The World In A Week - Interim Update
News flow is beginning to contain something other than easing of lockdowns and vaccines.
Economies around the world are beginning to re-open, ahead of the schedules that were first announced back in the middle of March, and infection rates look to have largely been contained. The worst-case scenarios that made the headlines three months ago, now have a much lower probability of actually occurring.
Let us not forgot that any signs of market weakness have been met with additional support from central banks and governments. Japan’s announcement yesterday of an additional $1.1 trillion fiscal stimulus package continues that theory.
Whilst all of this is generally good news, the world’s media needs to find the next dramatic headline and as we wrote on Tuesday, the souring relations between the US and China are taking a more serious step. Last night, US Secretary of State, Pompeo, stated that the US could not consider Hong Kong as being autonomous from China, which does have significant consequences, as it may affect Hong Kong's special trading status with the US.
The political leverage that Donald Trump seeks to gain from managing the US/China relationship is becoming a key element in his re-election campaign. As we wrote last year, when the Phase 1 deal was penned, this New Cold War is not something that will dissipate anytime soon.
Finally, Brexit has once again hit the headlines. The EU have told Westminster that Brussels remains open to extending the transition period by up to two years. Talks on what the trade deal will look like remain unresolved, with the original target date of 30th June 2020 looking less likely to be met.
The World In A Week - Crunch Time
Tensions are running high. The balance between keeping economies locked down in order to protect the health services, and the desire to loosen lockdown measures in order to lessen the long-term impacts, is coming to a head.
Here in the UK, there has been tentative rhetoric that we are preparing to lift restrictions, but attention has shifted towards accusations that Boris Johnson’s senior aide broke lockdown rules. All nations will need unity to help with smoothing the economics of a bounce back, and Dominic Cummings’ actions will certainly be an unwelcome spanner in the planning.
In the US, we have already commented on the increasing pressures between itself and China, mainly at the finger of Trump’s Twitter account. Over the weekend, it was the turn of China’s foreign minister to ratchet up the tension, accusing the US of pushing relations to a New Cold War. All of this could mean short-term volatility in financial markets.
However, support for markets from both central banks and governments remains significant. Last week, France and Germany proposed a €500 billion Recovery Fund that would represent a significant step towards fiscal mutualisation in the Eurozone. What does this mean? The idea is that the distribution of the Fund’s resources will be based on need, while the burden of the repayment will be based on ability. This will treat the Eurozone as a whole, with the arguably stronger nations, such as France and Germany taking on greater burden, while less well-off nations, such as Italy and Spain, can benefit from the resources of the Fund.
We knew the route to combat COVID-19 would be uncertain and we appear to be at another inflection point. While the short term remains unclear for markets, the monetary and fiscal support appears to be the one constant.
The World In A Week - Interim Update
It is happening again. President Donald Trump has been busy with his Twitter account this week and the focus of his attention is China. Trump’s increasingly critical comments of China could be a worry for the longer-term economic bounce back.
Whilst pent-up demand during lockdown is potentially a boost for US growth in the short term, restoring the level of growth to where it was before COVID-19 will require a stronger underlying economy, and reawakening trade tensions with China will not help.
There is more at play here than meets the eye though; casting China as the villain has been successful in the past for Trump’s approval ratings, and in a recent survey amongst Republican voters, disapproval of China is at 72%. With the US Presidential Election not far off, seeds are already being planted for campaign strategies. For the Trump team, it will be a difficult balancing act of building political support and ultimately keeping the trade deal alive.
In the UK we saw the official rate of inflation drop significantly from 1.5% in March to 0.8% for April, and below economists’ expectations of 0.9%. Driven downwards by falling commodity prices, as well as reduced spending and increased savings, a result of having so many people in lockdown. This has prompted the Bank of England to make a U-turn on the possibility of negative interest rates in the UK.
The Governor of the Bank of England, Andrew Bailey, confirmed that policy had changed slightly and that they were reviewing all tools possible to help alleviate the impact of the coronavirus. He did stress that the Bank needed time to consider the implications of such a move and they want to see how the economy reacts to the previous rate cut to 0.1% before enacting further monetary policy.
The World In A Week - Schools Out
A recent rally in equity markets has seen the S&P 500 only down by -2.6% in 2020 in Sterling terms. However, the FTSE All-Share remains the poorest performing equity asset class; down -23.0% for the year. The S&P 500’s recent upsurge partially attributes to the depreciation of Sterling which continued to drop last week amid stalling Brexit negotiations between the UK and the EU.
