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China: ever larger, ever changing

The Chinese stock market broke the $10 trillion barrier in October.

Source: Investing.com

The total value of China’s stock markets in Shanghai and Shenzhen surpassed $10 trillion in October. For comparison, the UK market was worth about $4 trillion at the end of September 2020. However, this was not the first time that Chinese markets had reached the $10 trillion level. In mid-2015, the two markets peaked at $10.05 trillion before dropping precipitously to under $5 trillion in a matter of months as the authorities took action against traders – often individuals – investing with borrowed money.

Much has happened since that whiplash period. The Chinese markets have become less of a gambling for retail players and more like other global markets, with institutional investors taking a leading role. At the same time, a variety of initiatives by the Chinese Government and changes by international index providers, such as FTSE Russell and MSCI, have encouraged investment from outside the Middle Kingdom. Foreign (i.e. non-Chinese) investors now own about 5% of Chinese shares, up from virtually nothing in 2015. Consequently, the weight of foreign and institutional investors has reduced volatility.

As the graph above shows, that does not mean 2020 has been a smooth ride for the Chinese markets. With the Covid-19 pandemic originating in China, it was inevitable that Chinese share prices would suffer. However, their fall in the first three months of 2020 was less than most other large stock markets. That has meant that, perhaps surprisingly, for the year to date, the Chinese market has performed much the same as the US market.

The latest economic figures out of China show economic growth of 4.9% in the third quarter, after 3.2% in the previous three months, suggesting that China could be the only major economy to grow in 2020.

The $10 trillion value of China’s markets and the resilience of its economy mean the country cannot be ignored by investors. For now, it is still classed as an ‘emerging market’, although its size almost makes it the emerging market. To find more information on the choice of China-focused funds available for UK investors, get in touch with us.

The value of your investment and income from it. 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.

Some light in the dividend tunnel

A recent report on UK dividend payments suggests the worst of the cuts may be over.

Source: Link Asset Services

First, the bad news:

  • In the third quarter of 2020, total (regular and special) dividend payments from UK companies were 49.1% lower than in the corresponding quarter in 2019.
  • Two thirds of UK companies either cut or cancelled their dividends in the quarter.
  • One-off special dividends fell by no less than 90% year-on-year in Q3.
  • Across 2020 as a whole, the fall in total dividends will be around 45%, according to an estimate from Link Asset Services, a leading company registrar.

If you hold UK equity funds – particularly UK equity income funds – or own shares directly, you will be lucky not to have felt the impact of such unprecedented dividend cuts. As the graph shows, the fall in payouts has been much greater than in the wake of the 2008 global financial crisis.

Now, a little good news:

  • The fall in the third quarter was less than the second quarter, when the overall drop was 57.2%.
  • Similarly, the proportion of companies cutting or cancelling dividends was also higher in Q2, at three quarters.
  • Special dividends were unusually high in the third quarter of 2019 – nearly quadruple the amount of Q3 2018 – which distorts the latest comparison.

The pandemic has been going on long enough for any company that needed (or, in some cases, wanted) to cut or cull its dividends to have done so. Some companies, such as BP and Shell, have taken the opportunity to ‘rebase’ their dividends, a subtle way of saying that the new, lower level is the base for future payments. A growing number of companies that suspended dividends have resumed payments or promised to do so.

Then there are the big banks, which were told by the Bank of England to stop payouts, just before their final dividends for 2019 became payable. According to Link, almost 40% of the fall in Q3 regular dividends was accounted for by the banks’ dividend curfew. If – and it is a big if at this stage in the pandemic – the Bank of England allows the banks to restart paying dividends in 2021, there could be a significant jump in regular dividends across the year.

Link estimates that UK regular dividends could increase in 2021 by between 6% in its worst-case scenario, and 15% in the best case. If you are looking for income in a world of near-zero interest rates, both projections are attractive.

The value of your investment and the income from it 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.

