The World In A Week - Every little helps
Written by Shane Balkham.
Every month starts with a surge of surveys to provide an update on the health of global economies. The current wave would suggest that global manufacturing is picking up slightly, which is good news, but that in itself would imply higher price pressures, which is bad news, especially with central banks’ decision meetings fast approaching next week.
It is no surprise that central bankers were busy last week reinforcing the view that fighting inflation remains the single most important task ahead of them. Managing inflation expectations, and with it rate hike expectations, has become a core skillset for members of the world’s central banks. They are haunted by inflationary mistakes made in the 1970s when monetary policy was eased too quickly.
With policymakers making all the noise, it was a much quieter week for politics, however in the UK we did see a breakthrough in the long drawn out talks between the UK and EU over the Northern Ireland Protocol. This was part of the Brexit withdrawal agreement, which was agreed in 2019 and rushed through Parliament to meet the legal deadline date of Brexit.
The difficulty was in designing a set of rules to avoid a hard border between Northern Ireland and the Republic of Ireland. The original Protocol ended up leaving Northern Ireland with access to the EU Single Market and effectively created a border between Northern Ireland and the rest of the UK. This resulted in a raft of inefficient red tape and some products were unable to be sent across to Northern Ireland from the mainland as negotiations continued.
Prime Minister Rishi Sunak met with the European Commissioner President Ursula von der Leyen last week and agreed to reforms under the ‘Windsor Framework’ which will allow goods travelling between the mainland and Northern Ireland that are not bound for the EU. These will pass through a green lane, largely avoiding custom checks. Although a minor issue to some, it has been a significant stumbling block for Northern Irish political stability.
The friendlier tone between Sunak and von der Leyen could present a more constructive relationship going forward between the UK and the EU. With Northern Ireland now being able to legally buy mainland sausages, this may mark the start of putting Brexit in the archives and allowing UK equities to be seen in a more positive light by global investors.
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 6th March 2023.
© 2023 YOU Asset Management. All rights reserved.
The World In A Week - Minute by Minute
Written by Chris Ayton.
After a strong start to the year, equity markets took a pause for breath last week with the MSCI AC World Index down -2.1% in Sterling terms and the FTSE All Share Index down -1.4%. The picture was similar globally as MSCI Europe ex-UK was down -2.4%, S&P 500 Index down -2.2%, MSCI Japan down -1.4% and MSCI Emerging Markets down -2.3% on the week. Fixed income securities held up a little better but the Barclays Global Aggregate Index GBP Hedged was still down -0.2%.
Investors responded negatively to the release of the minutes from the latest Federal Reserve meeting which showed a clear consensus across the Committee members to raise interest rates last month and to keep fighting inflation with further hikes as required. The minutes also noted that some members voted for higher increases than the 0.25% rise that was finally agreed. Economic data released post this meeting has done little to suggest the previous rate rises are beginning to bite sufficiently in order to bring US inflation or the US economy under control. This backdrop held back equity markets globally.
Away from equity and fixed income markets, we noted with interest that the price of the EU’s Carbon Allowances (EUAs) climbed above €100 a tonne for the first time, representing a 20% rise since the start of the year. This is the price that European companies within designated polluting industries, such as gas, coal power generation and industrial manufacturing, have to pay to buy credits to allow them to create the carbon emissions that are a by-product of their businesses. One allowance allows the purchaser to emit 1 tonne of carbon dioxide or equivalent. The higher these prices are, the higher their operating costs become and the greater the financial incentive for them to invest in more environmentally friendly solutions. More and more industries are being brought into this regime by the EU, forcing companies to buy EUAs on the open market if they want to operate legally. In addition, the supply of these credits is designed to structurally fall over time which forces polluters to compete for an ever-reducing amount of credits, or switch to cleaner solutions. Moving through the threshold price of €100 a tonne may turn out to be a watershed moment on the long-term path to achieving the EU’s ambitious environmental goals. Our Multi-Asset Blend Funds have held a small exposure to these EUAs since June 2022 and are therefore benefitting from the price rise as well as the indirect positive environmental impact of taking these credits out of the market.
