying off the mortgage. Providing support to children and grandchildren now could have a larger impact than receiving an inheritance. Of course, you need to ensure that offering gifts won't have a negative impact on your lifestyle in later years and you should consider the IHT implications.
When should you review your estate plan?
You might think once complete an estate plan is finished, but, like any other part of your financial plan, it's important to keep going back to it. Over time, your aspirations and financial positions will change, which should be reflected in your estate plan. From needing to pay for care costs to welcoming grandchildren, your initial plan may be very different from what you want in five years' time. As a result, it's wise to review it regularly alongside other financial plans and make adjustments where necessary.
If you're thinking about how you'll pass wealth on to loved ones, please contact us. Our goal is to give you complete confidence in your financial situation now and in the future.
Please note: The Financial Conduct Authority does not regulate estate and Inheritance Tax planning.
Bank of Mum and Dad: Can you afford to support family?
The Bank of Mum and Dad has become essential for many first-time buyers struggling to scrape together a deposit to secure a mortgage. However, research indicates that children and grandchildren are increasingly relying on financial support for a variety of reasons.
Whilst you may be keen to provide as much help as possible to loved ones, you may also be worried about the impact it will have on your own financial security. Understanding whether you're in the financial position to offer some form of monetary help can give you the confidence and peace of mind to do so.
So, how are parents and grandparents providing support for adult offspring? Offering a helping hand when purchasing a house makes up a sizeable chunk of the money handed over, however, it's not the only area where financial support is sought.
- Research from Legal and General suggests that in 2019, up to £6.3 billion will be taken from the Bank of Mum and Dad to fund thousands of property purchases. By offering up sums to act as a deposit, parents are financing around one in five transactions in the UK property market. The average amount received for this purpose is £24,100.
- Relatives are also putting their money into the entrepreneurial ventures of children too. A survey conducted by Worldpay indicates that around one in ten small business owners asked their parents to invest in their idea. With under-35s twice as likely to seek family support than older generations, it could be a growing trend.
- Finally, figures from SunLife found that more than half of people aged over 55 are financially supporting their children. Around a fifth are providing more support than they had planned to. This is despite some feeling as though their own finances are being squeezed as a result.
What's causing the trend?
There are many reasons why children or grandchildren could benefit from financial support, some of which may be personal. However, generally speaking, wage growth has remained low whilst expenditure, including property, has continued to rise. As a result, younger generations are often finding it a struggle to balance the books and still reach life milestones, from buying a first home to starting a family, without risking financial instability.
It's natural that as a parent or grandparent, you want to provide support to help loved ones live comfortably. Whilst your heart may be saying 'yes' when they ask for help, your head may have some reservations. That's normal too. After all, if you place your own financial security at risk you won't be in a position to provide support at all.
Making it part of your financial plan
Whether you want to offer ongoing support, to cover school fees for grandchildren, for example, or a one-off gift, you should make it part of your financial plan.
This gives you the insight needed to understand how your finances will be affected in the short, medium or long term. Would taking a £25,000 lump sum out of your savings to act as a house deposit mean you could run out of money in later retirement, for instance? By building gifts and monetary support into your financial plan you can make an informed decision based on your circumstances.
Often, potential benefactors find they're in a better position to help than they first thought. Using financial planning to fully understand the long-term consequences of gifting means they decide in full confidence and with complete peace of mind.
It's not just confidence that financial planning can help with either, but deciding which assets to use:
- Would your long-term wealth be impacted more by withdrawing from investments or cash savings?
- What is the most tax-efficient way to access large lump sums?
- Will the support potentially be liable for Inheritance Tax?
- Could you replace the money at a later date if you choose to?
Financial planning can help you answer the above questions and more to create a solution that's right for you.
If you decide you're not in a position to offer financial gifts, there are likely to be alternative options too. You could, for example, act as a guarantor on a mortgage to allow for a lower deposit or provide a lump sum on a loan basis. Financial planning can help you better understand what other routes there are to explore.
To discuss your financial situation and aspirations for helping loved ones find their feet, please get in touch.
Retirees risk pensions running out ten years early
Do you have enough money in your pension to see you through retirement? Research indicates there's a very real risk that UK retirees will be short of more than a decade's worth of money.
As we start making withdrawals from a pension and even when saving into one, it's crucial to think about the kind of lifestyle it'll afford and how long for. Without this vital bit of information, there's a chance you'll be left with a shortfall that could mean a retirement that promised much, leads to disappointment or struggles in later years.
