The risky rise of Cryptocurrency
The Bitcoin rally has certainly caught the attention of many with a high of almost $50,000 over the weekend. Currently, none of the funds we use directly invest into Bitcoin or any other cryptocurrencies. However, that is not to say that they will not in the future or that they do not have indirect exposure at the moment. For example, the car manufacturer Tesla, which is held in funds, has bought 1.5bn USD of Bitcoin. Likewise, you may have seen that Ruffer, recently initiated a position in Bitcoin.
Amongst other reasons, there are three major concerns, which hold us back from considering this asset class directly:
Store of value. We are unsure on its merit as a store of value (it has fallen by more than 80% on more than one occasion after all). It may turn out to be a fantastic investment, but we do not know. Memory sticks can be lost, passwords forgotten and exchanges can be hacked.
Regulation. The FCA recently banned the sale of crypto-derivatives to retail customers and warned consumers of the risks of investments advertising high returns based on crypto-assets. Governments could move to try and make these currencies illegal / make them difficult to use. This has the potential to push up the price of Bitcoin or it could just push people towards other cryptocurrencies.
Implementation. It is hard to own this type of asset in a daily dealing fund given the liquidity issues surrounding this asset class (cryptocurrencies) and there are questions surrounding the suitability of owning such an asset in retail portfolios.
Other reasons include the slow pace of transactions and the potential use of cryptocurrency for illegal activity.
The ultimate fate of cryptocurrency will depend on whether it becomes 'money'. It appears that it is too soon to predict. Till then 'doubling and halving' of the bitcoin on a regular basis should not come as a surprise . We prefer to stick to high quality tangible investments that we have a high level of conviction in, and who have proven to deliver consistent and understandable returns over many years.
The great vaccination race
Two months ago, a UK grandmother received the very first COVID-19 vaccination and now, Israel has delivered at least one dose of the vaccine into the arms of more than 60% of their population. The UK and the US trail with 18.4% and 12.3% of their populations having had one dose, respectively. In Europe, both Germany and France have vaccinated less than 4% of their population so far, and the EU averages just 3.7%. Emerging and Asian economies have all but false started, as China and India have vaccinated just 2.2% and 0.4% of their populations, respectively.
The success of Israel
Israel's vaccination owes a large amount of success to a deal struck between Israel's Prime Minister, Benjamin Netanyahu, and Pfizer's Chief Executive, Albert Bourla. Israel agreed to share data on the impact of the pandemic as long as supplies were plentiful and prompt. This has in effect created a huge countrywide experiment, the outcome of which will provide insight into how mass vaccination programs will alter the course of the virus across the globe. The early signs have been encouraging, in a study by a team from the Weizmann Institute of Science, based close to Tel Aviv, daily case rates among people aged 60 and above have fallen by 46% relative to their mid-January peak, compared with just 18% among under-60s.
Record-breaking day in the UK
The UK set a daily vaccination record of 598,389 on the 31st January and the Government has announced a target of vaccinating all over-50s by May. This effort could reduce pressure on health systems and allow the wider opening of the economy on a permanent rather than temporary basis. Another key advantage for the UK is its market leading capabilities in testing and genomic sequencing, allowing detailed tracking of the differing coronavirus strains.
Targets set in the US
The US is on track to meet its target of immunizing all adults by the end of the calendar year. For that to happen, they will need to ramp up vaccinations to three million per day, far above current levels. However, distribution rates are sharply climbing and they look set to cross this figure by the end of April.
The picture in Europe
Europe's vaccination program has been far more disappointing. Slower vaccine approval was a major issue as the EU wrangled with suppliers over liability. The US and the UK on the other hand, were quick to grant emergency approval and take on the responsibility from pharmaceutical companies.
A false start in Asia
Not only have developing economies been outmuscled by their deeper pocketed Western peers on the vaccine priority list, they also face distribution constraints. We will likely see excess supply from developed economies filter their way through, as many have ordered enough to vaccinate their populations multiple times over. This will likely be a huge lifeline to many of these economies, who are yet to secure enough vaccines to cover their population. China remains somewhat of an exception, with various vaccines in development as well as the security of 100 million doses from BioNTech.
Widespread vaccinations should lead to pickups in economic activity across the globe, particularly as the winter waves fade in the Northern hemisphere and economies start to re-open. Risks remain around various COVID-19 strains however, so far these have been mitigated. Inflation expectations have also been picking up as we move perhaps into another expansion/re-opening phase.
Three lessons learnt from the GameStop frenzy
Last week's GameStop saga and the capitulation of hedge funds such as Melvin Capital, a premier Wall Street hedge fund which lost 53% in January, drew a lot of attention from commentators and banks. Should we be concerned by what has happened in the US and what can we learn?
Retail investor bullishness is increasing. We have seen examples of this in the rising share price of retail investor favourites such as Bitcoin and Tesla. This behaviour is perhaps due to increased levels of savings as with lockdowns, investors potentially have fewer outgoings. Perhaps it is due to boredom; after all, there is no need to #OccupyWallStreet if you can do it from the sanctity of your bedroom…
Nothing is free. One of the noteworthy points to emerge from the drama surrounding GameStop is that the 'free' retail-trading platform, Robinhood, sells their investors' trade flow to market makers allowing Robinhood to profit from their customers' trades. This serves as a timely reminder that you are the product if you are getting a service for free.