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 February 2023.
© 2023 YOU Asset Management. All rights reserved.
Use it or lose it: last financial orders before the end of the tax year 2022/23
The tax year is soon to come to a close, and with it, any allowances that may have gone unused. This year is possibly the most important of recent times as a number of important tax changes are coming into force from 6 April 2023. Time is running out to use allowances and give your wealth the best prospects for the year ahead.
Here are the key changes you should be aware of, and where to maximise your allowances before they’re gone forever.
Dividend allowances
The dividend allowance is being slashed in half from 6 April to just £1,000. This will then be halved again from April 2024 to just £500. Above this allowance you pay dividend tax on any earnings. Dividend tax is calculated at 8.75% for basic rate payers, 33.75% for higher rate and 39.35% for additional rate payers, potentially taking a big chunk out of any income that isn’t protected by a tax wrapper.
Where possible to bring forward the taking of a dividend, for example out of a profitable business you have a share in, it is essential to max out this allowance or else face paying tax on those earnings from April.
Capital Gains Tax allowance
The Capital Gains Tax (CGT) allowance is currently set at £12,300 but this is being more than halved to just £6,000 from 6 April. From April 2024 this is going to be slashed even further to just £3,000. Maximising the CGT allowance this year is therefore crucial. You pay CGT when you dispose of an asset that has grown in value, including stocks and bonds, property (that isn’t your primary residence) or even personal possessions such as jewellery, paintings or antiques.
This means if you have any assets that you were considering selling to cash in on the growth gains, then the allowance should be used now before it is effectively gone. This is relevant for assets held outside of a tax efficient ISA or pension as those assets inside these accounts won’t be liable for CGT.
Inheritance and income
Both inheritance tax (IHT) and income tax aren’t having any changes to their allowances or thresholds per se, but the thresholds have been frozen. This means if you receive a pay rise, or assets inside your estate rise in value, then you’ll see less benefit from those increases in earnings or value.
In order to mitigate the worst effects of the threshold increases, then for IHT it can be a good idea to bring forward some gifting where possible as you get £3,000 a year to gift without IHT liability. You can carry forward this allowance but only for one tax year – so if you haven’t given a gift in either 2021/2022 or 2022/2023 then you could potentially gift away up to £6,000 before 6 April. If you are married, then combined this could be as high as £12,000 over two tax years.
Use your ISA allowance
The ISA is one of the least complicated investment vehicles for our long-term wealth and one of the most generous is tax-exemption terms. The allowance is £20,000 a year, it can’t be carried forward, and anything inside the ISA is protected from any form of tax including the aforementioned CGT and dividend allowances. This makes the ISA allowance extremely valuable in wealth planning terms and should be taken advantage of where possible.
If you’re looking to mitigate CGT, for example, you can use a method called ‘bed and ISA’. This is where you own assets such as stocks or bonds outside the ISA wrapper – you sell those assets then use the cash to rebuy inside the ISA, effectively inoculating your money from tax liabilities.
Investors are prohibited from buying back assets within 30 days of selling them under CGT rules (in order to prevent gaming of the system), but there is an exemption if you sell them outside an ISA then reacquire them within one. If you have assets outside an ISA, and unused CGT and ISA allowance, then it’s a no-brainer to do this to save on hefty tax liabilities. If you have children under 18 and you’re considering strategies for passing some of your wealth on to them, a Junior ISA (JISA) can be a great product to kick-start this too. Unlike a regular ISA, the JISA has an annual contribution limit of £9,000.
Take advantage of pensions allowance
Pensions allowances are also very generous, with up to £40,000 per year available (assuming you haven’t triggered the money purchase annual allowance), plus tax relief on anything you put in. The tax relief is perhaps the most attractive aspect of a pension as it means you have more money to start with than an ISA as you’re bypassing income taxes using the relief.
However, pensions have more tax implications when it comes to withdrawal which are worth discussing with an adviser where possible.
