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Fundraising challenge for Children in Need

I’m delighted to say that I finished the Beachy Head Marathon in one piece on Saturday afternoon.

Although very cold, the weather was beautiful, with barely a cloud in the sky and the supporters along the way were fantastic.  They definitely spurred us all on .

In my last post, I mentioned sausage rolls.  They were stationed at mile 16 but even I couldn’t face one at that point.  Still, I’m sure they fuelled many a runner on the last stretch!

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Thank you to everyone who has sponsored me.  We’ve raised a very healthy £350 for Children in Need.

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Beachy Head Marathon

As many of you are aware and because a number of clients have kindly asked for details, I wanted to let you know about my plan to run the Beachy Head Marathon tomorrow.

Having spent the last few months marathon training, I am pleased to say that I have made it to the end in one piece but wanted to reach this stage before publicising my efforts!   As I am highly unlikely to be silly enough to agree to another marathon during my lifetime I’ve chosen to run for a charity with a presence across the UK.  Running in a bear suit was a step too far, but running for a bear seemed achievable.

BBC Children in Need support disadvantaged children and young people all across the UK. With our support, they are able to change almost half a million young lives across England, Wales, Scotland and Northern Ireland every single year.

Assuming I am able to, I will add a post-race update and photo (sausage roll in hand) next week !

https://www.justgiving.com/fundraising/catherine-greeves

“…This too will pass….”

Thoughts on recent market restlessness

What is it about October? As flooding in parts of the UK subsides and the clear up following Storm Callum continues, investors are also taking stock of the damage wrought in the financial market storm of the last two weeks. The press were quick to compare Callum to the ‘Great Storm’ of 1987. Thankfully, so far, the falls in markets have not been on the scale of those witnessed 31 years ago, on Black Monday.

The trouble this time is a rapidly growing US economy rather than a slowing one. The Federal Reserve raised interest rates in September to 2-2.25% range and the minutes released yesterday suggest that more are to come. We have been here before, most recently in January and February this year, where fears of rapidly rising interest rates caused markets to fall. The Fed has been communicating to the markets that it expects to raise rates again this year (most likely in December) and another three rate rises in 2019. The sell off this month, as happened earlier this year, is that there will be more rises or by greater amounts, than has been suggested.

This is a case of good news being bad for the markets. The US economy is growing at its fastest rate for decades – over 4%pa – unemployment is low and Donald Trump’s tax cuts and promise to slash regulation has boosted sentiment further. Wages are increasing which has led to inflation rising above the target level of the Fed and as a response, interest rates have been increased. Any data which suggests wages or the economy is growing faster than expected, good news more broadly, will be interpreted by investors as a sign that interest rates will rise more sharply and therefore be bad news for markets.

A growing economy and rising interest rates are part of a normal economic cycle and have been repeated time and again since the establishment of the market economy. What is making the process more painful this time is the base from which monetary policy is moving. Interest rates have been at historic lows for nearly 10yrs following the financial crisis; governments have taken on massive debts in order to stimulate their economies and Central Banks have engaged in quantitative easing, swelling their balance sheets to unprecedented levels. All of this needs to be unwound and the US, being the first into and out of the crisis in 2008-09, is leading the way.

It is also still the dominant World economy and despite growth in Emerging Market economies, a lot of their debt is priced in Dollars and by extension linked to US interest rates. Therefore a rising Fed rate does more than affect US businesses and consumers. It threatens to cause debt crisis in over-leveraged Emerging Markets and if the strong Dollar weakens US demand for imports, manufacturers in East Asia will be affected also.

So what happens next?
Given the underlying economy in the US is so strong, and the Fed and the Government are more sensitive to a potential downturn, it is unlikely that interest rate rises will tip the US economy into recession. Economic growth across the World is more divergent than it was in 2017, however most economies are growing and therefore the underlying drivers of market returns are robust, so a full-blown market crash looks unlikely. What is more likely is that markets will continue to be flat, as they have shown to be this year, as rising interest rates dampen expectations of that rate of future profit growth and that profit is valued less in todays terms and therefore prices will come under pressure. At the same time there will be plenty of volatility as fears around the rate of increases ebbs and flows, not to mention the countless political and geo-political tensions brewing. Expect Italy, Brexit, Turkey, US-China trade wars and the Middle East to continue to dominate the headlines this year and next.

What can investors do?
Given that market levels, even now after the recent sell-off, are at long term highs, and that alongside this, levels of volatility and uncertainty are also high, taking some risk off the table is probably sensible. The trouble in doing this is what ‘safe assets’ to move into? Gilts and Government Bonds are at risk of capital falls as interest rates rise, particularly given the low rates they are moving from. Quantitative easing and a decade of low interest rates means that anything with a yield has been in high demand and so bonds across the investment risk spectrum are also at historic highs. They are also more susceptible than in the past to interest rate rises because of this. Therefore managers have been focusing on shorter duration, where there is less interest rate risk and whilst they may not perform well in the short term (where shares and bonds are affected by rate rises), should there be a greater market sell off, interest rates will be cut and bonds will be back in favour as the traditional safe haven.

