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May market commentary

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May market commentary

Thursday, May 3rd, 2018

Introduction
It looked for a long time that the main headline for this commentary would be the opening salvos in a trade war between China and the USA. The International Monetary Fund published a bullish report on world trade, saying that global growth will hit a 7 year high of 3.9% this year – giving a stark warning at the same time that trade risked being ‘torn apart’ by a protracted trade war.

But then came the news of North Korean leader Kim Jong-un’s, historic visit to South Korea and his meeting with President Moon Jae-in. There followed a bromance which would have been impossible just a few months ago, and a commitment to rid the Korean peninsula of nuclear weapons. The meeting would have been unthinkable at the beginning of the year when North Korea was boasting of being able to reach the US mainland with its rockets: now Pyongyang says it will invite US observers to witness the shutdown of its nuclear site in May.

By the end of the month even the China/US threats and counter-threats seemed to have receded a little and most of the major stock markets which we cover made up losses suffered early in the month on fears of a trade war. There was, however, one significant fly in the ointment as the price of oil continued to climb: Brent crude went past $72 a barrel in light of the continuing troubles in Syria and the instability in the region.

UK
Let’s start the UK section with some really good news: 2017 was a record year for the UK wine industry, as figures showed 64% more bottles of UK-made wine reached the market than in 2016. The Wine and Spirit Association said the industry was reaping the benefits of ‘huge’ investment over the last decade.

…But if April brought good news for wine, it brought yet more bad news for retail as the wet Easter proved a washout for the UK high street, following the bad weather which kept shoppers at home in March. Carpetright announced the closure of 92 stores – and you have to think that the merger of Asda and Sainsbury’s, announced at the end of the month, will ultimately lead to store closures and job losses. There have been plenty of warm words from both sides but it is hard to see that the merger can be good for jobs or, in the long term, for consumers as the number of big supermarket groups in the UK reduces from four to three.

We have commented above on the IMF forecast for world trade: that same forecast included a prediction that UK growth this year would be 0.1% higher than originally thought at 1.6%. HSBC also predicted that UK exports would rise this year by their fastest rate since 2011.

Other numbers for the UK made mixed reading: a slowdown in construction and the effects of the ‘Beast from the East’ meant that UK growth in the first quarter of the year was just 0.1% – the lowest figure since 2012. Mortgage lending was also down, as figures for March showed it falling 2.3% to £20.5bn.

There were some positive figures: wages finally climbed above inflation as the year long squeeze on pay showed signs of ending earlier than expected, and unemployment fell to 4.2% – its lowest level since 1975. And London was voted the world’s top financial centre, finally climbing above New York for the first time in five years.

The vote was presumably taken without reference to TSB: April ended with TSB taking the phrase ‘banking chaos’ to a whole new level. The bank upgraded its systems – inevitably in order ‘to improve customer service’ – and ended up seemingly giving customers access to anyone’s account except their own.

Fortunately, there was no such chaos for the FT-SE 100 index of leading shares. After some lacklustre months, it rose 6% in April to end the month at 7,509. As so often happens, the pound went in the opposite direction, falling 2% to end the month trading at $1.3754.

Brexit
Throughout April, the debate raged about whether the UK should stay in some sort of customs union with the EU after March next year. Doing so would avoid a ‘hard border’ between Northern Ireland and Eire – but would severely limit the UK’s ability to do trade deals with countries outside the EU.

It would, sadly, be possible to write an entire 2,500-word commentary on the various models of customs union – or partnerships – that are currently being discussed: we will attempt to do it in less than 200.

The first option – favoured by the Brexit supporters and known in Whitehall as ‘Max Fac’ (short for Maximum Facilitation) would see the UK and EU agree to minimise all checks, using smart technology and building on best practice from around the world (for example, the USA and Canada do not have a customs union). This means that there would be a border between the UK and the EU, but it would be as light touch as possible.

The second option is a hybrid model – the Customs Partnership – which rests on the EU recognising UK customs checks as equivalent to their own, so that goods entering the EU at say, Rotterdam, could in theory travel on to the EU without further checks.

This appears to be Theresa May’s favoured option, but has been described by hard right Tory Jacob Rees-Mogg, as ‘cretinous’ while the International Trade Secretary Liam Fox, has come out firmly against any form of customs union. With eleven months to go until March 2019, the debate will undoubtedly rumble on: but we have reached the 200 word limit, we promised. Don’t worry, the politicians will undoubtedly still be discussing it next month…

Europe
April was a busy month for French President Emmanuel Macron, who made a high-profile visit to Washington and, earlier in the month, made a speech in Strasbourg calling for ever-closer union between the EU’s member states and, as the EU faced up to the loss of the UK’s contribution, more tax and revenue raising powers for the EU.

Many commentators perceived this as Macron’s bid for the de facto leadership of the EU, with German Chancellor Angela Merkel widely seen to be in a weaker position following her eventual coalition agreement with the Social Democrats. German dominance no longer a safe bet, ran a headline in City AM.

Away from the corridors of power and in the banking halls, the European Central Bank announced it would leave interest rates unchanged, despite the pace of growth in the Eurozone starting to slow. There was bad news from Deutsche Bank, which announced ‘significant’ job cuts as it scaled back its corporate and investment banking operations. Christian Sewing, the new CEO of Germany’s biggest lender, said that the cuts were ‘painful but unavoidable’ as the bank reported a sharp drop in first quarter corporate and investment banking revenues.

Fortunately, there was no pain on the German stock market, as the DAX climbed 4% in the month to end April at 12,612. The French stock market had an even better month as it rose 7% to 5,520 – and there was even good news from Greece, with the Athens stock market up 10% to 858.

US
All the attention at the beginning of the month focused on the war of words – and potential trade war – between the US and China. It ended with the historic meeting in Korea and South Korean President Moon Jae-in suggesting that Donald Trump be awarded the Nobel Peace Prize.

Away from that potential plaudit, the US President had some troubling numbers to contend with. The US trade deficit widened in February to $57.6bn (£42bn) and there are suggestions that the US could have a trade deficit of a trillion dollars a year by 2020.

Jobs growth slowed in March, with just 103,000 jobs created in the month, and there were disappointing figures for the first quarter, as annualised growth slowed to 2.3%. Those figures are unlikely to be helped by suggestions that the US could get as many as four interest rate rises this year, as the Federal Reserve pursues a more aggressive line in a bid to keep inflation under control.

April was, however, a good month for both Alphabet (the parent company of Google) and Amazon as their sales and profits surged ahead. But it was a lot less fun for Facebook’s Mark Zuckerberg: he endured an uncomfortable month as he apologised for his company’s massive data breach at a Congressional hearing. Not a good month for Wells Fargo either, as the bank was fined a record $1bn (£730m) for failing to resolve investigations into car insurance and mortgage lending breaches.

What did the Dow Jones index make of it all? Virtually nothing. Having opened the month at 24,103, the Dow closed April up just 60 points at 24,163.

Far East
The news from the Korean border rather overshadowed China’s news in the month – specifically that the country had seen its economy grow at 6.8% in the first quarter, ahead of the government’s growth target for the year of ‘around 6.5%’ – although obviously, this figure would be under pressure from a prolonged trade war with the US.

In Chinese company news, Didi Chuxing, China’s equivalent of Uber, the world’s largest ride-hailing app and currently reckoned to be worth nearly £40bn, announced modest plans for world-wide expansion.

The Economist Intelligence Unit published an interesting article, listing the countries which were most ready for the robotics revolution: South Korea headed the list, with Japan and Singapore joining it in the top four. (The UK was in 8th place, just ahead of the USA.)

Obviously, the news of the détente between North and South Korea had a positive influence on the region’s stock markets. Only China – perhaps still worrying about a possible trade war – saw its stock market fall during the month, with the Shanghai Composite down 3% at 3,082. Hong Kong went in the opposite direction, up 2% to 30,808 and the South Korean market rose 3% to 2,515. Japan, free of the worry of North Korean missiles flying over its islands, saw the Nikkei Dow rise 5% to close April at 22,468.

Emerging Markets
US sanctions hit Russian shares said a BBC headline in the middle of the month, reporting that sanctions imposed by the US had hit the shares of companies controlled by Russian oligarchs, ‘as the Russian stock market tumbled in the wake of the sanctions.’ This followed the diplomatic crisis sparked by the poisoning of former spy Sergei Skripal and his daughter, and President Trump’s threats of tariffs on aluminium and steel.

Well, sanctions or no sanctions the Russian stock market had recovered by the end of month, closing April up 2% at 2,307. There was an even better performance from the Indian stock market, up 7% in April to end the month at 35,160 – and Brazil completed our Emerging Markets hat-trick as the market there rose 1% to close at 86,115.

And finally…
April was a good month for the ‘And finally’ section of the commentary – but we start with something that is probably best not read while you are eating breakfast.

