Archive for February, 2009
Global Markets Summary
Friday, February 27th, 2009 | Market Updates | No Comments
‘Stop the world, I want to get off…’
The true cost of the sub-prime mortgage meltdown
2007 was the year in which the US sub-prime mortgage sector collapsed, triggering worldwide problems within the financial system. However, 2008 was the year in which governments, businesses and individuals became fully aware of the consequences of the sub-prime debacle amid the development of a worldwide credit crunch.
As the year progressed, investors and governments realised that the problems faced by financial institutions were even more extensive and serious than had previously been thought. Moreover, it became clear that these problems would not remain confined to the financial sector, but would affect almost every business and household. During 2008, confidence in the financial system has collapsed, share prices have plummeted and governments and central banks have striven to boost confidence in the financial system and kick-start lending activity.
A banking sector in disarray
The collapse of sub-prime and the subsequent credit crisis led to massive changes in the structure of the global financial sector, not to mention wholesale redundancies. JP Morgan bought troubled investment bank Bear Stearns in a deal underwritten by the US Federal Reserve (Fed), while American International Group (AIG) was bailed out in order to avoid the risk of meltdown in the global financial sector. However, 158-year-old Lehman Brothers was allowed to collapse in a move that shook the sector. Merrill Lynch was taken over unexpectedly by Bank of America, and venerable investment banks such as Goldman Sachs decided to transform themselves into ordinary bank holding companies in order to allow themselves the chance to benefit from Treasury funding if necessary. Meanwhile, in the UK, mortgage banks Northern Rock and Bradford & Bingley were nationalised by the British government and Lloyds TSB launched a takeover bid for HBOS.
Iceland hit the headlines in the autumn following a raft of bank failures that strained relationships between London and Reykjavik amid concerns that Iceland was refusing to guarantee the deposits of UK-based savers. This controversy, combined with Northern Rock’s collapse in 2007 and subsequent concerns about toxic debt within the banking system, triggered new debate about compensation schemes for savers.
Global stock markets experienced heavy losses
Financial markets experienced wild swings during 2008, and movements of four per cent in a single day were not uncommon towards the end of the year. The MSCI World Index fell by over 40% during 2008, and every major market experienced heavy losses, with the American stock market plumbing depths not seen for over five years. Corporate profits are under pressure; companies are cutting or cancelling dividends, and high levels of redundancies are swelling unemployment statistics as firms do whatever they can to cut costs, shore up their profits and stay afloat. Higher unemployment is likely to compound pressure on economic growth as consumers tighten their belts and stop unnecessary spending.
Propping up the financial system
Amid the financial and economic turmoil, governments and central banks have worked hard to prop up the financial system. After some political wrangling, the US agreed a rescue package worth US$700 billion intended to help bring back confidence in the financial system and encourage banks to restart lending activity. A subsequent package worth a further US$800 billion was agreed in November. The European Commission announced a spending plan to boost the eurozone economy worth €200 billion, while the UK government announced measures to help shore up the UK economy in its annual pre-budget report.
Interest rates tumbled
Interest rates provided some of the most dramatic headlines during 2008. UK interest rates began the year at 5%, and ended the year at 2% – their lowest level for over 50 years – amid growing fears about the risk of deflation and concerns about the worse-than-expected economic downturn. Meanwhile, American interest rates reached an all-time low of 0.25% as the Fed attempted to kick-start economic growth and control price stability. The Fed’s actions have increased speculation that the Bank of Japan might cut Japanese interest rates from their current level of 0.3%. Elsewhere, interest rates in the eurozone ended the year at 2.5%, but have been tipped to fall as low as 1.75% during 2009.*
So what will 2009 bring?
The International Monetary Fund (IMF) expects world economic growth to slow from 5% in 2007 to 3.75% during 2008 and to just over 2% in 2009, and this decline is likely to be led by the major economies. The IMF expects the UK economy to experience a particularly significant decline of 1.3% during 2009, while, the all-important US economy is forecast to contract by 0.7% next year. **
Although analysts still await official confirmation, the UK and US economies are widely considered to have fallen into recession some months ago, and this has already been discounted in share prices. Nevertheless, businesses, investors and analysts remain preoccupied by the possible length and severity of the recession, and are likely to keep a sharp lookout for evidence that the economy is either improving or deteriorating. As we say goodbye to 2008 and head into 2009, this uncertainty is likely to keep investors’ nerves on edge, and ensure that share-price performance remains volatile.
