The World In A Week - Interim Update
We previously wrote, just two weeks ago, about the risk of economic forecasts during this period of uncertainty. The unreliability of data during the lockdowns will, in turn, make the forecasts equally unreliable. Although there is some consensus around how long economies will take to get back to pre-crisis levels, the range of forecasts for how much damage will be done is historically wide.
The one forecast that did hit the headlines was from the Office of Budget Responsibility (OBR), who caveated their forecast by stressing it was not a forecast at all. Their ‘illustration’ of the potential fiscal effects of a three-month lockdown gave us a 35% reduction in output and unemployment of two million. The silver lining beyond the headlines that the media ran with was OBR’s assumption of “no lasting economic damage” beyond a short downturn.
Naturally, focus is starting to centre around what an exit-strategy from lockdown will look like, however, not all economies will have the same experience of dealing with different phases of the virus. Reinvigorating a weak economy from a lockdown will depend on having sufficient stimulus in place and a consumer base willing to consume. That means keeping unemployment as low as possible.
The Federal Reserve announced this week that it will expand the size and scope of its lending facilities to provide up to $2.3 trillion in loans, in support of the US economy. This is to provide business with much needed liquidity to ensure that as many jobs as possible remain open when the furloughing ends.
We must also remember that this slowdown is not due to structural imbalances around the globe; but a deliberate policy-induced slowdown, which may not echo previous slowdowns. It is about keeping an open mind to the range of possible outcomes and not jumping to conclusions too early.
The World In A Week - A Rally From Awful To Bad
The last week before the Easter break saw risk assets rally strongly as investors left the haven of cash and re-entered the market. While High Quality Bonds rallied +0.3%, the greatest moves were seen in the riskier segments of the Fixed Income markets, as High Yield Bonds gained +4.7% and Local Emerging Market Debt rallied +4.6%. In Equities, Global Equities as measured by MSCI ACWI rose +8.6% in GBP terms, while the S&P 500 Index of US Equities rallied +10.3% - its strongest weekly performance since 1974.
While we expect markets to remain volatile to the upside and downside for the remainder of the year, the returns highlighted above illustrate the critical importance of remaining invested throughput the market cycle – no matter how painful the prior drawdown may have been.
Market performance has been driven by a number of factors, which of course all centre around the ongoing Coronavirus pandemic. Chinese trade and economic data has been better than expected as the Middle Kingdom begins to lift restrictions, awakening dormant companies. As with all Chinese data, this should be treated with caution, however. It has been reported that over 70 vaccines are being developed globally, with some about to begin human testing. In addition, some European countries are beginning to contemplate re-opening their economies – although the situation remains bad in the UK.
The economic damage caused by the virus will likely have ramifications for some time, and pockets of infection or re-infection may arise around the globe sporadically. This informs our view that market volatility will persist.
The World In A Week - Interim Update
The ebb and flow of sentiment is critical in the short term. The markets will overreact to both good news and bad. The problem is that data is going to be less reliable than it has ever been and that is the fuel that feeds sentiment. The extrapolation of data points amplifies the overreaction and a virtuous cycle quickly becomes a vicious one.
News of ‘lowest number of cases’ that permeates headlines can quickly change to a much darker narrative. Yesterday, the number of new infections in Germany rose to a three-week high and Italy announced that it was keeping schools closed until September. Hong Kong has extended its lockdowns until the end of April and expectations for a similar extension here in the UK are high.
However, we do know that for every piece of bad news, policy makers are looking to quell with announcements of new stimuli. Last night our Chancellor, Rishi Sunak, pledged £750 million of extra funding for our struggling charities and Congress in the US confirmed an additional $1 trillion stimulus package was currently being drawn up.
This is a reminder that temptation to gorge on the 24-hour news flow can lead to a rollercoaster of emotions; we wrote in our quarterly review in January of the perils of relying on particular media sources. We strive to provide balanced and relevant commentary, which we hope will become your mainstay in these difficult times.
The World In A Week - A Week Of Firsts
US jobless numbers surged from 3.3 million the week prior to 6.6 million last week, taking the total to almost 10 million people filing for benefits. Donald Trump responded to these record-breaking figures by signing an historic $2.2 trillion virus relief package into law. The package gives the unemployed $600 per person, in addition to their state benefits, for up to four months. This is a significant increase from the average benefits payment of c.$385 per person per month. It is expected that jobless numbers will continue to climb as workers and businesses alike access benefits; these stark numbers validate the consensus view that the US is already in recession.