NASA, America’s space agency has been looking for a material that can be transported into space and used for the spare parts that are inevitably needed on a long space mission. The idea is that the parts would be made using a 3D printer: but what material to use? The rocket scientists at NASA have decided that, well… human waste would be ideal. Transported into space and put to use: that’s an idea that Major Tom never discussed with ground control…

There had been widespread rumours of an exodus of London’s leading bankers after Brexit. Apparently, that is not now going to happen. A report in Politico said that the bankers’ wives – and one husband – had been to inspect Frankfurt, the rumoured new banking capital of Europe, and found it to be ‘dark, grey and dull’. So there you are: David Davis and Michel Barnier can huff and puff all they like – in the end it looks like bankers’ wives will decide the shape of Brexit.

Sadly, one wife who had rather less influence was the wife of Tanzanian gambler, Amani Stanley. So sure was Amani that his beloved Manchester City would clinch the Premier League title by beating Manchester United at home that he bet his wife on the result. All was looking good when City were leading 2-0 at half-time. Unfortunately, United stormed back in the second half to win 3-2 and Amani lost his wife for a week to his United supporting friend Shilla Tony. As yet there is no news on her husband’s gambling from Mrs Stanley…

How to approach student loans with your kids

Wednesday, April 11th, 2018

University is always going to be at least partially a financial decision both for prospective students and their parents, or whoever they rely on financially. Calculating the rising total bill for tuition fees and cost of living for a degree course can make university seem like an impossibility for some. But it’s essential that all involved carry out proper research into the cost of higher education before making a decision about the future, rather than letting sensationalist reporting in the media surrounding student debt scare them away.

Firstly, it’s crucial to remember that the cost of higher education never needs to be paid all in one go. Once a university place has been secured, tuition fees are paid automatically by the Student Loans Company for those who have taken out a student loan, and loans are also available for living costs.

Importantly, no student will need to start repaying their loan until the April after they graduate at the very earliest. Even then, only those students earning above £25,000 per year will be required to start making payments (the threshold has been increased from £21,000 to £25,000 in April 2018). Under the system, a graduate pays 9% of everything they earn annually over the £25,000 threshold. Someone earning £26,000 would therefore pay 9% of £1,000, or £90 over a whole year.

If a graduate’s earnings drop below the threshold or they find themselves out of work, the payments stop automatically. As student loan repayments are collected through your salary, you don’t have to worry about making them on time or debt collectors chasing you.

It’s important to remember that this isn’t something to feel ashamed or worried about: the system has been designed to ensure only those who can afford to pay back their student debt after graduating will be required to do so. If you still have outstanding student debt thirty years after graduating, this will be cleared no matter how much you still owe. As such, it’s expected that most graduates won’t repay their entire loan plus interest within thirty years.

A student loan is not the same as a bank loan, and as such doesn’t appear on your credit file. The amount you owe in student loan repayments will therefore not impact upon your ability to apply for other types of loans or credit cards when you graduate. The only time it may potentially come into play is in mortgage applications, where your take-home income is considered in assessing whether you can afford repayments on your home.

These are just some of the points which warrant consideration before making a decision about going to university. Each prospective student and the people they rely on financially will have individual circumstances to consider. The most important thing to remember therefore is to do your own research and make an informed decision about the financial facts and myths surrounding higher education.

Spring Statement – March 2018 Overview

Wednesday, March 21st, 2018

Introduction

In 2016 Britain voted to leave the EU and new Prime Minister Theresa May invited George Osborne to consider an alternative career and replaced him as Chancellor with Philip Hammond, the MP for Runnymede and Weybridge nicknamed ‘Spreadsheet Phil’ by his Commons colleagues.

Five months later, Hammond stood up to deliver his first Autumn Statement and immediately announced it would be his last. “No other major economy,” he said, “has two financial statements in a year.” Thus the Budget was moved to Autumn and, from 2018, the Spring Budget would become the Spring Statement.

And here we are… Eighteen months on from Mr. Hammond’s first announcement, the UK continues along its road towards Brexit and the Chancellor – who seems secure in his job for now – continues to be a man who will “choose our course and stick to it” (or words to that effect).

The Economic Background

Expectations for the speech were not high among journalists and commentators: ‘Don’t expect Hammond to pull a rabbit – or even a March hare – out of the hat’ was the general consensus.

Nevertheless, the Chancellor would have some good news on public finances to deliver in his speech. Borrowing has reduced significantly and was expected to be around £45bn for this year as opposed to the forecast £50bn, with day-to-day public spending finally in surplus for the first time since 2002/2003. However, the UK’s total national debt currently stands at £1.8 trillion, equal to 86% of the country’s annual economic output.

Would this mean the Chancellor announcing an end to austerity? After all, some local councils are claiming that they are effectively bankrupt and the NHS has seen spending increase by just 1.1% in real terms since 2010. But the Chancellor will not be changing course: speaking on the BBC’s Andrew Marr Show on the Sunday before the Statement, he said: “This (austerity) isn’t about some ideological issue. It’s about making sure we have the capacity to respond to any future shock in the economy.”

This view was backed up by Liz Truss, Chief Secretary to the Treasury, who wrote in The Times, “There will be no red box, no rabbits out of the hat and no tax changes. Our message is simple. Let’s keep on course, keep our economy strong and focus on the opportunities ahead of us. We want to keep taxes low so that the weekly budget goes further.”

With the OECD predicting that the UK economy would grow at the slowest pace of all the G20 countries this year, what could we look forward to in the speech? The rumours suggested there would be more details of taxing the tech giants such as Facebook and Google, consultations on taxing and discouraging the sale of single-use plastics and even the possibility of a tax on chewing gum to pay for cleaning up the mess it makes.

The Speech

As is now traditional, the Chancellor began his speech with a joke at the expense of Labour Shadow Chancellor, John McDonnell. “I won’t be producing a red book, Mr. Speaker,” he said. “But I can’t speak for the Shadow Chancellor,” – a reference to McDonnell brandishing ‘The Thoughts of Chairman Mao’ in the Commons chamber.

Even more traditionally, he spent the next few minutes outlining what had gone right as the Government, “made solid progress building an economy that works for everyone.” But eventually, the chamber ‘rapport’ was put aside and Philip Hammond turned to what he does best: reading out lists of figures…

The Numbers

The Chancellor began with the forecast growth figures for the UK economy, which the Office for Budget Responsibility (OBR) has increased for this year, now forecasting growth of 1.5% in 2018. That will be followed by growth of 1.3% in 2019 and 2020, then 1.4% in 2021 and 1.5% in 2022. These forecasts are up in the short term and down in the long term, presumably reflecting some uncertainty over the impact of Brexit.

Employment and Inflation

The Chancellor pointed out that the number in work had increased by 3 million since 2010, the equivalent of 1,000 people finding work every day. The unemployment rate is close to a 40 year low and the OBR is predicting that there will be 500,000 more people in work by 2022.

Equally importantly, it is expected that inflation will start to fall over the next 12 months, “closer to the target rate of 2%” which should see most working people start to enjoy real growth in their wages again.

Public Finances

“Borrowing has fallen by three-quarters since 2010,” said the Chancellor and – as we noted in the introduction – this means that the amount the Government spends on servicing the national debt has reduced significantly. The UK now borrows £1 in every £18 it spends, compared to £1 in every £4 in 2010. The Chancellor also confirmed that debt as a percentage of Gross Domestic Product will also fall, from 85.6% of GDP in 2017/2018 to 78.3% in 2021/22.

He confirmed that borrowing would be £45.2bn for this year, £4.7bn lower than had been forecast in the Autumn Budget. “And,” he announced proudly, “£108bn lower than in 2010.” Borrowing would be 2.2% of GDP this year and would gradually fall to 0.9% in 2022/2023.

Progress since the Autumn Budget of 2017

Despite it only being five months since the Autumn Budget, the Chancellor was keen to summarise a list of achievements. There was nothing new in this section: rather it was a re-statement of the commitments made in the Autumn and a confirmation – at least in the Chancellor’s eyes – that the country is on track.

The Autumn Budget contained a pledge to increase the supply of homes to 300,000 a year by the mid-2020s, via an investment programme of £44bn over 5 years and the Chancellor confirmed that the Government was working with 44 areas throughout the UK to bring this about. In addition, London will receive a further £1.67bn to start building 27,000 affordable homes by 2021/22 and the Housing Growth Partnership, which provides additional finance for small builders, was more than doubled to £220 million.

To loud cheers from the backbenches behind him, Philip Hammond announced that an estimated 60,000 first time buyers had already benefited from the abolition of stamp duty announced in the Autumn Budget.

To some muted jeers, though – quite possibly from some of his own Eurosceptic backbenchers – the Chancellor said that “substantial progress” had been made in the Brexit talks. He looked forward to “another step forward” at the forthcoming EU summit and confirmed that the Treasury would be publishing information about how the initial £1.5bn of the £3bn set aside for Brexit planning would be allocated to Government departments.

