Stock Market Falls – October 2014

On 3rd September this year, the FTSE 100 index briefly touched 6,898.62: this was within 52 points of the all-time high of 6,950 reached in the final trading session of 1999.

Since then the FTSE has fallen significantly. At the time of writing this update, it stands at 6,247 – down more than 500 points (over 9%) from September 3rd.

Not surprisingly, many clients are worried by this and have asked us why the fall has been so sudden and so dramatic.

We therefore thought it would be useful to set out some notes explaining the fall and trying to put it into context. Hopefully, this will reassure our clients, but as always if you have any further questions, please don’t hesitate to get in touch with us.

Perhaps the first thing to say is that the FTSE is not alone: the major stock markets in Europe have also fallen, as have stock markets around the world. As you’ll see below, the UK is doing well compared to other economies: but these days we live in a global market and the UK stock market is as much affected by events overseas as it is by what’s happening at home.

The rise in the UK and European stock markets on September 3rd was on hopes of a ceasefire in the Ukraine conflict. True enough, there is now an uneasy truce in the region (with Vladimir Putin taking time off from the Russian Grand Prix to order his troops to pull back from the Ukrainian border) – but as the dust has settled in the Ukraine, so the focus of world discontent has moved elsewhere. Several events have happened at once and this has created a lot of uncertainty; the one thing stock markets dislike above all others.

First of all the UK – along with a host of partners – is now committed to taking action against the Islamic State (IS). As you’ll know if you have seen the news recently, the coalition partners are currently relying on air strikes as the battle rages for the strategically important town of Kobani. What’s already becoming clear is that the battle against IS will not be over quickly – military strategists are already talking of ‘years not months’ – and markets are naturally worrying about the cost of a sustained conflict.

Sometimes, though, stock markets do overreact to military situations. Many of you will remember a day in the Second Gulf War (fought in 2003) when our tanks became ‘stuck in the desert.’ The media claimed they’d be there throughout the summer, with troops facing temperatures in excess of 50 degrees and the war dragging on indefinitely. The stock market duly dropped to just above the 3,000 level. As we now know, Baghdad fell to US forces on April 9th – and in hindsight ‘the day the tanks got stuck’ was a superb buying opportunity.

While the war on IS has been the headline news, less well reported – but of more significance to global stock markets – was a very downbeat assessment of the world economic outlook from the International Monetary Fund. The report was published at the beginning of October, with the IMF cutting its forecasts for global economic growth which, it warned, would be “weak and uneven.”

Chief IMF economist, Olivier Blanchard, warned that the recovery was becoming “more country specific.” This was good news for the UK, where the IMF remained positive, but there were sharp downgrades for Russia, the Middle East, Japan and the Eurozone.

Speaking to the BBC, George Osborne had warned that the UK economy was bound to be affected by the slowdown in Europe. “The UK,” he said, “is not immune to what is happening on the continent.” As we’ve reported in our regular monthly bulletins, there have been fears about the Eurozone stagnating for some time, and matters were made worse by German industrial output falling sharply in August (although this was partially explained by late school holidays which impacted on factory output).

Markets in the Far East have also been unnerved by the clashes over the planned elections in Hong Kong and the IMF’s warnings about the global economy – with the Japanese index falling by 1.4% on the day the IMF report was published.

All in all therefore, there has been a lot of global uncertainty – and as we mentioned earlier, the one thing stock markets crave is certainty. When you throw in the political uncertainty at home following the Scottish referendum and Clacton by-election results, it is little wonder that the FTSE is down, and down significantly in the short-term.

However, it is important to remember that investing is a long-term proposition – and all the investments and savings of our clients are part of carefully-considered long-term financial planning strategies.

If you have any further questions or queries, please do not hesitate to get in touch.

