Archive: Jul 2017

  1. June CPI inflation figures – maybe interest rates will remain

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    The CPI for June showed prices flat over the month, whereas prices rose by 0.2% between May 2016 and June 2016. The consensus had been for a 2.9% annual rate, so the 0.3% drop to 2.6% surprised the markets. The CPI/RPI gap widened to 0.9%, with the RPI annual rate now standing at 3.5% (down 0.2% on May’s annual figure). Over the month alone, the RPI was up 0.2%.

    The Office for National Statistics (ONS) newly favoured CPIH index was down 0.1% to 2.6% for the year, its first decline since April 2016. The ONS put the fall down to a variety of factors:

    Downward

    Transport: The largest downward effect came from transport, in particular motor fuels. Fuel prices fell by 1.1% between May and June 2017, the fourth successive month of price decreases. Over the same period last year, fuel prices rose by 2.2%.

    Recreational and culture: This category also made a substantial downward contribution to annual inflation with overall prices dropping by 0.1% between May and June 2017, compared with a rise of 0.6% a year ago. The move downward partially reverses the upward pressure seen between April and May 2017 and comes from a variety of areas, principally data processing equipment, cultural services, and games, toys and hobbies.

    Upward

    Furniture and household goods: This category gave largest upward contribution with overall prices up by 0.5% compared with a 0.3% fall between May and June 2016. The upward effect came from prices for a variety of bedroom, kitchen and lounge furniture.

    Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) was down 0.2% at an annual 2.4%. All twelve index components remain in positive annual territory, with the lowest pair (recreation and culture and communication) now +1.5%. Food and non-alcoholic beverage inflation is now running at +2.3%, against -1.1% at the end of 2016.  Goods inflation fell 0.3% to 2.6%, while services inflation decreased by 0.1% to 2.9%.

    Producer price inflation (PPI) eased again. The input PPI figure fell back from 12.2% in the year to May 2017 to 9.9% in the year to June 2017. Since the start of 2017 the input PPI annual rate has dropped by 10.0%, a reminder of its volatility. Output price (aka factory gate price) inflation fell 0.3% to 3.3%.

    The surprise drop annual CPI figure eases the pressure for an interest rate rise when the Bank of England’s Money Policy Committee meets in just over a fortnight’s time, Its announcement is due on 3 August, alongside publication of the latest Quarterly Inflation Report.

  2. The Cost of Education

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    A quarter of UK parents regret not saving earlier for their child’s education and one is five say they wish they had saved more, according to new data. Funding the cost of education is a big and important issue.

    It seems that more than 70% of parents contribute towards the cost of their child’s education, at a “rich mix” of fee-paying schools, colleges or university.  Despite this, less than half of those questioned in research by HSBC said they had started thinking about these costs before their child had started primary school.  This compares to 60% of parents in the rest of the world. Blimey, we’re way behind!

    20% of those British parents interviewed said they would be willing to cut back on holidays to fund their child’s education (not what the owners of Peppa Pig world and CeeBeebies land want to hear) and 14% said they would work longer hours to keep up with education costs.  Nearly three-quarters of parents said they relied on day-to-day income to fund their child’s education.

    HSBC, who were behind the research say almost half of UK parents admitted to not knowing how much they were spending on their child’s education.  This was the highest proportion of any country in the survey; the global average was 22%.  Given the “every day” grind/joy of bringing kids up, these stats are pretty worrying.

    Many parents, it seems, just don’t know how much they are spending on education – even when the core fees are met by the local authorities.  Ignorance is bliss – but the opposite has the strong capacity to create so called “justifiable anxiety” – you (may) have heard it first here.

    HSBC say that for parents in the UK with a child in paid-for education can spend about £128,600 over the course of primary, secondary and tertiary education.

    It seems from the HSBC report that parents in Asia lead the way in terms of planning ahead.  More than half of parents in China said they funded their child’s education through general savings, investments or insurance and more than two-fifths through a specific education savings plan.  In contrast, fewer than one in 10 parents in the UK (5%), Australia (8%) and Mexico (8%) choose to fund their child’s education through a specific education plan.

    HSBC said that in nine of the fifteen countries surveyed, paying for their child’s education is most likely to be parents’ biggest financial commitment, above others such as mortgage or rent payments and household bills.

    Whatever may happen politically in relation to government support of higher education costs there is a real and, I believe important need for informed advice to seriously and concertedly attack this wide-open door of opportunity. Done well this will benefit parents, grandparents, children and the advisers putting in the time and expertise to deliver excellent outcomes

    University Money Guide

    It may be too late to consider saving or investing for your child who is off to University in September, would you be interested in a guide that I am compiling – Managing your student finances?  Let me know and I will ensure you are sent a copy.
    If you hope your children are off to university in the future, you have a choice, you are 100% certain to retire and maybe a 60% chance your child will go to university – once you’re retirement planning is sorted, then consider the university fees.