Wages and Taxation

In the lead up to the speech, the Chancellor had worked hard to set expectations that there would be little by way of new tax or policy announcements. As it turned out, the Chancellor did mention some previously announced changes, but he was also true to his word when it came to brand new announcements or significant new initiatives.

What The National Living Wage will rise to £7.83 per hour
When From April 2018
Comment All the other minimum rates will rise in line with the increase in the headline rate, with the youth rate seeing the largest increase for 10 years. In total, around 2 million people are expected to benefit from the increases.
What The tax free personal allowance will increase to £11,850
When From April 2018
Comment This will mean that a typical taxpayer will be paying £1,075 less income tax than in 2010/11. The threshold for higher rate tax will also increase to £46,350 from April (or £43,431 in Scotland).

Business

What The next revaluation of business rates will be brought forward
When Moved forward to 2021, instead of next being revisited in 2022
Comment This will be welcomed by businesses, especially those in retail and catering/hospitality which have been hit hard by the high level of business rates. Revaluations will also now take place three yearly rather than five yearly, meaning that there will now be reviews in 2021 and 2024.

Other business measures

In the Autumn Budget, £1.7bn was announced for measures to improve transport in English cities. Half of this was given to cities with mayors, but bids are now being invited from other cities across the UK for the remaining £840m.

Hand in hand with this went the Government’s commitment to improve digital connectivity across the UK. In total, £190m was allocated to this and we will now see the first wave of funding, with £95m allocated to 13 areas across the UK.

There will also be £50m made available to help employers prepare for the new T-levels, the technical qualification the Government is introducing.

The Chancellor also discussed three consultations that may impact businesses, though the detail behind these was missing from the summary published on the government website.

Productivity

A long-standing topic in the Chancellor’s speeches (and his predecessor’s), productivity made it on to the formal agenda again, with the Chancellor promising “to understand how best we can help the UK’s least productive businesses to learn from, and catch up with, the most productive.”

Late payments

The Chancellor also promised, if not action, then at least the promise of action, on what he called “the continuing scourge of late payments”. Small businesses everywhere will doubtless be very keen to see what the Chancellor comes up with on this topic.

“Human capital”

A slightly odd choice of phrase, but the Chancellor surmised that the government and business currently know more about measuring the value of investing in infrastructure than they do about measuring investments in “human capital”. For this reason, he said, he had “asked the ONS to work with us on developing a more sophisticated measure.”

There was then a further consultation announced via the treasury website on the same day as the Chancellor’s speech, though Mr Hammond did not refer to it directly.

Enterprise Investment Scheme

Aimed at the current range of venture capital schemes (including the Enterprise Investment Scheme, Seed Enterprise Investment Scheme and Venture Capital Trusts), this consultation is ultimately aimed at attracting more investment into innovative firms. The consultation is considering “additional incentives to attract investment” but, as with many other announcements from the Spring Statement, we will have to wait to see whether that promise comes to fruition.

What might we see in the future?

The pundits had speculated that the Chancellor would only speak for 20 minutes or so. 20 minutes came and went and MPs who had planned on a decent lunch started looking nervously at their watches. But in some senses, this last section of the speech was the most interesting, as it gave a clear indication of the measures we might see in future Budgets, depending on the outcome of various consultations.

The plastic tax

This has been widely trailed – it is also referred to as the ‘litter levy’ – and the Government will use the tax system to ‘encourage the responsible use of plastic throughout the supply chain.’ This will include items such as coffee cups, plastic cutlery and foam takeaway trays. The Chancellor did not mention chewing gum specifically but the rumours are that it will also be included in the measures. “Some of the money raised from any tax changes,” for which you can read, ‘there will be tax changes’ – will be used to encourage the creation of newer, greener products, while £20m will also be given to businesses and universities to fund research into ways of reducing the impact of plastic on the environment.

Taxing the tech giants

What would a Budget speech – or a Spring Statement – be without an attack on the tech giants who are “not paying their fair share of tax?” The Government will once again be considering ways in which to tighten up on Facebook, Amazon, Google and friends: looking 10 years down the line it may also need to consider the impact of the Chinese tech giants such as Alibaba, Tencent and JD.com.

White van man goes green?

At the moment there is tax relief given for agricultural diesel but the Chancellor said he would “call for evidence” on whether this is contributing to air pollution. And in the days when every delivery from Amazon arrives in a white van, he announced that he would consult on tax cuts for low-emissions vans.

Giving people the skills they need

Clearly, improving skills benefits not just the individuals concerned but the wider UK economy, and the Chancellor gave a clear hint that he will offer tax relief to both employees and the self-employed who fund their own training.

Goodbye to cash?

Far more of us now use digital payments rather than cash – although the UK has some way to go to catch up with some countries (such as Sweden) where cash has all but disappeared. The Chancellor is ‘seeking views’ on encouraging business who want to use digital payments. And why wouldn’t he? Digital payments can be tracked and taxed and would represent a way to strike back at the black economy.

Conclusion

The Chancellor’s final point may have read as something of a warning to those up and down the country who currently deal heavily in cash (think hairdressers and window cleaners), but he was determined to finish on a high for all, repeating a message that his party has long promoted. He was keeping the UK on course to be, “an outward-looking, free-trading nation, confident that its best days lie ahead.”

The detail of exactly how he plans to make that happen, though, may well have to wait until the Autumn Budget, where many of the Chancellor’s plans will be made clearer.
For now, however, the new, slimmed down Spring Statement acted as a useful summary of our current economic outlook and an interesting trailer of both things to come and plans being made.

May Market Commentary

Wednesday, May 3rd, 2017

Introduction
It’s difficult to know where to begin this month. In France? Where we now know the French Presidential election will be a straight fight between Emmanuel Macron and Marine le Pen. In the UK? Where, having declared several times that she saw no need for a General Election, Theresa May summoned everyone to the polls on 8th June. Or in North Korea? Where the simmering tensions between Kim Jong-un and Donald Trump threaten peace and stability in the region.

Politically, the world was a volatile place in April – but the world’s major stock markets reacted with studied indifference. The French index was the biggest gainer, up 3% in the expectation of a victory for Macron on 7th May. Two markets – the UK and China were down by 2% – and the rest inched ever-so-slightly upwards.

…Or maybe we should start this commentary in the corridors of Brussels, where the EU was busy setting out its negotiating position for Brexit – negotiations which are not now expected to begin in earnest until after the UK General Election. For good or ill, Brexit is going to dominate the news agenda between now and March 2019, the supposed date when the UK will leave the EU. Clearly we need to report on Brexit in this commentary and – rather than distort the UK or Europe sections – it seems more sensible to introduce a separate ‘Brexit’ section from this month. Naturally we have placed it between the UK and Europe…

UK
As Chancellor Philip Hammond led a trade mission to India there was disappointing economic news to start the month in the UK. Figures for February confirmed a fall in output in both the industrial and construction sectors, down by 0.7% and 1.7% respectively. The pound duly fell back on the weak economic data and the Halifax announced that house prices were growing at their slowest rate for four years.

But all this paled into insignificance when Theresa May changed her mind and called a General Election. She’d spent the previous week walking in Wales, and clearly views Jeremy Corbyn as somewhat less of a challenge than Mount Snowdon. All the indications are that she can expect to be back in Downing Street with an increased majority, allowing her to pursue the Brexit negotiations without needing to worry about the House of Commons.

Back with the economy, cheaper air fares held inflation steady at 2.3% and there was finally some good news as the International Monetary Fund upgraded its forecast for UK growth, lifting it to 2% for the year from the 1.5% it had forecast in January.

Good news too for the UK taxpayer, who has now recouped the £20.3bn used to bail out Lloyds Bank. Could the same eventually happen with RBS, with the troubled bank posting its first quarterly profit – £259m in the first three months of 2017 – for nearly two years?

There was also good news from British car manufacturers, with March being their most productive month for seventeen years, as they produced 170,691 vehicles and exported a car every twenty seconds.

…But sadly, the bad news returned at the end of the month with overall growth slowing to just 0.3% in the first three months of the year, and retail sales falling at their fastest rate since 2010. With online sales continuing to grow, you can unfortunately expect future commentaries to be reporting ‘yet more job losses on the nation’s high street.’

Eventually, the bad news won out with the FT-SE 100 index of leading shares being one of only two major markets to fall in April, dropping by 2% to end the month at 7,204. It was a different story for the pound, however, which ultimately rose by 3% against the dollar to $1.2952.

Brexit
April was the month when Theresa May decided to seek the clear Commons majority she apparently needs for the negotiations – and when Europe set out its position that the divorce must be settled before there are any talks on a future trade deal.

As we noted above, substantive talks will not begin until the result of the General Election is known so – in public at least – the next six weeks are likely to see a lot of sound and fury and little of real significance. You need no more evidence of this than the recent meeting over dinner, which according to the German press, led Jean-Claude Juncker to describe Theresa May as ‘delusional,’ whilst UK Government sources said they simply did not recognise that version of events.