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Sources: Osborne warns of UK slowdown due to Eurozone woes http://www.bbc.co.uk/news/business-29551541 IMF (8/10) says recovery is weak and uneven. Sharp downgrades for Russia, Middle East, Japan and the Eurozonehttp://www.bbc.co.uk/news/business-29520881 But postive on Britain (to the delight of the more patriotic tabloids and UKIP) Chief economist Olivier Blanchard said “The recovery is becoming more country specific.” Asian stocks reacted badly to the news with Japan’s Nikkei Dow index falling 1.4% http://www.bbc.co.uk/news/business-29531859 Beginning of month 1/10 Q2 growth revised upwards to 0.9% http://www.bbc.co.uk/news/business-29422267 Fears of recession grow stronger as German output falls due to later school holidays – was expected to fall 1.5% but down 4% - biggest drop since January 2009 http://www.cityam.com/1412664596/german-industrial-productions-suffers-biggest-drop-since-january-2009

Understanding Active vs Passive investment strategies

The debate about whether a passive or an active investment strategy produces a better return for investors is one that has rumbled amongst financial planners for as long as passive strategies have been in existence. For you as a client, the method favoured by your adviser can have a major impact on your investment experience, so understanding the two different approaches is important.

An active strategy is one in which the investor – possibly a fund manager or other investment professional – will make investment choices on a regular basis, buying or selling holdings when they think it is necessary, often when they believe they can make a peak profit. An active strategy is highly involved and requires constant management.

A passive strategy meanwhile is one which requires hardly any trading whatsoever. Instead, money is invested into funds linked to indexes, such as the FTSE 100, by way of just one of many possible examples. Relying on the market to make your gain, passive investing is typically seen as a longer term strategy and, although it may sound easier than active from a management point of view, there is still a lot to do in terms of selecting the right funds and creating a well-balanced portfolio of asset classes that meet client’s needs.

On the active side, proponents claim that such a strategy is the only way to generate better-than-average returns; the only way to ‘beat the market’. After all, passive strategies, though divested across indexes and asset classes, are by their very design market-linked. If the index your passive strategy invests in goes up, so will your investments, with the negative being true if the index falls. Your investment may never outperform the market but it will also never lose more than the market as a whole.

Passive proponents, meanwhile, point out that active investment strategies typically cost more in fees, with these fees potentially impacting on the ability of the strategy to produce a better return. Those who favour passive investments also point out the increased volatility of active strategies, stemming from the higher frequency of investment movements and the timing of those movements, which also produce the potential for market-beating gains

Scottish Independence: What would it mean for business and your investments?

Scottish Independence: What would it mean for business and your investments?

Even if you live in a cave on top of a mountain a very long way from anywhere, it won’t have escaped your attention that the referendum on Scottish independence is drawing inexorably closer.

Voting will take place on September 18th – little more than five months from now – and at the moment the indications are that the ‘no’ camp will prevail. That said, the bookmakers will only give you 3/1 against a ‘yes’ vote, with the opinion polls currently suggesting around 45% of the votes will be cast in favour of independence.

At the moment, therefore, a ‘yes’ vote appears unlikely but very far from impossible. Rightly, many of our clients have asked what the implications of an independent Scotland would be for their savings and investments – and the wider economic prospects of the country. The notes below reflect our current thinking: we’ve tried to answer the questions clients are most often asking us. However, they are necessarily general in tone – if you would like to have a more specific discussion, please don’t hesitate to contact us.

Would an independent Scotland keep the pound?

The ‘yes’ campaign would like to, with John Swinney, the Scottish finance secretary, arguing that the benefits of a currency union are “clear for both sides.” However, George Osborne has specifically ruled out a currency union with an independent Scotland and at the moment is supported in this by all parties at Westminster.
In practice, a currency union would be very difficult. After independence, the economies of Scotland and the rest of the UK are likely to diverge. For example, Scotland would be a major oil exporter while the UK would continue as an importer. And if currency union did go ahead, clearly it would be under the control of the Bank of England – with the rest of the UK ten times the size of Scotland, there is little doubt where priorities would lie.

What would be the impact on business?

Clearly, the UK is Scotland’s biggest market and Business Secretary Vince Cable is fairly specific on the threats independence would pose. “Breaking up Scotland’s most lucrative market would potentially put growth and jobs at risk.” The ‘yes’ campaign dismiss this as ‘scaremongering’ but there is little doubt that business would be affected by a vote for independence. The impossible question to answer is ‘how much?’