Volatility is here to stay. Currently, there are some curious situations occurring in markets, be it the GameStop fiasco, the sharp rise in the price of silver over the weekend, the increasing mound of margin debt, the proliferation of SPACs (Special Purpose Acquisition Companies), the Fear Index going through 30 (VIX) or the EU getting twitchy over the weekend about exports of vaccines. There are pitfalls out there and we expect this volatility to stay. That markets are twitchy is understandable because as we look towards the second half of 2021, the vaccine rollout will play a crucial role in the ability for us to reach herd immunity and ultimately emerge from lockdowns. This will clearly affect share prices and with valuations already rich in the US, the stakes are high.
Ultimately, as investors favouring high quality equities that generally prefer long only investment vehicles, we do not envisage the GameStop situation to impact portfolios in any great way. However, it does remind us of the importance of being active, nimble and undertaking fundamental research as this should provide protection against shocks. This ability to be nimble not just at asset class level but also at fund level, should stand us in good stead should volatility remain elevated.
An update from our investment partners LGT Vestra:
Are stretched valuations a cause for concern?
With the exception of more cyclical markets such as the UK, stock markets have rallied past pre-Covid-19 levels after a dramatic resurgence from April onwards. It is notable that despite everything that has happened, with over two million people dying, companies falling into administration and unemployment rising sharply, that US equity markets in particular have pushed through all-time highs and investor sentiment has continued to be bullish.
There is no doubt valuations in some parts of the market are looking a bit stretched. Three noteworthy areas are:
The rise (and rise) of retail investor favourite Tesla (in spite of the fact that they sell and produce a tiny number of cars compared with the other seven manufacturers),
The second coming of Bitcoin, and
The proliferation of SPACs (Special Purpose Acquisition Companies)*.
However, we are not yet at a level of concern where we would reduce our equity exposure altogether. We believe that there are several key reasons that the market could continue to push upwards:
While Central Banks are in ultra-accommodative mode, we believe that markets can continue to climb. Whether it is Chairman of the Federal Reserve (Fed) Jay Powell or the European Central Bank (ECB), Central Banks have indicated that interest rates will remain low in spite of what inflation may do.
Governments have also signalled a shift away from austerity and towards a more fiscally expansive regime, even in more traditionally conservative regions such as Germany. The genie is out of the bottle.
Tail risks have receded. The US election, EU–UK trade agreement and the acceleration/success of vaccination programmes have provided some much needed clarity to investors.
Finally, there are also parts of the market that offer fair value such as the UK, Europe and Emerging Markets. Not everywhere is as expensive as the US!
Things to do during Lockdown Version 3
These are uncertain times during which the UK Government has advised its citizens to remain at home in order to stay safe and to protect our vital National Health Service. The current UK lockdown measures may mean you find yourself with some available downtime and so, it may be a worthwhile exercise to put your basic wealth planning "house in order" with the help of the simple checklist below.
1. Write a will
Recent research by The Royal London Mutual Insurance Society indicates 54% of adults in the UK do not have a will and six out of ten parents do not have one, nor do they have guardians in place who would look after their children. For those who already have a will, this might also be a good time to review and determine if it needs to be updated in the form of a new will to reflect changes in circumstances.
It is also worth noting that marriage revokes an existing will unless the will was written in full anticipation of the marriage. Whereas a divorce does not revoke an existing will. As a result, life events can often necessitate the need to review an existing will to ensure it continues to remain up to date and reflect your wishes.
2. Establish a Power of Attorney
A Power of Attorney is a legal document that allows someone to make decisions for you, or act on your behalf should you no longer be able to, or if you no longer want to. This could be in the short term, for example as a result of spending a period of time in hospital or long term, due to mental incapacity.
These decisions can relate to your general welfare, including decisions made on your daily routine, any medical care, or in choosing a care home – this is known as a Health & Welfare Lasting Power of Attorney. Alternatively, you may require assistance on making decisions, should you be physically or mentally incapacitated, regarding your finances. This includes managing your savings and investments, structuring your income requirements, paying your bills or selling your property(s) – this is known as a Property & Financial Affairs Lasting Power of Attorney (LPA).
You are able to appoint one or more attorneys to help you make the decisions on the above. An attorney must be over 18 and have the mental capacity to make their own decisions. Where the expectation is that the attorney could only be required for a short period of time then a simpler ordinary power of attorney could be considered rather than an LPA.
3. Collate lost pensions arrangements
Are you aware of all of your existing pension arrangements? Even from that short-term employment you took up 10 years ago? Any pension funds which you have accumulated in your working life could make a real difference to your overall pension savings when you reach retirement.
