Monthly Archives: July 2017

No summer Budget
July 2017

The general election left the future of many spring Budget announcements up in the air, but that situation may soon change.

When Theresa May announced her snap election in April, it threw a major spanner in the previous month’s Budget. There was no time to pass the 776 pages of Finance Bill before parliament shut down.  The result was that about 80% of the Bill was removed and its uncontroversial residue passed through parliament in a few days.  At the time it was anticipated that following the election the Chancellor – not necessarily Mr Hammond – would reveal a Summer Budget, just as his predecessor did in 2015.  The second Budget of the year was expected to reinstate the lost measures and add a few more that were best left until after the polls closed.

It did not quite work out that way, as we all know.  Mr Hammond has remained in place at 11 Downing Street and in June told Andrew Marr “… there’s not going to be a sort of summer Budget or anything like that, there will be a regular Budget in November as we had always planned…”  Shortly after that appearance, the background notes to the Queen’s Speech revealed that there would indeed be a Summer Finance Bill, even if there was no Budget.

A tight timetable

The new Bill will incorporate “a range of tax measures including those to tackle avoidance”, but precisely what those measures will be or when the Bill will emerge is unclear.  The Treasury has a record of stretching seasonal limits when it comes to publications and will not be helped by the parliamentary timetable, which arrives at the summer recess on 20 July.  Parliament resumes on 5 September, but only for nine days before the conference recess, which runs until 8 October.

One planned-and-abandoned/deferred measure which could be relevant to you is the reduction in the money purchase annual allowance.  This generally operates when pension contributions are being made at the same time as benefits are (or have been) being drawn.  If you think this might affect you, it is vital you check the current situation with us before taking any action.  Click here to get in touch.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Getting our hopes up for an interest rate rise?
July 2017

Last month saw the first suggestions that interest rates could increase soon.

 

 

 

 

 

 

 

 

 

In June, the US central bank, the Federal Reserve, increased short term interest rates for the second time this year and the fourth time since December 2015.  The 0.25% increase to 1.00% − 1.25% had been well signalled by Fed officials, so there was no surprise.  As seems to be the case these days, the focus was more on whether the next rate rise was still three months away or might be deferred.

The day after the US interest rate decision it was the turn for the UK central bank, the Bank of England, to make its annoucement.  This was universally expected to be another “no change”, leaving base rate at the 0.25% fixed amidst post-referendum concerns last August.  The rate did remain unmoved, but there was nevertheless a major surprise: three out of the eight people charged with setting the rate voted for an increase.  According to Reuters, this was the nearest the Bank has come to raising interest rates since 2007.

Not so fast

Does that mean the Bank’s next meeting might see the first rise in interest rates in a decade?  The answer is probably no.  One of the trio of rate risers will have left the Monetary Policy Committee by the time of the next meeting.  Her replacement is thought to be less anxious to raise rates.  A new deputy governor is also due to be appointed, bringing the Committee up to its normal quota of nine.  The balance of the Committee is thus set to change.

Despite some apparent differences between the Bank’s governor, Mark Carney, and its chief economist, Andy Haldane, most experts still do not see the first base rate increase happening until 2018.  That is good news if you have a variable rate mortgage, but bad news if you have a deposit account or cash ISA.

The value of your investment can go down as well as up and you may not get back the full amount you invested.  Past performance is not a reliable indicator of future performance.

 

Mr Carney prepares to write a letter as inflation rises
July 2017

The latest inflation numbers show prices rising at their fastest rate for nearly four years.

The May inflation data came as a surprise to many pundits.  The expectation had been for inflation, as measured by the Consumer Prices Index (CPI), to remain at April’s level of 2.7%.  Instead, National Statistics revealed that annual inflation had reached 2.9% (3.7% on the Retail Prices Index yardstick).

 

 

 

 

 

 

 

 

 

 

Source: ONS

The last time inflation was at this level was June 2013, as the graph shows.  Since then it has taken a rollercoaster ride to around zero for much of 2015, only to surge upwards in the past year: in May 2016 CPI inflation was just 0.3%.

At 2.9%, inflation is already above where the Bank of England had been expecting it to peak later this year.  If the rate adds another 0.2% next month, then Mark Carney, the Bank’s Governor, will have to write a letter to the Chancellor explaining why the inflation target has been missed by more than 1%.  It’s already clear what he would say from statements issued recently by the Bank: blame the fall in sterling since the Brexit vote.