There is clearly the potential for significant differences between an independent Scotland and the rest of the UK: regulations, employment law and the tax regime would all be different. Different businesses would be affected in different ways and the simple answer at the moment is that nobody knows who the winners and losers would be.

Would businesses leave Scotland?

Quite possibly. Again, it is difficult to estimate accurately and much would depend on factors such as the regulatory framework and taxation regime in an independent Scotland, but inevitably some companies would want to operate under UK law. Standard Life – which employs 5,000 people in Scotland – has warned that it could relocate, and is believed to have already set up subsidiary English companies in case it made such a move.

Royal Bank of Scotland has also voiced concerns, suggesting that an independent Scotland could damage its credit rating. Clearly, many major businesses have worries and in the event of a ‘yes’ vote it is likely that at least some of them would vote with their feet and cross the border.

What about the banks?

At the moment, Scottish banks and other financial institutions operate under UK law. In the event of a ‘yes’ there would need to be a new regulatory framework and new measures for consumer protection. Against that the pro-independence lobby point to many European countries roughly the size of Scotland that operate banking and financial sectors quite successfully – albeit very often under the EU umbrella. What’s clear is that Scotland cannot vote for independence on September 18th and be admitted as a member of the EU on September 19th.

How would financial services be affected?

Inevitably the regulatory regime would change in an independent Scotland. It may well be the case that some products and services currently available may cease to be available. At the moment, clients’ policies and investments are governed by UK law – whether a policy set up under UK law could still operate under that law if Scotland were independent is a question which must have the barristers rubbing their hands. So yes, financial services and its regulation could very well change, as could the taxation treatment of clients’ policies and investments.

We hope the above is helpful – sadly, for many of the issues there are far too many ‘don’t knows’ for comfort and as September 18th draws closer, it is likely to be the rhetoric – not the clarity – which is increased.

The 8 most important points from the 2014 Budget

The Chancellor may have gone for the popular phrase from Chancellors of yore by taking ‘a penny off a pint’, but what were the real big announcements during The Budget 2014? We summarise the 8 main points:

1. Changes to pensions mean many more options than just buying an annuity

In measures to be introduced in April 2015, pensioners will have complete flexibility on how much of their pension they want to take at retirement, effectively eliminating the need to buy an annuity. This opens up many more options for what to do with your pension in your retirement years.

2. ISA revisions are great for savers

The ISA limit was increased to £15,000 a year and it was announced that Stocks & Shares ISAs and Cash ISAs would be merged into a New ISA. Again, this gives savers much more flexibility and potentially allows more of their income to be shielded within the tax free accounts.

3. New additions to the bonds market

A new Pensioners Bond will be introduced at the start of 2015 with what were described as ‘market leading rates’, thus giving pensioners another option for what to do with their newly released pension savings! There were also changes to Premium Bonds, with an increase in winners promised.

4. Personal tax allowance increase

The personal tax allowance was confirmed as increasing to £10,500 in April 2015, with the increase at the start of the tax year in April going to £10,000. Good news in that a little more of our money is saved away from taxation!

5. Small pension limits increased

For any small pension pots currently held, there was an increase in the total amount of individual pot that can be taken as a lump sum to £10,000. The Chancellor also announced an increase in the total number of pots, up to this size, that could be taken to three, meaning £30,000 could be taken in total.

6. Flexible drawdown limits reduced

In yet another pensions related matter for what was a busy Budget for the industry, savers now only need to have £12,000 (as opposed to £20,000) in their pot in order to access flexible drawdown.

7. Small measures for individuals and businesses; fuel duty, minimum wage and apprenticeships

Whilst these might not be the headline grabbers in overall cost terms, they will have an impact for many individuals and business owners. Fuel duty has been frozen in another attempt to get the current high costs down, whilst both the minimum wage and the number of apprenticeships were increased, with the Chancellor promising to ‘double’ the latter.

