Weekly Market Commentary 29 November 2019

FCA’S mini-bond ban proves too little too late for retail investors
Mini-bonds are essentially loans to fund small business. They were portrayed by FCA recognised London Capital & Finance (LCF) as offering returns of between 7-9%, that were both tax and risk-free in the form of a HMRC approved ISA. An alluring prospect to most retail investors but as the 11,600 who bought the mini-bonds quickly found out, complete hogwash in reality. To make matters worse, none of these clients are protected by the Financial Services Compensation scheme.

It’s not the first-time customers have been short changed, but the size of this latest scandal has finally made the FCA sit up and completely ban promotion of mini-bonds to retail investors. Regulation only applies to mini-bonds if an authorised firm has approved a promotion for them. But if a firm offers unregulated products, they can also be bought without advice and subsequently without any right to compensation. Widening the perimeter to ensure mini-bonds fall under complete regulation by the FCA would go a long way in fixing this loophole.

Companies: LVMH Targets expansion in Hard Luxury Market
By buying Tiffany and Co for $16.2bn this week, luxury group LVMH announced a serious intention to increase its market share within the hard luxury market (watches and jewellery). The world’s largest luxury group with a market cap of $200bn will look to put a squeeze on current incumbents like Cartier while closing the revenue gap (€4.2bn, 2018) to market leader Richmont (€9.16bn, 2018).

Elsewhere, private equity firm Silver Lake who specialise in technology investments signed one of the biggest deals in sports history. Silver Lake subject to regulatory confirmation bought a 10% ($500m) stake in City Football Group (CFG), parent company of Manchester City. The deal values CFG at $4.8bn. Abu Dhabi who bought the football club as an oil diversifier back in 2008 will continue to retain majority ownership. Other listed football clubs like Manchester United also benefited from the news with share price surging 10 per cent following the announcement.

Global: Economy continues to show tentative recovery
As long-term growth figures are being revised down, in the short-term, the global economy is continuing to show green shoots of recovery. Global manufacturing growth is stabilising while consumer confidence in key markets like USA, Germany and Korea were all positive. Singapore, often seen as a bellwether for global growth as the size of industrial trade dwarfs the local economy, revised third quarter growth figures upwards. However, the one main detractor to global growth is China.

Falling consumer spending alongside bruising trade tariffs have led to industrial profits taking a hit as production, which accounts for 40% of GDP, continues to deteriorate. Weakening data also puts China in a bind as it gives the US the upper hand in trade negotiations. That’s why expectations of phase one of the trade deal being completed remain high even if President Trump signed a bill backing the civil rights of Hong Kongers.

Latam: Chilean Riots Destabilish Peso
The political temperature in Chile is close to boiling point as violent protests over stark wealth inequality continue to escalate this month. President Sebastian Pinera attempts to appease the nation by sacking his entire cabinet has done little to quell the unrest. At least 23 people have died, more than 13,000 people injured and 25,000 arrested.

So great is the social unrest, that Chile’s central bank had to announce two separate currency interventions this month to arrest a falling Chilean Peso. The first earlier this month was a liquidity injection in both dollars and pesos to the tune of $4bn lasting until January 2020. The second injection announced this week was five times greater and is expected to run until the end of May next year.

The march of ETFs

Institutional investors have shown high preference for Exchange Traded Funds (ETFs) and Fund of Funds (FoF) over other category of mutual fund schemes in the past three-four years. Of the total investments in ETFs and FoFs, at the end of August 2019, close to 93% has come from institutional investors and a meagre 7% from individual investors. Institutional investors include banks, insurance companies, Employees’ Provident Fund Organisation (EPFO) and other domestic institutions. As well as lower charges, at times when it is difficult to identify alpha or returns higher than the benchmark in active funds due to slowdown, investment in ETFs becomes a prudent choice.

The European ETF retail market has long lagged its US counterpart. While there are no solid statistics on ETFs by client type, the consensus among industry players is that more than 80% of ETF assets in Europe are in the hands of private banks, wealth managers, pension funds, hedge funds, and other types of institutional investor. While the European retail investor community is relatively untapped by ETF providers, most agree they could play a key role in the growth of the market looking forward. Commentators think the major barriers to retail uptake in Europe have been education and technology. Both of these are slowly being broken down.


Stamp duty take down

The Treasury’s stamp duty haul has fallen by more than at any point in the past decade. Stamp duty receipts from residential property fell by more than £900m in 2018-19 to £8.4bn, figures released by HM Revenue & Customs show a 10% decrease. It marks the largest drop since the financial crisis decimated house prices in 2008 and follows on from almost 10 years’ of steady increases. It comes as house price growth has slowed to the lowest level in years, just 0.7% according to the latest figures from the Land Registry.

