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Brexit Brave new world or foolish little britain

Brave new world or foolish little britain Brexit

Something unexpected happened last week. Not England’s exit from Euro 2016 – no surprise there. Or the Brexit vote; 50/50 after all. What was never foreseen was that the FTSE 100 would make its largest weekly gain since 2011.

What the last 8 years has shown us is that markets don’t like uncertainty. And the advancement of news and trading technology means that anyone can hear news and make a decision in the markets almost instantly.

So long as there is a stream of consistent news the apple cart trundles along. What the UK has done is unwittingly set the cart on the bumpiest track, and thrown in a few boulders for good measure.

Consider first the UK uncertainty after the UK vote to exit the EU. Will we-won’t we actually leave the EU? The final decision rests with parliament, and – after a lacklustre and complacent campaign – the Remain camp are way more vocal now than the Leave campaign were prior to the vote.

Law firm Mischon de Reya reports on its website that it has “taken legal steps to ensure that Article 50 is not triggered without an Act of Parliament”.

Some comments by the Leave camp made before the vote have returned to the mouths whence they came in the form of a large foot; Farage had said that if the vote was close, say 48-52 in favour of Remain, it would be unconstitutional and invalid, and a new referendum would be needed.

One activist, William Oliver Healey, set up an online government petition calling for a new referendum should either side have less than a 60% win and 75% turnout. He has now disassociated himself from it, as it has effectively been hijacked and turned against the Leave camp, becoming – by a considerable margin – the largest government petition since the e-petition system was launched in 2011. By 30th June there were over 4 million names registered. There is also a growing mass, in excess of one million people, that have declared that they regret voting to leave. This is too little too late, as was, it turns out, much of the Remain campaign.

Lies, damned lies or Statistics?

And there is the truth dawning on many voters as the promises, or “suggestions” made that £350m a week saved in EU contributions would be available to the NHS – something most could see from the start was fiction – have now been dismissed as a “mistake”.

Anyone involved in agriculture or fisheries and has been reliant upon EU subsidies will have wondered all along how the Leave campaign maths was going to work.

The UK is also under threat from within; the SNP or in particular its leader, is of the opinion that some regions, notably Scotland – because the votes were counted separately – can make their own decision regarding EU membership. That idea was promptly dismissed by Brussels, saying that even if Scotland was independent it would still have to re-apply for membership, and probably adopt the euro as currency.

However, having stated that she was “determined that Scotland’s voice be heard” the SNP can still make the exit difficult. It’s not so much her voice but its echo from SNP supporters that don’t yet realise they are swimming against the tide. If ever there was a non-starter that is it, except perhaps for the campaign now rising calling for an independent London. As if.

Then there is Ireland, and what appears to be a sensible all round solution, except for those living there that don’t want it. With the Republic of Ireland forming the only land border between the EU and the UK, the merger of Northern Ireland with the Republic would certainly ease worries on the direct and local trade and movement that has developed in the last 20 years, and form a natural break for immigration purposes. It does on paper have more legs than any ideas for Scottish independence or EU membership.

EU has its own opinion

Now consider the rest of the EU, where there will be parliamentary and presidential elections in Germany, and one or other in France, Hungary and the Czech Republic. Each of these countries has a strong and vocal anti-immigration and anti-EU population, whom may use their strength to demand change or even their own referendum on EU exit.

The UK financial industry has built itself on providing service across Europe. But French President François Holland has already stated that the clearing of euro trades cannot continue in the UK once separation happens.

The ongoing status of ex-pats throughout the continent will affect many thousands of British citizens that rely on the EU membership for basic healthcare and the free or easy movement across borders, currently taken for granted. These may be restricted or removed in the future.

The ugly side is the opportunity created for far right groups to target immigrants. The police already confirm increasing occurrences of “hate” offenses. What we see in the UK may well be reflected by right wing groups in Europe against British overseas; Brits have just put themselves in the sights of all those that feel their futures are uncertain because of the UK vote.

Instability will create volatility

These “instability events” are or would be comparatively minor, and at first glance many would seem not to affect us directly. But each would have the opportunity to create market mayhem that affects a large number of us.

More worryingly any combination of them from the UK, Europe or the wider globe may combine or interact in unexpected and unpredictable ways.