8. The new pound coin!

Perhaps it’s not actually one of the most important points from The Budget (though the Chancellor would point to the increased percentage of forged pound coins, which cost the economy) but it will certainly be one of the more visible ones when the new coin starts to enter circulation at some point around 2017.

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Sources: gov.uk

HK Wealth Budget Summary 2014

"A Budget for makers, doers and savers". George Osborne delivered the 2014 Budget to Parliament yesterday and with it the customary outlook on the UK’s financial and economic situation. There were a number of surprises in the Budget for savers and pensioners with significant financial planning considerations.  The Budget has wide-ranging implications for both individuals and businesses and so, to help put the Chancellor's announcement in to context, I've produced an easy to read guide, providing context to many of The Budget's details and examining their likely impact.

I think it's important to keep you updated on a variety of financial matters, including The Budget and I hope you find the guide helpful. If you have any questions about The Budget or any other topic please do not hesitate to get in touch: I'll be happy to assist you in any way I can.

VCTs and EIS compared

Both are high risk investments – but both have the potential of high reward…

Let’s start with some facts. A Venture Capital Trust (VCT) is an investment vehicle quoted on the stock market, like an investment trust. The VCT scheme is designed to encourage investment in smaller, normally higher risk companies, often including start-up companies. The VCT therefore has to hold at least 70 per cent of its portfolio in these qualifying companies with a range of rules defining what is and isn’t a qualifying company. For example, no company it invests in can have gross assets in excess of £15m and none may comprise more than 15 per cent of the entire portfolio.

An Enterprise Investment Scheme (EIS) is an investment in a single unquoted, privately held company. With such an investment, there’s also an opportunity to participate in the running of the business – and to get paid for doing so.

Both investments come with substantial tax breaks. With a VCT, you can invest up to £200,000 per tax year in ordinary shares and qualify for 30 per cent income tax relief, provided you hold the shares for at least five years. There’s no CGT on disposal (but also no CGT relief on losses). Dividends are exempt from income tax.

With an EIS, you can invest up to £1,000,000 and receive 30 per cent income tax relief if you hold the investment for three years. Gains are CGT free, and you can defer CGT gains on other assets by investing them into an EIS. The charges on both VCTs and EIS are higher than on unit trusts and investment trusts.

So, which is better? For many of us, the answer would be “neither”. Both are high risk investments – due to the inherent fragility of start-up companies, in which both vehicles invest. According to the Times 100, one in three UK start-ups don’t last three years. The reasons are many: lack of experience, over-borrowing and under-capitalisation, poor business models, and so on. It’s possible to lose all your money invested in a VCT or an EIS.

However, this means that two-thirds of start-ups do survive: and some of these inevitably go on to become very successful.

So, while unsuitable for novice investors, more experienced and wealthier investors might want to consider these as part of their portfolio.

That being said, which is best? That will depend on your circumstances. However, the VCT spreads risk by investing in a number of companies, not just one like the EIS. Also, because VCTs are traded, you can sell them after five years (or earlier, if you’re prepared to forego the tax breaks). An EIS is highly illiquid, and usually the only way to realise your investment is through flotation.

As always, taking expert, independent financial advice is suggested before indulging in this form of investment. But if you’re happy to take on extra risk for the potential of greater gain, they might be worth considering.

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Sources: hmrc.gov.uk

...take your eye off the ball...

Sometimes we focus so hard on something we think is important, we become oblivious to significant events right under our noses. This is the idea behind The Invisible Gorilla, a book based on a series of experiments by Christopher Chabris and Daniel Simons.

The centrepiece of their work is a short film in which two teams of three people pass a basketball between them. Viewers are instructed to count the number of times the team in white passes the ball. About half the people who watch the film are concentrating so hard on the white team, they fail to notice a person in a gorilla suit enter the scene, stop to beat their chest in the middle of the screen, then stroll casually out of shot. Those who spot the gorilla are usually caught-out by more subtle experiments with similarly obvious tricks.