Triple lock survives – for now

The government has acted to ensure state pension increases can happen next April.

The Basic State Pension (BSP) and the New State Pension (NSP) – for anyone who reached State Pension Age after 5 April 2016 – are both subject to the ‘Triple Lock’ measure. This means that every April these two pensions increase by the greater of:

  • 2.5%;
  • Consumer price index (CPI) inflation to September of the previous year; and
  • Average earnings growth based on the annual change in earnings in the period May–July of the previous year.

The Triple Lock is a feature that the main political parties pledged to maintain in their 2019 election manifestos, but despite political promises, the Triple Lock has no legal standing. The law governing increases to the BSP and NSP is based on earnings growth. Earnings growth applies to the April 2020 increases (of 3.9%), but in years when it does not take the top slot, the government overrides the statutory rules.

In September, the Office for National Statistics (ONS) published the Triple Lock earnings growth data, showing that year on year, earnings had fallen by 1%. The drop presented a problem for the Department for Work and Pensions (DWP), as it viewed the legislation as saying that if earnings growth was below 0%, pension payments must be frozen, with no scope for discretion. In response, the DWP rapidly put a Bill into Parliament to amend the law and allow the Triple Lock measure to continue.

Curiously, the Bill only applies for 2021 and does no more than allow the Secretary of State to choose the increase level – there is no reference to the Triple Lock. In practice, the BSP and NSP should rise by 2.5%, as CPI inflation to September will be lower.

The 2021/22 NSP will therefore be £179.60 a week (£9,339 a year), a timely reminder that for all the legislative gaming of the numbers, state provision is far from adequate for a comfortable retirement.

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.  

National Savings wields the axe

National Savings rate to drop sharply from 24 November.

At times, National Savings & Investments (NS&I) looks like a relic. Its role in raising money for the government has seemed an increasing anachronism for three main reasons:

  • The amount NS&I raises each year is but a small part of the government’s total borrowing. For 2020/21, NS&I’s fundraising target is £35 billon ( +/- £5 billion), but on current estimates, the government will need to borrow more than ten times as much.
  • Rather than selling NS&I products, the government can raise billions by selling government bonds (gilts) with much less administration at significantly lower interest rates. At the time of writing, gilt yields were negative for terms of up to six years. 
  • On the rare occasions when NS&I rates are competitive, it can distort the savings market, prompting criticism from the building societies and banks with which it competes for retail deposits.

In mid-February, NS&I announced that it would be cutting interest rates across a range of plans from 1 May. Two months later, NS&I changed its mind and announced in a press release under the headline “NS&I supports savers in this unprecedented time”, that it was dropping the planned changes to variable rate products. All then went quiet, leaving NS&I with a range of league-topping interest rates. Between April and June, nearly £20 billion flowed into its coffers.

On 21 September, NS&I had a change of heart, deciding that reductions were necessary to “ensure NS&I’s interest rates are aligned appropriately against those of competitors”. The cuts, which generally take effect from 24 November, were dramatic, as the table shows.

Product Current rate New Rate
Direct Saver 1.00% gross/AER 0.15% gross/AER
Income Bonds 1.15% gross/1.16% AER 0.01% gross/AER
Investment A/C 0.80% gross/AER 0.01% gross/AER
Direct ISA 0.90% gross/AER 0.10% gross/AER
Junior ISA 3.25% gross/AER 1.50% gross/AER
Premium Bonds* 1.40%

24,500:1 monthly odds

1.00%

34,500:1 monthly odds

* From December prize draw.

Such microscopic rates will take NS&I to the bottom of the league tables. If your income will be hurt by the NS&I cuts, make sure you consider all of the options before moving your money. With the best available rate just 1.6% – for a five-year bond – at the time of writing, now could be the time to talk to us about your income options beyond deposit investments.

The value of your investment and income from it 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.

Another Autumn Budget deferred

After heavy hinting from the Treasury for some weeks, the expected Autumn Budget has been pushed into spring 2021.