Now is the time to take advantage of left-over tax allowances that you have yet to use. We are here to advise you, so please get in touch.
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 2023.
The World In A Week - Not so cheaper by the dozen
Written by Millan Chauhan.
Last week we saw several economic data releases, which included the US Consumer Price Index (CPI) print rising by 6.4% in January 2023 on a year-on-year basis which was slightly above consensus expectations of 6.2%. The main drivers of inflation remain transportation services (namely airfares) and food. Within food prices, the cost of eggs has increased 70% on a year-on-year basis in January which is the most of any grocery item. This is due to the avian-influenza outbreak which has caused a contraction in the supply of chickens.
US Inflation has clearly cooled down as it peaked at 9.1% in June 2022. With the inflation print coming in slightly higher than expected, it could mean that the Federal Reserve continue to hike going further into 2023 as they attempt to curtail pricing pressures. As a reminder, the Federal Reserve has raised interest rates from 0.50% to 4.75% over the last twelve months.
In the UK, CPI rose by 10.1% in January 2023 on a year-on-year basis which was down from 10.5% in December 2022. The print was lower than expected and was further evidence that inflation may have peaked as the print was a five-month low. UK inflation remains much higher than in the Eurozone and the US but has been helped by lower energy price growth.
There are clearly strong signs of slowing inflation and there will be another inflation report due before the next Bank of England Monetary Policy Committee meeting on the 23rd March, when it will make an interest rate decision. Similarly, the Federal Open Market Committee in the US is set to meet on the 21st March where there will be another US Inflation report released mid-March for the Committee to consider going into that meeting.
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 20th February 2023.
© 2023 YOU Asset Management. All rights reserved.
Bank of England hikes rates again – where does it go next?
The Bank of England chose to hike rates again on 2 February 2023 by 0.5%, bringing the headline base rate to 4%.
The hike brings the base rate to its highest level since November 2008 – and marks ten consecutive hikes since January 2022. The bank has hiked rates to a 14-year high thanks to rocketing inflation which has taken hold of the UK and the global economy in the past 18 months.
Inflation has soared thanks to a mixture of factors including the reopening of the economy after more than a year of COVID-19 related lockdowns, which caused global supply chain issues. Unlocking the economy also unleashed pent-up cash held by people who were unable to spend on things like eating out, holidays and other out-of-home items. Inflationary pressures were then severely exacerbated by Russia’s invasion of Ukraine, which triggered an energy crisis across Europe which filtered out into the rest of the world.
Why has the Bank of England hiked again?
The latest inflation data from the ONS suggests that we might have reached a peak for accelerating price rises. October 2022 saw CPI inflation hit 11.1%, but this has waned slightly, down to 10.7% in November and 10.5% in December.
While these falls are small, they do give a small amount of hope to the economy that pressure might be beginning to ease. However, the Bank of England has maintained its policy of hiking rates despite this easing. There are a few reasons for this. Firstly, the jobs market remains really robust, with little signs of rising unemployment. This sustains demand and can help to keep prices rising more strongly than otherwise. Secondly, wage rises are still relatively strong. Although on average workers are not getting pay rises that beat inflation – currently 6.4% for regular pay – this is still relatively high in historic terms. Like employment this means that inflation overall could prove to be ‘stickier’ than otherwise as people’s pay packets are boosted.
Finally, core inflation – which measures less volatile segments of price rises – remains relatively high. This measure excludes volatile prices such as food, energy, alcohol and tobacco. Both core and services inflation rose in December, despite the headline fall. This tells the Bank of England that important parts of the economy are still experiencing rising demand and a shortage of provision for that demand – the basic cause of inflation. The Monetary Policy Committee (MPC) will have looked at these factors to decide where it should go with its base rate, and this is why it has chosen to continue hiking.
Where next for rate hikes?
The Bank of England has kept its cards fairly close to its chest on what it will do in subsequent months this year in the face of inflation. Much depends on changing economic conditions. For its forecast, it sees the UK economy entering a shallower recession than previously estimated, which would suggest it expects rates will have to stay higher for longer to tame price rises. Ultimately, the Bank of England has a mandate to bring inflation to a level of 2%. As long as inflation persists at higher levels, it could be drawn to more hikes to temper the economy.