Analysis in the FT, Telegraph, Times and Guardian of vote demographics suggest broadly that those in favour of leaving the EU may not feel any direct pain from volatile markets, or the ever lengthening list of events that could kick start or add to existing volatility, but they may eventually feel the effects through rising prices or lower pensions.

Those that have any invested funds in equities – bearing in mind that for six years or so there has been little alternative even for income investors – or ISAs or personal pensions will feel a shudder every time an event in or even affecting Europe flashes on their TV news screen. French National Front leader Marine Le Pen said that the vote was “the end of the EU as we know it”. For those that voted to Remain it may yet be much more than that.

Investors might want to take a look back at 2013 when volatility really showed itself in the UK, and consider a strategic balancing of assets to limit exposure while maximising gains.

Gold has already shown itself to be the haven of choice, that in addition to a technical outlook that suggested a big increase in value. Gold was the RMS Carpathia passing quietly in the night as the UK’s RMS Titanic foundered. Apart from the effects of a round of profit taking by long patient gold investors the price looks certain to rise, with a potential upside of a further 15 per cent towards $1,550 per troy oz.

The other major recipient of last week’s cash movement was US treasuries.

Asset allocation will be crucial

The UK exit should not have much effect on the global economy – though the value of european markets may bring that idea into question. The slide in the value of sterling should make overseas equities more attractive. Finding funds that have a broad global stance that can weather any local storm are favourite. There are articles on gold and global income funds in The IRS Report this month, and are available on the website at TheIRSreport.co.uk.

Otherwise, now is the time to pay attention to how markets react to good, bad or catastrophic news.

The UK FTSE 100 opened on 24th June 8.7 per cent lower than it closed the previous day, and then rose to close just shy of three per cent lower. Some sectors took significant and sustained battering, providing buyers of banks or builders with discounts of 30 per cent or more. The whipsaw action was an opportunity for the value investor and those looking for income. HSBC was already yielding nearly eight per cent, and though it did not fall as Barclays did, there was a chance to buy a solid stock yielding over nine per cent, though the exchange rate movement may reduce that.

Central bank action to stabilise markets, and assurances of more to come, have spurred markets as they did with QE previously. By 4th July the FTSE 100 had touched 6,600, a new high for the year, and the highest it had been since April 2015.


Volatility will be back, and will provide bargains for those looking to add to positions slowly, thereby increasing yield or lowering average cost. What happened in the markets in late June was nothing compared to the January-February routs, so prepare to use them to your advantage when they come – for they will come.

Don’t let the clamour for equities blindside you. The currency fluctuations mean that inflation is likely to rise – JPM suggest 4% in 2017 – so safeguarding should be a priority. Consider gold, inflation linked gilts and overseas equities alonside equities to protect against the volatility.
For investors, asset allocation and being contrarian will be more important than ever.

July 2016

The moving target of emerging markets

The moving target of emerging markets

What exactly is an emerging market? There are various definitions from organisations such as the IMF and OECD, and also the FTSE.

The FT Lexicon defines emerging markets as those that are developing their economy and infrastructure, and so therefore might be expected to deliver higher returns. But the category includes some quite wealthy countries that cannot be defined as developed because their regulatory controls are not satisfactory.

Over the last two years those responsible for many of the indices we use have made some changes, and for the first time reclassified a developed country as an emerging economy.

That downgrade really sums up the political and economic catastrophe that has consumed Greece over recent years.

But by some measures Greece has been an all out winner. Back in 2012 their benchmark 10 year bond peaked at over 40 per cent before falling to less than seven by early 2014. And again in 2015 it soared back over 14 per cent before falling back to just under nine per cent. As the yield falls the price of the bond increases. Few assets have appreciated to the same degree over the same period.

Key to recent performance was the election of Syriza on its anti-austerity ticket – something everyone watching from this side of the fence knew was never going to work. But Alexis Tsipras convinced a desperate population that it could. Many high profile detractors – including George Soros and Alan Greenspan – echoed similar opinions, all essentially that Greece was going to default and the euro would collapse when the inevitable Grexit happened.

After a referendum in July 2015 rejected the creditors’ terms – when the coupon on the bonds was 19.2 per cent – investors bought Greek debt as an investment, and as a sign of confidence in the forward plans and the austerity plans forced upon Greece.
100% gain in just three months

By September 2015 those bonds had more than doubled in value.

