The UK Wealth Advisory business of Stonehage Fleming, working with aspiring and wealthy clients to develop and implement strategies to protect and manage their wealth.
What differentiates us is our strategic approach. We devote time and energy to really understanding your objectives as experience has shown how important this is.
A wealth strategy sets out your objectives – what you are really trying to achieve for yourself, for your family and for others. This provides the strong foundation for all the advice we give.
Our clients include those who consider their affairs to be straightforward as well as those with the most complex needs. The breadth and depth of our technical expertise allows us to advise UK residents, domiciled and non-domiciled, as well as arrivers and levers in support of UK-based assets.
We are authorised in the UK to provide regulated advice across investments, pensions and insurance.
Now we have had 24 hours to digest the content of this Budget, we can begin to see how it can inform our wealth strategies and future planning for clients. After all the hype about pensions, there was little change but it does set a direction of travel. Assuming there is no major political fall out after the EU referendum, we can expect more radical change to move away from pensions towards the Lifetime ISA later in this parliament.
In the medium term, there are two key areas that might drive our thinking. Firstly, what the latest economic forecasts might tell us about the health of the economy. Secondly, the impact of the changes and increasing complexity in the personal taxation system which now sees additional allowances for dividends, interest, property and trading.
Let us look firstly at the economic outlook. In the Autumn Statement, the Chancellor was given more room for manoeuvre by forecasts from the Office of Budget Responsibility which were generally considered optimistic. This time around a downgrade in short term growth forecasts combined with significantly more pessimistic assumptions on longer term productivity have fundamentally altered the outlook. It is difficult to believe that the real economy has changed so much in a three month period. As we know with our own cash flow planning for clients, long term forecasts can set a direction and frame a plan but they are not a promise of absolute outcomes. Yet, boxed in by his own fiscal promises, the Chancellor is forced into reacting to these forecasts with more cuts or tax rises. He has pushed these back to the end of the parliament potentially more in hope than expectation that things will get better.
The EU referendum has the potential to derail any forecasts and will inevitably add to market volatility in the short term. But aside from a major upset there, our central house view remains for a period of low growth and continued low inflation, broadly consistent with the OBR’s latest outlook.
In this low return environment, taxes represent a bigger drag on wealth preservation. And here we can welcome some of the initiatives for encouraging savings and investments. They might not represent big wins for the already wealthy or retired, but certainly offer planning opportunities for the next generation and can also play a key part of generational planning.
The Lifetime ISA clearly sets a path towards ISAs replacing pensions. Much research shows that the public don’t like or trust pensions which they see as remote and complex, whereas the ISA brand is seen as accessible and well liked. If this can encourage greater engagement of young people in planning for their futures, it is a good thing.
The increase in the ISA allowance to £20,000 from April next year is a significant benefit, allowing clients to accumulate significant tax free retirement income and partly offsets the reduction in the pension annual allowance. And finally a reduction in CGT to 20% combined with the dividend and interest allowances can, with good planning, reduce the effective tax rate in retirement. The reduction in CGT may offer opportunities for certain clients to defer prior year gains into EIS and pay at the lower rate on exit from EIS after 3 years.
The only forecast which is certain is that there will be more change. Each tweak to the tax or regulatory system adds cost to the industry which inevitably gets passed on to consumers. But in today’s environment of low returns and complex tax, maximising the use of reliefs and allowances across the family is critical to wealth preservation and income generation in retirement.
Investors looking at the quarter-end equity market return may be forgiven for thinking that Q1 2016 has been rather dull. However, this has masked a period of elevated volatility which saw broad equity markets fall 11%, before staging a recovery from these lows to end largely where they started. Sterling investors enjoyed better performance numbers for the quarter where they had global equity exposure as the pound weakened in the face of Brexit concerns.
The volatility is driven by a nervousness among market participants and has challenged many an active manager over the quarter. Long term investors or those who took advantage of the sell-off to cautiously add to long term portfolios will have finished the quarter in reasonable shape.
At the start of the year we outlined our expectations for 2016, and central to this was the view that the US would not enter a recession. Whilst recent economic data points to relatively lacklustre growth, it continues to support our ‘o recession’ view and in fact the data has improved modestly over the past few months. Economic cycles are typically curtailed by central bankers being forced to tighten monetary policy as overinvestment and overheating leads to inflation. We do not see evidence of these developments at present. In fact, the US Federal Reserve has adjusted their stance to a more dovish one, forecasting only two rate increases this year against the four initially anticipated. We also see other central banks, most notably the Bank of Japan (BoJ) and the European Central Bank (ECB), continuing to use monetary policy tools to help stimulate their economies. Despite their substantial efforts, inflation remains elusive and growth sluggish. There are now some question marks over the efficacy of these tools, in particular negative interest rates, and this could present a challenge for the BoJ and ECB in the coming months.
