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Is uncertainty becoming the new norm?

Archive for June, 2017

Is uncertainty becoming the new norm?

Wednesday, June 21st, 2017

No matter how often we might have heard soundbites such as ‘strong and stable’ and ‘Brexit means Brexit’ which are intended to reassure us, it seems that every major political event of the past twelve months has delivered an unexpected result and an uncertain future. June’s general election was no different: Theresa May began streets ahead in the polls, and ended up scoring a political own goal in reducing the parliamentary majority she intended to increase, resulting in a hung parliament. You might expect the business world’s reaction to reflect the apparent turmoil in Westminster, but it’s relatively muted response perhaps suggests that those in business now see uncertainty as something to simply accept as part of daily life.

For example, the reduced Conservative majority and the alliance with the DUP they’re likely to establish in order to form a government, puts the future of the Tories’ plans to cut corporation tax to 17% in doubt. Whilst the DUP clearly think the same way – they want an even greater cut to 12.5% in Northern Ireland – the somewhat reinvigorated Labour party wants the tax to increase. Any tax changes, until the political climate has settled down again, will almost certainly be simple and symbolic, meaning that any action regarding business tax will most likely be put on the back burner.

VAT is another tax many might expect to be reviewed soon after a general election result but, again, the continued uncertainty of the UK’s political position means that this too is now unlikely. In the case of VAT, this stems not only from the divergent attitudes of the various parties towards the tax, but also through the continuing unpredictability surrounding Brexit. Theresa May’s negotiating position appears more severely undermined than ever, and the ‘hard Brexit’ the government previously appeared to be aiming for now seems almost entirely unlikely.

From an accounting point of view, we have seen many businesses try to ‘future proof’ themselves and manage the uncertainty by investigating the best forecasting tools available, in an attempt to secure the best chance of protection against any political or economic surprises the future might hold.

With Theresa May’s days in number 10 apparently numbered, the likelihood of a new Chancellor being put in place when her successor arrives, and the strong possibility of another election in the not-too-distant future, it seems we may all have to simply accept the lack of certainty we’re currently experiencing and factor this into our business plans as best we can.

What’s happening with Defined Benefit pension schemes?

Wednesday, June 21st, 2017

Defined benefit (DB) pension schemes continue to be a hot topic in the business and financial worlds as an increasing number of people seek to transfer their pensions from a DB scheme. Recent figures suggest that more than four out of five (83%) of financial advisers in the UK have seen an increased demand for such transfers over the last twelve months, with over half (54%) describing it as a ‘significant increase’. Additionally, 71% of UK advisers said they expected the demand to increase further over the coming year.

A major contributing factor to this higher demand for DB transfers is the introduction of pension freedoms in recent years. Demand is also being fuelled by the continued uncertainty created by the DB pension scheme deficit. The latest figures suggest that the shortfall has remained stable over the past year despite the political turmoil: the deficit shrank to £183 billion at the end of May 2017, down from £194 billion twelve months earlier. That said, this is still a significant negative amount of money, which is undoubtedly contributing to many looking to ditch their DB pension in favour of something which appears to be more stable.

Employers, too, appear to be moving themselves away from DB pension schemes. It was reported at the end of May that BT is looking to close its DB scheme for current employees, a move unlikely to be popular with its workers; a similar move by Royal Mail Group following the company’s privatisation which aimed to shut the scheme to its current workforce led to strike action in April this year.

The AA has also recently confirmed that it will go ahead with proposed changes to its DB pension scheme, moving all members of the scheme to its existing career average revalued earnings (CARE) pension arrangement. The CARE scheme will also see amendments such as moving its indexation from the Consumer Price Index (CPI) to the Retail Price Index (RPI), likely to be more favourable for those receiving pension benefits.

It looks likely that the changes and discussions surrounding DB pension schemes will continue for some time. If you are a member of a DB scheme and you’re considering a transfer or you’re unsure of what to do, the most important thing to do before anything else is to seek financial advice to ensure you understand the choices available to you and which is best for you. If you have any questions around this topic, please feel free to get in touch with us directly.

Falling house prices for the third month in a row

Wednesday, June 14th, 2017

Recent figures have shown that house prices in the UK fell again in May this year, making it the third month in a row which has seen prices go down. Nationwide, the UK’s biggest building society which carried out the research, stated that this is the first time house prices have fallen in three consecutive months since 2009. Following the drop of 0.3% seen in March and 0.4% in April, May saw prices decrease by 0.2%, making the average house price £208,711. The annual rate of price growth also hit 2.1%, down from 2.6% in April and the slowest pace seen since June 2013.