The experiments are among the many that begin to help us understand how investors behave and they suggest that people are easily seduced by glamorous investment stories that dominate the news. Right now, for example, all eyes are on the US and how people are reacting to public sector workers being sent home. That’s the ball-passing game people are fixed on and so pages of analysis suggest what impact it will have on the economy, the dollar, interest rates and Wall Street. Yet this focus on the ever-changing headlines is often at the expense of more important slow-burning truths – the biggest perhaps being that holding on to a well-balanced mix of investments is generally more successful than endlessly chasing the news. This is the gorilla that people miss.

Sometimes we are smart-witted creatures capable of great feats of intelligence. But other times, much of our behaviour is governed by instincts that were hard-wired into our brains tens of thousands of years ago. This means that, sometimes, we fail to spot the gorilla.

National Savings are back with Index-Linked Savings Certificates

NS&I have re-introduced new issues of its savings certificates, including index-linked Savings Certificates (often referred to as inflation-beating savings) and fixed-interest Savings Certificates.

The new Issues are available in a 5-year term only and offer tax-free returns based on inflation, Retail Prices Index (RPI) plus a fixed rate of 0.5%. They offer a maximum investment of £15,000. Fixed-interest Savings Certificates will pay 2.25% AER.

It is anticipated that Billions of pounds will flood into these new government backed investments as savers look to beat inflation on their savings. Savers are currently affected by the combination of high inflation and low interest rates, which means that the real value on savings are being eroded by inflation.

Although these do appear to look very attractive to savers particularly higher rate tax payers I would also consider the following points.

As we know currently inflation is at a very high level and with RPI at 5.3% it is well above the Bank of England’s inflation target. Also, at the moment interest is at an all time low and has been for some time now. Just in the last week the Bank of England has warned that inflation may rise further to a peak later this year. This would suggest that upon reaching its peak inflation will start to fall again.

It is therefore important to consider the effects of the anticipated returns over the full 5 year period where savers may be disappointed with the total return over the 5 years. It is possible to bail out after just 1 year where the return would be RPI plus 0.25%.

The anticipation over the next year or so is that interest rates are likely to start rising to bring the current high inflation under control. As inflation starts to drop the guaranteed return of inflation plus 0.5% will gradually become less attractive over time. The effect of this is that as interest rates start to rise again savers will start to receive some better rates of interest on their cash savings.

I therefore think there will be a point over the next year or so when there will be a tipping of the scales and that savers will benefit from the returns offered by the new NS&I Indexed Linked Savings in the early years of the 5 year period when inflation is still very high, as inflation drops savers will see a drop on their returns.

As a result although savers are receiving a very low rate of interest on their cash savings at present as inflation drops and interest rates increase savings will start to see some better rates of interest appear.

To conclude I would suggest that the rates currently look very attractive, particularly for higher rate taxpayers, and that they may be suitable for some savers as part of an overall savings and investment strategy to avoid the effects of high inflation.

Don't put your retirement dreams on hold!

Almost two thirds of people who had planned to retire in 2011 would consider having to pospone retirement and continue working in order to give a vital boost to their retirement income.

New research from Prudential's Class of 2011 survey has revealed that almost 50% say they will definately continue working beyond their planned retirement age in order to supplement pensions and build further savings before they retire.

The Prudential Class of 2011 surveyed people who had the original intention of retiring throughout this year. The results highlight the growing trend of individuals phasing retirement gradually in the UK as a result of the reality of having to fund a much longer period in retirement.

The survey highlighted that over 30% would consider working for up to a further two years if it secured them a greater income in retirement. Where more than one in five would consider an extra two to five years working, 8% said they would be prepared to work for five to ten years longer.

Not all those surveyed planned to continue working beyond planned retirement due to financial constraints as many were happy to continue working on. Over 50% said they did not feel ready to retire and actually still enjoyed working.

I see more clients nearing retirement with a more flexible approach to how and when they retire and the option of part-time and consulting work is attractive for many clients.

The secret to all of this is in carefully planning your retirement in advance and arranging with professional financial advice appropriate investment portfolios and a suitable retirement strategy.

This prevents you having to delay your retirement dreams and allows you to stay in control of your retirement aspirations for which should be an exciting, enjoyable and relaxing period of your life.