Other than bonds there are alternative strategies such as property and cash. Cash is a good short term tactical play, given it has little cost and has the greatest liquidity. The downside is that if held for too long it is eroded by inflation. Alternative strategies are expensive but with a good manager have shown themselves to have low correlation to financial markets. Finally property, whilst still exposed to economic cycles and the least liquid of these assets, has maintained good yields and capital values have been fairly stable.

The recent market falls seem to have abated and markets found a new level. Unless corporate earnings are much higher than expected, I do not see markets racing ahead from here and so it may be some time before the previous highs are reached.

A full-blown market crash looks unlikely but repeats of the recent falls are likely, though hopefully accompanied by subsequent recoveries. A sensible strategy to navigate this would be a more cautious one, however one which also has a good yield. Whilst market levels fluctuate, investors can still generate positive returns by way of income. Re-investing this income will benefit from pound cost averaging in these turbulent times also.

We are living through one of the longest recoveries in history, which means a future downturn is closer than the one we left we left behind. Having interest rates at a higher level and monetary policy more ‘normal’ will mean more can be done to manage the next downturn. For economies such as the Eurozone (0% interest rates) and Japan (-0.1% interest rates) it will be much more difficult to manage.

In Summary
As always, the trick is to remain patient, ride it out, and look through the noise and sensationalist headlines. Bear in mind that whilst these gyrations are painful, they are necessary. The quote at the beginning of this article is by Benjamin Graham. He was a British-born American investor, economist and professor and taught Warren Buffet, among others. Graham said, of a particularly turbulent time in investment markets “In the old legend, the wise men finally boiled down the history of mortal affairs into a single phrase: “This too will pass.”

At Greenstone, we advocate three key principles to help you achieve your financial goals.

1) Have faith in the future and keep perspective.
Market downturns can be upsetting but history shows that major stock markets such as the UK and US markets recover from declines and can still provide investors with long-term returns. For example, during the past 35 years, the US market experienced an average drop of 14% from high to low during each calendar year, but still had a positive annual return in more than 80% of the calendar years in this period*

2) Patience
Work out a plan with your adviser. Articulate your key goals and understand how they might be achieved. Be patient about achieving them and make sure you are comfortable with your whole financial situation. Your adviser will have helped you to put together a portfolio that takes account of your time horizon, goals, tolerance for risk and capacity for loss. Speak to him or her about that plan if you need to refocus.

3) Discipline
Avoid doing the wrong thing. Market timing is a tricky game to play. There have been numerous studies over the years into the effects of moving in and out of the market. In fact, it is virtually impossible to consistently predict when good and bad days will happen. If you miss even a few of the best days, it can have a lingering effect on your portfolio.

That said, market downturns may be an excellent time to carry out some tax planning. For example, if you haven’t used your ISA allowance as yet this year, now might be a good time to do so. Alternatively, if you wish to sell some holdings that have performed well, a down-turn may provide an opportunity for some Capital Gains or Losses planning. This could help your overall financial position.

As ever, if you have any questions about this article or your investments, do please contact us your adviser on 020 3931 0340 or, for more general queries, contact us at info@greenstonefp.co.uk

*Fidelity; “6 tips to manage volatile markets”; Fidelity Viewpoints 01/08/2018

Pension flexibility two years on – the report card

The Financial Conduct Authority (FCA) has examined the impact of pension flexibility and is worried about the lack of advice.

Pension flexibility came into effect in April 2015. In theory, since then it has been possible from age 55 onwards to withdraw your entire money purchase pension fund as a lump sum, albeit generally 75% would be taxable as income. When the proposals first emerged there were concerns expressed that the temptation to take a pot of cash and spend it would be too great for many. The FCA has been examining what has actually happened since 2015 and in July published an interim report on its findings.

The FCA found that over half of the pension pots accessed since April 2015 had been withdrawn in full. While this grabbed the headlines, it does not tell the whole story: 60% of those pots were worth less than £10,000, while another 30% were below £30,000. That does not suggest the worries about people blowing their pension funds on a new Lamborghini have been realised. Indeed, the opposite seems to have happened: over half of those who fully cashed in their pension reinvested the proceeds in other savings or investments. However, as the FCA noted, such a move can “…give rise to direct harm if consumers pay too much tax, or miss out on investment growth or other benefits”.