Even after the Election result is known it remains to be seen whether any genuine progress will be made before the summer holidays and the subsequent German elections in September. With twenty-two months to go to the March 2019 deadline, it’s easy to see the negotiations being concluded in one very late night sitting on 28th March 2019…

Europe
The big story in Europe was, of course, the French Presidential Election with Emmanuel Macron (23.9%) and Marine le Pen (21.4%) finishing first and second in the initial poll, and going through the run-off on Sunday 7th May. That is widely expected to see a comfortable victory for Macron, and both stock and currency markets duly breathed a huge sigh of relief. The ‘Macron rally’ added $290bn to the value of world stock markets, and the euro jumped to a five month high against the dollar.

Whoever wins on 7th May is going to face some big problems as they walk into the Elysee Palace. Clearly terrorism and immigration will be high on the list, but so too will be unemployment. While France has a high standard of living and high productivity, it also has a high unemployment rate – around 10% with some 3m people out of work. This is roughly double the rate of neighbours like the Netherlands and Austria, whilst the rate is below 5% in the UK and below 4% in Germany.

There are, however, some encouraging signs for the wider European economy, with the Purchasing Managers’ Index in Germany recently hitting its highest level since May 2011: the indicator for the Eurozone as a whole also stands at a six year high. Consumer confidence also appears to be improving, with indicators such as retail sales and new car registrations all moving in the right direction.

There was even good news on Greek debt as Eurozone finance ministers finally agreed terms with the Athens government, allowing them to ‘unlock’ a delayed bailout programme. For those of you that haven’t been keeping up, Greece is now part of the way through its third Eurozone bailout programme, with this one worth up to €86bn.

Both of Europe’s major stock markets were up in April: the German DAX index rose by just 1% to 12,418 while as we noted above, the French index – anticipating a Macron victory – rose 3% to finish April at 5,267. And we must put in a word for Greece – the Athens stock market was up 7% in April, reaching the giddy heights of 712 as it breathed a sigh of relief at the latest bailout.

US
Having announced a separate section for Brexit, it is tempting to do the same for ‘the pronouncements of the President.’ Donald Trump campaigned on drastic tax reform to stimulate the US economy, simplifying the tax system for individuals and slashing US corporation tax from its current level of 35% to just 15%. In April, Treasury Secretary Steve Mnuchin appeared to pave the way for this reduction, calling it “the biggest tax cut ever.”

Meanwhile, his boss was promising a “haircut” for US banking laws – at the moment, it seems that this may involve the separation of retail and investment banking – plus a renegotiation of the North American Free Trade Agreement.

Let’s turn to some concrete news: the US economy added only 98,000 jobs in March – far fewer than economists expected and only half the number for January and February. Despite this, though, the unemployment rate fell to 4.5%, the lowest since May 2007. Perhaps the low number of jobs created was a function of the US economy growing by only 0.7% in the first quarter of the year – the slowest rate of growth since the first quarter of 2014 and leaving the President some way to go to meet his election pledge of raising growth to 4%.

In company news there was another sign of the ‘new’ economy as the increasing share value of electric car maker Tesla saw it overtake General Motors in total capitalisation, having passed Ford in late March. Tesla’s total valuation is approximately $52bn: next up is Honda, which is currently worth $53bn.

Like all other world markets the US Dow Jones index rallied after the first round of the French Presidential election, and eventually finished the month up by 1%: having started April at 20,663 it ended at 20,941.

Far East
Tesla may be moving upwards but Toshiba seems to be heading in exactly the opposite direction. Having reported a loss of 532bn yen (£3.8bn) for April to December 2016, the company delayed publishing its audited accounts and admitted that its future may be in doubt.

Meanwhile, there was much better news in China, where growth in the first quarter of the year beat expectations. Growth was 6.9% according to official figures, compared to a target of 6.5% for the year as a whole. State-led infrastructure investment, demand for new property and an increase in consumer spending were all responsible for the higher growth rate, with retail sales in February up 10.9% on the same period in 2016.

Having spent his campaign criticising China for using an artificially low currency to “rape” American industry, the newly diplomatic President Trump had a meeting with Chinese leader Xi Jinping and said that China “was not a currency manipulator.” In truth, the almost weekly missile tests in North Korea are giving both men far more to worry about than currency manipulation.

Despite the tension in the region three of the four leading Far Eastern markets rose by 2% in April. Hong Kong was up to 24,615, Japan rose to 19,197 and the South Korean market advanced to 2,205. The one exception was China, where the Shanghai Composite index was down by 2%, ending April at 3,155.

Emerging Markets

April was a quiet month for the three major emerging markets we cover, but the corruption scandal in Brazil centring on the state oil provider Petrobras continues to have repercussions. A US judge has now fined Brazil’s engineering giant Oderbrecht $2.6bn in a case inevitably connected with Petrobras, as the engineering company agreed to a plea bargain deal with the US, Brazilian and Swiss authorities, pleading guilty to bribery in twelve Latin American countries.

Other than that a quiet month, but a pleasantly uniform one. It may be some time before this happens again, but all the three emerging markets we cover in this commentary saw their stock markets rise by 1% in April. India was up to 29,918: Brazil rose to 65,403 and the Russian market had its first positive month of the year, ending April at 2,017 – although it remains down by just over 9% for the year as a whole.

And finally…
Last month was, of course, a vintage crop for the ‘and finally’ section of this commentary. We were worried how this month would maintain the high standard – but it got off a good, slithery start with news from the Association of British Insurers that an anorexic python had swallowed £790 in vet’s bills. This was in their annual report, which revealed that the average cost of a claim on your pet insurance is now £757 – something of a shock for those of us that spent the bank holiday watching re-runs of James Herriot and thought it was seventeen shillings and sixpence.

Costing rather more than a trip to the vets was a trip from Taunton to Trowbridge. The towns are just 64 miles apart but that didn’t stop Great Western Rail offering a ticket for £10,000 on its website. The company blamed a (very expensive) ‘anomaly…’

Sources

January market commentary

Wednesday, January 4th, 2017

Introduction

At the start of 2016, Brexit was seen as unlikely and President Trump was seen as impossible. David Cameron was busy negotiating a deal with his European counterparts which would surely secure a comfortable majority for the ‘Remain’ camp – and while Donald Trump might manage a few wins in the primaries, he’d eventually give way to one of the mainstream Republican candidates, who would in turn be beaten by Hillary Clinton.

We all know what happened and with elections due next year in Holland, France and Germany 2017 could be equally dramatic. But let’s first look back at December, and also cast an eye over the whole of 2016. It was a year when the pound fell by 15% against the dollar, when the FTSE ended at a record high and the Dow Jones index closed within touching distance of 20,000 – and when the price of crude oil nearly doubled from the low it reached in January.

All but three of the major stock markets we cover in this commentary were up in December, whilst for the year as a whole, eight were up, two virtually unchanged and only one (China) was down in the year. We also keep a watchful eye on Greece, where the market advanced 2% in 2016 as the country continued to battle with its creditors and the far-left government of Alexis Tsipras became increasingly unpopular.

UK

December started on a downbeat note in the UK, with the pace of manufacturing growth slowing slightly and Bank of England Governor, Mark Carney, warning that increasingly sophisticated robots posed a threat to 15m jobs in the UK. (But not, fortunately, to the Governor of the Bank of England…)

Presumably some of the jobs under threat will be those concerned with burgers and fries, but McDonalds gave the UK a big vote of confidence when it announced that it would move its non-US tax base from Luxembourg to the UK. This means that UK tax will be paid on royalties the firm receives outside the US.

There was mixed news for the UK housing market in December. Nationwide reported average house price growth across the UK at 4.5% in 2016, with London for once below the average at 3.7%. The average price of a house in the UK is now £205,937 – but home ownership among the young has fallen significantly over the past 20 years. In 1996 46% of those aged 25 owned their own homes: that figure has now fallen to just 20%.

Very firmly in the ‘good news’ column, eight months of uncertainty came to an end for the steelworkers at Tata’s Port Talbot plant when the company gave a commitment to secure jobs and production there and at other steelworks across the UK. The growth of the UK economy was revised upwards for the third quarter – from 0.5% to 0.6% – and in company news Sky agreed to an £18.5bn takeover from 21st Century Fox.

We won’t weary you with the progress – or lack of it – of Brexit. The Chancellor dared to voice the opinion that perhaps a four year period of withdrawal might be sensible, duly raising the blood pressure of some newspaper headline writers. Meanwhile, Europe turned its collective back on Theresa May, discussing Brexit without her.

Whatever the Prime Minister’s problems, they weren’t shared by the FT-SE 100 index of leading shares, which finished the year at a record high of 7,143. The market was up 5% in December and 14% for the whole of 2016.