The Greek population wanted to remain within the eurozone, and maintain its stable currency rather than revert to the drachma. The official line of the heads of the eurozone was also that it wanted Greece to remain.

Meanwhile the stock market was suffering through poor liquidity and lack of investment. MSCI downgraded Greece from a “developed” economy status to “advanced emerging”. On the face of it that might be negative, but does in fact open the Greek market to more investment through index based funds.

As a developed economy it had a weighting of just 0.019 per cent in the MSCI developed market index. But as an advanced emerging economy the bigger Greek listed companies will have more exposure within funds, with a weight of four per cent in the MSCI EM index, and 3.8 per cent in the MSCI EM Europe index.

The potential inflows should help to ease liquidity on the Greek stock exchange, and the overall efficiency of the market.

Late in 2015 FTSE indices also downgraded Greece with effect from March 2016, but for different reasons. MSCI had concerns about failures regarding borrowing, lending and short selling. The FTSE downgrade is based on market inefficiencies, including the reduced market capitalisation which excludes many funds from investing. The irony is that an advanced emerging economy should experience low unemployment, high growth and positive prospects for the economy, all of which are still absent in Greece.

Greece is unique though, as emerging market economies often come with associated currency risk, whereas Greece has a “zero” currency risk as long as it remains in the eurozone.

A long road to recovery

Greece is still a basket case, and is the worst performer in the MSCI Emerging Market index. But the likely effects of the downgrades should be positive if Greece remains politically stable and within Europe, as money starts to get back to cash starved companies.

We are just starting to see Greece feature more regular in the news, with worry over the looming July repayments that it can’t make without further bailout funds, the second tranche from the third bailout. And in order to secure those funds further sacrifices will be demanded from the Greek population.

However they got into this situation, the effects of such dramatic changes to income and hence living conditions will hurt. And there are already demonstrations about these further potential austerity measures that will increase taxes and further reduce pension payments.

To recap, Greece now has four creditors; the European Commission, European Central Bank, International Monetary Fund and the European Stability Mechanism. They agreed terms with Greece and put in place a review policy. But from day one that was in jeopardy as Tsipras says he does not believe in the policies he has agreed to implement. The November 2015 review is still to be completed. The worry that the lack of progress brings is reflected in Standard & Poor’s rating of Greek bonds as CCC+, which suggests there is a “substantial risk of default”.


Against all the odds and mad ideas that it could survive without austerity Greece has survived, and not exited the euro. The Greeks have shown that they can rebuild – by 2014 banks had recapitalised and investment was pouring in – but must accept that it has been their own policies that have stopped the recovery, and even set it back further.

And history has shown that when they create turmoil markets react. The periphery of that turmoil will create oppor-tunities in the UK and Europe, and may stretch into the US and Asia. But most of all it will affect Greek markets, and the increased number of funds that now have exposure to them. And it will affect bonds, where a well-timed purchase has proved to be an excellent investment.

As a contrarian investment it must be close to top of the pile.

Is the Chancellor playing Robin Hood with your pension

Is the Chancellor playing Robin Hood with your pension?

In little over five weeks the Chancellor is expected to announce further adjustments to the way we save for retirement in what is effectively his third budget in under 12 months.

Speculation online and in the press suggests that he may further the transition to a pension tax regime which sees little or no tax relief upfront on payments into pension funds, and no tax later when money is withdrawn – like ISAs.

This would follow the steady reduction in annual and lifetime allowances since 2010.
First in line are likely to be higher rate taxpayers, with the relief on their contributions reduced or even removed.

The motive for curtailing this saving incentive is the current £30 bn annual cost of pension contribution tax relief, the majority going to higher rate taxpayers. This could transform the government’s spending projections before the end of the current term.

It is also being presented as an egalitarian move on the grounds the current system is unfair. The 4.5 million or so taxpayers who pay 40 or 45 per cent tax claim nearly three quarters of the tax reliefs paid, clearly favouring those who can more easily afford to save.

The pensions industry is expecting a universal flat rate tax relief to be introduced. The precedent is already there with the progressive restriction of tax relief on borrowings for buy-to-let to 20 per cent by 2020. As with such guesswork ahead of budgets in previous years, what no-one can foresee is exactly the level it will be set, or when it will come into effect. Any slowing of the economy – through domestic or global influence – is likely to make the need more urgent.