Sources:
* Bloomberg, 15 Dec 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=azuNjokrEk88&refer=home
** International Monetary Fund, 6 Nov 2008
http://www.imf.org/external/pubs/ft/weo/2008/update/03/index.htm#table1
Capital Gains Tax
Friday, February 27th, 2009 | Financial Digest | No Comments
Capital Gains Tax: by Paul Kennedy
What was the biggest event of last year and what does that mean for 2009? 2008 was a year when big themes dominated the agenda and gallons of ink will be spilled retelling all the events and crystallising their meaning.
If only to avoid the worst losses, investors have needed to be on the right side of the big bets – oil and financials; emerging and developed markets; and the shifting dominance of the biggest currencies. Finding oneself on the wrong side of those trades would have cost dearly yet, amid the investment turmoil, one of the most significant events of the past year became somewhat forgotten – the introduction of the 18% capital gains tax (CGT) rate.
Last March, the financial crisis began a new phase as vultures gathered in the skies above Bear Stearns and the US administration orchestrated JP Morgan’s purchase of the stricken investment bank. At the same time Alistair Darling confirmed a new simple flat rate of tax of 18% was to apply to capital growth, bringing an end to the previous more complex regime where rates could be as high as 40%, reducing down the longer an investment was held.
Of course, there is no connection between these two events except the month they occurred, but both deserve a place in the record of 2008’s significant moments. One will be remembered as a watershed in this financial crisis, the other will have a profound and lasting effect on how investors in the UK approach their fund buying.
The introduction of the new rate of CGT started to bring a real focus to how tax is applied to the two main investment wrappers – investment bonds and collectives. Until last March, many in the industry were at ease with the investment bond’s unofficial default position but afterwards, when the Chancellor had moved the tax goal posts, it became even clearer the same client in the same investment fund could be at a considerable advantage holding their investments in one wrapper rather than another.
The extent of the difference the wrapper can make is as startling as any of the major financial events of the year and it is not hard to imagine that, in the real world, it might make as much of a difference to a client’s end investments as any of the year’s big investment trades.
We performed some analysis – simple mathematics – to establish which type of investment wrapper is better for investors. This found, for example, the return for a higher-rate tax payer investing for capital growth would be up to 70% better if their investments were wrapped in a collective rather than a bond. In any other year this news would have grabbed the headlines, but the other events of 2008 meant it was but a whisper in the wind of the financial storm.
The conclusion of the analysis is that different investors with different investment needs will need to consider carefully their choice of wrapper. Until last March, lump sum investing was a simple ‘one, two, three’ process where the adviser assesses the client’s appetite for risk and their investment needs, then devises an asset allocation before selecting the best funds. But there is now a fourth dimension – tax planning. With such a difference in their client’s ultimate return at stake, it simply cannot be ignored. So in 2009, as investors gingerly return to the markets and their appetite for risk is rediscovered, advisers will need to establish their process for understanding the implications from a tax perspective of investing in one wrapper or another. This year we must also start to tackle the thorny issue of what do with an existing investment that is palpably now in an inefficient tax wrapper. Whether investors return with new money or not, there will remain a need to review existing wrappers to ensure they remain in the interest of the investor.
In the past, suggesting one wrapper over another might have been done at the expense of efficiency – a client with a variety of investment bonds and collective investments would be a complex account to manage. But with the rise in popularity and usability of neutral platforms, which offer all wrappers as a simple option after the main investment selection and consolidate them thereafter, the decision is much less, well, taxing.
The platform will also offer clients consolidated tax statements, reporting tools and, now income can be drawn regularly and automatically from capital if required, the option to initiate a regular withdrawal plan. This can be especially useful for investors looking to make the most of their CGT-free allowance each year as part of their income.
For much of the coming 12 months, finance and the dire state of the world’s economy will continue to dominate the headlines. At some point during the year, that will change and more positive news will emerge. Before that, advisers can help their clients with the good, albeit less exciting, news of CGT.
