UK Election Summary

After years of Brexit stalemate, months of battling to agree to an election and weeks of campaigning, the day finally arrive when the UK went to the polls for the 3rd general election in 4 years. The polls in the lead up to the election pointed to a large Tory majority which was whittled away during the campaign however give the track record these in the Brexit vote, the last general election and the US presidential election, little faith was placed in these predictions. Then came the exit poll and it felt almost a disappointment, perhaps the polls were right this time?

A Conservative government was returned and with a majority that no one believed possible. Sterling made large gains on the news and markets moved higher during the day. This is less a comment on sentiment towards Brexit and more relief that we did not return a hung parliament or a very left-leaning Labour government. A Tory majority is the outcome which provides the greatest certainty going forward which is the reason for the market response.

We will have to wait and see whether this now unleashes the pent-up investment and corporate spending which was much talked about and if that does come to pass whether this offsets any negative impact of finally leaving the EU. Whilst Johnson will be keen to pass his withdrawal bill with his new majority, it is of course only the beginning of our departure. The real negotiations begin around how our future trading relationship will function which even with a stable majority at home will be anything but uneventful.

One silver-lining, in purely economic terms, is that with this comfortable majority Boris may be inclined to soften his talk of a hard Brexit and look to reach out to the remain side and seek to negotiate a softer Brexit which will be less disruptive for future trade.

That move to the centre ground seems even more important for the Labour party. After leading the party to three straight electoral defeats Jeremy Corbyn has said he will not stand as leader in the next one. Whilst Brexit clearly dominated the election this time around, many were cautious about their economic plans. Assuming this parliament lasts its full term, perhaps we will see a less radical Labour party at the polls next time, which given that the country would have had nearly 15 years of Conservative rule in which austerity was pushed through and a potential exit from the EU, it will surely be Labour’s to lose next time.

So what does this all mean for our clients? The continuation of Tory rule should mean that tax rates and rules remain broadly where they are and one should not fear a government grab for your wealth. As stated above, markets have reacted positively to this outcome but that is more on relief than strong endorsement of the regime. A negative financial outcome has been avoided but we are not out of the woods yet. A lot of spending has been promised and given that growth continues to soften, government revenue will need to be found somehow. Therefore continuing to tax plan carefully remains a top priority. Also important is the need to diversify. As we negotiate our exit the UK market is likely to remain volatile. Elsewhere in the world there are a number of trends and potential events which will cause unease in global markets and demonstrated time and again, the unexpected always occurs, even when you were told it would happen as in the case of this election!

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.

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.

“Difficulties mastered are opportunities won”

An Investment Manager’s Perspective

“Difficulties mastered are opportunities won”. Winston Churchill famously uttered these words in a speech on 21st March, 1943, at the height of the Second World War. As we have seen, the UK has been thrown into a state of flux following Friday’s vote. However, as always, this also represents opportunities; the question is how to take advantage of those?

As many of our clients hold Wellian portfolios, we decided to speak to Richard Philbin, Chief Investment Officer at Wellian Investment Solutions earlier this week.

Although this absolutely does not constitute a recommendation to invest in Wellian (we are of course, independent and use a range of investment firms), we thought it might be helpful to hear their house view on the decision to leave and how that may impact decisions taken in relation to their portfolios.

So we asked Richard (RP) a number of questions:

Richard Philbin image
Richard Philbin, Chief Investment Officer, Wellian Investment Solutions

CG – Had you known the result in advance, how would you have positioned the portfolios?

RP – Hindsight is a wonderful thing. We are longer term investors and have been changing the shape of the portfolios for quite some time now – it is better to close the stable door BEFORE the horse bolts. We also build portfolios to be diversified across geographies, styles, asset classes and so on, whilst still being very mindful of the risk profile and investment objectives of the underlying client. We often use the following (potentially flippant) saying “if you’ve bought a toaster, you expect it to cook bread, you don’t expect it to change into a washing machine.”

We build and monitor our portfolios to meet defined risk boundaries as well, and had been aware that correlations and risks were rising in the UK, so we reduced UK exposure to a number of funds. In a couple of models we increased our cash weight too.

With perfect hindsight, you would be fully weighted in equity until Thursday night and then go short Sterling, and correspondingly long US Dollars (USD). You would have increased exposure to gold. Then, this morning (28th June) you would have gone back into the market….

