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Week Watch | 29 July 2019

Stock Take

The ‘blond bombshell’ finally has the keys to 10 Downing Street. Having won the Conservative Party leadership contest with 66% of the vote, Boris Johnson entered through the famous black door on Wednesday afternoon.

He will have been greeted by Larry the cat. The ‘Chief Mouser to the Cabinet Office’ has been at 10 Downing Street since 2011 and has already outlasted two prime ministers. Considering Johnson has inherited a wafer-thin parliamentary majority, has endured protests before even starting his new job, and has put a squad of high-profile players on the back benches, don’t bet against Larry seeing off a third (unless, of course, the rumours of a new Downing Street dog prove true).

The new prime minister made a typically bombastic start. “The people who bet against Britain are going to lose their shirts because we are going to restore trust in our democracy, and we are going to fulfil the repeated promises of parliament to the people and come out of the EU on October 31, no ifs or buts,” he said in his maiden speech. This was followed by one of the most brutal culls of senior government figures ever; as more than half the members of Cabinet were sacked or chose to resign before they were pushed.

Johnson did overcome the first hurdle – he survived until the parliamentary recess without Labour calling a vote of no confidence in his leadership. However, the scrutiny of his Brexit position is unlikely to subside. Nigel Farage, leader of The Brexit Party, made overtures about an electoral pact and the Liberal Democrats’ new leader, Jo Swinson, promised to fight a no-deal Brexit every step of the way.

There are fewer than 100 days until 31 October and the UK’s scheduled departure from the EU. Azad Zangana, the senior European economist at Schroders, does not expect a definitive outcome by then. “Given the low likelihood of a successful renegotiation, the most likely outcome is therefore another delay. Johnson’s ‘do or die’ promise during his campaign simply lacks credibility,” said Zangana.

Johnson’s new chancellor, Sajid Javid, may also have a busy few weeks. After years of austerity, Johnson will be keen to deliver on his campaign promise to loosen fiscal policy; public spending as a share of GDP is at its lowest level since 2004. There have been rumours of an emergency (and generous) Budget in September, ahead of Brexit; but the summer recess and autumn party conference may squeeze it out. With Johnson’s victory priced in, markets initially brushed off the week’s upheaval; the FTSE 100 was flat for the week; and sterling seemed impervious – until this morning, when it struck a two-year low against the dollar.

President Trump was one of the first to offer his congratulations, referring to Johnson as “Britain Trump”. Back at home, there was less for him to celebrate; revised figures showed that the US economy only grew at 2.5% – well below the president’s 3% target. Second-quarter growth slowed to 2.1% (annualised). Jay Powell, Chair of the Federal Reserve, will have to consider whether this sluggish growth impacts the scale of an anticipated interest rate cut when the Fed meets tomorrow.

He may also be wary of a mixed earnings season for many companies this week. Alphabet, the parent company of Google and YouTube, saw its after-tax profits triple compared to a year ago, while its revenues rose 19%, beating expectations. Amazon’s results, on the other hand, fell below analyst expectations despite increased revenues; a disappointment after four consecutive quarters of record profits. 

Indeed, despite buoyant stock markets and a fresh high for the S&P 500, the growth outlook remains uncertain. “What we’re looking at today is a position where the valuation on the US market isn’t actually at stratospheric levels and nowhere near where it was at 1987 or 1929 [when the market crashed],” said Chris Ralph, Chief Investment Officer at St. James’s Place. “But if we move into the third and fourth quarter and companies start missing on their earnings targets, then people are going to get more worried.”

The International Monetary Fund cut its growth forecasts for the global economy this year and next – as it did for the US. But it upped its growth forecast for 2019 for the UK, and even raised its 2020 forecast, although only on the basis of an orderly Brexit; a no-deal Brexit was named as one of the biggest threats to global growth. The National Institute of Economic and Social Research said the mounting risk of a no-deal Brexit means there is a 25% chance the UK is already in a recession and predicts GDP has fallen 0.1% in the second quarter.

Fears of stagnation are encouraging the European Central Bank (ECB) to cut interest rates and resume quantitative easing. A key measure of eurozone manufacturing growth fell to a seven- year low, and eurozone inflation is significantly below target. Last week, ECB president Mario Draghi said that, since “the outlook is getting worse and worse”, interest rates would not rise until mid-2020 at the earliest.

The UK’s most unpopular tax is set to maintain its reputation as HMRC ramps up investigations into the estates of the recently deceased.

Estates liable for Inheritance Tax (IHT) now have a one-in-four chance of being investigated by the taxman, with the number of cases rising nearly 8% last year to 5,537.1

The tax, which saw record-level receipts of £5.2 billion in 2018, is notoriously complex; something acknowledged by then-Chancellor Philip Hammond last year when he asked the Office of Tax Simplification (OTS) to conduct a review.2 The introduction of the residence nil-rate band in 2017, which provides an additional IHT allowance where a property is passed to a direct descendant, has made the system even harder to navigate: the number of IHT investigations has increased year-on-year since its introduction.3

The OTS’s recent report made a set of recommendations designed to make it simpler. Yet critics of the report say it has has “skirted around some prickly subjects, and made others even more knotty”, with the risk that the accompanying changes to Capital Gains Tax may make IHT more, not less, complicated.4

“The increased scrutiny reflects the government’s desire to clamp down on tax evasion,” says Tony Müdd of St. James’s Place. “But any oversight by executors is far more likely to be due to the complexity rather than an attempt to defraud HMRC. It does, though, highlight the importance of executors getting the right advice.”

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

1 MoneyAge, ‘25% of estates liable to pay IHT investigated by HMRC’, July 2019
2 Moneywise, ‘IHT payments top £5 billion in 2018 – and are set to keep rising’, July 2019
3 MoneyAge, ‘25% of estates liable to pay IHT’, July 2019
4 Adviser Points of View, ‘What does the OTS review of inheritance tax mean for financial planning?’, July 2019

In the Picture

Foreign technology majors have had a famously tough time in China’s heavily-vetted market. Yet, in some cases, the casualties of the 2000s have enjoyed a resurgence in the 2010s – and re-entered the Chinese market.


The Last Word

They call him ‘Britain’s Trump’, and people are saying that’s a good thing. They like me over there. That’s what they wanted. That’s what they need.
Donald Trump on Boris Johnson


Schroders is a fund manager for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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