Services PMI data shows a sedate return to the new normal for China and a somewhat grim picture for Europe. As China gets back to work, data sluggishly moved up from an historic low of 26.5 in February to 43 in March, a move in the right direction, but at a slower pace than expected. Europe, notably Spain and Italy, tells a very different story; both countries posted services data of 52.1 in February which collapsed to 23 and 17.4 respectively in March. While the Coronavirus continues to wreak havoc with the global economy, there are some tentative signs, in both Spain and Italy, that the infection rate is slowing.
Crude oil hit rock bottom last week tumbling to $25 a barrel having started 2020 at $66 a barrel. The slowing economy and excess supply have resulted in the collapse in oil price. In a move to stem further price falls, OPEC and others will meet this Thursday with a view to cutting supply. In an unprecedented move, which has not been witnessed before, Saudi Arabia will delay announcing its official oil selling price for May until after the meeting has taken place; prices were due on Sunday.
The World In A Week – Interim Update
Economic data is likely to become increasingly less reliable as a result of the COVID-19 lockdown. We know that the effect on the global economy will be bad, we just do not know how bad. That is why we are seeing significant stimulus packages from governments around the world and why they keep getting bigger. No sooner has the US announced stimulus package number three, at an impressive $2.2 trillion, there was expectation from politicians for stimulus package number four.
This dichotomy of knowing that the global economy is going to be damaged, but unable to accurately forecast to what extent, is why we have seen volatility in the markets and commitments to soften the blow increasing week-on-week.
Most economic data are survey based: industrial production, unemployment numbers, inflation numbers and various sentiment opinion polls need people to fill in the surveys. Filling in survey forms during a lockdown may not necessarily be representative of the whole. Social media spreads fear and affects sentiment and sentiment affects answers to surveys. Then you have issues such as consumer price inflation, which includes restaurant prices; how do you survey something that is not there?
It is likely that the data we will see coming out for the first quarter of 2020 will not be as reliable as it has been in the past. Interpolations of annualised numbers should be analysed with a fair degree of scepticism and investment decisions for the short term should not be made on this potentially soft foundation.
Although the extreme fear that was dominating much of March has slightly dissipated, we are still wary of the short-term outlook while in the midst of the virus crisis. Good news, such as the rumours that President Trump will cut taxes for US companies by suspending trade tariffs for 90 days, will elicit a good reaction from markets. While reports of increasing infection rates and deaths will provoke a negative reaction. Clear heads and predictable processes are needed in this phase of the crisis.
The World In A Week Interim Update - Apply. Rinse. Repeat.
This week we have seen the US Federal Reserve offer unlimited quantitative policy, along with various other bells and whistles. This is to keep the wheels of monetary policy lubricated; to encourage lending to companies by banks, and in turn this may save some jobs. It may also help to stabilise the markets, which would give enough breathing space to allow fiscal policy to be rolled out.
This is what we are seeing in the US. The Senate has now agreed a fiscal package worth over 9% of GDP and the buck is passed to The House of Representatives who will vote tomorrow on the $2 trillion deal. Co-ordination across the globe has been key and we have seen the European Central Bank announce today their unlimited commitment to asset purchases. In the UK, the Government continues to roll out more details about the £350 billion relief package.
All of this is about avoiding job losses. The more people that are unemployed means the less they are going to consume. If consumption drops, it will delay the second phase of the fiscal policy rescue package, which is the economic bounce-back.
In the US a quarter of the deal will focus on loans to businesses, to support them during this period and hopefully avoid an unnecessary increase in unemployment. President Trump is also riding to the rescue, with the possibility of a further tax cut through the suspension of trade tariffs for 90 days, which should alleviate pressure on some companies’ profit margins.
Apply. Rinse. Repeat. The same instructions that were given for the quantitative easing programme to combat the great financial crisis are being repeated for the great virus crisis. Only this time the measures being enacted are more dramatic; projections for the Federal Reserve’s balance sheet is a surge of more than $3 trillion. This will equate to an expansion of roughly 75% and is comparative to the entire stimulus injected over a decade since the global financial crisis. It is likely the current level of policy stimulus will not need to remain in place for as long as it did for the previous crisis. However, it is needed now as it was 12 years ago to prevent a global depression.
The World In A Week - Contagion
Basic evolutionary theory teaches us that adaptation is the biological mechanism by which humans adjust to changes in their environments. We find ourselves living in a period of great change, and it is those that adapt to change best that will come out on top, after the virus subsides.