“It is still early days, but this provides further evidence that the housing market is losing momentum”, said Nationwide’s chief economist Robert Gardner. “Moreover, this may be indicative of a wider slowdown in the household sector, though data continues to send mixed signals in this regard.” The building society also warned that it is too soon to know whether the recent downturn can be considered to be more than a “blip”.

Considering whether the slowdown could be a result of the snap general election being called, Gardner was confident that the two were not linked: “Housing market trends have not traditionally been impacted around the time of general elections. Rightly or wrongly, for most homebuyers elections are not foremost in their minds while buying or selling their home.”

Nationwide have also suggested that house prices will continue to slow, and that inflation rises will put pressure on household budgets, leading to weakened household spending. However, the building society has predicted that house prices will increase by around 2% overall throughout 2017, buoyed by a shortage in the supply of housing across the UK. Whilst this offers some reassurance, this figure is considerably lower than the 4.5% rise seen in 2016.

Why retirement is worrying millennials

Wednesday, June 14th, 2017

A recent study by HSBC has revealed the main financial worries of the ‘millennial’ generation, recognised as those born between 1980 and 1997. As its title suggests, the ‘Future of Retirement’ survey focuses primarily on how millennials feel about how they are preparing for life after work, but also delves into the wider issues around money and modern life which are inherently linked to the subject.

In general, millennials see themselves as less fortunate than the generations which have come before them. Over half (52%) felt that they had seen weaker economic growth than previous generations, whilst 60% said they saw themselves as experiencing the consequences of decisions made by those older than them, including rising national debt and the global financial crisis. In relation to retirement, 65% of respondents are worried that they will run out of money when they retire, whilst 46% were concerned that employer pension schemes would collapse without any payout for their generation.

The average age that millennials begin saving for their retirement is 27, with just 13% admitting to not having begun putting money away for their pension yet. 76% said that curbing their current spending was difficult but necessary to save for later in life, whilst 68% are willing to do so. When it comes to investment, nearly half of those surveyed (48%) said they would go for a risky opportunity which had the potential for greater returns further down the line.

Expanding out to look at the concerns of all those currently working, which includes both Baby Boomers (those born between 1945 and 1965) and Generation X (born between 1966 and 1979), the survey found that only 17% were worried they wouldn’t be financially comfortable in retirement based on their current savings, with a worrying 14% admitting to having not been able to save anything. However, over half (52%) said they felt that due to the constantly changing financial climate, their current retirement plans would not be relevant.

When asked about back-up plans, around two thirds (67%) of working people said they would continue working in some way after they reached their retirement, whilst more than four fifths of people (82%) said they were intending to retire two years later than originally planned in order to give themselves greater financial stability. 41% also said they wouldn’t mind taking on a second job or working for longer to supplement their pension pot.

The key guidance from HSBC’s research is that starting to save early is the best way to ensure you have sufficient savings to support yourself after you’ve retired. Another key message is the importance of seeking advice, with many people now using technology to plan their retirement: almost half of those surveyed (49%) have used the Internet to research their options, 35% have used online retirement calculators and 27% have contacted advisers online. Online savings accounts are also popular, with 41% saying that they are using one to put money away.

Savings, investments & the political climate

Wednesday, June 14th, 2017

Whilst the country takes in the latest developments in the ongoing saga that is contemporary British politics, one question that many will be looking for answers to, is how the result of the general election is likely to affect them financially. It’s inevitable that savings and shares will be impacted upon in some way by Theresa May’s failure to convert her confidence in April into a larger majority in June and the resultant Conservative/DUP deal, as well as the wider ramifications the election outcome might have for the upcoming Brexit negotiations.

Following the election and the slight fall in the value of the pound, shares in many of the largest British companies went up. As companies dealing in dollars and other currencies benefit from a weakened pound, the FTSE 100 initially rose. However, ‘local’ companies dealing in sterling, such as Lloyds Banking Group, housebuilders Crest Nicholson and retailer Next all came out worse off, as did smaller companies linked to the UK economy.

As such, those with diversified pensions and ISA funds are likely to be no worse off than before the election, and doing significantly better than this time twelve months ago. However, it’s worth remembering that the uncertainty and volatility that are likely to be seen in UK politics in the coming days, weeks and months could result in shares and investments shifting further.

Whilst interest rates on both savings and mortgages were at historic lows before the election, capital markets pushed these still further down the day after polling day in order to absorb some of the shock of a result most had not predicted. This is just the latest setback for savers in a period which has seen rates declining consistently since the Bank of England lowered the Bank Rate from 0.5% to 0.25% in August 2016. With little competition between lenders, it’s more likely that rates will fall further than begin to climb any time soon.