Research carried out by The Association of British Insurers in October 2018 estimates that there is nearly £20 billion held within 1.6 million pension pots with an average size of £13,000 which have been forgotten. If you suspect that you have an old pension pot from a previous job, you are now able to track down the pension scheme's contact details by using the 'Pension Tracing Service' which is a free government service.
4. Update pension beneficiary form (expression of wishes)
You have reviewed your will; now do you know who will inherit your pension benefits? Pensions normally do not form part of your estate for inheritance tax purposes and are therefore not covered by your will. In order to specify who you want to inherit your pension after your death you need to have an Expression of Wish in place, and if any of your pensions pre-date your current relationship then you may want to review this to ensure they are up to date.
The best chance of ensuring your beneficiaries are able to retain the tax advantageous pension wrapper in the form of a beneficiaries' pension, is to list them specifically on your Expression of Wish form and check the death benefit options of your existing arrangement. You should contact your pension providers to find out your current nomination and to obtain the relevant forms as soon as possible.
5. State Pension
In 2016 the UK Government introduced the new single-tier State Pension. Under the previous system it was difficult to understand exactly what you may have been entitled to until you reached your state retirement age, however the new system is de-signed to make this far simpler.
The new State Pension is based on your National Insurance record, requiring an individual to have 35 qualifying years to be eligible to receive the full amount. A qualifying year can include years where you have been in full time employment, or where an individual has received National Insurance credits given to those who have caring responsibilities (i.e. those receiving Child Benefit).
The majority of individuals are unaware of how much they may be eligible to receive as their State Pension, or at what age they will qualify for it. This link provides further information on how much you could stand to receive and at what date it could become payable. The State Pension could form a valuable part of your retirement income, so understanding your entitlement is essential.
6. Review old insurance policies
Every month, do you see that direct debit leave your bank account and go off to an insurance provider for that protection policy you took out many years ago? Or do you have that prehistoric mortgage endowment policy which you keep receiving annual statements for? Do you know what you are actually covered for and whether this is sufficient for your needs?
Insurance may also need updating following changes in your personal and financial situation and/or following certain life events, including:
A new job or changing to self-employment.
You may have sold your business and be considering retirement.
Marriage or divorce.
Children or grandchildren.
A change in either yours or your partner’s health.
Paying off a debt or other liability.
Moving house or buying/selling property.
Making financial gifts from your estate.
Right now might be the time to review your protection policies to ensure you are adequately covered in the event that you may have a need to make a claim on your insurance policies. If you cannot locate your original policy documents, you should contact your insurance provider to find out what exactly you are covered for.
As you review these policies, you should also check if your life assurance policies are held in trust. Ensuring these policies are written under trust will mean that when the funds are paid out they do not automatically form part of your estate or your beneficiary's estate on your death.
7. Consider new insurance policies
If you do not have any insurance currently in place, then this is something that you may wish to consider. Putting in place a basic level of protection is probably more affordable than you think and you could buy certain life insurance for just a few pounds a month.
There is currently (and what is referred to in the industry as) a ‘protection gap’ in the UK. This means that a large proportion of the UK would be left financially vulnerable should they, or their spouse, pass away prematurely or suffer an illness or injury that would affect their ability to earn. Despite this apparent financial vulnerability and need for a safety net, a research study by the Financial Conduct Authority (FCA) highlighted that 65% of the UK adult population has no form of insurance. Among the 35% who do have some form of insurance more of them have critical illness insurance (10%) than income protection (4%) and it is estimated that from c 26.7 million households in the UK, just 300,000 have an income protection policy in place.
Given the recent COVID-19 pandemic and the increasing levels of staff being furloughed, or made redundant now could be the time to consider your ongoing protection needs for you and your family.
8. Consider making gifts
Right now might be a time that someone close to you needs some financial support more than ever and you may want to help. Making an outright gift from capital is usually classed as a Potentially Exempt Transfer for Inheritance Tax (IHT) purposes. This means that if you were to pass away within seven years of making the gift, it would form part of your estate for IHT purposes unless the gift qualifies for an exemption.
One such exemption is the IHT exempt annual allowance of £3,000 per tax year. Each individual is able to make an outright gift of £3,000 per annum which is immediately exempt from their estate for IHT purposes. In addition, once the current year's allowance has been maximised, you are able to utilise the previous year's unused allowance meaning the first gift could amount to £6,000, which is immediately exempt from IHT.
Each tax year you can also give away up to £1,000 per person in consideration of marriage or civil partnership (or up to £2,500 for a grandchild and up to £5,000 for your son or daughter).
Finally, where you have the disposable income to do so, gifts out of income could also be immediately exempt from IHT provided the gifts are from disposable income, the intention is to establish a regular pattern of gifting and, they do not adversely impact on your standard of living.
Concerns have been raised about the potential longevity of these valuable reliefs with several influential reviews calling for wholesale change to the IHT regime. With asset valuations potentially lower, if you feel that you are in a position to do so, now may be an opportune time to make those gifts.
