Monthly Archives

June 2023

Graphic showing dominoes with Union Jack on them standing up, and dominoes spelling out the word 'economy' falling down, alongside a spherical object with 'interest rates' printed on the side - representing interest rates negatively affecting the UK economy

Why the Bank is wrong to raise interest rates

By | Investments

It is fair to say that the latest base interest rate increase came as something of a surprise to market participants. The Bank of England Monetary Policy Committee raised the Base Rate by 0.50% to 5% last week, a much more significant hike than expected. For some time, we have voiced our concern at the speed of central bank tightening in an attempt to combat inflation. Following the latest move, and language used by Bank Governor, Andrew Bailey, we are becoming increasingly worried that the central bank’s actions are likely to heap more pain on the UK economy. This only reinforces the importance of global investing and the need to carefully consider how investment portfolios are positioned.


Forecasting track record

The Bank of England has come under fire from politicians over recent weeks, who have accused the Bank of using outdated models as a tool by which to set monetary policy. A cross-party group of MPs have called for an overhaul of forecasting methods, and the Bank itself has launched an external review of processes used to forecast market conditions.

To be frank, the Bank’s track record has been poor over the last year, which calls into question the decision taken to raise Base Rates by 0.50% last week, with the suggestion of even higher rates to follow. In November 2022, Andrew Bailey predicted that the UK economy would face the longest recession since records began, with no growth being registered during 2023 and the first half of 2024. Unemployment was also predicted to rise to 6.5% at the time.  Fast forward six months, and Bailey made an abrupt about turn, and forecast that the UK would not enter recession during 2023. Indeed, GDP growth projections were increased for both 2024 and 2025, in the “biggest ever upgrade” to published data.

The Bank has also badly mis-judged the speed at which inflation is falling. In February, the forecast year-end inflation rate was 3.9%, and Bailey explained to the Treasury Select Committee that “there are powerful downward forces on inflation now, and I think we have turned the corner”; however, this prediction was short-lived, and the year-end inflation rate was revised to 5.2% in May, just three months later.

Given the bank’s recent track record, we are again concerned that the Bank’s forecasting is inaccurate and have raised rates too far in a bid to re-assert its’ credibility in terms of financial forecasting.


Trying to regain credibility

It is apparent that the Bank of England were far too slow in curtailing the extraordinary support put in place during the Covid-19 pandemic. It is worth reflecting that just 19 months ago, the Base Rate stood at 0.1% and the Bank of England were printing money at a rate of £20 billion a month through Quantitative Easing. At this point, the first signal that inflation was rising was evident in data published at the time, and in the Bank’s own forecast in November 2021, inflation was expected to peak at 5% in April 2022 before falling back.

When the Russian invasion of Ukraine caused energy and food prices to surge, the Bank should have raised rates more aggressively and got “ahead of the curve” in economic speak. Shutting the stable door after the horse has bolted is unlikely to achieve the desired result, and we feel that the further rate hike announced last week are simply not warranted and could potentially lead to a situation where the Bank is forced into yet another embarrassing turnaround. This view is reinforced by the poor forecasting track record seen over recent months.

We feel the Bank should focus on the time lag between policy actions and the impact these have on the economy. This is known as Response Lag, and economists believe that it can take as much as 18 months for a change in interest rates to achieve the desired outcome. Whilst the Bank assert that the increase last week was necessary to bring inflation back to the target rate of 2%, the policy decision could put the UK economy into stall speed. This could result in inflation falling below the target and force the Bank to quickly unwind the rate hikes over recent months to avoid the UK falling deeper into recession. The UK housing market, under some stress at the current time, is likely to be a key indicator, given the impact falling house prices can have on consumer confidence.


Importance of global investing

Initial market reaction to the hike in UK Base Rates has been muted. There has been little impact on Bond markets, as UK Government Bonds have already priced in further hikes to come. After an initial spike immediately after the vote announcement, Sterling has also given back some ground against the Dollar. This is, perhaps, an indication that currency traders feel the Bank is losing its’ credibility in fighting inflation.

The likely impact of the unwarranted hikes in the Base Rate serves as a timely reminder that investors should take a global approach to investing. Whilst inflation remains sticky in the UK, inflation is falling at a faster pace in Europe and the US. Japan’s inflation rate is just over 3%, which is the highest level seen in Japan this century and a welcome change from the deflationary conditions of the last 20 years.