Prices in the South East and North East have fallen by 2% and 2.9% respectively. Purplebricks is calling on Boris Johnson to follow through on his Stamp Duty promises. Purplebricks says this would bolster the UK economy by £6bn and bring around 130,000 more homes on to the market each year. Johnson has previously said he would raise the Stamp Duty threshold – where it starts to be paid – from £125,000 to £500,000, and cut the highest rate of Stamp Duty from 12% to 7%.

Almost a third (29%) of UK home-owners say Stamp Duty is the number one factor which would stop them from purchasing a new home, according to research commissioned by Purplebricks. If the proposed changes to Stamp Duty materialise, 90% of people moving home wouldn’t have to pay Stamp Duty and 15% more properties would come on to the market each year. Although Stamp Duty receipts would decrease by around £3bn there would be an overall net boost to government revenue of around £1bn due to associated spending and increased economic activity.

Half of adults still rely on parents

Almost half of adults have said that they still rely on their parents for financial support, according to a new study. Over the last year, adults have borrowed a total of £708 from their parents to assist in the costs of university fees, bills and home improvements, with some admitting to using the cash to fund coffee pods, contact lenses, mobile phone bills and dog food. Out of the 2000 adults polled, three in five said that they would struggle to cope without financial support from their parents. The research was commissioned by Virgin Media to mark the launch of its new Family Plan offering. The research shows that ‘The Bank of Mum and Dad’ is still very much in business, with Brits depending on their parents even when they’re grown-up.


How to ensure a power is acceptable to a Financial Institution

Some financial institutions refuse to accept a copy of a power of attorney unless it is certified and dated on every page.

It has been reported that several banks and building societies now appear to insist that certified copies of a property and finance lasting power of attorney must be dated on every page, as well as certified. This demand appears to originate in online Government guidance, so it is useful to reproduce its main points.

A donor can confirm that a copy of their lasting power of attorney (LPA) is genuine by ‘certifying’ it if they are still able to make their own decisions. A donor or their attorney can use a certified copy to register your LPA if they do not have the original form.

The attorney can also use the certified copy to prove they have permission to make decisions on the donor’s behalf, for example to manage their bank account. The guidance includes the appropriate wording to use in order to certify, which needs to be written on the bottom of every page of the copy, namely: “I certify this is a true and complete copy of the corresponding page of the original lasting power of attorney.”

On the final page of the copy, it must also be written: “I certify this is a true and complete copy of the lasting power of attorney.” The donor needs to sign and date every page.

Obviously, once the donor has lost capacity, they will not be able to certify anything. In such a case copies of an LPA can be certified by a solicitor or a person authorised to carry out notarial activities. As the latter is likely to incur a fee, it may be sensible to advise donors who still have capacity, but have not made certified copies, to do so sooner rather than later.


Buy-to-let landlords under attack from McDonnell

John Mcdonnell has announced a scheme that would allow private tenants the right to buy the home that they live in a discount price. This is on top of a report commissioned by the party earlier this year that also recommended caps on the amounts buy-to-let landlords could charge tenants. Alongside the cap to the rent there would also be curbs on their ability to evict rents “on spurious grounds”.

The latest suggestion from the Shadow Chancellor is to apply Margaret Thatcher’s iconic right for council tenants to buy their homes to those who rent properties from millions of private buy-to-let landlords. He hopes it would reverse the fall in affordable housing seen after Mrs Thatcher’s decision to allow council housing tenants to buy their homes. Speaking to the Financial Times, Mr McDonnell said: “We’ve got a large number of landlords who are not maintaining these properties and are causing overcrowding and problems.” Labour could give tenants who rent private homes the right to buy them at a cut-price rate, in the Shadow Chancellor’s plans. But experts believe it would decimate the rental market in the UK, creating a shortage of properties available to rent.


Weekly Market Commentary 22 November 2019

Corbyn’s Manifesto may not be as radical as first thought
This week the launch of the Labour manifesto brought gasps of shock and horror from all but the most ardent Corbyn fans. We were hoping we wouldn’t need to talk about it. Given Labour’s chance of forming a majority is practically zero, this is little more than socialist fan fiction, but there is so much that stands out we can’t help ourselves. In isolation many of the proposals are not that extreme; in most of Europe utilities are state owned and the lights stay on; higher rates of tax on dividends and capital gains are also quite common. When corporation tax was cut by George Osborne it had little impact – so a hike will probably not matter much either; and so on and so on.

The cumulative effect of changing the tax treatment of dividends, gains and profits all at once is almost unfathomable however. While we think a lot of the “tax prevents growth” story is overdone, and indeed the evidence has always been shaky, it does change behaviour. How investors, businesses, and indeed the whole economy would react is a complete unknown and is the real danger behind the proposals.