In the UK, we are being urged to stay indoors and socially distance ourselves to prevent the spread of the virus further. As humans, we are experiencing significant structural reform as we adapt to our new working lifestyles and plan around the latest advice issued by the Government. Negligible commute times and a ban on outdoor social activity has created a great deal of free time for people to utilise. Governments across the world are assessing measures to restrict the economic disruption that the virus is causing.
It seems the UK’s approach has been more staggered than the rest of Europe’s with Boris briefing the nation daily by issuing more restrictions and providing further guidance. Whereas in Germany, gatherings of two or more people have been banned and illustrates a direct approach than it appears the UK are operating with. The UK are more focused with reducing their economic hit from the virus than reducing the spread of the virus and it is expected that more drastic restrictions in the UK will follow. The decision to close schools in England was made after Wales and Scotland. However, the ban for pubs, gyms and restaurants shows that Boris intends to issue more rigorous policies.
Rishi Sunak has offered £350bn in the form of loans and grants to save British businesses from insolvency and workers from redundancy. This economic response appears to be one of the most significant displayed from any major country. Germany has made available €500bn in the form of loans available to all businesses and has encouraged firms to defer their tax payments. There doesn’t appear to be a generic response, but fiscal stimulus appears to be the most popular decision taken. Hong Kong has selected a more direct stimulus and has pledged to give HK$10,000 to each citizen. However, with lock-down measures likely to be in place, this doesn’t appear to be an effective response.
The last pandemic was the swine-flu pandemic in 2009-10 which infected almost 1.4bn people globally but the death toll ranged from 151,700 to 575,500. Swine flu was more prevalent in younger people which we now know to be the opposite of COVID-19. The effect of swine flu was masked by the financial crisis of 2008. However, COVID-19 is the first pandemic to exist in the social media era where information and opinion is more readily available and is one of the major factors attributing to the high volatility of the global markets.
What we all need to appreciate is that we are living in a period of unprecedented change and we all need to be adaptive, bold and co-operative to ensure we continue to deliver to our clients.
During times of heightened market volatility, many investors feel a strong urge to de-risk and sell out of their equity positions. However, history has rewarded patient investors who stayed invested over a longer time horizon. There has never been a market drop without a subsequent rally and with equities at a major discount, this offers a suitable opportunity to top up your equity positions.
Article on Private Client Insurance by Alastair James, independent insurance broker
Mid and high value home insurance
If you own a mid or high value home, a listed property or a house that has been designed and built using methods other than traditional standard construction, you may find it difficult to obtain insurance that fully meets your requirements, or pay a much higher premium to do so.
This is because the majority of “of-the-shelf” insurance policies that we see so heavily advertised on television and on comparison sites are designed to meet mass market criteria that ticks all the boxes. Anything outside of this, and we are often faced with a “computer says no” response and lack of understanding.
In this situation, specialist advice should be sought from an insurance professional, specifically an insurance broker, who understands the unique requirements of such a homeowner and has access to specialist insurers who can provide the right cover and protection at a sensible premium. This sector is often referred to as High Net Worth Insurance or Private Client Insurance.
The Cover
It is often underestimated the time it can take for a property to be fully reinstated following a significant event such as fire or flood. Specifically in relation to listed buildings, aside from having to often source materials in keeping with the original construction and using the original methods of labour, before any work is even undertaken, listed building consent is required to sign off the proposed work, and all of this can be a very lengthy process. If your home is uninhabitable following the damage, it is important that your insurance will adequately cover you to live in alternative accommodation throughout this process, which can unfortunately sometimes be a number of years. Some of the mass market insurers will only limit this for a short amount of time, or to a limited monetary value which, if exhausted, will mean this will then be a cost to be borne by you. Most specialist high value home insurers will provide cover up to 5 years which is much wider than the standard market.
Within the home, too, a specialist high value home insurer will offer much wider limits on items such as fine art, antiques, collectables, silver, jewellery and watches, with items not needing to be individually listed until they exceed at least £10,000 per single article, which is much wider than the standard market. It is important to be aware of any single article limits within any contents insurance policy to ensure that, in the unfortunate event of a claim, one is fully reimbursed and not restricted to an insurer’s inner limit or maximum amount payable. Some mass market insurers will only pay up to a fixed amount for valuables so again, please ensure your cover adequately reflects your own personal circumstances.
Cover for contents from a Private Client insurer is offered on “all risks worldwide” basis, so your contents are covered worldwide, for all eventualities unless specifically excluded (such as wear and tear or gradually operating causes). This gives enormous peace of mind, for example, that if holidaying abroad, and you lose a diamond from a ring, this is covered as standard.