Diversification across a range of assets remains a key component of any successful portfolio strategy, and in periods when cash returns look appealing, it is worth reflecting on the strong performance seen from Equities markets over the first half of the year, and the prospect that Equities can provide both capital appreciation and income through dividends. There are attractive opportunities in global Bond markets, too.

Speak to one of our experienced financial planners here if you would like to discuss how your portfolio is positioned.

Graphic of pile of cryptocurrency with a graph line across it

Cryptocurrencies – a timely reminder of the risks

By | Investments

The Financial Conduct Authority (FCA) has recently repeated the warning that investors in cryptocurrency should “be prepared to lose all their money” whilst introducing new rules covering the marketing of crypto assets. We feel this is an appropriate time to highlight the risks associated with cryptocurrencies and why even tighter regulation is likely and warranted.


Tighter restrictions

As part of a package of measures announced by the FCA, crypto firms will, in future, need to ensure that investors have appropriate knowledge and experience to invest in cryptocurrencies before making a purchase. In addition, promotions will need to carry clear risk warnings and any advertising will have to be clear, fair and not misleading. Marketing techniques, such as the offering of bonuses to refer friends will be banned. Finally, from 8th October 2023, individuals who purchase a cryptocurrency for the first time will be provided with a “cooling off” period, to allow them to change their mind about the purchase for a short period after the order has been placed.

Westminster is also keen to see further regulation in the industry. The UK Parliament Treasury Committee called in March 2023 for so-called “unbacked” crypto tokens, i.e. those whose value is not represented by a physical holding in currency such as US dollars, to be regulated in the same way as gambling.


Wider reach of Crypto

Investing in cryptocurrencies has become increasingly popular in the UK, which we feel underlines the importance of the FCA’s announcement. In a survey by Kantar for H M Revenue and Customs in 2022, 10% of UK adults said they hold or have held a crypto asset (this equates to just under 5 million UK citizens). The majority of those questioned said that they had bought crypto currency and have never sold any of their holding. Of those surveyed, 53% of current owners had holdings valued up to £1,000, with 7% holding more than £5,000 in value. Of those surveyed, 76% of holders were under the age of 45, showing the increased uptake of crypto assets by younger investors.


Regulators tighten their grip

Global financial regulators have shown concern over the increasing popularity and reach of cryptocurrencies. In 2021, a comprehensive International Monetary Fund report concluded that cryptocurrencies offer some opportunities for decentralised finance but underlined a number of risks to global financial stability, which include the potential that episodes of poor confidence in crypto assets could spread to mainstream assets, and the risk that cyber security breaches and lack of oversight could disrupt the currently unregulated market. Recent news from the US has added to the notion that the regulators are, perhaps, finally ready to increase regulation.

The US Securities and Exchange Commission (SEC) have recently filed lawsuits targeting two of the world’s largest crypto exchanges – Binance and Coinbase. These relate to alleged rule breaches covering the trading of crypto assets that were not registered as securities by the exchanges. This includes popular tokens such as Cardano and Polygon.

The Commission’s actions have come amidst stark warnings from regulators. SEC Chair Gary Gensler commented that “the entire crypto industry business model is built on non-compliance” and the recent moves are perhaps the clearest signal yet that US regulators’ stance is shifting.

Whilst consumer protection is clearly a high priority, another key reason regulators are keen to introduce tighter restrictions is the lack of Anti-Money Laundering and other due diligence checks carried out on investors. As a result, it is widely believed that many cryptocurrency transactions are illicit. The UK National Crime Agency estimate that over £1bn of illicit cash is transferred overseas each year using crypto and coin exchanges are often used by money launderers.


Increasing risk of fraud

Whenever clients talk about cryptocurrencies, our response has always been the same – investments in cryptocurrencies are unregulated and carry significant risk of total loss of the investment.

It is the unregulated element that concerns us the most. Unlike regulated investments, where investors do have some protection offered under the Financial Services Compensation Scheme if something goes wrong, cryptocurrencies are unregulated, potentially leaving investors without recourse if an investment fails, or funds disappear due to fraud or malpractice. There have been a number of high-profile reports where coin wallets have been stolen by cyber fraudsters and according to research carried out by Chainalysis, hackers stole a record $3.8bn worth of cryptocurrency in 2022. Numbers as large as these only serve to highlight the risks of investing in cryptocurrencies.


Will regulatory oversight be effective?

Regulators around the world are slowly starting to make moves to bring crypto assets under closer scrutiny. We feel the FCA announcement is welcome and as part of the Cryptoasset Taskforce, the FCA aim to work with the Bank of England and Treasury to further assess the potential impact of crypto assets in the UK and with international partners, look to increase co-ordination on regulating cryptocurrencies on a global scale.