Since the March Budget and through to August, the expectation was that the Chancellor, Rishi Sunak, would introduce his second Budget this autumn. Such timing would have restored the cycle of a Spring Statement followed by an Autumn Budget after it broke down last year in the lead up to the general election.

With intense speculation around tax rises to pay for the raft of Covid-19 support measures, the first serious clue to a possible Autumn Budget delay emerged on 8 September, when the Office of Tax Simplification (OTS) slipped out a statement about its review of capital gains tax (CGT), which had been commissioned by the Chancellor in July. The statement announced the response deadline on the technical part of the OTS consultation would be deferred by four weeks, to 9 November. This was a surprising move as the OTS CGT report was expected to feed into the Autumn Budget.

Soon after, the Chancellor himself issued a brief written statement saying he had asked the Office for Budget Responsibility (OBR) to prepare an economic and fiscal forecast “to be published in mid-to-late November”. The vagueness surrounding the timing was evident, as the OBR report is produced alongside the Budget and incorporates costings for Budget measures.

What had started to look inevitable was confirmed on 24 September when the Treasury cancelled the Autumn Budget. The Chancellor will still have a set piece event towards the end of the year; not only is there the OBR report to present, but Mr Sunak must also publish a Spending Review. The latter was also a victim of the general election and ought to have been produced a year ago to cover the three years from April 2020. Instead, the then Chancellor published a one-year Spending Round. Given the pandemic uncertainties, it is likely that Mr Sunak will take a similar short-term view, rather than introduce a multi-year plan.

The postponement of the Autumn Budget does not mean the spectre of tax increases has also evaporated. The level of government borrowing (£174 billion in the first five months of 2020/21) makes tax rises virtually inevitable. However, the Chancellor has afforded you more time to plan and take action in areas such as CGT and pension contributions.

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

Market update: a quieter quarter

 Market update: a quieter quarter

The third quarter of 2020 saw share markets calmer than in the previous two.

Index 2020 Q3 Change
FTSE 100 –4.9%
FTSE All-Share –3.8%
Dow Jones Industrial +8.0%
Standard & Poor’s 500 +8.5%
Nikkei 225 +4.0%
Euro Stoxx 50 (€) –1.1%
Shanghai Composite +7.8%
MSCI Emerging Markets (£) +3.9%

For many, 2020 has not been a year they will want to remember. For investors, the first two quarters were a whiplash experience. For about a month from mid-February, Covid-19 pushed share markets down with a brutal abruptness. By the time March came to an end, there was a consensus that, as often happens, the gloom had gone too far. As a result, the second quarter produced rises across the major markets. In the summer, it looked like the worst of the pandemic could be over and the forecasts of a V-shaped recovery would prove correct.

The third quarter, and in particular September, provided a different story. The threat of a second wave of Covid-19 emerged, while two other longstanding ‘known unknowns’ – the US presidential election and the end of the Brexit transition period – came closer into sight. Central banks’ talk of multi-year zero or sub-zero interest rates did not encourage investors, perhaps suspicious that 12 years after the global financial crisis, the rate setters had finally run out of monetary ammunition.

The UK stock market’s third quarter was weaker than in other major markets. In global terms, it is arguable that the UK looks cheap – the historic price-earnings ratio for the UK market is around 21 compared with 29 in the US. However, across the Atlantic, the main market index, the S&P 500, rose by 8% in the third quarter against a fall in the FTSE 100 of 5%. Once more, the US market has been driven by the five technology giants – Microsoft, Apple, Amazon, Facebook and Alphabet (aka Google) – which account for 1% of the number of companies in the S&P 500 Index, but almost 23% of the index by value.

The third quarter was generally more rewarding for investors in overseas markets. The fourth quarter’s impending US election and Brexit finale looks set to create a dramatic end to a dramatic year. What 2020 has proved yet again is that market timing is virtually impossible, so if you think now is the time to act – whether buying or selling – make sure to take advice before pulling the trigger.