However, looking at important factors in the current inflationary mix suggests that price rises could soon fall quickly. Energy prices have come way down from their wholesale peak in June 2022. While it takes time for this to feed through into the wider economy and ultimately our bills, energy has a big influence on prices as almost all businesses need to use energy to provide the goods and services they offer, while households are reliant on it to run their own homes.
What does this mean for your finances?
Higher interest rates have a number of effects on personal finances and wealth. The most obvious is higher debt costs. As the Bank of England hikes rates, financial firms are obliged to raise the interest they charge for borrowing. This includes everything from mortgages to loans and credit cards.
Mortgages are the most obvious place where rates visibly rise. However, most households are on fixed rates. Those households that are facing coming off their fixed rates this year are likely to see their monthly payments soar if rates continue to persist higher. After the disastrous mini-budget of October last year, some of the so-called ‘moron premium’ added to average rates has come down slightly. However, rates are still higher than they might have been.
Another important area that is affected is savings and investments. Savings accounts are offering better rates than previously, but largely still well below inflation. This means that while a savings account might provide a much better headline rate than in the past, it still isn’t preserving the value of that money.
Investments had a tough year in 2022 as they adjusted to the new conditions. However, higher rates offer opportunities in new areas such as the bond market which now has attractive valuation levels. Equities have also had a stronger start to 2023 as markets have priced in some of the worst effects of rate hikes.
If you would like to discuss this or anything else not mentioned in this article, don’t hesitate to get in touch.
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 13th February 2023.
Why making a will matters
Making a will might not be at the front of your mind. Nevertheless, if making sure your finances are properly managed, then ensuring you have one in place is a crucial aspect of good financial health.
Wills can be a tricky subject matter. They force us to confront one of the most difficult issues in life – what to do with your worldly possessions when you’re gone. However, it is an essential matter to take care of, especially to give your loved ones peace of mind should the worst happen. It will also ultimately provide your family with clarity over inheritance and your wishes. A will can prevent messy issues and even disputes over what happens to your estate.
If you die intestate, there are rules that govern how an estate can be allocated, which can lead to suboptimal outcomes depending on what you want to happen. This particularly matters for couples that are unmarried, as the partner could conceivably be left in the cold without a will to provide for them. There are also potential tax implications if an estate is not managed properly after death.
If you don’t draft a will, your spouse or civil partner (if you have one) will inherit your personal possessions and the first £250,000 of your estate, plus half of whatever is left after that. If you have children, they will then be entitled to the rest. If you don’t have a spouse but do have children, the estate will be divided equally among them. If you don’t have children, whoever are your nearest relations will inherit instead.
How to make a will
A will is a legal document, so ultimately writing what you want down on a piece of paper and signing it won’t be enough. However, making a list of your wishes is a good place to start. It isn’t an obligation to use a solicitor to draw up a will. To do so can be as simple as writing your wishes up and having two people witness you sign it. This must be done voluntarily and without pressure from a third party.
You can also use professional will writing services, charities such as Will Aid or your bank (although not all offer such a service). The costs of this will vary depending on the service offered. Beneficiaries, including partners or children, should not act as witnesses as this can lead to disputes down the line. You will also need to nominate executors to carry out your wishes. This can be a spouse, child or children or another trusted friend or relation.
It is a good idea to keep your will up to date as well. This should be done every five years, or any time there is a significant change in your financial or lifestyle circumstances. Alterations should not be made to the original document. You can add supplements, called a ‘codicil’ for minor changes which should be signed and witnessed in the same manner as the original will. Big changes however, such as divorce or remarriage, generally require a new will to be drafted in toto.
Once your will is drafted it is important to keep it somewhere safe, and ensure that the executors of the will know where it is located and how to access it (if it is in a place such as a secure lock box or safe).