9. Charitable donations
You only have to hear the story of Captain Tom Moore, who has raised an enormous amount for NHS Charities Together, to realise how many people are making charitable donations during the lockdown. You may be making donations to a charity close to your heart at this time too. If you are a UK tax payer, when you make these donations, you are usually able to elect to apply Gift Aid to these contributions meaning the charity you are donating to receives an extra 25%, at no cost to you.
In addition, if you pay tax above the basic rate, you can claim the difference between the rate you pay and basic rate on your gross donation (i.e. the donation amount after gift aid is applied). You should therefore remember to make a note of the donations you make so that you can apply for the additional relief on completion of your self-assessment tax return.
With all this extra time on our hands, now could be a good time to go through the rather boring (and sometimes frightening) exercise of seeing what you normally spend. This may be especially important if you are currently facing a cut in pay or income as a result of the pandemic. While in lockdown you are likely to save costs on some expenses, such as parking, petrol, train fare, coffees, eating out and entertainment.
You may also have been able to put certain monthly subscriptions on hold such as gym memberships. As such, a good start point would be to review your expenditure prior to lockdown to determine how much is available in disposable income to start a new savings arrangement, make gifts out of income to a loved one or, to your chosen charity.
11. In Case of Emergency (ICE) document
Do your family members know where all your important documents are held, who your financial adviser, investment manager, accountant or solicitor is, and do they have their contact details? Has one member of the family historically controlled all the family finances? Now would be a good time to put all the important information into one document, including the location of your will, and anything else you think would be relevant if something were to happen to you.
12. And finally, consider the Budget 2021
It is worth remembering that the Spring budget is planned March 3rd this year. The Chancellor Rishi Sunak cancelled the Autumn Statement so we may see some changes announced in this year's budget that may well impact your future financial planning. So below is a brief checklist of just some of the things you could consider before the end of the tax year or perhaps more realistically before March 3rd.
Remember to always take professional financial advice.
Do you feel in control of your finances?
We were unsurprised to see Royal London research stating that clients who have an ongoing relationship with their adviser are twice as likely to feel in control of their finances than those who don’t. Psychologists consider a sense of loss of control to be the primary cause of stress.
There are various surveys which have shown increased wealth amongst clients who are regularly advised. In 2020 we feel it was more important to have a sense of control and security, perhaps more than simply being wealthier. In such a difficult, tempestuous, nervous year, the human value of this cannot be underestimated.
Almost universally our clients have fed back in the last 9 months how surprised and delighted they are with the robust valuations of their pensions and investments. So Invest Southwest make you wealthier and happier. If only we could make our clients taller and slimmer we would have the full house!
Do please spread the word if you have friends, family, colleagues or associates you feel may benefit from our personal touch combined with the modern high-tech approach which has enabled us to function so well during lockdown.
Wishing you continued good health and wealth in 2021.
Covid-19 Matrix Update
An update for employers, employees and the self-employed
An update from our investment partners LGT Vestra:
Threading the Needle
Prime Minister Boris Johnson addressed the nation on Monday, expressing his hopes to ramp up distribution of the vaccine in order to protect tens of millions over the next few months. Recent development in support of vaccination has sparked optimism in the face of the pandemic – a welcome signal that the end is now in sight, and a sigh of relief for investors.
Moderna, a Massachusetts-based biotech company, has been the latest to announce successful trials for their vaccine which is nearly 95% effective, similar to that of Pfizer and BioNTech. As the world embarks on the greatest vaccination programme in history, the pace of vaccinations in the UK is accelerating, following the arrival of our own Oxford AstraZeneca vaccine. As of 5th January, 1.3 million people in the UK had received the first dose of the Covid-19 vaccine. The race is undoubtedly on as Boris Johnson stated in his address to the nation "so far, we in the UK have vaccinated more people than the rest of Europe combined"1.
While we are encouraged by a return to normality sooner rather than later, the overriding factor is the speed at which the vaccine can be administered. As we have seen, the supply, coordination and logistical nature of the vaccination programme is complex. Given the rapid spread of the new strain of Coronavirus, the promptness of the rollout has become even more important if we are to avoid healthcare systems being overwhelmed. Despite the renewed threat of tougher lockdowns where cases are rising, markets across Europe rose higher on the first trading day of the new year. The FTSE 100 led the rally, jumping nearly 3% following on from the agreement of a Brexit trade deal.
Should the vaccine rollout be a success, we would expect a similar rotation to what we saw in November with retail property, travel and hospitality sectors benefitting from a return to customary trade. We have already seen this to some extent, with investors easing off online giant Amazon, and services such as Ocado on our side of the Atlantic. The share price of Zoom Video, the video conference software company, has slumped as much as 18% since the Pfizer's vaccine news, while shares in other video streaming companies such as Netflix also dipped, though to a lesser extent. On a year to date basis, these web-based companies have retained significant growth, yet there are marks of rotation out of these sectors none the less. Value stocks are experiencing a rebound, and the price of oil is back up near its eight-month high.
Whilst it is tempting to reallocate to sectors that screen as cheap and could benefit on positive vaccine news, we are well aware that there are several hurdles for these companies to overcome and many will not survive. A number of these companies have suffered significant balance sheet deterioration and may struggle once government support is lifted, as such, we continue to have a bias to quality/growth assets that we believe can outperform in the long run.