Paul Kennedy is head of trusts & tax planning solutions at Fidelity FundsNetwork
On your best behaviour
Friday, February 27th, 2009 | Financial Digest | No Comments
Investors are strange creatures: they wait until the market has risen before they put money in and then sell out when the market has plunged – or worse, hold on to a floundering stock, waiting for it to get back to the value they paid for it.
Why do we behave irrationally? We would not wait for the price of our morning coffee to go up 20% before buying it, so why do we do this with investments? Why do we panic when markets drop, even though we knew it would happen? And why do we become attached to lame ducks when selling them and moving on would get our money back quicker?
Many theories abound: go back as far as the 18th century and economists such as Adam Smith were seeking an explanation of why markets behave as they do. One that has gathered force of late is behavioural finance.
Behavioural finance suggests people often make decisions based on so-called rules of thumb, rather than after rational analysis. Technically referred to as heuristics, it involves understanding that the way a problem is presented can affect the outcome (a process called framing). Therefore, market inefficiencies are not the only way to explain outcomes that go against rational expectation.
Two of the most influential psychologists in the field are Daniel Kahneman and Amos Tversky who, in 1979, published a paper comparing models of rational economic behaviour with decision-making during times of risk and uncertainty. Their theories sought to explain anomalies in the way investors and financial markets react.
These theories help explain how we all got pulled into phenomena such as the technology boom (mostly too late to make any real money), despite the irrational theories that tend to support them.
They also help explain why we sell out of a falling market, just when our loss is at its greatest, and why we hold on to ‘loved’ investments long after they have started to go wrong. And it is why we shy away from markets that have underperformed, despite indications of great potential.
Increasingly, asset managers are using pricing models to take behavioural biases into account, as they believe it gives them an advantage. If you understand these theories, you could have that advantage too. It can be difficult to swim against the tide but, in the long term, you may be very glad you did.
The burden of IHT
Friday, February 27th, 2009 | Financial Digest | No Comments
Despite the threshold rising to £624,000 for married couples and civil partners, (£312,000 for individuals) the boost in house prices over recent years means inheritance tax (IHT) could still be a concern for many people. It is therefore sensible for investors to consider the potential liability they may be leaving behind.
For most, the key contribution to the value of their estate will be the family home but it is not the only asset that counts. For example, ISA investments shelter investors from capital gains and income tax but not from IHT. Property held abroad also counts towards the total. The problem with IHT is not just that it has to be paid, but that it generally has to be paid quickly. Therefore, without a little planning, the family home or other heirlooms may need to be sold to meet the bill.
However, there are things you can do to offset the impact. For example, you have an annual gift allowance of £3,000 a year. Certain gifts for weddings, from parents, grandparents and even friends, are also exempt. Other useful tools, despite recent changes, include loan trusts and discounted gift schemes – indeed, there are a myriad of options available, some more complex than others.
This, along with the changes in legislation as the Government looks to close potential tax loopholes, mean it is always worth getting professional advice on the best way to ease any burden on your estate.
Seminar Services
Thursday, February 26th, 2009 | Company News | No Comments
Lansdown Place are pleased to announce the launch of our new Seminar Services Division.
Employers often use seminars as a way of passing important information, advice and help to employees, particularly at times of change. Our seminars cover subjects such as Retirement and Redundancy for employees, and Investments, Inheritance Tax, and Wealth Management for the public. We also offer specialist seminar services to solicitors and accountants.
Our seminars can run from one and a half hours to two days, and are often offered as a free service.
We have just finished a successful run of seminars delivered to the public on the subject of Inheritance Tax and Investments. Venues included Celtic Manor Resort, the Bath Spa Hotel and the Institute of Directors in London. Seminars were well attended and the public expressed their appreciation of the content to a high degree.
More seminars are planned in March, April, and on an ongoing basis.
Please contact us on seminars@lansdownplace.co.uk for further information.
CALL US ON 0845 30 50 222
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UK Business News
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- London close: Late rally limits losses - ShareCast March 9, 2010
- How firms 'avoid' pension costs - BBC News March 9, 2010