The housing market too has been slowing since well before the election, making it a good time for those looking for a great deal on a mortgage to find one – but only if they meet the increasingly fastidious lending methods being used by lenders. The economic instability the country could potentially see in the coming months mean that criteria may tighten further, so those hoping to benefit from a low mortgage rate should do so sooner rather than later in order to avoid missing out.

June market commentary

Wednesday, June 7th, 2017

As we wrote last year, ‘It is tempting to think that Brexit is the only game in town.’ Cross out ‘Brexit’ and replace it with ‘General Election’ and the sentiment holds good. But the rest of the world keeps turning – or in May, grinding to a halt as the WannaCry ransomware attack hit more than 250,000 computers in more than 100 countries, with our own NHS being particularly badly hit.

Once the computers were back up and running, UK growth for the first quarter of 2017 was revised down, whilst US growth for the same period was revised sharply upwards. In France, new President Emmanuel Macron presumably had a small sip of champagne to celebrate his victory over Marine Le Pen.

Who knows what Kim Jong-un drinks, but he may have raised a glass of it to toast another successful missile test in North Korea, further adding to tensions in the Far East.

As to world stock markets, four of the major markets that we cover made good gains in May, whilst two – Russia and Brazil – suffered significant falls. As always, let’s look at the world’s various regions in more detail.

May started with the now regular dose of bad news for traditional British retailers as Sainsbury’s profits fell by 8.2%. House prices were also heading in the same direction, with the Halifax reporting that prices fell by 0.2% in the three months to April, the first quarterly fall since November 2012.

The news was even worse if you are a diesel car owner, with a warning that many cars bought on finance deals could be heading for negative equity as their resale value continues to fall.

BT deepened the gloom by announcing plans to shed 4,000 jobs and the EY Item Club forecast that the UK jobless numbers would start to rise in 2018. The rate is currently 4.7% but the forecasting group is expecting an increase to 5.4% next year and 5.8% in 2019. In particular the Item Club’s report singled out Scotland, where it said automation posed a threat to 1.2m jobs.

By the middle of the month, the Bank of England had cut its growth forecast for the UK economy from 2.0% to 1.9% for this year, with Governor Mark Carney warning of a spending squeeze as inflation rises and real wages fall. Energy price rises saw the UK’s inflation figure up to 2.7% for April.

As we noted above, UK growth for the first quarter of the year was revised down from 0.3% to 0.2% and Government borrowing rose more than expected in April – it spent £10.4bn more than it received in April (£1.2bn more than in April 2016) as tax revenues stalled.

Something else which emphatically stalled was British Airways planes. The company was hit by what it described as a ‘massive system outage’ over the bank holiday weekend, leading to chaos at Heathrow and Gatwick – and ultimately to millions of pounds in compensation.

Despite all the gloom around in May the FTSE-100 index of leading shares enjoyed a good month. It broke through the 7,500 barrier for the first time and closed the month up 4% at 7,520.

There was little to report on the Brexit front in May. There were, of course, a lot of words, negotiating positions and posturing, but with substantive talks due to start eleven days after the UK General Election May was something of a ‘phoney war.’

One interesting development was a poll in Germany which showed 88% of those asked, were in favour of the UK paying its debts to the EU, which are currently put at between £50bn and £100bn depending on who you believe. More than any other European nations the Germans want the EU to adopt a tough negotiating stance. With new French President, Emmanuel Macron, also saying he does not want the EU to compromise we can expect the two sides to be a long way apart when the negotiations begin.

A bad month all round for national carriers as Alitalia went into administration at the beginning of the month, albeit with the approval of the Italian government.

Emmanuel Macron comfortably defeated Marine Le Pen to become France’s youngest leader since Napoleon, but the level of abstentions and spoiled ballot papers suggested that Monsieur ‘None of the above’ would have had a real chance of winning had he been on the ballot paper.

The Euro predictably strengthened on the news of Macron’s victory – and the German economy predictably produced another thumping surplus. Figures for March showed exports at €118.2bn while imports climbed to €92.9bn. These were the highest figures ever recorded and gave a trade surplus of €25.3bn for the month. Angela Merkel said the surplus was due to the weak euro.

Meanwhile, Portugal, one of the countries originally considered likely to follow the same economic path as Greece, was pronounced back to fiscal health by the EU, as its budget deficit fell below 2% of GDP last year.

It was a quiet month for Europe’s major stock markets: the German DAX index was just 1% higher at 12,615 while the French index – having anticipated a Macron victory last month – was virtually unchanged at 5,284.

POTUS – the President of the United States – continues to make waves, headlines and enemies in equal measure. Last month, found him in Saudi Arabia signing trade deals which were worth an initial $110bn and may ultimately rise to $350bn. He promised to slash government spending on health and education and signalled the start of renegotiations of NAFTA – the North American Free Trade Association.