By-passing advice

That danger highlights another FCA concern: that many people are failing to take advice about their pension flexibility options. In the FCA’s words, they are choosing “the path of least resistance” and opting for drawdown with their existing pension provider. The regulator says that the lack of shopping around this implies “may result in [the unadvised] achieving poorer deals”.

If you are considering drawing money from any pension arrangement, you should pay heed to the FCA’s emphasis on the benefits of shopping around and taking advice. DIY pension planning can turn out to be an expensive option, even if at first sight it looks the easiest.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Finance Acts 2017: the sequel?

The long-running saga of the final spring Budget and subsequent Finance Bills is one step nearer the end.

The Chancellor’s spring Budget was thrown into disarray by the snap election. It was billed as the last spring Budget, since from now on all Budgets will be autumn events. However, only about a fifth of the Budget’s proposals made it onto the statute book before Parliament shut up shop ahead of the election. The question of what would happen to the four fifths lost in action has been up in the air ever since.

It was (and is) an important question because large parts of the missing legislation were originally intended to take effect for this tax year from 6 April 2017. A good example is the proposed 60% reduction in the money purchase annual allowance (MPAA) to £4,000, which could affect you if you both draw pension income and your (and/or your employer) also make pension contributions. In theory, the current £10,000 limit still applies, but in practice acting on such a premise could be an expensive mistake should the proposed change eventually be enacted with an April 2017 start date.

Autumn Finance Bill on the cards

A week before the politicians left Westminster for their summer holidays, some clarification emerged in a written statement from the new Financial Secretary to the Treasury. The Government will “introduce a Finance Bill as soon as possible after the summer recess containing the withdrawn provisions”. The start date for provisions “will be retained”, meaning the £4,000 MPAA will be backdated to the start of the current tax year. This assumes that the Government will succeed in passing the Bill, which is not 100% guaranteed, even with DUP support pledged for Budget measures. As the Chancellor learned during the March Class 4 NICs battle, the best laid plans can falter in the face of backbench opposition.

At least there is now some greater certainty about the shape of the tax legislation. If you have been delaying any planning action while waiting for the dust to settle, now is the time to start talking to us. You might also want to discuss whether any pre-(autumn) Budget planning is necessary…

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

No summer Budget, but…

The general election left the future of many spring Budget announcements up in the air, but that situation may soon change.

When Theresa May announced her snap election in April, it threw a major spanner in the previous month’s Budget. There was no time to pass the 776 pages of Finance Bill before parliament shut down. The result was that about 80% of the Bill was removed and its uncontroversial residue passed through parliament in a few days. At the time it was anticipated that following the election the Chancellor – not necessarily Mr Hammond – would reveal a Summer Budget, just as his predecessor did in 2015. The second Budget of the year was expected to reinstate the lost measures and add a few more that were best left until after the polls closed.

It did not quite work out that way, as we all know. Mr Hammond has remained in place at 11 Downing Street and in June told Andrew Marr “…there’s not going to be a sort of summer Budget or anything like that, there will be a regular Budget in November as we had always planned…”. Shortly after that appearance, the background notes to the Queen’s Speech revealed that there would indeed be a Summer Finance Bill, even if there was no Budget.

A tight timetable

The new Bill will incorporate “a range of tax measures including those to tackle avoidance”, but precisely what those measures will be or when the Bill will emerge is unclear. The Treasury has a record of stretching seasonal limits when it comes to publications and will not be helped by the parliamentary timetable, which arrives at the summer recess on 20 July. Parliament resumes on 5 September, but only for nine days before the conference recess, which runs until 8 October.

One planned-and-abandoned/deferred measure which could be relevant to you is the reduction in the money purchase annual allowance. This generally operates when pension contributions are being made at the same time as benefits are (or have been) being drawn. If you think this might affect you, it is vital you check the current situation with us before taking any action.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

China becomes an emerging market as MSCI finally opens up

China-listed shares are finally to be included in the leading emerging markets index.

China has the world’s second largest equity market, but at present shares listed on the Chinese stock exchanges don’t figure in the MSCI Emerging Markets Index. The MSCI index is the most important equity index for emerging markets, with an estimated $1,600 billion of funds using it as a benchmark. While the index already has a 28% China weighting, this relates to Chinese companies listed on stock exchanges outside China, notably Hong Kong and in the United States.

For each of the last three years, MSCI has reviewed whether conditions in the Chinese stock markets were appropriate to warrant including shares listed on them in the emerging markets index. In 2014, 2015 and 2016 the answer was no. Various technical reasons were given and each time the Chinese authorities made adjustments in the hope that next year MSCI would change its mind. Last month, the answer finally switched to yes.