We expect to see much greater efforts to regulate crypto assets over coming months and years, as crypto becomes increasingly mainstream, in particular with younger investors. Even if tighter regulation is bought in, we feel the FCA’s reminder of the risks is timely and worth repeating.

Speak to one of our experienced financial planners here if you would like to discuss the above further.

estate planning written on a mini whiteboard with leaves next to it - Inheritance Tax receipts rise again

Preserving Family Wealth

By | Tax Planning

As we get older, our financial priorities often begin to shift, and many start to consider preserving the wealth they have accumulated during their lifetime for the next generations.  It is only natural that we would want to leave family wealth to those who mean the most, and in the most tax efficient way possible. It is easy to forget that accumulations of wealth through salary or earnings have already been taxed on receipt, and with assets above the Inheritance Tax nil rate band subject to a tax charge of 40%, this can lead to a significant reduction in the value of the net estate.


Inheritance Tax receipts rise again

The main band for Inheritance Tax remains at £325,000, which is the level it has been set at since 2009, and this band will remain at this level until 2028 at the earliest. As asset values grow, more estates are becoming liable to Inheritance Tax, and it was of little surprise to see the HMRC data for April, which showed that Inheritance Tax receipts reached £597m for the month of April alone, an increase of £90m on the same month last year. Inheritance Tax receipts now account for a growing proportion of the overall Tax take, with the Office of Budget Responsibility predicting the Treasury will collect £45bn in Inheritance Tax over the next 6 years.

There are, however, steps you can take to mitigate the liability to Inheritance Tax on your potential estate and with careful planning, greater sums of family wealth can be passed on to the next generation. As holistic financial planners, we take the broadest view of a client’s financial circumstances, and conversations with clients about potential Inheritance Tax concerns and estate planning are a feature of the regular ongoing reviews we conduct. By starting conversations early, appropriate mitigation can be put in place in time so that hard-earned wealth can be preserved for family members.


The importance of seeking advice

We often see clients for the first time, who haven’t given any consideration to Inheritance Tax planning. With rising house prices, increasing wealth through investment and surplus income receipts and inheritance they may themselves receive in the future, clients are often surprised at the amount of Inheritance Tax that could be payable on their death. Naturally, clients will often have more significant financial priorities to attend to in mid-life, such as saving to provide a retirement income, paying off existing debts, or covering the costs of University for their children. As clients get older, however, conversations about wealth preservation generally become more focused, and we work with clients to set in place a financial plan to tackle the potential tax liability.

It is very important to seek professional advice and guidance on an ongoing basis to make the most of any Inheritance Tax mitigation and avoid any potential issues that mitigation could cause. For example, making gifts of assets to children and grandchildren is a perfectly rational strategy to consider; we, however, have seen cases where clients have decided to make large gifts to family at an early stage in retirement, without considering the longer-term implications. They then find themselves in need of capital that now isn’t available to them, as the capital has been gifted and spent. Likewise, we have come across individuals who have put in place complicated -and often costly – arrangements that may not be effective for Inheritance Tax mitigation.

Finally, it is important not to leave Inheritance Tax planning too late in life, as this can limit the range of options available. This is where regular financial planning reviews can assess the need to consider Inheritance Tax planning as circumstances and objectives change over time.


Keeping actions taken under review

Another complication of this type of planning is the potential for changes in legislation to impact on Inheritance Tax planning that has already taken place. Of course, any advice can only work within the existing set of tax legislation, and we, like everyone else, are peering into the darkness in trying to determine what the rules will look like in years to come. Given the increasing relevance Inheritance Tax receipts now have as part of the overall Treasury revenue, it is fair to say that any reduction in the amount of Inheritance Tax received would need to be found through alternative taxation. For this reason, we look to plan ahead with clients, and as part of a wider financial planning strategy, can include solutions that aim to provide Inheritance Tax mitigation, but can also be altered if tax rules change in the future.


The value of planning ahead

The latest figures from HMRC are a stark reminder of the amount of tax received from families, where planning and taking appropriate steps could potentially have reduced the tax burden faced by the next generation. We provide advice to many families, where two, three or four generations of the same family are clients or have been clients during their lifetime. As those clients have benefitted from ongoing holistic advice, we have undoubtedly saved clients many millions of pounds in Inheritance Tax that would otherwise have been payable. That is the value obtained by seeking advice and planning ahead.