I guess the question could also be phrased along the lines of “how far in advance would we have known the outcome?” Our models have performed very well over the past couple of days – our funds are not 100% exposed to the UK stock market, and even though we do have some exposure to the domestic market which has hurt, we have been increasing our international holdings and diversification which would have benefited from the currency weakness. A good example would be the purchase of Fundsmith Equity which we placed into a number of models almost 5 months ago. It accounts for instance 8% in the Growth model.


CG – How are investment managers taking advantage of this uncertainty?

RP – A very good question. I have been talking to a number of fund managers in the last couple of days; collating their views and thinking about the future, and the vast majority are talking about “caution.” The dust is far from settled – politically the Conservative and Labour parties are rudderless, Article 50 – the now famous Article 50 – has not yet been invoked, and there is no precedent regarding how a European “divorce” will happen. All we know is that it will take some time and not be painless.

Some indices have sold off dramatically – especially the Small Cap and Mid 250 indices, and within these there have been some large movements – stocks within the retail, real estate, construction sectors (and many more) for instance are down greater than 20%. Some approaching 50%. This means there will be opportunities – for domestic as well as international buyers (just think – US investors can now gain an extra 10% due to currency movement alone…)

In the large cap space, insurance and banking stocks have taken a beating – financial services is seen in the immediate term to likely be a large “loser” and that is not too surprising all in all. The fear of inflation, interest rates, corporate failure, bad debts and so on weigh on the mind of the market.

There will be opportunities – the market is both “a weighing machine as well as a voting machine” when it comes to share prices.

Liquidity seems to be fine (unlike 2008) which should give some comfort to market participants. I only know of one major “winner” – Crispin Odey – who runs a hedge fund – where his portfolio was up greater than 15% on Friday alone. But, his fund is still massively down on the year….


CG – In light of the decision, do you foresee any immediate portfolio changes?

RP – I don’t think “immediate” changes are on the cards – we will closely monitor the situation. I would imagine over the next couple of months though that we might increase our exposure to the UK due to the benefits already gained from the weakening currency and the recent stock market sell-off. We do not know if the sell-off witnessed on Friday and Monday is a knee-jerk reaction or the start of something greater. Fortune favours the brave, but I don’t think it is our job to be super “brave” at the moment.

Our portfolios are diverse and we will have had some funds deliver excellent numbers as well as some that have disappointed. But, we are happy with this approach and aim to deliver outperformance over the medium to long-term.


CG – The biggest casualty to date seems to be Sterling.  How have portfolios been affected by this?

RP – It is very interesting to see that Sterling has been the main “casualty” of Brexit. The Bank of England is independent and has the ability to print money. Over the past 12 months or so Sterling has weakened against most currencies – the Euro and the US Dollar especially. Of course our funds would have taken some impact from having UK holdings, and to a certain extent, the old “pound in your pocket” saying still remains. We have been increasing our international holdings over the past couple of months, and the translation effect of Dollars to Sterling or Euros to Sterling will have positively impacted returns.

It is (sorry for sounding like a stuck record here) still very early to say whether the short-term weakness in Sterling will become long-term weakness, but companies that export will be beneficiaries and the UK does operate within a global marketplace. Japan has been trying for years to weaken their currency and would love to see the Yen fall to such an extent.


CG – Looking forward, what are the key points for clients to be optimistic about?


  • The UK stock market has a great deal of businesses that are both inward and external looking when it comes to revenues, profits and therefore there will be winners in this recent “turmoil”. We have global leaders in many market segments and there will be opportunities.
  • When markets sell off, dividend yields rise (although you need to be mindful of pay out ratios.) With interest rates low, inflation muted (but this could change if Sterling remains weak) and yields on gilts touching less than 1% yesterday for the 10Y Treasury, sometimes taking risk when others are taking cover could provide a very timely investment return.
  • Interest rates could fall at the next BoE meeting (July). Low interest charges can be translated into higher profits.
  • The UK is very entrepreneurial in spirit. (Potentially) less legal constraints due to Brexit can free up innovation
  • The UK is still 0:00 on GMT. We speak the global language of business and have some of the best laws in the world. London is a global city and will always attract foreign money – whether that be for business, property or leisure spend. It’s now 10% cheaper to come… Maybe the leisure industry will be a big winner.