He did take time off to fire FBI director James Comey and global stock markets briefly fell in the ensuing turmoil which all led to the ‘will he be impeached?’ speculation. Never a dull moment…

Away from the peace and calm of the White House the unthinkable happened: sales of iPhones fell. Apple sold fewer iPhones in the first three months of the year – just the 50.8 million – which was down 1% on the same period in the previous year. Apple CEO, Tim Cook, said it wasn’t really a fall, just a “pause” as customers waited for a new phone to be launched.

But there was no pause for Facebook as it reported profits of just over $3bn in the first quarter – up 76% year-on-year as it nears 2 billion users worldwide.

There was however, gloom for the US retail sector – or at least that part of it which trades from bricks and mortar stores. US retail sales were up 4.5% compared to a year ago, but all the growth was online with the US Commerce Department reporting an 11% year-on-year increase. In contrast, ‘traditional’ retailer JC Penney reported a 3.5% fall for the first quarter, with Macy’s and Nordstrom also reporting declining sales.

There was more gloom as Ford – facing weak sales and declining profits – offered voluntary redundancy to 15,000 workers in a bid to shed 1,400 jobs worldwide. But there was some good news at the end of the month as US growth for the first quarter of the year was revised upwards from 0.7% to 1.2%.

Wall Street reacted to the mix of good and bad news as you might expect: having started the month at 20,941 the Dow Jones ended it at 21,009 for a rise of just 68 points.

Far East
May did not get off to a great start in China, with news that output had slowed in the country’s factories and mines. There was better news a few days later as China’s first domestically built passenger plane – built by the state owned Comac – made its maiden flight in Shanghai. Better news, that is, unless you are Boeing and Airbus…

Of even more long term significance was the launch of China’s ‘Belt and Road’ trade plan – an investment of $124bn in an ambitious economic plan to rebuild ports, roads and rail networks. The plan – which aims to expand links between Asia, Africa and Europe – was first unveiled in 2013 and has been described as a new Silk Road.

Elections were held in South Korea, which saw Moon Jae-in become the new president, but it was someone not bothered by trivialities like elections that captured the headlines. As we noted above, North Korea launched a successful missile test, to the widely photographed delight of Kim Jong-un. This put immediate pressure on President Moon, who had campaigned for better relations with the North.

Attention switched back to China at the end of the month as ratings agency Moody’s – worried by the ‘debt mountain’ – cut China’s credit rating for the first time since 1989. For those of you who like credit ratings, it was cut by one point from A1 to Aa3.

The Shanghai Composite index duly took note, falling 1% in the month to 3,117. However, it was the only Far Eastern market to fall, with Japan up 2% to 19,651 while the market in Hong Kong rose 4% to 25,661. Star of the show, though, was South Korea: clearly, the stock market approved of President Moon at it rose 6% to close May at 2,347.

Emerging Markets
As we wrote in the introduction, two of the world’s major emerging markets had poor months in May. The Russian stock market fell by 6% to close the month at exactly 1,900 – it is now down by nearly 15% for the year as a whole, having started 2017 at 2,233.

In Brazil, trading on the stock market was briefly halted mid-month following corruption allegations against President Michel Temer – long since seen as the man to ‘clean up’ the country. Trading was stopped with the market down 10%, as the President was forced to deny allegations that he had given his consent to paying off a witness in a huge corruption scandal. There are plenty of those in Brazil, so expect to hear more of this story. Meanwhile, the stock market finally closed the month down 4% at 62,711.

There were no such worries in India where the stock market enjoyed an excellent month. Having started May at 29,918, it finished the month up 4% at 31,146.

And finally…
Prime Minister Theresa May was roundly condemned for refusing to appear on the BBC’s election debate. Meanwhile in Oxfordshire, a retired politician smiles and slips into his new ‘man cave’ to begin work on his memoirs.

Yes, our former leader, David Cameron, has splashed out £25,000 on a ‘shepherd’s hut’ which he intends to use as a writing room. Unfortunately, competition in the Cameron household appears to be just as fierce as in the Palace of Westminster: Cameron’s son, Arthur, has apparently won the battle to be the first to sleep in the hut. Hopefully, our former leader will soon be able to return to his writing room, as the nation waits with bated breath for his memoirs, reputedly worth £1.5m.

So a splendid return for Mr Cameron on his £25,000 investment. But if he wants really stellar returns he should perhaps invest his money with the Church of England, who apparently made a 17.1% return on their investments last year and whose fund has averaged 9.6% over the last 30 years – comfortably beating many expensively managed city funds and comprehensively outstripping the top-rated Yale University endowment fund.

As we all know in financial services, ‘past performance is not necessarily a guide to the future.’ Or perhaps it is with a little Divine Fund Management…