Europe

As we mentioned in the introduction, 2017 will be a significant year in Europe with elections due in Holland, France and Germany. This time next year will we be reporting on the European equivalent of Brexit and President Trump? It wouldn’t be surprising, and there was an indication of the popular mood when the Italian government of Matteo Renzi was heavily defeated in a referendum on constitutional reform held in early December.

Commentators are now predicting a “period of uncertainty” in Italy. That’s also a phrase which can be applied to the Italian banks with suggestions that the Italian government will be asking for €15-20bn from the European Stability Mechanism to help the country’s banking system.

The chief casualty appears to be Monte dei Paschi, the world’s oldest bank, which failed to raise the €5bn it needed to re-capitalise from private investors. The Italian government was forced to step in, with the bank crippled by years of losses and loans that can never be repaid. Before Christmas the bank’s funding shortfall was put at €5bn – a rather less festive assessment after the holiday put the figure at €8.8bn.

No doubt Angela Merkel tut-tutted at this Southern European profligacy as she announced plans to run for a fourth term as Chancellor: and no doubt the right wing Alternative fur Deutschland will have plenty to say on that score by the time the elections are held in September…

As we all know Christmas is a time for traditions, and VW reaching another deal over its emissions crisis is fast becoming one. This time it was with the US authorities over 80,000 VW, Audi and Porsche cars. There was equally bad news for Deutsche Bank as it reached a $7.2bn ‘settlement’ with US authorities over its mis-selling of mortgage-backed securities.

Despite these seasonal gremlins December was a good month for the German stock market, with the DAX closing up 8% in the month at 11,481. This enabled the market to post a 7% rise for the whole of 2016, and it was a similar story in France where a strong performance in December – up 6% to 4,862 – allowed the market to finish up 4% for the year as a whole.

US

Donald Trump is due to become the 45th President of the United States on 20th  January. His cabinet is now complete, with new Treasury Secretary Steven Mnuchin vowing a tax overhaul ‘not seen in decades’ in a bid to boost the US economy.

Peter Navarro – the man Trump has picked to head US trade and industrial policy – also appears to have been making vows, specifically about China. Navarro has described the Chinese government as ‘despicable, parasitic, brutal, amoral, callous and ruthless’ – and that’s just a start. Clearly, the Trump presidency will see an entirely different style of negotiating and diplomacy to the Obama years: to say that 2017 will be worth watching is an understatement.

…But the President-Elect appears to have made a promising start economically, with the news that Japanese company SoftBank is to invest $50bn in the US, creating up to 50,000 jobs. Trump also claimed the credit for air-conditioning company Carrier Corp’s decision not to re-locate to Mexico, keeping another 1,000 jobs in the US.

Meanwhile, the US Federal Reserve raised its benchmark interest rate by 0.25%, only the second increase in a decade. The rate was moved to a range of 0.5% to 0.75% as the Fed cited stronger economic growth and rising employment. Some analysts are expecting further rises, with Kathleen Brooks of City Index saying “the US economy will be on fiscal steroids in the next few years.”

Wall Street certainly seems to have taken steroids since Trump’s victory, with the market constantly reaching new highs in December and threatening to go through the 20,000 barrier. In the event the Dow Jones index closed the month at 19,763 – up 3% for the month, 8% for the last quarter of the year and 13% for the year as a whole.

Far East

Gambling seemed to be the key theme in the Far East in December, as Japan legalised casinos and those investors who’d taken a punt on the Chinese ‘selfie firm’, Meitu, hit the jackpot after it was valued at $4.6bn. Meitu’s key selling point is that it lets you ‘beautify’ your own selfies – a service a few of us might need  after Christmas and New Year…

More seriously, concerns were expressed that the Chinese property market is overheating, with many first time buyers in the major cities being priced out of the market: according to the National Bureau of Statistics the average property price rose by 11% in China’s seventy biggest cities for the year to September 2016.

Tackling this problem will be a job for the next leader of China’s central bank, as Zhou Xiaochaun steps down in 2017 after steering the Chinese economy for fifteen years: commentators have suggested that this will allow President Xi to further consolidate his hold on power.

Across the China Sea, Japanese Prime Minister Shinzo Abe signed off a record defence budget, reflecting a year of continued tensions with China, and North Korea’s nuclear and missile threats to the region. Presumably, the outlook is therefore good for Japanese defence contractors – but it is much less rosy for Toshiba, whose shares fell 20% in one day last week and are now down by 40% since  26th December. Most people think of Toshiba as an electrical firm: in fact, it’s now a diverse conglomerate, with the shares falling due to worries that its US nuclear business – responsible for a third of the company’s revenue – may be worth less than previously thought.

On the region’s stock markets the best performer in December was Japan, with a rise of 4% to 19,114. The market there is more or less unchanged for the year, but it is worth noting that it is up 16% in the final quarter of the year. China’s Shanghai Composite index fell by 4% in December to end the year at 3,104: it is down by 12% for the year as a whole, but all the damage was inflicted early in the year, with a slight recovery taking place in the second half of 2016. Hong Kong was down 3% in December to 22,001 and is another market to be virtually unchanged for the year as a whole. Finally, South Korea ended the year at 2,026 – up 2% in December and 3% for the whole year.

Emerging Markets

It’s the Emerging Markets section of the commentary with takes the New Year’s Honours, with Brazil the best performing stock market of the twelve we cover, closely followed by Russia. Despite falling 3% in December to end the year at 60,227 the Brazilian stock market rose by 39% in 2016, having ended last year at 43,350. The Russian index was up 6% in December to finish at 2,233 where it is up 27% for the year as a whole and 13% in the final quarter of 2016.

There was an interesting development in Russia as commodities trader Glencore and Qatar’s sovereign wealth fund together bought a 19.5% stake in Rosneft, Russia’s largest oil company. They paid $11.3bn for the stake (which equals that already held by BP) as Russia sought to sell some state assets in a bid to balance its budget and end a two year long recession.

The other major emerging market we cover, India, saw its stock market virtually unchanged in December at 26,626: it finished up just 2% for the year as a whole. The Indian central bank surprised most observers by holding interest rates at a six year low of 6.25% and the deadline for depositing discontinued 500 and 1,000 rupee notes came and went. The notes – worth approximately £6 and £12 – will no longer be legal tender as Prime Minister Narendra Modi bids to combat widespread corruption.

And finally…

We cover the thorny subject of debt in the first ‘and finally’ of 2017 – specifically, Cuba’s debt to the Czech Republic. Cuba owes the Czech Republic $276m, a debt dating back to the time when Cuba and the then Czechoslovakia were part of the Communist bloc.

On the very sensible grounds that they don’t have much money but do have a lot of rum, Cuba has suggested repaying the debt with bottles of rum – an offer which would give the Czechs enough Cuban rum to last a century. Sadly, the curmudgeonly, unimaginative Czech officials have said they’d like to be paid in cash. Perhaps the Cubans should throw in a few million cigars to clinch the deal…

Happy New Year…

October market commentary

Wednesday, October 5th, 2016

Introduction

September was the month when nothing much happened on the world’s stock markets. Three of the 11 major markets on which we report were up, three were unchanged and five were down – but none of them by very much. The UK led the way, albeit only up 2%, while Japan and China were the laggards, both markets declining by 3% in the month.

One thing that was definitely up was the price of oil: at the beginning of the month the price rose after Russia and Saudi Arabia agreed to discuss ways to ‘stabilise the market’ and at the month end the oil producers cartel, Opec, agreed a preliminary deal to cut production for the first time in eight years. Brent crude rose 6% to nearly $49 a barrel on the news.

There was widespread international condemnation as North Korea claimed a fifth successful nuclear test. South Korean President Park Guen-hye called it an act of “self-destruction” and the US warned of “serious consequences.” Meanwhile, life in North Korea continued in its normal, rational way as Supreme Leader Kim Jong-un banned sarcasm, apparently worried that people would, “only agree with me ironically.”

UK

UK Prime Minister Theresa May began the month at the G20 Summit in China, where she found very few people agreeing with her, ironically or otherwise. Japan’s government warned that Brexit could result in the country’s firms moving their European head offices out of the UK, “if EU law ceases to be applicable.”

That will perhaps be tested sooner rather than later: we will report on this fully in next month’s Bulletin, but the Prime Minister has now confirmed that Britain will trigger Article 50 and begin the formal process of leaving the EU, “by March 2017.” With new Chancellor Phillip Hammond also saying that he will abandon many of his predecessor’s key targets, there’ll be plenty to write about next month!

For September, most of the economic news for the UK was good. Figures reported at the beginning of the month showed the manufacturing sector had rebounded sharply in August, with the Purchasing Managers’ Index rising to 53.3 from July’s figure of 48.3 – with any figure above 50 indicating expansion.

There was also good news for the services sector, with the PMI jumping from a seven year low of 47.4 to post its biggest monthly rise in 20 years, up to 52.9. These two pieces of good news prompted most commentators to suggest that any recession in the immediate aftermath of Brexit was now unlikely.