Sums Insured
A report by Barrett Corp Harrington, the UK’s leading dedicated provider of buildings insurance valuations, stated that 77% of UK properties were under-insured, on average by 45%, which is a frightening statistic. In the event of significant damage to your home, if this is correct, one could be faced with the proposition of simply running out of funds to reinstate the property, or being subject to an insurer’s under-insurance condition. This states that if underinsurance exists, any claim settlement will be subject to a deduction depending on the level of underinsurance. By way of a simple example, if a property is under-insured by 50%, and a claim is made for £100,000, the insurer is only liable for 50% of the cost, settling the claim at £50,000, leaving the policyholder with a shortfall of £50,000.
Many specialist high value home insurers will offer a free buildings appraisal whereby they will appoint a surveyor, at a cost to the insurer, to either visit the property or conduct a desktop survey remotely, to ascertain the correct rebuild vale of a property and thus eliminate the issue of underinsurance.
Portfolio Insurance
In addition to covering your main UK home, these specialist insurers will also provide cover for second homes and holiday homes, both in the UK and overseas. Again, cover is generally broader than that provided by the standard market and will extend to include perils such as accidental damage and damage by tenants, which is often a typical exclusion with other insurers. For many people with a second, or even third home, who split their time fairly evenly between properties, why should they have to accept reduced cover at one of their properties just because an insurer doesn’t deem it to be their “main” residence? A specialist insurer will consider this and the same high levels of cover will apply at each property.
Private Client Insurance Market
The vast majority of these specialist insurance policies can only be obtained through an insurance broker, and the insurers will not sell their policies directly to the general public. This is because insurers recognise the advice that a broker gives to their clients to ensure a bespoke policy is provided to match each individual’s requirements, rather than adopting a one size fits all approach. One homeowner’s requirements may differ greatly from the next, so it is the insurance broker’s job to ensure the right policy is provided to that individual. The importance of getting this right cannot be underestimated. Ultimately we all hope that we never need to call upon insurance as it means we have suffered some form of loss or damage. However, we should expect that if we do need to make a claim that we will be paid quickly, and in full. Get the right cover in place from the outset, and benefit from peace of mind knowing that should the worst happen, you do not experience any shocks or unexpected surprises in the unfortunate event that you need to make a claim.
Alastair James Insurance Brokers Limited are an independent insurance broker based in Cheltenham, who specialise in selected classes of commercial and personal insurance, the primary focus of which is high value homes and contents. They have a panel of specialist high value home insurers and provide a personal service enabling them to achieve the right balance between a comprehensive policy and a competitive premium.
Telephone – 01242 371 058 Email – admin@ajamesinsurance.co.uk www.ajamesinsurance.co.uk
The World In A Week - Interim Update
Policymakers around the globe are turning to their fiscal armouries to meet the economic challenges that the Coronavirus is, and will be, causing. This is a welcome development and as we have written previously, central banks have all but exhausted what monetary policy can achieve.
President Trump is pushing for a stimulus package that could reportedly be as much as $1.2 trillion and UK Chancellor, Rishi Sunak, has unveiled £330 billion of state loan guarantees, with an additional £20 billion of financial handouts aimed to help businesses cope with the impact of COVID-19. These stimulus packages are looking to offset the short-run economic damage that is likely to be done from social distancing, travel bans and outright quarantines.
However, central banks still have an important role to play in this crisis. It is their role to ensure that the cost of borrowing remains low for the foreseeable future, in order that governments can do whatever is needed to overcome both the social and economic crises.
We have already seen the Federal Reserve reduce interest rates to zero in the US and our own Bank of England has pulled rates down by 0.5%. To supplement this, central banks around the world have already embarked on a fresh round of quantitative easing, buying up assets to reduce borrowing costs further and give support to the underlying economy. The European Central Bank has just announced a programme to buy €750 billion of bonds after an emergency meeting last night.
What we must remember is that this is not a repeat of the global financial crisis of 2008. 12 years ago, the great recession was caused by a collapsing housing sector and a lack of confidence in banks, meaning the risk at hand was a complete failure of the global economy. This time, the sectors that look most vulnerable are travel, tourism and retail, which combined accounts for 10% of the global economy and employ 10% of the global workforce (source: Fidelity Investment Management).
This is more akin to a natural disaster and the right thing to do in the event of an earthquake is to support those most affected by the seismic economic and social upheaval.