     

     

  3. More Over 50’s Setting up Businesses

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    ONS (Office of National Statistics) data shows that as at the end of 2015 there were 4.6m self-employed people in the UK – up from 3.8m in 2008 – and the over 50’s account for 43% of those that start their own business.  In addition, the number of self-employed people aged 65 and over has more than doubled in the past five years.

    This is quite compelling – the rise of the “nevertiree”.  It seems that many of these new older self-employed/business start-up initiators are using their pension funds to fund their ventures. 

    This “rise of the older entrepreneur” is another example of how demographics and social change are affecting and (predominantly) extending the need to access financial advice.

  4. Let Property Campaign: Guide to making a Disclosure

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    HMRC has recently updated its guidance on the Let Property Campaign.

    The Let Property Campaign is for landlords who owe tax through letting out residential property, in the UK or abroad, to get up to date with their tax affairs in a simple and straightforward way.

    It includes:

    • those that have multiple properties
    • landlords with single rentals
    • specialist landlords with student or workforce rentals
    • holiday lettings
    • renting out a room in your main home for more than the Rent a Room Scheme threshold
    • those who live abroad or intend to live abroad for more than 6 months and rent out a property in the UK as you may still be liable to UK taxes

    Those who are unsure whether they need to disclose unpaid taxes under this campaign can use the Let Property questionnaire to help them decide.

    Full details of the campaign and how to make a disclosure can be found here.

    This is an ideal opportunity for property investors to ensure their tax affairs are up to date and an early disclosure will result in lower penalties and interest being payable. Property investors should also be made aware that if HMRC accepts a disclosure they do not necessarily have to make an upfront payment as HMRC accepts various payment methods and will allow individuals to spread payments.

  5. Save your first working hour and make it automatic

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    Helping clients to make the right choices for regular savings and lump sum investment is one of the key roles of financial planners.  Making the wrong choices can cause serious financial detriment and this consequence, together with relative complexity over the choices and difficulty in “self-serving” the answers, are the three key components underpinning most needs for advice.

    Self-evidently an understanding of the investor’s attitude to risk, fear of loss and time-based financial goals (along with an understanding of all their financial assets) will substantially underpin the choice of investment fund or funds appropriate for the client. As a result of this understanding an appropriate element of risk reduction will be baked into portfolio construction through the development of an asset allocation strategy.

    A desire for tax efficiency will also usually be present, or at least it should be.  After all, reducing “tax outflow” will enable financial goals to be more easily reached. Tax efficiency will also allow a little more investment risk to be taken with the resulting possibility of more return.  Nothing being guaranteed of course – well, not without cost!

    In the quest for tax efficiency for the portfolio selected, pensions and ISAs are the recognised “no-brainers”. Once these are “filled up” though (limits reached) then (leaving aside VCT/EIS for the moment) attention will turn to investment bonds and collectives.  The tax implications dependent on the underlying portfolio can be material.  The changes to dividend taxation, the taxation of interest and capital gains tax all have a role to play – along with charges and how and when they are deducted of course.

    As well as advising on investment portfolio and product wrapper choice, though, it seems that we have a job to do to encourage some people to save a bit more in the first place.  According to new figures from the Office for National Statistics (ONS), UK households have responded to a tight squeeze on incomes from rising inflation, taxes and falling wages by saving less than at any time in at least 50 years.  It seems that only 1.7% of income was left unspent in the first quarter of 2017.  This is the lowest savings ratio since comparable records began in 1963.

    The UK consumer trend since Brexit seems to have been to borrow and spend – a powerful but worrying combination.  Powerful, as it has caused the economy to continue to grow.  But, worrying because, as the savings ratio falls, economists and policymakers are likely to be worried about how much consumer spending can contribute to growth in the months ahead.  Apparently, over the past 54 years the savings ratio has averaged 9.2% of disposable income.  The trend currently, though, is materially declining.  In the first quarter of 2016 the savings ratio was 6.1%, already below the long-term average, and it fell to 3.3% by the fourth quarter of the year.

    The ONS said that the fall was mostly caused by a rise in taxes on incomes and wealth, which led to a fall in household disposable incomes that was not matched by a corresponding drop in spending.

    Part of the rise in taxes was temporary, the ONS said, resulting from high tax payments in early 2017 on dividends paid a year earlier, but it added that not all of the drop was explained by temporary factors.

    They say “the underlying trend is for a continued fall in the savings ratio”.

    It seems that the Bank of England had expected the savings ratio to rise in the first quarter of the year.  In its May inflation report, it thought the drop at the end of 2016 was due to volatile factors and “the headline saving ratio is expected to have risen slightly in the first quarter of 2017”.

    Now it may well be that this “low savings” malaise is less likely to be present in the clients of financial planners with whom the planner has a strong and influential relationship. In which case maybe the planner has a strong role to play in helping the client embed a regular savings habit in their children/grandchildren. To do so can, obviously, have really beneficial effects for individuals’ long-term financial security.  Establishing the right habits early in life is undeniably a good thing – but eternally difficult in this day and age.