Wrapping up 2020 with a deal
As we fast approach the end of a turbulent year, we can take relief in the finalisastion of the trade agreement between the EU and the UK. The agreement still needs to be ratified by EU states and in UK parliament today, however it is expected to pass. The agreement allows many of the existing trade arrangements to roll over and prevents the highly undesirable 'cliff edge' scenario entailing miles of freight lorries queued up at Dover or at Manston airfield, as we saw a glimpse of due to the new strain of Covid-19 last week. The agreement marks the start of a new and exciting period for the UK with much needed clarity for businesses and investors alike.
The trade agreement will likely be added to in the months ahead to incorporate equivalence for the Financial Services sector, one of the UK's flagship industries. Achieving equivalence will take at least another three months, with both Paris and Frankfurt looking for a slice of the action, and it is not guaranteed. However, it will be important for the UK given the millions of people that are employed by this industry that is a very significant source of revenue for the UK Exchequer. Furthermore, it is important to note that while tariff free trade has been agreed in many areas, it is not without a cost in terms of paperwork and administration. So, whilst a Brexit Trade and Cooperation deal may be 'done', there are many other areas where negotiations will continue.
Since the news of the agreement on 24th December, the FTSE has moved higher and cable is trading around the 1.36 USD/GBP level, well above the 1.15 lows seen in March. We would expect this to remain relatively range bound while uncertainty remains about lockdowns and the new variant of the Covid-19 virus passes through the country. If sentiment improves, economies open up and the vaccine proves successful, we may see sterling continue to strengthen.
Overseas, attention turns to the US where many global equity market indexes are hitting new highs boosted by the US stimulus progression and the positive vaccine news. In the US, the House of Representatives has passed a bill approving the increase from $600 per individual to payments of $2,000 in line with President Trump's request however, the Senate may yet turn this change down. We are also keeping an eye on the Georgia election run-offs.
Bringing a close to the year, despite all of the drama, sorrow and market volatility of the past twelve months, we are pleased to announce that the Invest Southwest portfolios have shown strong performance, due to their broad spread and regular rebalances.
'Fixed Interest Investment ISA Bond' scam
We have been made aware of recent fraudulent activity, intended to impersonate Fidelity International and encourage people into making false investments. Fidelity International's Fraud Prevention team is working with the relevant authorities to address this as a priority.
This is based upon the fraudulent use of the Fidelity International name and brand to promote a ‘Fixed Interest Investment ISA Bond’ scam, which claims to be offering returns of 2.75% - 5.75% with a minimum initial investment of £15,000. Fidelity International does not offer these products.
If you think you may have been targeted and made an investment already then contact your bank and report the matter.
This is a stark reminder that there is much more fraud activity in the current times and all contact should be viewed with scepticism, especailly if it appears too good to be true.
Latest update from our investment partner, LGT Vestra:
"Don't let it dominate your life" tweeted President Trump, as he walked out of hospital unassisted on Monday afternoon following his fleeting battle with coronavirus. Perhaps a surprising assertion to be addressed to a nation still under the grip of the pandemic, but one which seems more aligned with the sentiment of markets.
There have been significant gains made through the U.S. equity market over the past five months. With the President's prompt recovery this week, and lawmakers moving to provide further stimulus, the U.S. Treasury yields have risen since edging lower, and the dollar has weakened. On Monday, we witnessed the S&P 500's largest rise in almost four weeks, contrary to the earlier decline in the tech-heavy Nasdaq index. We believe this indicates positive signs of diversification from an investor's standpoint, with the energy and healthcare sectors making up for lost ground. Asian equity looks set to follow suit on the news, while futures predict further gains in Hong Kong, Australia and Japan.
Contrary to popular belief, the economic recovery has so far been "V"-shaped. Further cash being deployed into the market has undoubtedly helped, accompanied by a universal tether on interest rates. The big question is whether this recovery can continue, where we are already seeing volatility rising again. We are unlikely to see a full lockdown such as that of April, and significant pullbacks are likely to represent buying opportunities rather than longer-term fears. We have already seen a significant development on the EU recovery package, with new stimulus measures set to douse concern over the region.
There will certainly be further challenges ahead. Inflation has not yet caught up, and the government debt pile swells. Supply chain disruptions may bring diversification in manufacturing, away from China and into other Asian economies. A large number of businesses with low inventories preceding this change are to be key drivers of growth over the coming months. We expect to see the recovery continue in spite of a flattening out as winter closes in on the Northern Hemisphere, and are yet to understand the impact that cold weather may have on the rate of infection. While interest rates are sure to remain low, and we continue to see renewed fiscal support, these challenges can be staved off for the time being. There is plenty of scope for growth to persist while production continues to catch up with the much faster rebound in goods consumption, despite the upward pressure on prices.