Look out for May 2018

The change will not happen overnight: adding such a large market to an index in a single move would be too disruptive. Instead, MSCI has set out a gradual approach. In May next year, MSCI will add shares in the largest 222 listed Chinese companies to its index, with an initial 5% weighting. The weighting is expected to rise over time until it reaches the full 100%, at which point Chinese-listed shares will represent about 15% of the MSCI Emerging Markets Index and total Chinese content, including the existing non-China listings, will approach 45%. Other smaller Chinese listed companies may also be added in the future, further raising the Chinese exposure of the index.

MSCI’s decision has been widely seen as a coming of age for investment in China and, on some estimates, could produce $500 billion of inflows over the next five to ten years. If you want to increase your exposure to China ahead of that predicted rush, there are a variety of options available which we would be happy to discuss.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Changes in the rates of exchange between currencies may cause your investment (and any income from them) to go down or up. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

Getting our hopes up for an interest rate rise?

Last month saw the first suggestions that interest rates could increase soon.

Source: The Federal Reserve

In June, the US central bank, the Federal Reserve, increased short term interest rates for the second time this year and the fourth time since December 2015. The 0.25% increase to 1.00% − 1.25% had been well signalled by Fed officials, so there was no surprise. As seems to be the case these days, the focus was more on whether the next rate rise was still three months away or might be deferred.

The day after the US interest rate decision it was the turn for the UK central bank, the Bank of England, to make its annoucement. This was universally expected to be another “no change”, leaving base rate at the 0.25% fixed amidst post-referendum concerns last August. The rate did remain unmoved, but there was nevertheless a major surprise: three out of the eight people charged with setting the rate voted for an increase. According to Reuters, this was the nearest the Bank has come to raising interest rates since 2007.

Not so fast

Does that mean the Bank’s next meeting might see the first rise in interest rates in a decade? The answer is probably no. One of the trio of rate risers will have left the Monetary Policy Committee by the time of the next meeting. Her replacement is thought to be less anxious to raise rates. A new deputy governor is also due to be appointed, bringing the Committee up to its normal quota of nine. The balance of the Committee is thus set to change.

Despite some apparent differences between the Bank’s governor, Mark Carney, and its chief economist, Andy Haldane, most experts still do not see the first base rate increase happening until 2018. That is good news if you have a variable rate mortgage, but bad news if you have a deposit account or cash ISA.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Mr Carney prepares to write a letter as inflation rises

The latest inflation numbers show prices rising at their fastest rate for nearly four years.

The May inflation data came as a surprise to many pundits. The expectation had been for inflation, as measured by the Consumer Prices Index (CPI), to remain at April’s level of 2.7%. Instead, National Statistics revealed that annual inflation had reached 2.9% (3.7% on the Retail Prices Index yardstick).


Source: ONS

The last time inflation was at this level was June 2013, as the graph shows. Since then it has taken a rollercoaster ride to around zero for much of 2015, only to surge upwards in the past year: in May 2016 CPI inflation was just 0.3%.

At 2.9%, inflation is already above where the Bank of England had been expecting it to peak later this year. If the rate adds another 0.2% next month, then Mark Carney, the Bank’s Governor, will have to write a letter to the Chancellor explaining why the inflation target has been missed by more than 1%. It’s already clear what he would say from statements issued recently by the Bank: blame the fall in sterling since the Brexit vote.

The Bank sees little respite in the short term. In the press release issued in June alongside its interest rate decision, the Bank said inflation “is likely to remain above the target for an extended period as sterling’s depreciation continues to feed through into the prices of consumer goods and services”.

With many deposit accounts paying interest rates of under 1% (before tax), the news on inflation is a wake-up call if you’re holding more cash than you need to. A year ago money on deposit was just about keeping pace with price increases, whereas now it’s losing buying power at the rate of about 2% a year. To discuss your options in the renewed battle against inflation, please talk to us.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

Independence Day

Achieving Financial Freedom

The Fourth of July marks Independence Day in the US, where they celebrate the overthrow of the King and the birth of a new and modern democracy, with ‘justice and liberty for all’. I wonder whether this year will see half the country celebrating more enthusiastically than ever and the other half wondering whether they are returning to monarchic rule.

That aside, the date and the name got me thinking about what we do for our clients, as independence is an important goal for many and we take great pride in helping people achieve this. Independence can come in many forms, from helping clients retire early to rid themselves of the stressful job they have grown weary of, to helping those achieve a comfortable and enjoyable retirement where they are free from worries that their money will run out, to something in between, helping a business owner become independently wealthy from their company so that they can step away from work any time they wish.

We are only able to achieve this through careful, meticulous, long term planning. It starts at our very first meeting where we identify what is most important to you and can then take many years to come to fruition. We work with you over this period to ensure you are on track and if the goal of independence changes, we amend your plan and the path accordingly.

If you or someone you know is looking for independence of some form, please contact us and we will be delighted to help.

Here’s to more people celebrating independence on 4th July 2018.