In addition to concerns about how the financial sector will contend with negative interest rates, recent announcements have counterintuitively led to Yen and Euro strength, rather than the weakness being targeted. In the UK, we see increasing levels of uncertainty surrounding the upcoming referendum in June on Britain’s membership of the European Union. Whilst the polls suggest that the vote to remain will hold sway, the exit campaign has been gaining momentum and we anticipate increasing levels of volatility with respect to Sterling as we approach June and further weakness should the polls tighten and an exit seem a more likely outcome.
At the end of 2015 concerns about Chinese growth were elevated, but in the past few months these have moderated, helped by Renminbi appreciation. As we’ve noted before, China has a material influence on the global economy, and yet the opacity of information makes it very difficult to assess. We see significant structural challenges which need to be overcome (in addition to ongoing political risk), but also opportunity. The structural issues include high levels of debt and the challenge of transitioning the economy from manufacturing and infrastructure-led to a more consumption driven model. However, a consumer base with growing spending power should provide ongoing positive support to global growth, and Chinese authorities have significant reserves to provide economic support if required.
So what of the outlook? Well as for much of the recent past, we are faced with an interesting mix of positives and negatives. Monetary policy remains very accommodative and whilst the US has moved to start tightening policy, we anticipate a slow and cautious approach to future rate increases. Growth, despite much monetary policy assistance, remains tepid which doesn’t provide great support to the fundamentals underpinning equity markets. However while oil and commodity prices remain low, it is positive for the consumer and also helps keep a lid on inflation and eases the pressure on the Fed with respect to rate increases.
In short, no major change from our core view that we are not heading for recession in the near term but growth will continue to be sluggish and returns relatively low. The outcomes are unlikely to be hugely exciting but unfortunately with so much uncertainty around we may suffer more quarters like the last where the journey is more dramatic than the end destination. With the EU referendum coming up, this will be particularly relevant in the next few months – hold onto your hats!
It has been difficult to avoid the rather noisy and not always informative debate around the EU referendum. But as the month of June starts, there remains considerable uncertainty about how it will finish and we cannot ignore what is undoubtedly a key decision for the country.
Whatever your views, how can we prepare for the potential outcomes and what should really concern us?
What do we know?
Firstly, the polls are close. The bookmakers have a better track record and at the time of writing you can get 2/7 odds on for Britain remaining. A vote to leave looks unlikely in their opinion. But you could get 5,000/1 on Leicester winning the Premiership.
We know that the majority of leading economists consider that the UK will be worse off if it leaves than it would be if it chose to stay. This is in contrast to the debate about joining the Euro where there were a wider range of outcomes from the models and opinions differed extensively amongst top economists.
But perhaps most importantly we know that it is causing uncertainty and any vote to leave will cause further uncertainty.
In politics, following an Out vote, it is difficult to see how there cannot be a change at the top after David Cameron has so whole heartedly embraced the ‘In’ campaign. No mainstream party has a manifesto for an Out scenario and there is no consistent view on what it might look like. This will inevitably leave a vacuum in politics at least in the short term. And this lack of leadership and direction will come at a time when there is a 2 year window to re-negotiate terms of trades and work out which EU driven laws are to remain and which to go. That will cause an uncertain environment for businesses.
We know that there is nothing that spooks markets as much as uncertainty.
So an out vote is a possibility – but not a probability – but a possibility that will have such major short term consequences that it is worth thinking about how to prepare for that eventuality.
So what should we do?
In this sense it is helpful to differentiate between the short term consequences and a longer term perspective.
Short term, there will be lots of volatility. The general consensus in the market is that the biggest impact will be on sterling with likely swings around the release of each opinion poll up until the vote and a significant immediate devaluation in the event of an Out vote – at least against the US dollar if not the Euro.
Some individuals may be interested in taking short term bets around that volatility. This type of short term trading is not consistent with our overall philosophy of long term investment but for those prepared to take the risk, it may offer some opportunities for profit. Or you could just look out opportunistically for good rates to buy currency for known future expenditure.
Equity markets, including the FTSE 100, have to date not been significantly impacted and are taking their guidance from the wider outlook for global growth and corporate earnings. With the US presidential elections later in the year, uncertainty will continue throughout 2016.
It is these longer term economic cycles which continue to shape our overall recommendations on investment. We continue to plan for a central scenario of sluggish global economic growth and a relatively benign outlook for inflation. Portfolios are diversified with international exposure in markets and currencies, seeking to access those areas where we see the relatively greater growth opportunities over the next economic cycle.
The uncertainty triggered by an Out vote may well tip the UK into recession and a fall in the value of sterling will increase the risk of inflation from the higher cost of imports and given the UK trade deficit. The outlook for UK property may deteriorate. What impact this will have on the outlook for the wider global economy is unlikely to be immediately obvious given there are so many different factors impinging on the current global outlook. If the possibility of an Out vote becomes a reality, then it is likely that our longer term outlook for different assets classes will alter and we will be recommending changes.
That outlook is driven by the main challenges facing the world – economically, socially and politically. June 24th will give us certainty over the outcome of the referendum but which ever way the vote goes, many of those challenges remain.