Measuring the gap between savings and lifestyle
A recently published report from the World Economic Forum set out to calculate how financially secure retirement will be. It notes, pension systems around the world are facing the common problem of trying to deliver existing promises whilst life expectancy has increased. It's a challenge that is expected to become even more significant over the coming decades.
The findings indicate that the average UK woman will run out of money 12.6 years before she dies. For men, it's 10.3 years. With a vital source of income drying up a full decade before passing away, some retirees could face struggling to get by on the State Pension alone. It could mean lifestyles need to be adjusted if dreams are to be realised.
Between 2015 and 2050, the report predicts the gap will grow even further, suggesting struggles are ahead for generation X and millennials. In 2015, it was estimated there was an $8 trillion (£6.2 trillion) shortfall in UK pensions, rising by 4% annually to $33 trillion (£25.8 trillion) by mid-century.
The risk of running out of money later in retirement is particularly troubling when you consider the potential need for care. Longer lives mean more people are requiring some form of support, from home visits to moving into a residential home. Most retirees will be required to pay at least a portion of care costs themselves until total assets are depleted to £23,250 under current legislation.
On top of this, the risk of running out of money is further compounded by the hope of retiring early. Research suggests that two in five savers hope to retire before they reach the age of 65. Given that the State Pension age is already steadily increasing, it's a dream that could place further pressure on finances. If you do want to retire before the traditional age, it's crucial to think about how those extra years will affect the savings earmarked for retirement.
How much is enough to retire?
This is a question that often comes up when people start thinking about retiring. However, there's no straightforward answer, it's very subjective.
Research indicates that covering the basics in retirement, such as food and utility bills, along with a few extras like eating out and entertainment, will set retirees back by almost £230 each week. Over the course of the year, the figure mounts up to more than £11,830, 35% more than the State Pension provides. The findings suggest that retirees need their personal provisions to pay out a minimum of £3,062 a year. That may not sound like a lot, but when you think retirement can last 30 or 40 years, it may be easier than you think to run out of money. When you factor in the luxuries you might be looking forward to in retirement, such as holidays, the risk rises even more.
As you think about how your own pensions will pay for retirement, it's important to consider the type of lifestyle you hope to achieve. It'll have a direct impact on how much you should be saving whilst working and whether you're at risk of falling short.
- When paying into a pension: Taking the time to consider how much you'll need to fund retirement whilst you're still paying into a pension puts you in a better position to secure the lifestyle you want. The further ahead you start to think about this, the better. Uncovering a shortfall with a decade still to go gives you an opportunity to increase contributions where necessary. Here it is crucial to consider how long you'll spend in retirement to calculate your target sum as accurately as possible.
- When taking an income from savings: Changes to how we access pensions in 2015 means more retirees are now opting to withdraw from their pensions in a flexible way. The ability to increase and decrease withdrawals can be valuable. However, you need to carefully balance the amount you're taking out with how long it needs to support you for. Taking sums that are unsustainable now may leave you struggling in the future.
If you're worried about how your retirement savings will match up to aspirations, please contact us. We're here to help you understand how long provisions will last with your lifestyle in mind.
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 - An Outbreak of a Truce
The most notable story of the past week was arguably the breakout of a truce in the escalating trade war between the United States and China on Saturday following talks at the G20 meeting in Japan. The outcome was broadly in line with the market's assumptions for the conference, global equities finished the week down -0.16% in GBP terms while UK equities rose +0.36%. Global bonds provided a nice hedge to the equity sell off and rose +0.23%, while Sterling bonds rose +0.01%. Sterling rose in value against the dollar over the course of the week, while the Euro strengthened against the Pound.
Expectations regarding the actions of major central banks have been the other major force driving markets recently. The assumption that the Federal Reserve will continue to cut rates to stimulate the economy has provided some support to markets in the face of the ongoing trade war - allowing the US equity market to remain flat since the commencement of the trade dispute in May.
As we continue into the second half of the year, we remain aware of the reality that trade is now being employed as an instrument of foreign policy and remain cautious in our asset allocation, given the increased tail-risks this new-normal brings with it.
The World In A Week - How low can you go?
The US Federal Open Market Committee (FOMC) kept interest rates on hold last week. Despitean inordinate amount ofpressure from Trump to cut ratesand elements of USmarket datasignalling a need for loosening ofmonetary policy, Jerome Powell, Chairman of The Fed, stood firm.