Overview and market direction
The COVID-19 pandemic has had a dramatic impact on the global economy, however in response, the level of fiscal and monetary stimulus has been massive. As has been already demonstrated through earnings data, companies that can still grow and have strong balance sheets, have performed well while others have suffered long lasting damage. This leads to massive dispersion of returns in geographic, sectoral and even between companies in the same sector. We expect the dispersion of returns to continue. As we move into the final quarter of the year, there are a number of events that culminate around the end of October, which may give added impetus to short-term volatility in markets. As the winter begins, we could see a second wave in the pandemic or a vaccine. Brexit trade negotiations could end with no deal or a new trade deal, and the US election could see a change of leadership.
Looking first at Brexit, in the eight months since the UK entered the transition period, there appears to have been no movement on either side on issues such as Fisheries, worker's rights and regulatory alignment. For any new treaty to be ratified, it needs to be concluded by the end of October. The pandemic's impact on the economy has dwarfed that of Brexit, but it remains a big concern for the UK economy. The pound has been stronger against the US dollar and held up against the euro, however this week has come under pressure reflecting nervousness by investors that the UK ends up with a no-deal.
In the US election, Joe Biden leads Trump in the polls, but the gap is narrowing as Trump appears to be gaining ground in key states. Trump could still win the Electoral College without winning the popular vote, as he did last time. Biden's proposed tax increases are seen as less business friendly, however, a more stable relationship with China could be good for global trade. The election is likely to see a ferocious and divisive campaign, which may make getting further fiscal packages agreed ahead of the election difficult. Equally, no one wants to take the blame for a lack of action, it is in both sides' interests to get a deal done. The Federal Reserve, by changing the way it targets inflation, has given itself more flexibility to take action but their powers are limited and fiscal action is also needed.
These factors could all come together in the last two weeks of October and the first week of November. Markets will continue to swing on news reports ahead of the events. As markets absorb the news flow, we should expect sharp move in markets in both directions. In the long term, companies that can grow with strong balance sheets should perform well but will not be immune from the volatility.
Will Covid-19 hasten the demise of cash?
The use of cash was already dwindling in recent years, with cards being the preferred method of payment (especially contactless). Since the outbreak of Covid-19, however, the use of physical money has reduced much further, with many shoppers wary of touching it.
The number of withdrawals from cash machines during lockdown is down by 60%, although people took out larger sums than usual at a time. As there were fewer places for people to go out and spend money, with bars and restaurants closed, it was believed many people were hoarding ‘cash’ at home, just ‘in case’. Not surprisingly, card payments increased significantly due to the surge in online shopping, especially for groceries.
According to a survey of consumers by Link, which is responsible for the UK’s cash machine network, 75% of people were using less cash, and 54% said they were avoiding cash. Just over three quarters of those surveyed said they expected to move to other forms of payment or online shopping in the next six months. It will be interesting to see whether people continue to change these habits post-lockdown and make a permanent switch to digital payments.
One of the issues will be that if a significant number of people stop using cash, there will not be enough demand to make ATMs profitable. The infrastructure of delivering cash could completely collapse.
Prior to the pandemic, the Bank of England was already considering the introduction of electronic banknotes. This would be a major revolution as the current system of people using central bank money in the form of paper banknotes has been in place for 300 years.
The idea would be to have a Digital Central Bank Currency, where £10 of the digital currency would be worth the same as a £10 note. You would load up Central Bank Digital Currency, just as you would withdraw banknotes from an ATM, but electronically. The system would be guaranteed by the Bank rather than a commercial enterprise. The Bank has stressed this would complement not replace paper banknotes as long as there was still a demand for physical cash.
This is important as the independent Access to Cash Review revealed that 20% of the population, including the elderly and vulnerable, are still dependent on notes and coins. Assurances have been made that cash will not completely disappear and legislation was passed in March to ensure that it would be protected for those who need it.
The Bank of England called for input into their discussion over digital currency up to mid-June so the outcome will be awaited with interest.
The Chancellor yesterday made his "Summer Statement". There follows a summary of the key points:
In the first two months of the FY 2020/21, UK government borrowing has exceeded £100bn and according to most estimates is heading towards £300bn by the end of the FY 2020/21.
The March 2020 budget was forecasting borrowing of £55bn for the FY 2020/21.
Total Government Debt is now more than 100% of GDP. As the ONS commented public sector debt is "just under £2.0 trillion"!
UK economy contracted by 2.2% in the first quarter of 2020
Bank of England forecasts unemployment at 10%. OECD have commented that unemployment could spike at 15% IF we seek a second wave of Covid-19 infections.
Job Retention Scheme
The Coronavirus Job Retention Scheme (CJRS) will NOT be extended beyond October.
However, the Chancellor will introduce a "Job Retention Bonus"
This scheme will pay £1,000 for every furloughed employee who remains continuously employed from the closure of the CJRS until the end of January 2021
Employees must earn on average more than the Lower Earnings Limit (£520 per month) in that period. The payments will be made to employers in February 2021.
More details will be published at the end of July.
A new scheme that covers England, Wales and Scotland but NOT Northern Ireland.
The aim is to create "hundreds of thousands" of 6 month placements for individuals aged between 16-24 and deemed to be at risk of long-term unemployment.