Although we are going through a turbulent time, it is precisely these moments that can create opportunities. It is important though to make sure you are as comfortable as possible with everything that’s going on – remember your plan and work it patiently.

We are always happy to answer any questions you may have and to discuss any concerns you or your friends and family may have.

“If I go there will be trouble” (The Clash)

So we have voted to leave – what happens next?

After months of campaigning, the UK has finally voted and whilst the result has been extremely close, many will be shocked at the decision to leave. Following on from Michael’s note last week, we have put together this short article looking at the consequences and potential impact of Brexit.


Market Reaction

Unsurprisingly, initial market reaction has been negative given that sentiment in the days preceding the referendum seemed to be swinging in favour of a Remain vote. As expected, the FTSE is down approximately 4% at time of writing and Sterling has fallen by approximately 6% versus the Euro and 8% against the Dollar.

It would seem that the prospect of protracted uncertainty across the UK and Europe means volatility will continue and coming weeks and months will be difficult for fund managers and small and mid-sized UK based businesses. However, it is important to remember that many of the companies listed on the UK Stock market, particularly those in the FTSE 100 are global companies and as such may be protected to a certain extent due to their relative lack of domestic economic exposure.


Political Repercussions

Statistically at 17.4m, the vote to leave was approximately 1.3m larger than the Remain vote. That said and even with a turnout of 72%, some 13m people didn’t vote which is 10 times the size of the Leave win.


Thumbs_up_downAlthough the choice was binary – “yes or no,” there is no doubt that the possible consequences arising from the decision are far from binary. Already we have seen David Cameron resign, raising the prospect of a leadership battle within the Conservative party and all that may bring (could we see Boris Johnson finally make his play?); Alex Salmond call for a further vote on Scottish Independence and in Northern Ireland, we have heard Sinn Fein call for the opportunity to allow the population to vote for a separation from the Union and look towards a United Ireland.

Although these calls present risks, they are not unexpected and in reality any decisions regarding the future of the Union ought to be viewed as possible on a longer term, say 10-year horizon.


Economic Consequences

As already alluded to, the economic consequences of this decision are not clear. If we look specifically at the regions of the UK, the impact could be significant. Scotland can set its own tax rates, but we have already seen Wales asking for money to replace what it will lose from the EU. Northern Ireland is a net beneficiary of EU money and so that money will have to be found from somewhere either in the form of extra taxes or extra borrowing with consequences for the economy as a whole. Only time will tell what the impact will be as the shock of the decision dissipates over time.

Some commentators have suggested that the vote in favour of leaving (52% v 48%) is relatively narrow and allows the possibility that the UK will retain access to the single market through membership of the European Economic Area. However, this depends on negotiations with the EU and could mean free movement of labour would continue across the EU… plus ça change, plus c’est la même chose…(the more things change the more they stay the same).

We should remember that the Bank of England and other institutions have worked out their contingency plans in the event that the country voted to leave. This was particularly evident in Mark Carney’s speech earlier today when he explained the plans that have been put in place to protect the UK and UK business as far as possible from the potential fallout caused by a Leave vote.


Our Message

Whilst this decision is the most important in a lifetime, I go back to the point we made in a previous commentary. The sun has still risen this morning, Wimbledon will still begin on Monday and Northern Ireland will still beat Wales tomorrow afternoon. The move to divorce ourselves from the EU will take a considerable amount of time, with more becoming clear in coming weeks and months.

At Greenstone we advocate three key principles:

Have faith in the future – At the moment, the FTSE 100 stands at 6,038. However on the day I was born it was 149.76 (please don’t ask when. It was a long time ago!). There will always be some crisis or other around the world that impacts on markets, but if we believe they are broadly efficient and capitalism works, then the long term trend is upwards.

Have a plan and work it patiently for your lifetime and if appropriate, the next generation. None of us are in this for the short term.

Have patience – Have a plan and work it patiently for your lifetime and if appropriate, the next generation.   None of us are in this for the short term.

Discipline – Avoid doing the WRONG thing. At times like this it is easy to be caught up in the broader sentiment. Keep a cool head and speak to us if you are worried about your investments.

As always, any uncertainty presents opportunities and we will continue to work with you to make sure your plan stays on course whatever happens in the short term.

However, we appreciate that you may have more questions about how this is likely to impact you personally, so do please feel free to contact us in coming days and weeks.