How a financial adviser can help
A DIY will might seem simple, but depending on the complexities of your wealth and possessions, it is advisable to consult with a professional, be they a solicitor or a financial adviser. A financial adviser can help you to make a list of the wealth that sits within your estate, what should or should not be included in the will and how it should be apportioned. This is particularly relevant when considering the implications of inheritance tax. An adviser can help to assess the best way to share your estate that reduces IHT liabilities. They can also advise you on important exemptions such as gifting throughout your lifetime or giving money away to charity, plus the rules around ‘potentially exempt transfers.’
A financial adviser can also help you to structure your wealth in a way that minimises IHT liabilities and will be able to advise you on limits relating to property wealth and other allowances. Tax wrappers such as pensions can help to mitigate some of the liability, but come with rules that need to be carefully followed.
The complexities of getting a will right make it a potentially crucial document in your financial planning. For this reason, it is essential to consult a financial adviser to ensure your will is drawn up with the most careful consideration possible.
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 13th February 2023.
Government to accelerate State Pension age uplift - could you be affected?
The Government is looking to bring forward the date at which the State Pension age increases, according to a report from Money Week.
Under current plans the State Pension age is set to rise from 66 to 67 by 2028. The next increase is currently set for 2046, when the limit will rise to 68. However, under plans being considered by the Government, the next increase could be brought forward by over a decade to as early as 2035. This means anyone aged under 55 now could face waiting longer to receive their State Pension, depending on what year the Government brings forward the age uplift to. Those born after April 1971 will already have to wait till age 68 under current rules.
Why is the State Pension age under review again?
The State Pension is one of the largest single costs the Government faces in its annual budgets. This is why in recent years it has pushed up the State Pension age to save on costs, particularly as life expectancy has soared for men and women in the years since it was introduced. Birth rates have also fallen, leaving less people to pay the taxes to fund an ageing population.
Conversely, critics of the Government’s new plans have highlighted that life expectancy levels have in fact reversed in the past few years, meaning the projected future costs are lower than anticipated. The Government has a life expectancy calculator you can check here.
With recent economic events the Government is finding it hard to plug shortfalls in its budget, with a combination of low growth and high debt costs squeezing its spending power. While politically difficult, increasing the State Pension age is one way for it to save money. The Government is now set to publish its State Pension age review in May.
What should I do?
While many people see the State Pension as a right they accrue through a lifetime of work and paying taxes, there is no ‘pot’ of money being saved into. The Government pays for the State Pension with taxes it rakes in each year from those in work. This is why it doesn’t have the funds to meet commitments it previously made, and why it is backtracking on those historic pledges.
The message here is that you should not rely on receiving a good State Pension income in retirement. While it can help, there are things you can do now to plan to build your wealth so as not to be dependent on the benefit in old age. This includes saving into pensions, ISAs and other tools for building long-term wealth.
If you would like to discuss your options, don’t hesitate to get in touch.
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 13th February 2023.
The World In A Week - Central banks tighten… but markets get looser
Written by Cormac Nevin.
Last week markets continued on their positive trajectory for the year , spurred on by a flurry of central bank interest rate decisions and press conferences from the Bank of England, US Federal Reserve and the European Central Bank (ECB). Growth equities led the way last week, with the MSCI All Country World Growth Index up +4.2% in GBP terms. The more value-orientated FTSE All Share Index of UK stocks was up +1.9%, while Emerging Markets (as measured by the MSCI EM Index) were one of the weakest performers but still up +0.9%. Fixed Income markets also had a strong week, with the Bloomberg Global High Yield Corporate Index up +1.0% and even the safest government bonds (measured by the Bloomberg Global Treasury Index) rallying +0.4% (both in GBP Hedged terms).
As mentioned, this price action in markets was largely viewed as the result of the market’s continued game of chicken with global central banks. All central banks raised their policy interest rates in their ongoing fight against inflation, however market participants appeared to be of the view that each policymaker was approaching the end of their rate hiking cycle and responded with a touch of exuberance to the prospect of the end of rate increases (or indeed the commencement of rate cuts). The Bank of England increased rates from 3.5% to 4.0%, the US Federal Reserve moved from 4.5% to 4.75% and the ECB moved from 2.5% to 3.0%.