The Government will provide the necessary funding for each job up to the level of 100% of the "relevant minimum wage" for 25 hours per week plus the associated Employer NI costs and minimum pension automatic enrolment contributions.
For a 21-24 year old whose minimum hourly rate is £8.20 per hour. This equates to a payment of circa £6,500.
Employers will also receive a payment of £1,000 for each 16-24 year old to whom they offer and provide work experience.
Government will also invest in better provision for traineeships
Temporary VAT cut for food, non-alcoholic drinks, accommodation and attractions
A 5% rate of VAT will apply to supplies of:
Food and non-alcoholic drinks from UK restaurants, pubs, and
Accommodation and admission to attractions operate from across the UK.
The temporary rate will be in force from the 15th July 2020 until the 12th January 2021. Further details to be published by HMRC in due course.
Temporary Stamp Duty Land Tax Cut
The nil rate band threshold for residential SDLT will increase from £125,000 to £500,000 with immediate effect until 31 March 2021.
That offers a maximum saving of £15,000. For second homes, the 3% additional rate will continue to apply.
The devolved administrations in Scotland and Wales set their own rates of tax on Land and Buildings Transaction Tax (LBTT) and Land Transaction Tax (LTT) respectively. When there have been SDLT rate changes previously, the administrations have tweaked their bands, although not necessarily in line with Westminster’s numbers. As at the 9th July, neither administration has announced any change but this may alter in the days ahead.
Green Homes Grant
A £2 billion Green Homes Grant is to be introduced. This will provide at least £2 for every £1 spent up to £5,000 per household to homeowners and landlords making their properties more energy efficient.
For those on the lowest incomes, the scheme will fully fund energy efficiency measures of up to £10,000 per household.
Full details of the Summer Statement can be found at: https://www.gov.uk/government/publications/a-plan-for-jobs-documents fbclid=IwAR0WIQq6BIDKFtEHnv6GkPaunsRcSMeojkAGvrqSdq7C8w8AkctgnUc_8o0
Global stock markets have recovered strongly in the second quarter of 2020 since the lows towards the end of March, with signs of a recovery also showing in leading economic indicators. However, extensive lockdowns have resulted in recessionary conditions almost everywhere and the coronavirus continues to dictate the shape, pace and durability of the economic recovery. Until a vaccine is found, there will be longer-term implications of lengthy lockdowns, and global demand weakness is likely to continue well beyond the lifting of restrictions.
There is significant uncertainty to economic growth forecasts as the risk of a ‘second wave’ of infections remains and could restrain growth, but the immediate and huge response from central banks and governments is likely to both continue and be needed, injecting significant liquidity into the financial system and keeping interest rates at ultra-low levels. This environment is likely to support and spur on a range of risk assets as lower (or even negative) risk-free rates and low inflation have the propensity to drive up the present value of future profits.
The current disparity between economic fundamentals and asset prices may seem alarming, but is quite normal as markets are anticipating what lies ahead (profits recovery and continued need for stimulus).
Equity markets have taken heart from the signs of a gradual return to work aided by additional stimulus packages. Whilst some of the economic data appears to be improving, the numbers still indicate that the global economy has incurred significant damage. Brexit negotiations continue with the EU and UK looking as far apart as ever.
Infection rates and the numbers of deaths in general continue to trend down. The measures taken to restrict activity appear to be working. As measures are relaxed, there remains a danger that we will see further spikes, particularly if the measures are relaxed too fast and mass gatherings take place. Protests over the death of George Floyd and crowds on UK beaches may lead to further outbreaks. The UK Government says it is following expert advice; however, it would appear that you can find expert views pointing in any direction you like. Our understanding of how the disease works appears to be improving, and suggestions that T-cells can play a role in resisting COVID-19 may indicate that there may be greater immunity in the population as a whole than previously thought. However, many experts still caution on a second wave in the autumn.
Fiscal and monetary update
While the EU package is still in negotiations, held up by the ‘frugal four’, Germany agreed a further EUR 130 billion package of support measures, including a EUR 20 billion cut in VAT. The European Central Bank (ECB) lived up to expectations, announcing a further EUR 600 billion in its Pandemic Emergency Purchase Program (PEPP). As noted above, the proposed EUR 750 billion EU funded mix of grants and loans remains bogged down in negotiations for now.
Away from virus related stories, Brexit trade negotiations failed to produce a conclusive result. The UK refuses to move on fisheries, the acceptance of EU regulation post-Brexit and the role of the European Court of Justice, amongst other things. Michel Barnier is restricted by the mandate he has been given so the room for compromise was limited. It will now be back to European Commission President Ursula Von Der Leyen and Boris Johnson to see if any compromise can be agreed. The UK Brexit bill set the 30th of June as a deadline for agreeing a new trade agreement, but EU leaders appear to be talking of discussions going on to October. A no-deal Brexit looks likely, but despite the words to the contrary, a last minute deal or an extension to the transition period may still be possible.