Rishi Sunak has extended the Government furlough scheme to the end of October as he aims to curb the number of job losses caused from the virus. Already 7.5 million workers are on the furlough scheme, which equates to 23% of the total working population. The Government initiative is estimated to cost £14 billion per month and could reach £80 billion.
The reopening of schools appears to be the biggest debate as Michael Gove discussed his intentions to reopen schools providing conditions were met that include smaller classes and staggered arrivals. Denmark was one of the first countries to reopen schools back in April, prioritising its younger children to return to class, whereas Germany has given precedence to their older students. Much of Europe have reopened their schools and have taken precautionary measures to ensure a safe environment including regular breaks to use hand-washing facilities. Globally, almost 1.6 billion students have been affected by the pandemic and further guidelines are expected to be revealed later this week.
The renewable energy sector has flourished in recent months from lower electricity demand and brighter weather conditions with solar farms powering almost 30% of the grid. The UK has now reached 34 days without operating with coal as of the 14th May. Global energy demand has declined 3.8% in Q1 of 2020 with coal demand falling by 8% and oil demand by 5%. Besides a greener environment, the pandemic has highlighted the importance of international co-ordination and co-operation, as we have seen social distancing operated on a global scale. If a similar stance is taken going forwards, the hope is that the fight against coronavirus will transpire into a successful global response to climate change.
Lockdown Checklist: 6 Financial Steps To Take During The Pandemic
If you’ve been putting off reviewing your finances, the lockdown is the perfect opportunity to complete some tasks that could help make sure your finances and plans remain on track. With potentially more time on your hands, here are six things to do during the stay at home period.
- Review your will and Power of Attorney
It’s estimated that more than half of UK adults don’t have a will in place and even more haven’t established a Power of Attorney. These two legal documents are vital for ensuring your wishes are carried out. Even if you do have both these in place, take some time during lockdown to review them.
A will is the only way to ensure that your wishes are carried out when you pass away. If you already have a will, you can write a new one or add a codicil to make amendments if your wishes have changed. It’s generally a good idea to review your will following life events and every five years.
A Power of Attorney gives someone you trust the power to make decisions on your behalf if you’re unable to do so. Losing the mental or physical capacity to make your own decisions isn’t something anyone wants to think about, but a Power of Attorney is important. There are two types, one covering health and wealth decisions and the other covering finances, you should have both in place.
- Update your pension expression of wishes
Did you know your pension benefits aren’t usually covered by your will? Instead, you should complete an expression of wishes with each pension provider, stating who you’d like to benefit from your pension savings if you pass away. As pensions do not form part of your estate for Inheritance Tax purposes and are likely to be one of your largest saving pots, they’re a valuable asset to consider as part of legacy planning.
- Find out if you have any ‘lost’ pensions
Over the years you may have accumulated several pensions as you switch jobs. If the pension is relatively small or the employment was from some time ago, it’s easy for pensions to become ‘lost’. Luckily, the government has a service that can help you find lost pensions and start taking them into account when it comes to retirement planning. You can find the contact details for workplace and personal pension schemes here.
- Check your National Insurance record
It’s simple to check your National Insurance record, you can do so here. This tracks how many full years of National Insurance you’ve paid, as well as any National Insurance credits you’ve received, such as when taking time out of employment to raise children or care for someone. Why is this important? You need to have 35 qualifying years on your record to be eligible for the full State Pension when you reach retirement age. If you have gaps, it may be possible to pay voluntary contributions. The sooner you know there’s a gap, the better position you’re in to make the right decision for you.
- Evaluate financial protection
If you already have financial protection in place, now is a good time to review the policies. As circumstances and priorities change, the policies that are right for us change too.
Whether you have an income protection policy, critical illness cover or life insurance, you should take some time to understand what each policy covers and whether they remain appropriate for you. Life events may mean that your current protection needs to be updated. These events could include starting a family, paying off your mortgage or starting a new job.
If you don’t currently have any sort of financial protection in place, it’s worth considering what would happen if your income suddenly stopped, you were diagnosed with a critical illness or the position your family would be left in if you were to pass away. It’s not something anyone wants to think about, but doing so can help you put steps in place to safeguard your and your family’s future.
- Consider making gifts now
The current situation has placed a lot of people under pressure financially. Whilst your finances may be secure, your loved ones may not be in the same position and you may want to provide some support.
If this is the case, making use of the gifting allowance can make sense. Gifts are classed as Potentially Exempt Transfers when given. This means they can be considered part of your estate for Inheritance Tax purposes if you die within seven years of them being received. However, some gifts are considered immediately outside of your estate. This includes the gifting allowance. Each tax year, you can gift up to £3,000 to loved ones, which can be carried forward a year if unused, under this rule.