Figures for July showed that the UK trade deficit had shrunk from £5.6bn in June to £4.5bn and UK car production hit a 14 year high in August as 109,004 vehicles rolled off the production line, up 9.1% on August 2015.

In the face of all this positive news, the OECD toned down its warnings of post-Brexit gloom – but there were still a couple of dark clouds on the horizon. The British Chambers of Commerce cut its forecast for UK growth for this year from 2.2% to 1.8%, and the BBC reported that small business confidence was down for the first time in four years.

What of the UK numbers? Inflation held steady at 0.6% and the Bank of England kept interest rates on hold at 0.25%. And as reported above, the FTSE-100 index of leading shares was up 2% to close the month at 6,899: it is now up 11% on a year-to-date basis.

Europe

By now you could probably write the opening paragraph of this section yourselves. Another month, another problem for Volkswagen. Or two in this case, as Australia announced plans to sue the beleaguered car maker, and the bill for the emissions scandal in the USA came in at $10bn.

Another German institution appears to be under threat, with the IMF recently describing Deutsche Bank as ‘the world’s most dangerous bank’ – the weakest link in a chain of globally significant institutions. Shares in the bank are at their lowest level for 30 years with Chancellor Angela Merkel having apparently ruled out any prospect of state aid.

With Commerzbank announcing plans to end dividend payments and cut 9,600 jobs, these are not happy times for the German banking sector.

…Or for EU chief Jean-Claude Juncker, who announced that the EU, “is facing an existential crisis” as member states co-operate less and less. His mood won’t have been helped by this weekend’s statement from Theresa May, or the referendum result in Hungary.

Meanwhile Austrian Chancellor Christian Kern became the latest European politician to berate multinationals like Amazon and Starbucks. “Every Viennese café, every sausage stand pays more tax in Austria than a multinational corporation,” he fumed.

So how did European sausage stands perform on the stock markets? They didn’t is the answer: the German market was down 82 points (just under 1%) at 10,511 whilst the French index had its second consecutive month of going virtually nowhere. It closed September up just 10 points at 4,448.

US

We’re now barely a month away from the US Presidential Election – due on November 8th – and Hillary Clinton remains the firm favourite: with new revelations coming out almost every day, the only safe prediction is that the contest will get a lot more heated and divisive before polling day.

US jobs figures for August were slightly disappointing, with 151,000 jobs created – down sharply on July’s revised figure of 275,000. The average monthly increase over the past 12 months has been just over 204,000 so these figures suggested that a rise in US interest rates might be delayed – although most commentators still expect a rise by the end of the year.

In company news, Apple launched the latest version of the iPhone, and media giant Liberty Media bought control of Formula One. Twitter shares were up on news of a possible takeover, and Yahoo conceded that ‘state-sponsored hackers’ had stolen data on 500m users, the largest publicly-disclosed data breach in history.

On Wall Street, the Dow Jones index was down 1% at 18,308. It is up by 5% for the year to date.

Far East

Fresh from warning North Korea about “serious consequences,” President Obama urged China to speed up measures to tackle over-production of industrial goods. Call me an old cynic but I suspect both will be roundly ignored.

Experts – this time it was former IMF chief economist Ken Rogoff – continued to warn about the slowdown in China, as suggestions continued that the economy is slowing down far more quickly than official figures suggest.

The Bank for International Settlements was the latest institution to warn about a possible banking crisis in China, as the banks continue to extend credit in a bid (presumably Government backed) to fend off the slowdown. This extension of credit may help to explain the record levels of Chinese investment overseas, with data for 2015 now showing that Chinese companies have invested more overseas (£111bn) than overseas companies invested in China.

Meanwhile the Bank of Japan was busy overhauling its massive stimulus package for the Japanese economy, setting long term targets for the economy and apparently abandoning its 2% target for inflation.

Despite the overhaul of the stimulus package – which initially sent world stock markets higher – it wasn’t a good month for the Japanese index, which was down 3% at 16,450. China’s Shanghai Composite Index was down by a similar amount to 3,005. The South Korean market was virtually unchanged at 2,044, with Hong Kong the only Far Eastern stock market to move up, although only by 1% to 23,297.

Emerging Markets

In Brazil, the new government of President Michel Terner has announced a privatisation plan in a bid to revive the country’s struggling economy. It plans to sell off four airports and two port terminals, as well as offer contracts for a range of projects from building new roads to operating mines. “The state cannot do it all,” said the new President.

Meanwhile, ex-President Lula and his wife have been accused of widespread corruption: with recent President Dilma Rousseff impeached for breaking fiscal and budget laws, politics in Brazil is coming to resemble Game of Thrones – but at least without the bloodshed.

Despite the ever revolving door of the courthouse, the Brazilian stock market was up 1% in September to 58,367. It’s now up by 35% on a year to date basis – easily the best performance among the markets we cover.

The Russian stock market was more or less unchanged in September at 1,978 while the Indian market fell back 2% to 27,866. They are respectively up 12% and 7% for the first nine months of the year.

And finally…

Numbers in China are often considered to have lucky or unlucky connotations. The number four is unlucky (because it sounds like the word for ‘death’) whilst the number eight – sounding like the word for ‘prosperity’ – is considered lucky.

But surely a group of Chinese investors were taking it too far when they bought 333 Kent Street in Sydney’s central business district? The price they paid was A$88,888,888.88, with the estate agent (who undoubtedly considers the number eight very lucky) reporting that this wasn’t the first time Chinese buyers had submitted ‘lucky’ bids.

On the off chance that the same investors are reading this Bulletin and would like a souvenir, various bits of the office are available including the mouse, keyboard and coffee cup used to produce this bulletin. Shall we start the bidding at £888.88?

c016septemberstockmarketbulletincompliance-doc

EU Referendum Summary

Monday, June 27th, 2016

Britain Takes Back Control. Or Does It?

This is our report on the result of the UK’s Referendum on continuing EU membership and the likely consequences of a Brexit vote. It was written over the weekend of 25th/26th June and completed at 5am on Monday morning. It’s our attempt to give you an overview of how things currently stand following the victory for Leave, but you will appreciate that events are moving very quickly so there may be a slight disconnect between the comments we wrote early on Monday, and events that developed later in the day.

The Result

‘I declare that the total votes cast for Remain were 16,141,241. The total votes cast for Leave were 17,410,742.’

‘I will do everything I can as Prime Minister to steady the ship… but I do not think it would be right for me to be the Captain.’

Two announcements, coming little more than an hour apart, which together sent the UK political system and its economy into wholly uncharted waters and sent stock markets and currency markets around the globe into turmoil.

The UK joined the European Union – then popularly known as the Common Market – on January 1st 1973. Ireland and Denmark joined at the same time, taking the original six members up to nine. On June 23rd 2016 the UK voted to leave the EU, now comprising 28 members and with five candidate countries hoping to join. There was a majority of over one million in favour of Leave, and – despite a petition calling for a second referendum passing the two million mark over the weekend – that appears to be that. And as several European leaders have said, ‘out is out.’ The ‘most complicated divorce in history’ is about to start.

The Instant Reaction

Both the FTSE 100 index of leading shares and the pound rose steadily throughout Thursday, as the markets anticipated a win for Remain. The bookmakers reported several six-figure bets on the status quo. However, as the early results came in and it became apparent that Leave had done far better than expected, both the pound and FTSE Futures (trading in the Far East) went sharply in the other direction.

The FTSE fell by 8% after opening in London, with shares in banks and housebuilders being especially badly hit: at one point shares in Barclays and RBS were down by more than 30%. By the end of trading, the FTSE had bounced back and it closed 2.8% down on the day at 6,139. To give that some context, the FTSE ended 2015 at 6,242 and finished both January and February below that level. Supporters of the ‘business as usual’ school of thought would also point out that the FTSE finished Friday 17th June at 6,021 – up 70 points on the day. If you follow that line of thought then the prospect of Brexit was worse for the stock market than the reality.

The pound was also hit sharply. Having been as high as $1.50 on Thursday, it touched levels on Friday that hadn’t been seen since 1985, at one point falling by 10% to $1.33. It finally closed the day down 9% at $1.36. In early trading in the Far East, on Monday 27th the pound was continuing to fall against the dollar.

In truth, there was always going to be a sharp reaction, whichever side won. But with Leave having triumphed, the next few days and weeks will be especially critical. Bank of England Governor Mark Carney will undoubtedly be a key figure. He says the bank is ‘well prepared’ and he stands ready with £250bn to pump into the banking system: whether that would be enough to stand up to market sentiment and determined selling of sterling by the hedge funds remains to be seen.

George Osborne – the UK Chancellor and a man whose political ambitions appear to have been fatally wounded by Brexit – will make a statement at 8am on Monday, seeking to provide reassurance about the UK’s economic and financial stability.