The Bank sees little respite in the short term.  In the press release issued in June alongside its interest rate decision, the Bank said inflation “is likely to remain above the target for an extended period as sterling’s depreciation continues to feed through into the prices of consumer goods and services”.

With many deposit accounts paying interest rates of under 1% (before tax), the news on inflation is a wake-up call if you’re holding more cash than you need to.  A year ago money on deposit was just about keeping pace with price increases, whereas now it’s losing buying power at the rate of about 2% a year.  To discuss your options in the renewed battle against inflation, please talk to us.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

FTSE at 20,000
July 2017

No, it’s not a mistake, but it is not the FTSE 100 either.

The most frequently quoted index of UK share prices is the FTSE 100 index, or the “Footsie” as it is frequently described.  The FTSE 100 index was launched at the end of 1983, with the aim of giving a yardstick to the value of the largest 100 companies listed on the London Stock Exchange.  It started life with an initial value of 1,000 and is now about 7,500, equivalent to an average annual return of about 6.2% excluding dividends.

Two years after the FTSE 100 came into being, the FTSE 250 appeared.  This captured the performance of the 250 UK listed companied that ranked below the Footsie’s larger constituents.  The FTSE 250 was launched with an initial value of 1,412.6, an odd-looking number which becomes more understandable when you know that was the reading on the FTSE at the FTSE 250’s birth.

In May, the FTSE 250 hit one of those round numbers which cause a brief flurry of comment: 20,000.  That is equivalent to an average annual return of 8.8%, again excluding dividends.

The difference in performance between the two can largely be explained by the difference in the industry concentrations in the two indices, as illustrated in the chart below.

The industry concentration is partly driven by the nature of the companies.  The FTSE 100 contains many large multinational companies, including mining groups (e.g. Rio Tinto), with little more than a share listing in the UK.  On the other hand, the FTSE 250 is more domestically oriented.

The gap between the two indices’ performance is a reminder that the numbers that make the press headlines do not always tell the full story and that relying on a fund tracking the Footsie may mean missing out on some of the better performing UK companies.  A review of your portfolio can be a useful exercise.  Give us a call to arrange a review.

The value of your investment can go down as well as up and you may not get back the full amount you invested.  Past performance is not a reliable indicator of future performance.  Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

 

The Bank of England has a slight change of heart
July 2017

The latest Quarterly Inflation Report (QIR) from the Bank of England has been published and shows that ‘the Old Lady’ has changed her mind a little.  But the market projections for short-term interest rates don’t make for helpful reading for those with cash deposits.

The QIR was published in May, a few days before the Office for National Statistics revealed that in April, CPI inflation was running at 2.7%, 0.7% above the Bank’s target.  The Bank shouldn’t have been surprised to see the higher inflation number.  It’s QIR projected a short-term increase, with inflation reaching 2.8% in the final quarter of this year. Thereafter the Bank’s central projection is in for a gentle decline in the pace of price increases that will still leave inflation above target in the early part of 2020.

Why isn’t the Bank raising interest rates?

In his opening remarks when presenting the QIR, Mark Carney, the Bank’s Governor, said “The projected inflation overshoot entirely reflects the effects on import prices of the fall in sterling since late November 2015 – a depreciation caused by market expectations of a material adjustment to the UK’s medium term prospects as it leaves the EU.”  This explains why the Bank is not raising interest rates, which would be its usual response to above-target inflation.

There is a highlighted page of the QIR devoted solely to explaining why global interest rates are so low and likely to continue to be.  For the UK, the Bank notes that the money markets are currently projecting that short-term real (inflation-adjusted) rates will still be around 0.25% in ten years’ time, compared with an average of 2.75% between 1993 and 2007.  Demographics and “heightened risk aversion” are to blame in the Bank’s view.

The current combination of sub-1% short term rates and 2%+ inflation is unwelcome news if you hold much cash on deposit: the longer your money is in the bank, the less it will buy.  That may be a price worth paying if you are convinced that investment markets worldwide are headed for a fall in the near term. If you are not, or are just feeling uncertain where your money should be placed, do talk to us about the many options available.

The value of your investment can go down as well as up and you may not get back the full amount you invested.  Past performance is not a reliable indicator of future performance.  Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.