The value of your investment and income from it 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.

Pensions, transfers, death benefits and inheritance tax

The Supreme Court has handed down a long-awaited decision on a complex case.

Mrs Staveley died in December 2006, but it was only in August 2020 that the Supreme Court settled the question of the extent of any inheritance tax (IHT) liability on her pension. In the intervening 13 years, the rules relating to pensions and IHT on death benefits have been changed several times, mostly reducing the impact of IHT.

Mrs Staveley’s case was examined at two tiers of tax tribunals and the Court of Appeal before reaching the Supreme Court. It says something of the complexity of the legislation and the various arguments involved that none of this quartet agreed on their decisions. One key question, that all four considered, was whether the transfer of a pension shortly before death could represent a gift for the purposes of IHT. Eventually, the Supreme Court ruled that for Mrs Staveley, it was not. This was widely reported in the national press as an important victory, confirming that pensions are IHT-free.

Unfortunately, much of the coverage represented a significant – and potentially dangerous – simplification. For a start, Mrs Staveley’s pension did end up being subject to IHT, albeit as a consequence of legislation which was amended in 2016, retrospective to 2011. Secondly, and more importantly, the Supreme Court’s decision, like any legal judgement, was based on the facts of the particular case.

In this instance, the pension transfer was effected primarily to make as certain as possible that Mrs Staveley’s ex-husband could not benefit from her pension fund on her death; in many close-to-death situations, the focus of the transfer is on ensuring who will receive the benefit of the pension value. Another difference from today’s norm was that Mrs Staveley’s transfer was from an old style of individual pension policy (a section 32 plan) rather than a final salary occupational scheme.

Pension arrangements can play an important part in estate planning and, under the law as it stands in 2020, will normally provide death benefits free of IHT (although income tax could apply on death at or after age 75). Clearly, advice is essential, especially if making pension transfers or contributions in a close-to-death scenario.

The value of your investment and the income from it 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.  

The value of tax reliefs depends on your individual circumstances. Tax laws can change.

The Financial Conduct Authority does not regulate tax advice

Who pays capital gains tax?

HMRC has published some interesting research into capital gains tax (CGT).

Here are three CGT questions for you to ponder:

  1. How many individuals made enough capital gains in 2018/19 to face a CGT bill?

The answer is just 256,000, according to the latest provisional figures from HMRC – 9,000 fewer than in the previous tax year. Viewed another way, that is less than 1% of all income taxpayers. However, over the 10 years since 2008/09 the number of CGT payers has nearly doubled.

Now you know that individual CGT payers numbered only about a quarter of a million, try the next question…

  1. How much tax did they have to pay in total?

The answer is £8,805m, which is over £3,400m more than was collected in inheritance tax (IHT) in 2018/19. IHT and CGT are both capital taxes, often levied on the same asset, albeit usually at different times. Yet CGT attracts much less criticism than IHT, which has been rated as the UK’s most-hated tax.

With the information on how many taxpayers and how much tax was collected, the third question might look easy…

  1. What proportion of that £8,805m was paid by the top 5,000 CGT payers?

The top 5,000 – about 2% of all CGT payers – contributed 54.4% (£4,789m) of all CGT paid. They all had gains of at least £2,000,000. Expand the band a little and 18,000 individuals, with gains of at least £500,000, accounted for just under three quarters of the CGT paid. The spread of gains and tax paid is shown in more detail in the pie chart below.

The answers to these three questions highlight two points which give pause for thought, one for the Chancellor and the other for you as an investor:

  • As with some other personal taxes, the amount raised from a small number of the wealthiest individuals is a significant proportion of the total. This means that the results of increasing the tax rate(s) will heavily depend upon how those individuals react. If some of them decide not to realise their gains, the overall takings from this tax could fall rather than rise.
  • The annual CGT exemption is £12,300 in 2020/21. Investment returns that are received as capital gains are usually taxed more lightly than those received as income. The relatively small number of taxpayers is a reminder of the current generosity of the exemption.