The reaction around Europe

There was a pre-Referendum boost for the Leave camp when Markus Kerber, the head of Germany’s equivalent of the CBI, said that post-Brexit trade barriers would be ‘very, very foolish.’ The UK is a highly significant market for many German and continental firms, and when the decision was announced there was plenty of conciliatory language. German Chancellor Angela Merkel was quoted as saying ‘there is no need to be nasty to Britain’ over the ‘divorce’ terms.

However, pressure was developing over the weekend for the UK to speed up those ‘divorce’ talks. EU President Jean-Claude Juncker said it ‘was not an amicable divorce’ – but then again, he claimed, it had never been ‘a deep love affair.’

Several right wing groups across Europe saw Brexit as legitimising their own calls for referenda on continuing membership. But pro-Europe groups were also opening the champagne, claiming that the UK had always been a brake on further European integration and cooperation.

The UK’s credit rating

One of the first casualties of the Brexit vote was the UK’s credit rating. Credit ratings agency Moody’s cut the outlook for the UK’s credit rating to negative, saying that the result would herald ‘a prolonged period of uncertainty.’

So what happens now?

First and foremost, the UK needs a new Prime Minister. Jeremy Corbyn’s position as Labour leader is also in question, but it is the next leader of the Conservative party who will be negotiating Britain’s exit from the EU. The early frontrunner is Boris Johnson, supposedly in a ‘dream team’ with Michael Gove. At the time of writing, Home Secretary Theresa May is emerging as the ‘Stop Boris’ candidate. May supported Remain, but did so very, very quietly.

David Cameron has said that he will stay on until October. However, it may be that events force him to step aside rather more quickly. Several European leaders are now calling for a ‘quickie’ divorce and the world’s financial markets are unlikely to grant the UK three months to find a new leader. You can see an argument that Cameron is now the lamest of lame ducks and on that basis it may be hard for him to continue in office until the Autumn.

Article 50

Cameron appears to want the next PM to invoke Article 50 – the formal process giving two years’ notice of our intention to quit the EU. Should the process not be completed within two years, then it can only be extended with the consent of all the other EU members.

Cameron had said that Britain would immediately invoke Article 50 – but the uncertainty of his own position calls this into question. If he is replaced by a pro-Brexit candidate (as seems likely), he or she is likely to argue that Article 50 works against the interests of the country leaving the EU: the new PM may seek a period of informal negotiation first.

As mentioned above, however, if there was one clear trend that emerged over the weekend, it was the desire of many European leaders to see Brexit happen quickly. They fear that an amicable, drawn-out settlement would simply encourage other countries to seek their own version of Brexit. David Cameron is due at a European summit on Tuesday: he can expect to hear ‘get on with it’ in several different languages.

How will Brexit affect your finances?

At this very early stage, the full impact of Brexit on our personal finances remains unclear, but we can already observe the following points.

The Pound and Prices

If the pound continues to fall then importing goods from other countries will be more expensive. This will push prices up and lead to a rise in inflation: but it’s good news for exporters as their goods become cheaper to buy.

Petrol

An early example of prices going up will be seen on the petrol forecourts. Wholesale petrol prices are quoted in dollars, so as the pound falls against the dollar, petrol prices will rise. The Petrol Retailers Association are already talking of a rise of 2-3p per litre.

Savings and Investments

Without question, the biggest threat to the stock market and your savings and investments is a prolonged period of uncertainty – the one thing markets hate above everything else. Assuming everything is worked out relatively quickly then the stock market should return to a normal pattern of trading – and as George Osborne will say today, the fundamentals of the UK economy are relatively strong. We certainly cannot assume that Brexit would be bad for shares: in the long run the stock market will be affected by events around the world – China’s economy, growth in the Eurozone, the outlook for the US – as much as it will be affected by Brexit.

Clearly any rise in interest rates (see below) would be good news for savers.

Interest rates and Mortgages

Before the Referendum vote, Remain were saying that a vote to Leave would push up borrowing costs, leading to higher mortgage payments and increasing renting costs. But if Brexit were to lead to a period of low growth then interest rates could be cut in a bid to stimulate the economy. David Tinsley, UK economist at UBS, has said that he expects two interest rate cuts from the Bank of England over the next six months, taking rates from the current 0.5% to zero.

House Prices

There appears to be some consensus that Brexit could lead to a fall in house prices, especially in London and the South East. The Treasury has spoken of a fall of 10-18% over the next two years. Clearly not good news for existing homeowners, but anyone with children struggling to get a foot on the housing ladder may take a different view.

Tax

During the campaign, George Osborne gave dire warnings of tax rises in the event of a victory for Leave. This would be directly contrary to the Conservative’s election pledge and would be difficult to implement: much more likely is an extension of ‘austerity’ for a further two years beyond 2020.

The Leave campaign did give a pledge to remove the 5% VAT on domestic fuel required by EU law – but there were so many pledges flying about that it is perhaps best to not build this into your household budget just yet.

Pensions

David Cameron did claim that a vote to Leave would threaten the ‘triple lock’ on pensions, but this presumes a poorer economy and a lower national income. If economic performance did deteriorate after Brexit, then the Bank of England might opt for a return to Quantitative Easing (QE) and/or lower interest rates. More QE would push down bond yields and with them annuity rates: so anyone buying a pension annuity would get less income for their money.

What will the UK’s relationship with Europe be when the dust has settled?

At this stage, it’s almost impossible to say. As of very early on Monday, the Labour party is in turmoil with 11 members of the Shadow Cabinet having resigned. The papers are reporting that pro-Remain MPs may attempt to block the decision of the Referendum. SNP leader Nicola Sturgeon is also threatening to veto Brexit and is demanding a second Scottish Independence referendum.

But let’s assume that Brexit goes ahead. The more rational Leave campaigners have been at pains to stress the UK’s links with Europe: the more rational European leaders will not risk losing such a big market, especially as Europe moves slowly out of a recession. Perhaps the best guess is that the UK will leave the EU (and quite quickly) but will retain some sort of ‘associate’ status. This would involve the UK making some contribution to the EU budget, accepting some of its trading rules and doing its best to control immigration with a points-based system, all things which potential Prime Minister-in-waiting, Boris Johnson, has started to discuss publicly. In the best traditions of politics and darkened rooms, a compromise may be reached – with both sides spinning it as a win. Will it work? No one knows; but when the dust finally settles, we may find that ‘out’ was not quite ‘out’ after all.

The next few days and weeks will be interesting, to put it mildly. We appreciate that our clients may have concerns and questions, so please don’t hesitate to get in touch with us at any time.

April market commentary

Wednesday, April 6th, 2016

Introduction

Another month, another dire warning from the economic great and good. In March it was the International Monetary Fund’s turn to warn that the world faces ‘economic derailment.’

As always, the blame was laid firmly at the door of the Chinese economic slowdown, with IMF second-in-command, David Lipton, warning that steps needed taking to boost global demand. ‘We are clearly at a delicate juncture,’ he said, which may well be IMF-speak for something rather stronger.

Interestingly, world stock markets did not seem to be at a ‘delicate juncture’ in March, with all the markets on which we report moving upwards in the month, some quite significantly. One of the reasons for this was remarks by Janet Yellen, Chair of the US Federal Reserve, suggesting that the US will now ‘proceed cautiously’ with regard to any future interest rate rises.

In the US, the Presidential race is increasingly looking like Hillary Clinton vs. Donald Trump – although that won’t be to the liking of the Economist Intelligence Unit. In the middle of the month their Global Risk Assessment ranked a Trump presidency equal to Jihadi terrorism as a threat to global economic stability. The Intelligence Unit gave the prospect of ‘the Donald’ entering the White House a score of 12. China experiencing a ‘hard landing’ was the highest threat at 20: the UK leaving the EU rated only an 8.

…And March was, of course, the month when George Osborne presented his Budget in the UK. But by the end of the month his plans for deficit reduction and moving next door to succeed David Cameron had been very much overtaken by the continuing crisis surrounding the UK steel industry.

UK

March got off to a good start in the UK. Nationwide said that house price growth was ‘steady’ in February, and McLaren Automotive announced plans to invest £1bn in 15 new models and employ 500 more staff. Car manufacturing was at a 10 year high and car sales for February reached a 12 year high.

There was the now customary claim and counter-claim regarding Britain’s possible exit from the EU, with Bank of England Governor, Mark Carney, describing it as the ‘biggest domestic risk.’

But in the first part of the month everything was leading to Chancellor George Osborne’s Budget on March 16th. His plans started to unravel even before the speech, when the much-heralded and widely-consulted-on plans for pensions tax reform were abandoned in the face of opposition from Conservative backbenchers.

The British Chambers of Commerce also contributed to a worrying backdrop, downgrading its forecasts for UK economic growth: the BCC is now expecting 2.2% growth this year, from a previous figure of 2.5%.

Nevertheless, the Chancellor still managed to deliver his customary confident performance, buoyed by figures released on the morning of the Budget showing that unemployment had fallen a further 28,000 between November and January and more people were in work than ever before.