M&A: Saudi Aramco IPO Valuation Downgraded
Months of work pitching Saudi Aramco shares to big institutional investors ahead of one of the most anticipated initial public offerings (IPO) this year, all came crashing down in one meeting this week – that lasted ten minutes. Aramco chairman Yasir al-Rumayyan chairman was disappointed that the $2trillion dollar valuation of the state oil company failed to garner enthusiasm. The valuation of the company has subsequently been revised down to $1.1-1.2tn. Investment banks would have been hoping for a bumper pay out from the floatation. Instead they may have to settle for a paltry $90m when compared to other large IPO’s such as Alibaba which generated $300m in fees.

Fund managers were concerned with both the governance of the state oil company and infrastructure security following the attacks on Saudi Aramco plants a few months ago. Rather than a global listing, the company will instead turn to, and in some cases lean on, local investors in order to beat the $25bn raised by Alibaba in 2014.

Global: OECD urges Governments to spend
With global GDP growth expected to be 2.9 per cent this year, its lowest annual rate since the financial crisis in 2008, the OECD is urging governments to act in order to avoid long-term stagnation. The intergovernmental economic organisation believes that if governments were to combine structural reform with targeted spending and tax policies at lower interest rates, growth will pick up over the long term. But in order for that to happen a coordinated effort is required, and it’s required now.

Economic uncertainty has been the main detractor to growth as trade talks and Brexit noise weakened manufacturing and squeezed global investments. The offsetting effect of strong service sector performance has also started to wane. The organisation was also bearish on the prospects of UK growth, predicting GDP to fall to one per cent next year regardless of whether a No Deal Brexit is avoided.

US: Housing Market Rebounds Sharply
Lower mortgage rates boosted US homebuilding last month. The number of privately-owned new houses on which construction has been started on was up 3.8 per cent in October, greatly exceeding the 0.9 per cent forecast. Building permits (proxy for future construction plans) increased five per cent to 1.5 million units, its highest level since 2007. Permits for single-family housing projects increased 3.2%. The number of houses being completed also spiked up 10.3 per cent to reach 1.1 million units.

Elsewhere, the betting markets now have President Donald Trump as odds-on favourite for impeachment. So far hearings haven’t gone Donald’s way and this week Fiona Hill, a former White House official, added more fuel to the fire, telling the congressional impeachment inquiry that Trump’s narrative that Ukraine rather than Russia interfered in the 2016 election was actually false.

Pension allowance charges increase

The number of savers hit by pension allowance charges has rocketed in the past year, new figures show. More than 37,000 people were hit with annual allowance charges in 2017/18, double the number recorded in the previous year, according HM Revenue and Customs (HMRC). The data shows that 26,550 people have reported contributions worth £812 million over the annual allowance. This means that on average, those above the allowance face paying tax on an excess contribution of around £30,600.

Pension experts have blamed the rise in breaches on the taper introduced in 2016. This meant that anyone earning over £150,000 had the amount they can save into a pension each year reduced. Twice as many people were hit with an annual allowance charge in 2017/18 compared with the previous tax year, with hundreds of millions snatched from the grasp of savers. The culprits behind this spike in pension tax are thought to be the taper, which lowers the annual allowance for high earners, and the money purchase annual allowance (MPAA), which penalises those who take taxable income from their retirement pot.


Study calls for overhaul of Capital Gains Tax

The Institute for Public Policy Research has called for wealth to be taxed at the same rate as income tax in a radical overhaul of the tax system. Describing the UK as one of the most ‘unequal countries in the developed world,’ the study by Institute for Public Policy Research (IPPR) warns income inequality could be set to worsen as capital and property ownership become more important sources of income generation. The IPPR believes this divide could be narrowed if wealth is taxed at the same rate as income, which could boost the government’s coffers by £90 billion over the next five years in the process.

The study suggests that it is profoundly unjust that those who work for their incomes are taxed more highly than those whose income is derived from wealth. This situation is all the worse when we consider that the wealthiest are less likely to generate their income from labour than the rest of us. Among the richest 1%, over one-quarter of total income is generated from dividends and partnership income alone. To address the balance, the IPPR has called for capital gains tax (CGT) on the sales of shares, bonds, property and other investments to be paid at same rate as income tax.

Bond rally bad news for annuitants

Annuity rates have tanked by 14% so far this year, with a £100,000 pension pot now buying a 65-year-old £4,654, £759 less than at the start of the year, according to research by Hargreaves Lansdown. Rate changes have been even more pronounced for younger retirees. A 60-year-old with a £100,000 pension who bought an annuity at the start of the year would have received an income of £4,776 but the same person retiring today would get just £4,051, a 15% decrease. Over the course of a 20-year retirement, that’s a difference of £14,500.