Other gifts that are immediately exempt from Inheritance Tax include those that are given from your disposable income.
During these times of uncertainty, we know that you may be worried about your finances and long-term plans. We’re still here for you, please get in touch if you have any queries about the above checklist or other aspects of your financial plan.
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 circumstances, tax legislation and regulation which are subject to change in the future.
The Financial Conduct Authority does not regulate will writing or estate planning.
Why You Should Have A Power Of Attorney In Place
Millions of Brits haven’t named a Power of Attorney. It may seem like something you can put off for a while, but it’s something we should all have in place.
A Power of Attorney is a legal document which gives someone you trust the ability to make decisions on your behalf if you’re unable to do so. Thinking about lacking the mental or physical capacity to be independent and make decisions isn’t something anyone wants to do. However, it can happen and having a Power of Attorney in place can provide you with some security if it does happen.
Being unable to make your own decisions is often something we associate with old age and dementia in particular. As a result, naming a Power of Attorney can seem like something that’s fine to put off for a few years or even longer. Yet, accidents and illnesses can strike at any age. It’s important to note that a Power of Attorney can make decisions on your behalf on a temporary basis as well as a permanent one. If you were to recover and in a position to take control of decisions again, you can do so.
You may think that you wouldn’t need someone to act on your behalf, that everything would stay on the course you’ve set out. But even being unable to make decisions for a few months can have a lasting impact. There are two types of Power of Attorney to consider when looking at what would happen if there was no one making decisions on your behalf.
Health and welfare: This relates to areas such as medical care, moving into a care home and life-sustaining treatment. You may have clear ideas about what you’d like to happen should you become ill. A Power of Attorney allows you to discuss these with a loved one who will then be able to make these decisions.
Property and financial affairs: This type of Power of Attorney allows a trusted person to manage your bank, pay bills and collect your pension. It can help ensure your finances remain secure and commitments are met. Even a few months could have an impact if someone isn’t able to access your accounts to settle bills, for example.
It’s also important to note that no one has the automatic right to make decisions on your behalf, this includes spouses and civil partners.
What happens if there’s no Power of Attorney?
If you don’t have a valid Power of Attorney in place, an application would need to be made through the Court of Protection. The Court of Protection can decide if you’re able to make your own decisions, make an order if you lack the mental capacity to make decisions, or appoint a deputy to make decisions on your behalf. The process can be costly and lengthy, delaying decisions that may be important. It’s a process that can be stressful for both you and your loved ones.
4 reasons to have a Power of Attorney
- A Power of Attorney should be part of your financial plan when considering ‘what-if’ scenarios and putting in place measures to ensure your security and plans stay on track as much as possible.
- It can provide financial security if something were to happen by enabling someone to take control of your finances, including ensuring payments are met and you’re able to access income.
- It’s also an opportunity to make sure your care and health wishes are met by discussing them with your trusted Power of Attorney.
- The legal document also supports loved ones, without one in place it can be difficult and time consuming to go through the Court of Protection to act on your behalf.
Supporting other estate plans
Naming a Power of Attorney should be done alongside a wider estate plan too. This may include writing or reviewing your will and considering a potential Inheritance Tax bill when you pass away. Putting these pieces in place together can ensure a cohesive plan that is aligned with your wishes. If you’d like to discuss legacy planning and safeguarding your future, please get in touch.
Please note: The Financial Advice Authority does not regulate Power of Attorney, will writing or estate planning.
Dividends And Coronavirus: Will Your Income Be Affected?
As businesses have been hit by the coronavirus pandemic, some have decided to cut dividends and regulators are adding pressure for others to follow suit. This may leave a hole in your income if you rely on dividends.
According to reports from The Times, investors have suffered a dividend cut of at least £600 million as some of the UK’s biggest businesses aim to conserve cash during the coronavirus pandemic. A wide range of business sectors has been impacted by the virus and resulting lockdown, leading to profits tumbling. As a result, firms have taken steps to hold cash as a buffer and, in some cases, regulators have stepped in. The UK banking regulator, for example, wants banks to suspend dividends temporarily. Some businesses are also using the government’s scheme to furlough staff, therefore taking money off the taxpayer, leading to questions around whether these firms should continue to make payouts to shareholders.
Why does this affect investors?
If you’re investing in growth stocks with a long-term plan, the recent market volatility isn’t likely to have a significant impact on your goals overall. However, it’s a different story if you rely on dividends to top-up your income.