Understanding Your Final Salary Income: What Income Will It Provide?
If you have a Final Salary pension, retirement planning can seem more straightforward. However, there are still important decisions that need to be made and it’s crucial that you understand the income it will provide. Whether retirement is just around the corner or some years away, reviewing your pension arrangements can provide confidence.
First, what is a Final Salary pension?
Final Salary pensions, also known as Defined Benefit pensions, are often referred to as ‘gold plated’. This is because your income in retirement is defined, protected and the benefits are typically competitive when compared to the alternative.
With the alternative pension scheme, a Defined Contribution pension, employees and employers make contributions, which benefit from tax relief and is invested. At retirement, pension savers have a lump sum of pension saving that will be dictated by how much they’ve contributed and investment performance. At retirement, they will have to decide how to access the pension and ensure it lasts for the rest of their lives.
In contrast, with a Final Salary pension, the pension scheme takes responsibility for how investments perform, which don’t have an impact on your retirement income. Instead, future pension income is defined from the outset. This is usually linked to how many years you’ve been a member of the scheme and either your final or average salary. At retirement, a Final Salary pension will pay out a regular income for the rest of your life.
Among the benefits of a Final Salary pension are:
- You don’t take responsibility for investments: You don’t need to decide where to place your pension contributions, this is in the hands of the pension scheme trustees. The performance of investments won’t affect your retirement income.
- It provides an income for life: Life expectancy can make planning for retirement challenging, as you don’t know how long pension savings need to last for. With a Final Salary pension, your income is guaranteed for life, taking away this element of uncertainty.
- The income is usually linked to inflation: In addition to a lifelong income, Final Salary pensions are usually linked to inflation. This means your income will rise in line with the cost of living, preserving your spending power in real terms.
- Many Final Salary pensions come with additional benefits: Your Final Salary pension may offer auxiliary benefits that provide peace of mind, such as a pension for your spouse, civil partner or children if something were to happen to you.
As a result, Final Salary pensions can be incredibly valuable for providing certainty and security in retirement.
Calculating your retirement income
The good news is that understanding the income you can expect to receive when you retire is usually straightforward.
How the income delivered from a Final Salary pension is calculated varies between scheme. .However, this will already be defined. If you can’t find the paperwork detailing this, contact your pension scheme. There will typically be three factors used to define your Final Salary income:
- How long you’ve been a member of the scheme
- Your final salary or a career average
- The accrual rate, this is the fraction of your salary that’s multiplied by the years you’ve been a member of the scheme.
Let’s say you earned £60,000 at retirement and it was your final salary that was taken into consideration. You worked at the company for 40 years and the accrual rate was 1/60. Your income in retirement would be £40,000 annually using the below formula.
Years as a member (40) x accrual rate (1/60) x salary (£50,000)
You should receive an annual statement from your pension scheme, which will include providing a value of your pension at retirement.
Creating flexibility with a Final Salary pension
A Final Salary pension can provide you with security throughout retirement. Yet, you may still want a flexible income to meet your retirement goals. This may be because you plan to spend more in early retirement or at other points. For example, you may have mortgage debt remaining, plan to travel or want to financially support loved ones.
There are ways that you can achieve the best of both worlds.
Many Final Salary pension schemes will allow you to take a one-off lump sum from your pension to kick-start retirement. This will reduce your income during retirement but does provide the capital for flexibility if needed.
Other options include using a Defined Contribution pension to fund a one-off expense if you have one and using your other assets, such as investments, to create a flexible income. It can be difficult to understand how your different assets fit together to help you reach retirement goals. This is an area we can help you with.
Transferring out of a Final Salary pension
If you have a Final Salary pension, you may be considering transferring out.
At retirement, you do have the option to give up the benefits of a Final Salary pension and receive a lump sum instead, which must be transferred to a Defined Contribution pension. There may be some benefits to doing this, such as providing greater income flexibility, but for most people transferring out isn’t the most appropriate option for them.
Receiving a lump sum can seem attractive. However, what you’re giving up, a guaranteed income for life is often more valuable. It’s important to weigh up your financial security and retirement goals before making a decision. If your Final Salary pension is worth more than £30,000, you must take regulated financial advice first.
Please contact us to discuss your Final Salary pension and what it means for your retirement lifestyle. Usually, there are ways to create a flexible income stream that will suit your goals whilst retaining the security one offers.
Please note: Transferring out of a Defined Benefit pension is not in the interest of the majority of people.