Our experienced holistic financial planners can help you consider estate planning as part of a wider financial review.  Contact us here to start a conversation.

Graphic of houses falling through the sky with percentage marks on them, representing falling house prices - prospects for property investment

The prospects for property investment

By | Investments

It is fair to say that most of the UK economy is faring better than expected over the year to date, confounding the doom-laden predictions of the Bank of England and International Monetary Fund, who have both upgraded their forecasts for the performance of the UK economy over the remainder of 2023.

Whilst our economy may be performing better than expected, house price growth has come under pressure, and it is becoming increasingly evident that central bank policy is having a detrimental impact on the UK housing market. Whilst house prices have historically proved resilient in the teeth of the economic impact of Brexit and the Covid-19 pandemic, we have highlighted the likely issues that the housing market will face in the short and medium term in previous Wealth Matters, and evidence is now growing that prices may continue to fall during the remainder of the year.


Weak data all round

Nationwide’s latest house price index reading, released last week, showed that house prices fell at their fastest pace in almost 14 years in May. The survey showed that house prices contracted by -3.4% in May compared to the same period last year.

Other data announced last week underlined the headwinds facing the housing market. The number of mortgages approved for April fell to the lowest level since February, and gross mortgage lending for April was 25% lower than the six-month average. Finally, households reduced overall mortgage debt by £1.4bn in April, the highest net repayment since records began in 1993, if you exclude the pandemic period. Taking in the round, it is clear that higher interest rates are impacting on family finances, and potential borrowers are finding mortgage affordability more difficult. Of course, it isn’t just mortgage costs that have become more expensive, higher energy, fuel and food costs have a cumulative impact on already stretched household budgets.


Why the housing market matters

You may well question why house prices matter when considering the economic outlook. Whilst rampant house price inflation has implications in terms of social mobility, falling house prices over a sustained period may have a detrimental impact on the wider economic performance. When house prices begin a sustained fall, individuals are aware of a drop in the value of their main asset, and therefore feel worse off. This can see a decline in spending and a higher level of saving and raise the prospect of negative equity for those who have bought recently. In turn, higher default rates can impact on the performance of the banking sector. In addition, there are a spectrum of industries that would be directly affected by a slow housing market, such as construction, legal services, and household goods.


Why are interest rates increasing?

The Bank of England Monetary Policy Committee have increased interest rates at twelve successive meetings, raising the base rate from 0.1% to 4.5%, as the Committee use monetary policy tools to try to tame higher inflation, which spiked last year on the back of higher costs caused by the Russian invasion of Ukraine, and a hangover from the Covid pandemic. Data indicates that UK inflation is falling, however so-called Core inflation – which excludes volatile energy and food prices – remains stubbornly high. It is therefore possible that we may see at least one further increase to the base rate over coming months, as the Bank of England’s latest forecast still sees inflation above target by the end of the year.

We have been concerned for some time that central banks could push the tightening cycle too hard, and force inflation below target over the medium term. A prolonged slump in house prices would undoubtedly impact on economic growth and could increase the chance of inflation undershooting. This highlights the delicate balance the Monetary Policy Committee have to try and achieve. Indeed, two members of the Committee, Silvana Tenreyro, and Swati Dhingra, have consistently warned against raising rates too aggressively at successive meetings, and we will watch minutes of forthcoming meetings to see if more of the Committee take a dovish view.


The impact on markets

We have seen the impact of higher interest rates on global markets over the last 18 months, with Bond markets coming under significant pressure. There is potential for prolonged weakness in the housing market to play a central role in dictating interest rate policy, and bring about a more rapid fall in base interest rates as we head through the next 12-18 months. This would be welcome news to fixed interest investors, but also to Equities markets as companies should find it easier to service existing debts and fund expansion when interest rates are lower. This is particularly relevant to companies that are growing rapidly, such as those in newer industries, for example Technology.


Property as an investment

From a financial planning perspective, residential property investments can be a useful diversifier, and property investors have generally enjoyed capital appreciation together with rental income over recent years. With the likelihood that property prices will stagnate at best, or possibly see modest falls over the next twelve months, this may be a good time for those investing in property to consider the rates of return they are achieving. In addition to the financial considerations, landlords should also be considering the cost and additional work involved in meeting new regulations, and also the potential that a future government could introduce measures that have a detrimental impact on returns.

As holistic financial planners, we can undertake a comprehensive review of your assets and consider your wider objectives and requirements. Speak to one of our experienced financial planners here if you invest in property and are considering diversifying your portfolio and income stream.