A dividend is the distribution of a portion of the company’s earnings paid to shareholders. Dividends are managed by the company’s board of directors and must be approved by shareholders through their voting rights. Dividends are typically paid in cash, but can also be issued as shares, and may be issued at regular intervals.
As a result, dividend-paying companies may be used as part of an income investment portfolio. These typically involve investing in well-established companies that no longer need to reinvest the majority of profits back into the business to reach goals. As a result, high growth businesses typically don’t pay out dividends.
For the most part, once a company has established dividends, investors expect this to continue, but that doesn’t mean they will. As even established firms face uncertainty in light of the pandemic and more are choosing to either freeze or suspend dividends in the short term.
Whilst historically dividends have tended to be less volatile than the stock market itself, this doesn’t mean they are a ‘safe’ investment. Investing for income, including dividend-paying companies, still comes with risks that need to be considered.
So, if dividends make up a portion of your income, what can you do?
- Reduce outgoings
If your income has been affected, the first thing to do is understand what it means for your finances in the short term. If there is a shortfall in covering essential outgoings, there are currently government-backed schemes in place to support households, including mortgage holidays. Where possible, it may be necessary to reduce outgoings temporarily to match the reduction in income.
- Use your emergency fund
Everyone should have a cash emergency fund they can fall back on should their income drop. Ideally, this should be easily accessible and have enough to pay for three to six months of outgoings. Often clients can feel reluctant to access this money they’ve put away for a rainy day, but it’s times like these that you’ve been saving for.
- Create an income from other assets
If your income from dividend-paying stocks has fallen, you could build an income stream from other assets that you hold. What’s possible and whether or not it’s the right decision for you will depend on a variety of factors. If this is something you’d like to discuss, please get in touch with us.
- Keep your investment plans in mind
If dividends have been reduced or halted altogether, you may be tempted to dump the stocks and look at alternatives. However, keep the bigger picture in mind.
Given the current situation, it’s likely many dividend-paying companies are in a similar position for the time being. A reduction in dividends can be a prudent move and ensure sustainability, therefore protecting your dividend income over the long term. If you’re worried about how secure a firm is, research why the changes to dividends have been made. A statement is often made available on the firm’s website. This may be able to provide you with some reassurance that the changes are temporary.
- Speak to us
We’re here to help ease concerns you have about your financial situation and what it means for your plans. This includes a reduction in dividend income. Whether you want to understand what it means in the short term or are considering making investment changes due to this, please get in touch with us.
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.
5 Tips For Keeping Pensions On Track During The Pandemic
During the market volatility, you may be worried about what it means for your pension. We take a look at five things to keep in mind to ensure your pension and retirement stay on track.
For most of us, pensions are invested with the hopes of delivering returns over the long term and it’s something we plan to pay into over our working lives. But the current pandemic may have impacted on your plans and the current value of your pension.
If you’re worried about the impact of coronavirus on your pension, you’re not alone. Research from Aegon found that many pension savers are anxious about their retirement savings. Perhaps unsurprisingly, older generations that will have more saved into a pension and maybe nearer to retirement are the most concerned. The survey found:
- A third (33%) of 18 to 34-year-olds checked the performance of their investments in March, amid significant market volatility
- This compared to 53% of pension savers aged between 55 and 64
This divide was also reflected in who was paying attention to market movements. Some 72% of the older group were doing so, compared to 44% of younger savers. This is despite younger generations being more likely to take this time to make one-off investments, which 28% have done compared to just 10% of those approaching retirement.
For all generations, there is a risk that rash decisions will have a long-term impact. For those still building up their pension savings, this could include halting contributions as worries about job and financial security become a concern. For those accessing their pension, failing to factor in market downturns if taking withdrawals could also have an impact on long-term value.
So, what can you do to keep your pension on track?
- Maintain contributions
Given the current economic uncertainty, workers still paying into their pension may consider reducing or pausing their pension contributions. However, due to the effects of compounding even a relatively short break from making pension contributions can have a long-term impact. Keep in mind your own contributions will benefit from tax relief and, if you’re employed, contributions from your employer too. As a result, by halting your own contributions, you’re effectively giving up this ‘free money’.
If you find you can’t continue to make contributions, be sure that you understand the long-term impact and what it could mean for your retirement.
- Don’t make rash financial decisions
With bold headlines and falling values, you may be tempted to make adjustments to your investments or make larger withdrawals from your pension to keep it ‘safe’. However, it’s important to keep in mind that a pension is a long-term investment that should have considered the impact short-term volatility would have. Keep this in mind if you’re thinking about making a knee-jerk reaction to the current market movements.