After all, George Osborne is not going to let his deficit reduction target fall entirely by the wayside, as it will be the foundation of his claim to be party leader and potentially PM.

Surveys of pension professionals show they think the new across the board rate of relief will be 25 per cent at the low end and 30 per cent at best.

Changes such as these would likely take some time to implement, but there is every chance that further contributions to maximise the benefits available under the dying regime would be capped.

Who is affected?

Additional rate taxpayers already know that they will have contributions capped from April 2016. The transitional rules mean that the annual allowance becomes £80,000 for the pension input period (PIP) from July 2015 to April 2016. PIP is the timeframe over which your annual allowance can be invested, and a measure taken of what has been used.

Contributions cannot exceed employed earnings for the year, regardless of allowances.

The details of the new regime from April 2016 are complex but generous, reflecting the restrictions high earners will face moving forward.

The annual allowance will be reduced by £1 for every £2 of taxable income in excess of £150,000. Someone earning £210,000 would see their annual allowance reduced from £40,000 to just £10,000. As usual any overpayment would be taxed at the marginal rate, suggesting that employees may seek to adjust their remuneration to reflect the inability to use the pension payments – after all, there is no point having pension contributions as part of a remuneration package that can’t be used.

Additional rate taxpayers – especially those affected by the eroding of their annual allowance – should maximise their contributions before the deadline of April 5th.

Higher rate taxpayers have to consider the possible reduction in relief from an effective 67 per cent to 33 per cent. Even if it is likely to be drawn upon in a few years – now the age to access funds is just 55 – it must be worth adding in virtually anything extra now in the hope of being able to draw it as a pension under a more favourable tax regime.

If so, anyone paying higher rate tax should consider funding to the maximum – if they can afford to do so. Any unused allowance from the previous three years (PIPs) can be paid into a pension fund before the deadline of April 5th.

There are calculations on some websites that demonstrate how a loan or credit card transfer can be used in a strategy to successfully make additional payments if ready cash is not available.

Basic rate taxpayers are the winners, with any increase in the “flat rate” providing a boost to their pension savings.

A change to 30 per cent would represent a 50 per cent hike in the relief available. Because the most likely change won’t be to their detriment, and potentially to their advantage, basic rate taxpayers should not be in any hurry to make further contributions.

Table 1 below shows how redistribution might work at rates of 25, 30 and 35 per cent, reducing the benefit for higher earners, while Table 2 on page 3 shows how it increases for basic rate taxpayers.

This in itself represents a significant incentive to make pension savings. Along with the changes made to income tax bands and minimum wage, it seems George Osborne really must believe that the way to election victory in 2020 is to play the role of a latter day Robin Hood.

There is no real idea when this could happen, but the Chancellor has imposed other such changes very quickly, sometimes with immediate effect. The only thing that might delay it is the complexity and its effect on businesses; for example, they may well need time to implement payroll adjustments for a flat rate of tax relief.

Further changes come into effect on 6th April. The Lifetime Allowance (LTA) is reduced again to £1m from £1.25m. Those with pension pots already beyond that should apply for protection with HMRC.

Those who already have a subtantial fund which might exceed £1.25m before they want to draw anything can also apply for protection, but may have to stop making any more contributions.

This obviously presents the investor with a gamble: will the fund grow beyond £1.25m with no further contributions?

This is a calculation that can be made by your pension provider based on your fund’s current value and likely growth.


Potential changes in relief on pension contributions will affect higher earners, and especially those with longer to wait until retirement.
The pensions industry believes these changes will happen, and urge anyone affected to top up as much as possible before the deadline.

But remember the same industry experts have been predicting the end of the 5 per cent annual tax free concession for life assurance funds for decades now; and that in general terms it is unwise to undertake any financial transaction for the tax reasons alone. And the younger you are, the greater the dangers. Who knows what the situation will be when you come to take your pension? Lower tax relief now might be offset by promises of lower taxes on the pension you draw in the future – but while governments can legislate for the future, no government can actually ensure a future one of different hue might not completely overturn anything promised today.

Of course these thoughts are still speculation, and George Osborne may yet postpone these ideas. So far he has not faltered when grasping the nettle. And remember the advice not to invest for tax reasons alone. Especially not perhaps for speculative tax reasons.

February 2016