If you are struck by the paradox of central banks tightening policy (via raising interest rates) but markets responding with looser monetary conditions (via increased equity prices, tighter credit spreads etc.), then you are not alone! We think it is an illustrative reminder of the forward-looking nature of markets as they look through the proximate actions of policymakers and to where “terminal rates” might settle.
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 6th February 2023.
© 2023 YOU Asset Management. All rights reserved.
The World In A Week - Is the rabbit out of the hat?
Written by Shane Balkham.
The last full week of January was relatively quiet for markets. With the arrival of the Year of the Rabbit, many Asian markets were closed for the Chinese Lunar New Year celebrations. In the US, the Federal Reserve was in a blackout period ahead of the rate setting meeting next week. In fact, this week is considerably more interesting with the Federal Reserve, Bank of England, and European Central Bank all having their first policy meetings of 2023. Expectations are for a slowing in the pace of rate hikes, with a potential pause at some point this year. More on that next week.
There were some interesting data releases though, with company earnings and guidance reporting lower, managing expectations for a below-trend growth environment in 2023 and preparing for a recession. However, fourth quarter growth for the US beat expectations, with GDP growing at an annual 2.9%, but underneath this figure we saw signs of weakness as consumer spending was subdued.
On a brighter note, US core PCE (Personal Consumption Expenditure) inflation data was published on Friday. Although it showed a slight uptick from November (moving from 0.2% to 0.3%), the annualised figure came in at 4.4%, significantly lower than the peak of 5.4%. This is still above the Federal Reverse’s target, but definitely moving in the right direction and arguably faster than expected. This could be sufficient evidence for policy makers to tone down the pace of rate hikes in this week’s meeting.
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 30th January 2023.
© 2023 YOU Asset Management. All rights reserved.
The World In A Week - It’s a Wonderful Life (When you are appropriately diversified)
Written by Cormac Nevin.
Markets were rattled last week, with the MSCI All Country World Index down -4.5% in GBP terms. What was different to the reaction vs the sell off we witnessed last year, however, was that high quality bonds had a very respectable rally at the same time, with the Bloomberg Global Aggregate Index up +1.1% in GBP Hedged terms. Japanese Equities were also up +0.9% over the week.
The source of the worry was a bank that you will not typically find on the high street, but which is very important to high-growth tech companies both in Silicon Valley and across the globe. Silicon Valley Bank (SVB) was the bank of choice for venture capital funds investing in high growth tech companies. The bank received massive inflows in deposits during the tech boom we witnessed over 2020/2021. They needed to find safe assets to invest these deposits into and made concentrated investments in US Treasury Bonds. Crucially, they failed to hedge these bond exposures against rising interest rates which is what most banks would have done. As the Federal Reserve raised rates hard and fast over the last year, SVB’s bond portfolio took large losses leading to a flight of deposits and a crash in the share price. This is the standard-issue reflexive loop of a traditional bank run, made worse by lack of diversification in the bank’s depositor base which was concentrated in VC Funds and tech start-ups.
After much speculation while markets were closed over the weekend, it transpired on Sunday night that banking regulators in the US would make depositors whole in an effort to stop the doom loop in its tracks. All depositors, including those whose funds exceed the maximum government-insured level, will be able to access their deposits in full, according to a joint statement by U.S. Treasury Secretary Janet Yellen, Fed Chair Jerome Powell and Federal Deposit Insurance Corp Chair Martin Gruenberg. In the UK, HSBC announced that they would buy the UK arm of SVB for the notional amount of £1. This underscores how healthy the rest of the global banking system is and leads us to believe that while this event is largely the consequence of higher interest rates and poor risk management from SVB, the contagion effects will likely be limited.
As ever, never neglect diversification, even if you are a tech whiz in Silicon Valley.
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 13th March 2023.
© 2023 YOU Asset Management. All rights reserved.