Making rash decisions is something the Association of British Insurers (ABI) has warned about. Yvonne Braun, Director of Policy, Long-Term Savings and Protection at ABI, said: “Rushed financial decisions are rarely the right ones, even at this worrying and uncertain time. Lockdown will not last forever but the decisions you make today about your pension could impact on your standard of living for years to come.
“Now, more than ever, it is important to think longer term, consider your options and seek advice and guidance before making any decisions.”
- Review your portfolio
Whilst the media has focused on the fall stocks have experienced, for many pension savers, this isn’t all your portfolio is made up of. Your portfolio is likely to contain a mix of assets, which can help cushion the fall seen on global markets. You may have seen that the FTSE fell 30% due to coronavirus, but it’s unlikely the fall your pension has experienced is this high. In addition, markets have started to recover, they haven’t reached the levels they were at earlier in the year, but the fall isn’t as significant as it was.
If you’re worried about reading headline figures, looking at your own portfolio is likely to show the impact of volatility isn’t as bad as you first imagined. It can help put worries into perspective.
- Assess withdrawals if you’re accessing your pension
A dip in the value of pension investments isn’t usually something to worry about if retirement is some way off. If, however, your pension is in drawdown and you’re already making withdrawals, it’s worth assessing the impact these will have. As you’ll need to sell off more assets to receive the same income as you’d have done at the beginning of the year, this can deplete your retirement savings quicker. Where possible, temporarily stopping or reducing withdrawals can help your pension go further. Please contact us if you’re accessing your pension flexibly and want to discuss the rate of withdrawal.
- Speak to your financial planner
As your financial planner, we’re here to offer you reassurance and advice when you need it. Speaking to us about pension concerns you may have can help you understand the long-term impact of the current situation and create a solution where one is needed. If you’re worried about your pension, or any other aspect of your finances, 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
We knew it was coming, but that did not stop the market from overreacting to what is undeniably a certainty.
The UK economy shrank at the fastest monthly rate on record during March, due to the lockdown and the enforced economic slowdown. UK gross domestic product (GDP) fell 5.8% compared with the previous month, making it the largest drop since records of monthly GDP began in 1997.
It also meant that the UK has had its first quarter-on-quarter drop in GDP since the Global Financial Crisis. The 2% fall compares to falls of 1.2% for the US and 3.8% for the Eurozone. The recession will technically become official when we have a negative reading for this quarter, as you need two consecutive negative quarters for a recession.
Although much of this was widely expected, it did not stop the market reacting wildly. The first three days of this week saw the FTSE 100 swing more than 200 points, evidencing that volatility is here to stay. As we wrote on Monday, the likelihood of a ‘V’ shaped recovery has dissipated, and our base case of a ‘W’ shaped market is looking more probable.
That means more commitments of economic stimulus if markets became too unruly. In anticipation of this, we have already had proposals from the US of an additional $3 trillion fiscal package. However, there is a conflict building between those who see these extreme measures as absolutely necessary, and those that fear the spectre of rising debt will come back to haunt us. Exceptional times call for exceptional measures and ultimately the combined total of the global promises is essential to combat the global pandemic.
The World In A Week - Phoney War
Last week saw a moderate rise in the value of risk assets with the FTSE All Share up +0.65% and the MSCI All Country World Index down -0.36% in GBP terms, as the value of Sterling rose against the Dollar and many other major currencies. Within Equities, the Emerging Markets and Europe lead the way, while Japanese Equities lagged.
This sentiment was also broadly reflected in Fixed Income markets Investment Grade Credit, High Yield Bonds and Emerging Market Debt all advanced – while Treasury returns were more subdued.
The relative tranquillity observed in markets was at odds with the slew of dreadful economic news that hit the headlines last week. It was announced that the US economy lost 20.5m jobs in April, rocketing the unemployment rate to 14.7% - a new post-war high. Consensus is now gathering that the likelihood of a “V shaped” recovery from the coronavirus is getting closer to zero. The unprecedented increases in unemployment are likely to take a long time to unwind, and consumer’s purchasing power and habits may well be changed for good.
However, since their nadir on the 23rd March 2020, Equity markets have paid little heed to the deteriorating economic fundamentals, with MSCI ACWI up +18.2% and the S&P 500 up +21% in GBP terms. In the riskier Fixed Income markets, we have also seen a strong rally in High Yield Bonds from their lows, although this is arguably not as over-extended as the Equity markets. As we celebrated Victory in Europe day over the Bank Holiday weekend, it has begun to feel like a phoney war mentality has taken over the markets – one that may collide with reality in due course. While the rally demonstrates the necessity of maintaining market exposure through all stages of a cycle, we remain neutral on Equities at this point.