It has been a positive week for equity markets and developed market government bonds fell as yields have moved higher. Peripheral European bonds, particularly Italian bonds, did better given the latest ECB action. Value stocks that had dramatically underperformed during the coronavirus sell-off have begun to outperform as markets recover. Given the lack of progress on the Brexit trade negotiations, the pound has held up surprisingly well, this may not be a reflection of confidence in the pound but rather weakness in other currencies. Changes to the FTSE 100 Index reflect the changes in our lives. Travel and tourism suffer under coronavirus while people in lockdown have more time to do home improvements. If the recovery continues then in a few months’ time this may reverse. After all, Kingfisher had been in the index until March when it dropped out. This makes us question the use of index trackers who tend to add stocks that have gone up already and remove them when they have already fallen. We continue to advocate taking a more selective long-term approach to equity investment.
The rally in equities has built a degree of momentum and may continue for some time, supported by continued low interest rates. Central bank support for bonds and credit markets is here for the long term. As stock markets recover, they become more vulnerable to setbacks and we expect volatility to be high in the months to come.
The last week has generally been positive for equity markets as lockdown restrictions have eased around the world. The proposed European Union (EU) stimulus package was largely well received but is still opposed by the ‘frugal four’: Austria, Holland, Sweden and Denmark. At the end of the week, rising tensions between the US and China dented the earlier positive sentiment.
While we understand that the statistics are not entirely reliable, the infection rate and the number of fatalities in many countries are falling. Whilst this is welcome news, every death is a tragedy and many of us have friends or family who are mourning the loss of a loved one. South Korea, who had appeared to have effectively contained the disease, saw a new outbreak. This reminds us of the danger of a further spike in cases. In reassuring news, there is continued optimism that a vaccine can be developed sooner rather than later. Anthony Fauci, the US government’s top infectious diseases expert, said that there was a good chance that a vaccine could be available by October.
The big news of the week was the EU’s proposed package of measures to support the economy, which built on the proposal made by President Macron and Chancellor Merkel last week. The present proposal appears to amount to EUR 500 billion in grants and EUR 250 billion in loans. This would be funded by the EU borrowing directly. They would aim to raise money with EU wide taxes on tech and carbon. Whilst this was more than expected, there are doubts about whether this can get approval from all 27 countries and even if it does, it may take some months to come into effect. The objection is to grants rather than loans, where the burden is shared across the union but hard hit southern countries are the major beneficiaries. As with many things EU related, negotiations will go on and it is likely a compromise will eventually be agreed.
Against the background of the COVID-19 crisis, Brexit negotiations continue. With only one more round to go, the negotiators on both sides continue to have very different ideas about the outcome. There appears to be little real progress on the key sticking points such as fishing rights and an even playing field for regulation. The UK insist that they are treated like any other country, while the EU believe that because of proximity they need tighter rules for fair competition. EU negotiator Michel Barnier’s hands are tied by the mandate he has been given and the demands of individual countries within the EU. We are getting close to the deadline for concluding an agreement, which may focus minds on a compromise.
Equity markets responded positively to the EU proposals and the proposed gradual re-opening of economies. China’s decision to impose additional security laws in Hong Kong caused that market to fall sharply at the end of last week. This has not helped US/China relations that were already tense, as President Trump blames them for the economic damage caused by coronavirus. A renewed trade war would not be good for the global economy and would be poorly received by equity markets.
Markets have recovered a large part of the losses in the first quarter. Many technology stocks have reached new highs and the US Nasdaq Index is up 4% year to date. However, wider indices remain substantially lower this year, with the FTSE 100 down 18%. We have seen big daily moves and a very wide dispersion of returns within markets. In the short term, equity markets balance economic stimulus and lockdown easing, against the risk of a second spike in the virus and trade wars. In the UK, Brexit adds a further level of complication.
Latest update from our investment partner, LGT Vestra:
Last week saw falling rates of COVID-19 infections and moves to gradually ease restrictions on movement in many countries. In the UK, Chancellor Rishi Sunak announced an extension to the employment support scheme to October. A more cautious note taken by Anthony Fauci, Director of The US National Institute of Allergy and Infectious Diseases, offset this better news. His warning against reopening schools too soon appeared to put him at odds with President Trump who remains keen to ease lockdown measures. As expected, the economic numbers continue to be dire with US unemployment at 16%.
What is clear from looking at the past is the need to avoid a prolonged problem; governments should not raise interest rates or taxes and should not restrict trade. We have seen phenomenal monetary and fiscal stimulus so far which has gone a long way to support financial markets. However, the political rhetoric is building for a renewal of the US-China trade dispute and in the UK, a leaked Treasury report talked of higher taxes to pay for the additional expenditure being made. Markets continue to walk a fine line, balancing the stimulus and long-term prospects against the economic damage being done. As a result, market volatility is likely to remain high in the weeks to come.
Lockdown measures appear to be working in many parts of the world. Public Health England and Cambridge University say there are fewer than 24 new cases a day in London with the number halving every 3.5 days. Elsewhere in the country, the numbers are getting better but not as good as the capital. Boris Johnson outlined a plan to very gradually open up the eco