‘Britain,’ the Chancellor declared, was ‘Set to growth faster than any other major economy in the world.’ However his forecast for growth this year was even lower than that of the BCC, at 2%. Growth would then rise to 2.2% in 2017 and then level out at 2.1% for the following three years.

These forecasts, the Chancellor was not slow to point out, were based on the UK remaining within the EU. Leaving, according to the Office for Budget Responsibility, ‘could usher in a prolonged period of uncertainty.’

So despite the world presenting what the Chancellor described as a ‘dangerous cocktail of risks’ everything appeared to be on course, with Osborne still committed to removing the Budget deficit in the lifetime of this parliament.

Sadly, everything then started to unravel remarkably quickly…

Iain Duncan Smith resigned and the Chancellor’s plans for cuts to disability benefits were abandoned even before they’d reached the Commons. Welfare u-turn leaves Chancellor with £4.4bn black hole screamed the headlines.

However, the news was to get significantly worse by the end of the month, as Tata decided to put its Port Talbot steel plant up for sale, potentially threatening anything up to 40,000 jobs (depending on which newspaper you read). As the month ended the Prime Minister was hosting a cabinet committee and desperately looking for a buyer: with the UK now a relative minnow in global steel production you suspect it will prove difficult.

There was one last twist of the knife in March. Figures released at the end of the month showed the UK’s current account deficit had ‘soared’ in the last quarter of 2015: the deficit in the three months to December was £32.7bn – equal to 7% of GDP in that quarter according to the Office for National Statistics.

What did the FTSE-100 index of leading shares make of all this excitement? Not much was the answer, although it did manage to gain 1% in the month, closing March at 6,175. The index is down 1% for the first three months of the year.

Europe

There was yet more woe for beleaguered carmaker, Volkswagen, in March as prosecutors in Europe decided to widen their investigations into the emissions scandal, whilst the head of the company’s US arm resigned.

In the wider European economy, unemployment across the whole Eurozone came down to 10.3%, but there are worries the European Central Bank’s stimulus package is starting to falter. Falling energy prices meant that the Eurozone stayed locked in deflation, with consumer prices down for the second consecutive month.

The ECB has cut interest rates to zero against the backdrop of the fragile global economy, and its stimulus package is now running at €80bn a month. It’s difficult to see what other action the Bank can take.

It was however, a better month for the major European stock markets. The German DAX index rose 5% in March to close at 9,966 whilst the French index was up 1% to 4,385. The two markets are respectively down 7% and 6% for the first three months of 2016.

US

We’ve commented above on Janet Yellen’s statement that the Federal Reserve will proceed cautiously with regard to interest rate rises, and this was in evidence in March with the decision to leave rates unchanged. The ‘Fed’ said that the labour market was expected to strengthen – the US created 242,000 jobs in February – but that it was still looking for inflation to reach its 2% target figure. We may not now see the four interest rate rises this year that were mooted in December.

There was good news when it was revealed that US economic growth for the final quarter of 2015 had been revised upwards from the initial estimate of 0.7%: this was increased to 1.4%, with the economy overall estimated to have grown at 2.4% for the whole of 2015.

Despite now reputedly sitting on a cash pile of $216bn Apple didn’t have things all its own way in March as it battled the FBI over the unlocking of the San Bernardino killer’s iPhone. In the event, the FBI managed to do it without Apple’s help in a move the company described as ‘dangerous’ and ‘chilling.’ You suspect that this story of law enforcement vs. the tech giants has only just begun.

There was nothing ‘dangerous’ or ‘chilling’ for the Dow Jones index in March, which rose 7% to end the month at 17,685. It’s up just 1% so far in 2016 – one of four of the major markets we cover to be in positive territory through the first quarter.

Far East

There were contrasting views on the Chinese economy at the start of the month. Credit ratings agency, Moody’s, cut the outlook for China from ‘stable’ to ‘negative.’ Unsurprisingly, China’s chief economic planner took an entirely different view. Predictions of an abrupt economic slowdown ‘were destined to come to nothing’ said Xu Shaoshi, the head of China’s state planning agency.

The economic growth target for 2016 has nevertheless been cut to a range of 6.5% to 7% – compared to the 6.9% at which the Chinese economy actually grew in 2015.

China certainly doesn’t appear to be lagging behind in the knowledge economy, with the BBC reporting that the country is opening the equivalent of ‘a university a week’ – something which is contributing to a gradual shift in the composition of the world’s graduate population, with the trend inevitably being away from Europe and the US and towards the Far East.

There was good – or at least less bad – news in Japan, with the economy shrinking less than previously thought in the final quarter of 2015. Analysts had been predicting a reduction of 1.5% – in the event, the figure was only 1.1%.

The economy also slowed in South Korea, growing by only 0.7% in the final quarter of last year, compared to 1.2% in the previous quarter. Despite this, the South Korean stock market enjoyed a good month, rising by 4% to end March at 1,996 – up 2% for the first three months of the year.

Other Far Eastern stock markets followed a similar pattern, with the Chinese market up by 12% in the month to 3,004 – although it is still down by 15% for the first quarter of 2016. Japan was up 5% to 16,759 (down 12% for the first quarter) and Hong Kong rose by 9% to 20,777 (down 5% for the first quarter).

Emerging Markets

The three major emerging economies on which we report – Russia, India and Brazil – completed the ‘full house’ for us in March, with all their stock markets moving upwards in the month. Having started the month at 1,840 the Russian index ended at 1,871 – up 2% in the month and up 6% for the first quarter of the year.

There was a rather more spectacular performance in India, where the market rose 10% in March to close at 25,342 – however, it remains down 3% on a year-to-date basis.

Pride of place, though, goes to Brazil – for so long the source of nothing but bad news. The stock market powered up 17% in March to 50,055 and is now up 15% for the year. This came despite Brazilian oil giant, Petrobras, posting a record loss of $10.2bn for the last quarter of 2015 – thanks, inevitably, to the plunging oil price.

And finally…

Competition for inclusion in ‘And finally’ has never been fiercer than it was in March. An early front runner was Google’s driverless car and its seemingly fatal attraction for other vehicles. Its far-too-close encounter with a bus was widely reported in the media.

No doubt encouraged by this, the DVLA announced that trials of ‘driverless lorries’ would take place on the M6 later this year. They’ll be choosing a ‘quiet stretch’ of the motorway in a move that will apparently save fuel – but presumably hit sales of Yorkie bars.

But pride of place for March went to the nation’s pets, and the news that pet insurance claims have hit a record. No fewer than 911,000 claims were processed in 2015, including a python that was treated for anorexia. Claims for dogs increased at almost double that of claims for cats, with ‘swallowed owner’s sock’ among those conditions showing an upward trend!

Click here to view sources.

2016 Budget Report

Thursday, March 17th, 2016

George Osborne delivered his eighth Budget on Wednesday 16 March 2016.

Although the changes affecting private pension scheme provision weren’t nearly as great as they could have been, there are still a number of important changes.

Read our summary of the Budget 2016

Tax planning: time to get ahead?

Wednesday, March 9th, 2016

As we near the end of the tax year, now is the time to consider not only year end tax planning, but also planning for the new tax year.

It is one of the features of the political cycle that the more difficult and less palatable legislation tends to come at the start of a parliamentary term rather than as an election nears. Tax changes are very much a case in point: the rises come soon after an election, the cuts shortly before the election. When 2016/17 starts there will be a number of important tax changes scheduled to take effect which need to be built into your financial planning:

  • Lifetime allowance The lifetime allowance effectively sets the maximum tax-efficient value of all your pension benefits. It started life in 2006 at £1.5m, reached a maximum of £1.8m and will be cut from £1.25m to £1m on 6 April 2016. It will be possible to claim some transitional protection, although final details are still awaited. 
  • Annual allowance The annual allowance effectively sets the maximum tax-efficient annual input to all your pension benefits, regardless of source. It started life in 2006 at £215,000, reached a maximum of £255,000 and is now £40,000. From 6 April 2016 a new tapered annual allowance will be introduced, which may affect you if your total income (not just earnings) exceeds £110,000. The taper will mean that your annual allowance could be as low as £10,000. 
  • Dividend taxation The new tax rules for dividends begin on 6 April. If your dividend income is less than £5,000 you will have no tax to pay, but if you have substantial dividend income – perhaps from a shareholding in a private company – then your dividend tax bill could increase. 
  • Personal Savings Allowance This new allowance will mean that if you are a basic rate taxpayer you have no tax to pay on the first £1,000 of interest, while if you are a higher rate taxpayer, then £500 will suffer no tax. In line with these new allowances, interest from banks and building societies will be paid without deduction of tax (but it will still be taxable).

If any of the changes gives you pause for thought, do contact us. Each one offers planning opportunities, not all of which are obvious.

The value of your investment can go down as well as up and you may not get back the full amount you invested. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.