    Giving a young individual the gift of financial discipline founded on an acceptance of deferred gratification is one of the greatest things a financial planner can do to enhance intergenerational financial wellbeing for their clients and, ultimately, for themselves by protecting and expanding their client relationships.

    We suggest you pay yourself first, it’s the best financial discipline you can have and to make it easier on yourself, make the saving automatic.  Saving the first hour of your working day.  So if you’re working an 8-hour day save 1 hour or 12.5% of your gross income.

    The best place for most people to save this will be an automatic deduction from your pay into your employers workplace pension, so it’s deducted before you even see it!

    Allow the money to compound and grow overtime, so you will have a happy retirement.

    Happy saving folks!

  6. Half Way Point of 2017 Check In

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    The first half of 2017 is over, where did that time go!  The last 6-months marked the end of another politically turbulent period in the UK. The view across the six months belies the upheaval that took place: the most widely quoted yardstick of the UK stock market, the FTSE 100, nudged up a little under 2.5%. Elsewhere, there were some sharper movement, as the table below shows

     

    30/12/2016

    30/06/2017

    Change in H1 2017

    FTSE 100

     7,142.84

     7,312.72

    2.38%

    FTSE 250

     18,077.27

     19,340.15

    6.99%

    FTSE 350 Higher Yield

     3,753.53

     3,768.50

    0.40%

    FTSE 350 Lower Yield

     3,709.13

     3,953.53

    6.59%

    FTSE All-Share

     3,873.22

     4,002.18

    3.33%

    S&P 500

     2,238.83  2,423.41

    8.24%

    Euro Stoxx 50 (€)

     3,290.52

     3,441.88

    4.60%

    Nikkei 225

     19,114.37  18,909.26

    -1.07%

    Shanghai Composite

     3,103.64  3,222.60

    3.83%

    MSCI Emerg Markets (£)

     1,305.65  1,455.96

    11.51%

    UK Bank base rate

    0.25%

    0.25%

     

    US Fed funds rate

    0.50%-0.75%

    1.00%-1.25%

     

    ECB base rate

    0.00%

    0.00%

     

    2 yr UK Gilt yield

    0.11%

    0.37%

     
    10 yr UK Gilt yield

    1.24%

    1.33%

     
    2 yr US T-bond yield

    1.16%

    1.38%

     
    10 yr US T-bond yield

    2.46%

    2.28%

     

    2 yr German Bund Yield

    -0.79%

    -0.57%

     

    10 yr German Bund Yield

    0.11%

    0.47%

     

    £/$

     1.2357  1.2990

    5.12%

    £/€

     1.1715  1.1389

    -2.78%

    £/¥

     144.1202  145.9505

    1.27%

    Brent Crude ($)

     56.75

     48.99

    -13.67%

    Gold ($)

     1,156.40

     1,242.25

    7.42%

    Iron Ore ($)

     79.65

     63.00

    -20.90%

    Copper ($)

     5,500.00

     5,954.50

    8.26%

    A few points to note from this table are:

    • The US market performed better than the UK, helped by the continued strength in a small number of big cap technology stocks. However, for UK investors on this occasion the dollar worked against them as it fell 4.9% against sterling over the period. The demise of the dollar can be blamed partly on fading expectations that a Trump bump would lead to a rapid rise in US interest rates
    • The FTSE 250, regarded as a better yardstick for UK plc (although still with a significant weighting of overseas revenues), was more resilient. The FTSE 250 breached 20,000 for the first time in May. However, it too succumbed after the election. With the FTSE 250 achieving almost 7% growth in the six months, the result has been that the FTSE All-Share (roughly 80/20 FTSE 100/FTSE 250) outperformed the FTSE 100 by almost 1%.
    • The FTSE 100 has been on a rollercoaster, peaking at 7,377 in mid-January, dropping to 7,099 by the end of the month, then rallying back up to 7,430 by mid-March before diving to 7,114 in mid-April (on the election announcement). Thereafter it rose again to 7,548 in early June on opinion poll optimism, with an inter-day high almost breaching 7,600 before descending in the wake of the voting reality.
    • Against the backdrop of the Eurozone’s continued monetary stimulus, the euro strengthened and continental stock markets posted a positive return. Some of that was down to political clouds clearing in the Netherlands and France as populists failed to gain power.
    • Bond yields headed upwards over the first half, except for 10 year US Treasuries. The Federal Reserve put through two rate rises, with a third likely after summer. In the UK, the June vote of the Monetary Policy Committee suggested that a UK interest rate rise may be nearer than had been expected. Statements from Mark Carney and Andy Haldane, the Bank of England’s chief economist, have spread uncertainty. For now, the notion that there will be no move in the UK until 2019 has been largely abandoned.
    • Commodities had a mixed first half, with gold responding to the dollar’s weakness. The most notable change was in the price of Brent Crude, which sunk back below $50 despite OPEC’s decision to continue production limits.

    A look at these six-month figures is a reminder of just how much day-to-day noise can hide what is – or is not – happening to investment returns.