This current situation can only be described as having thekey ingredients for a blockbuster movie... not only hasthe President of the United Statesexplored if he has the abilityto sack the Chairman of The Fed, he isalso fully embroiled in atrade war withChina, which thus far, hasresulted inbillions of USdollars inlost revenue on both sides of the globe. Powellis certainlystuckbetween a rock and a hard place; he is in the unenviable position of managing interest rateexpectations while Trump continues to bully The Fed to cut rates.
While there was no interest rate rise in June, whichis a sensible move, as The Fed must show independence from politics, it is likely that pressure to cutwill continue to mount over the coming months.Powell's speech was certainly more dovish showing a marked shift in language. The Fed Chairman had previously described the committee's approach to assessing economic data as patient however, Powell highlighted that uncertainties around this outlook increased i.e. the darkening outlook trade wars with Chinais having onthe economy, coupled with muted inflation meansthat the committee will act as appropriate to sustain expansion.
The question is how low can The Fed go? with two interest rate cuts a high possibility in 2019, we could expect as many as three or four before the end of the year; although the currentprobability of any of these moves is below 40%, which means that markets will take some comfort,for now at least, that The Fed will remain accommodative, which will support markets.
In a move away from monetary policy, which I am sure Powell will no doubt be thankful for, the global focus will shift away from the US to the G20 summit, which will be held from 28th-29thJune. Japan will host their first ever G20 summit in Osaka and it's expected that tensions around trade wars could escalate further.
The effect the media has on your financial decisions
In the digital age, it's impossible to escape the media. But you might not realise the influence it's having on your financial decisions. Often, it's subconscious, but being aware of the impact it could be having mean you're in a position to better understand the decisions you're making and ensure they're right for you.
The news and media aim to sell. And, as a result, it often sensationalises headlines and content to catch your attention and draw you in. When reading the financial section of a newspaper, how many times have you seen the words 'dive', 'crash' or 'plummet' to describe a fall in share price that is relatively short-lived? It's the same story for shares that have performed well.
It's not just the financial sections of media that may have an impact on how you view financial decisions either. Headlines on the state of the economy, which industries are fast growing, or challenges on the high street, for example, could affect your decisions. Whether you read the news in the paper or use social media to keep up to date, it can be challenging to filter out the sensational news and understand what matters to you.
Does it really have an impact? You might feel as though you're rarely influenced by the media when making decisions, but it has probably happened at various points throughout your life, for instance:
- After seeing multiple sources citing that the economy was suffering, you decided to slow down investment deposits and instead hold savings in cash. If a slowdown did come, you might have felt satisfied that you'd minimised the impact. However, typically, investments outperform cash over the long term and media influence may have actually meant you lost money.
- Alternatively, after seeing several news stories looking at funds that have outperformed or individuals that have made their fortune through investing, you may be tempted to take on more risk. Seeing regular media sources claiming how others have secured above average returns can make you feel it's more likely to have than the reality.
The solution: Financial planning
So, what can you do about the media influence on your financial decisions? Financial planning can offer a solution for five key reasons.
1. Bring the focus back to you: Often in the media, stories will be conflicting. Differing opinions and outlooks means that people will have very different views on the best financial steps to take. This is because which route is best for you will depend on a whole range of personal circumstances. Financial planning helps bring financial decisions back to you and what you want to achieve.
2. Ensuring regular reviews: Aspirations, opportunities and risks all change over time, and this should be reflected in your plans and decisions. Engaging with a financial planner on an ongoing basis means you can take advantage of regular reviews to ensure you remain on track and bring up concerns. So, if you're worried about how the economy is performing and the impact on investments, for example, a review can either ease your concerns or lead to adjustments where necessary.
3. Visualise the long-term impact of decisions: When making a financial decision, it can be difficult to comprehend the impact beyond the immediate. For example, reducing the amount you put into your pension may free up some extra cash now, but what impact will it have had in 30- or 40-years' time? Through using cashflow planning tools, financial planning can give you a visual representation and put decisions into context with long-term aspirations.
4. Offering an outside perspective: Media influences can be hard to recognise in ourselves. You may make a subconscious decision, believing it's right for you, when an alternative would be better suited. Working with a professional financial planner means someone else takes a look at your plans. Another pair of eyes and a different perspective can be hugely valuable when weighing up what you should do.
5. Confidence: It's important to have confidence in your overall financial plan and the decisions you make. This is what financial planning should aim to achieve. With a plan that's tailored to your short, medium and long-term aspirations, it can help block out some of the noise and influence from the media, which may not be right for you.
If you'd like to discuss your financial plan or concerns you may have with a professional, 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.