The value of tax reliefs depends on your individual circumstances. Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.

The value of your investment and the income from it 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.  

A new season, a new Budget

As autumn arrives, the next Budget is not far away.

2020 will see something that normally only occurs when an election is imminent: two Budgets in one calendar year. The last Budget, on 11 March, now belongs to a different (pre-pandemic) era. Back then, the Chancellor Rishi Sunak announced £12bn of “temporary, timely and targeted measures to provide security and stability for people and businesses” in response to Covid-19.

But matters have moved on considerably since then. The latest estimate from the Office for Budget Responsibility (OBR) is that the direct effect of pandemic-related government decisions, in terms of increased spending and tax reductions, will amount to £192.3bn in 2020/21. Meanwhile the other side of the government balance sheet has been hit by lower tax receipts due to the recession.

So far, the Chancellor has won plaudits for his do-whatever-it-takes approach to supporting the economy, but the next Budget could be less well received as he begins to address the financial consequences of his actions. The current state of the UK economy, which shrunk by 20.4% in the second quarter of the year, makes it highly unlikely that Mr Sunak will reveal any significant direct tax increases in his Autumn Budget. However, he may well start the long process of book-balancing by reducing some tax reliefs and exemptions. As Parliament resumed in September, the Chancellor was already trying to quell backbench unease while simultaneously talking about “short term challenges” and a plan “to correct our public finances”.

There are several obvious revenue-raising candidates, about which the government is already in the midst of consultation: inheritance tax (IHT), tax relief on pension contributions, capital gains tax (CGT) and yet another review of business rates. Lurking in the background is the possibility of some form of wealth tax, although this might just be cover for the alternative of raising more revenue from IHT and CGT.

The date for the Budget had not been announced at the time of writing, although the present expectation is that it will be in November. Ahead of the Chancellor returning to the despatch box, it would be advisable to talk to your financial adviser about whether any plans you have – such as making a lifetime gift or realising capital gains – could be brought forward.

The value of tax reliefs depends on your individual circumstances. Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.

US market storms ahead

The main US stock market index hit several new all-time highs in August.

So far, the US has had a difficult 2020:

  • Its performance in the battle against Covid-19 has been widely criticised. In the first part of August the country was still experiencing around 50,000 new cases each day.
  • In the second quarter of the year, the economy shrank at an annualised rate of 32.9% (i.e. 9.5% across the quarter), following a 5.0% shrinkage (1.3%) in the first quarter.
  • Unemployment in July was running at 10.2%.
  • A political logjam in Congress has prevented a second round of financial stimulus, the first round having expired at the end of July.

Despite these headwinds, the main US stock market index, the S&P 500, reached several new highs in August, having risen more than 50% from the low that it plumbed on 23 March 2020 as the pandemic took hold.

On the face of it, the new Wall Street high looks seriously out of sync with life on the ground in Main Street, USA. However, there is some logic in the market’s performance:

  • Wall Street is not Main Street. In particular, the performance of the S&P 500 has been driven by a quintet of huge multinational technology companies – Apple, Microsoft, Amazon, Facebook and Alphabet (Google’s holding company). Together, these five companies account for just under a quarter of the value of the index.
  • Interest rates have fallen. US interest rates have dropped sharply since the start of the year; the 10-year government bonds now offer an annual return of around 0.7%. As interest rates fall, in theory share prices should rise because a low discount rate is applied to value future profits. For income seekers, the S&P 500’s dividend yield of around 1.72% could seem relatively attractive.
  • The market looks forward, not back. Economic data is about the past, but investment is about the future. Investors are considering how US companies’ profits will develop from here. As lockdowns and other restrictions are eased, an inbuilt recovery is expected.

Similar arguments apply in other markets: the best investors, like the best drivers, look and think ahead.

The value of your investment and the income from it 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. 

The value of tax reliefs depends on your individual circumstances. Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.