|Markets? We are holding our own reasonably though Mini Budget week was savage and the negativity is continuing. Our hedging Dollar assets rose in Sterling terms and so many ‘value’ equities now are exceedingly attractive, with high dividend incomes.|
Do we trim some of our Defensive Dollar-based assets now? Growth areas were hit hardest – so the Nasdaq yet again and all the global indices linked to the same big US Tech companies but we haven’t supported them for ages. If Mr Biden was clever he would now be buying Euros, Yen and Sterling as the artificially tall Dollar won’t help his economy. Sadly though, through all of this (and sanctions are absolutely right in view of the war) the West is suffering worse financially than Russia as a direct consequence of the economic constraints we have imposed. Countries more in league with Russia and still trading with it (mainly Asian and Middle Eastern countries) are the key winners.
I shall put my neck on the line now and say share prices already reflect worse than the worst, so whilst we need patience again and it is time to batten-down-the-hatches to ride the storm, it is certainly not the time to exit. Indeed, there are so many choice things to buy now and it would not be unexpected to see a significant rebound and very soon. Markets hate uncertainty worse than ‘bad certainty’, something with which they can cope.
The Budget shocked everyone, caused the left wing some emotional uproar suggesting it benefited the rich at the expense of the poor (it doesn’t but I’ll explain – we must try to cut the politics and emotion out of the financial facts here) but the market wasn’t sure and pushed Sterling lower again (though primarily the Dollar is steamrollering ahead).
However, crucially the markets are worried this may destabilise our economy so it pushed Gilt yields up by an unprecedented sum in one day and last moving so much over 30 years ago. This signifies concern, in that any budget shortfall must be funded by the sale of Government Stock and the cost of that is now dearer by 0.43%pa. If I round a few things and generalise, ignoring what the Bank of England holds under QE and other parts of the equation but one day’s movement means the cost of our National Debt has just risen by a tad under £10billion every year.
If the strategy works – and I believe it just might – then it captures the world’s attention. Cutting the highest rate of tax doesn’t cost much in fact (there are 629,000 payers of it, contributing £1-2billion of surtax) and in a strange way it can lead to more tax collected as these people do fewer things to avoid paying it (I am talking about legal things!).
Adding-in the cap removal on Bankers’ bonuses (like them or not but like pop/film stars and footballers’ pay they cost us nothing), the removal of the National Insurance hike, the cut in the Basic Rate of Income Tax, keeping Corporation Tax rates at present levels, new, targeted low-tax business zones and relaxing capital requirements for certain financial institutions create a very juicy recipe to attract business and to retain what we have.
AUTUMN STATEMENT 2022
No, I am not saying this as any party political statement but as an economist assessing what has ‘just’ happened. 34million pay Income Tax so a significant number pays none (the population is almost 68million, in 27.8million households) and the top 10% pays over half of the total Income Tax collected – the top 1% pays a third of all Income Tax collected). 7.3million over State Pension Age contribute.
So let’s imagine this works, trade comes here. It invests, employs people in permanent, good quality jobs, settles here, buys property and commits to staying here. It might bring its market listing here too (eg Unilever and Shell pulling-out of their shared EU domains).
What else does it do? It spends here but crucially, it and its employees pay taxes here – not just Corporation Tax and Income Tax but all the other taxes contributing to the State’s income to ensure we can pay more welfare but also have better funded public services.
On top of this, there were giveaways for lower earners too – National Insurance cut and the lowest Income Tax rate cut so two incentives to workers – and we need more people working and those doing so, doing more hours.
Indeed, it may well attract businesses and high earners from Scotland; they don’t have many surtax payers anyway but if they can work south of the border they’ll keep more of their earnings. This does prove the logic of the idea – Scotland doesn’t then lose just the 5% surtax differential – it loses the whole 45% and that means that everyone else left (the poorer people who can’t move) will ultimately have to pay more or expect less in welfare and public services.
What might I have done differently? Perhaps left Stamp Duty on homes alone and not cut the 1p on Income Tax but spent the equivalent on cutting duty on products we all buy, eg fuel or targeted VAT (like energy or construction/UK hospitality). That would then have also cut the headline Inflation rate and still given us money in our pockets.
What if it doesn’t work? Then expect the Government’s cost of borrowing to rise (meaning all our borrowing costs), the Pound to remain weak, the State to borrow loads more money and taxes will have to rise significantly in the future to put us back on an even keel.
However, interest rates are rising globally to dampen inflation – demand which pushes prices higher. It may create global recession and significant job losses and then we may find interest rates are cut savagely to stimulate demand needed to kick-start things again.
Share prices and fads
Who remembers when, in the good ol’ days, the supermarkets were the growth sector of the stock market? Tesco hit £6.10 on 31 October 2007 and now languishing nearer £2.17 yet far better value than ever they were then. Yes, there’s been an explosion of competition but so have their sales and the dominant position in retail still stands.
I don’t mind if they aren’t going to shoot-the-lights-out as they’ll still be there down the track and meantime we receive an enjoyable dividend of nigh 5% and profit made mainly by selling us groceries, which we need whether we are feeling economically affluent or impoverished.
They hit £1.89 on 31 December 2015. Sainsbury’s hit £5.64 on 30 June 2007 and its present dividend is 6.7%. Its shares hit £1.77 on 31 August this year. At these levels I should not be surprised to see some predator unlock value there but meantime, choice ‘value’ and being paid to wait – and with limited downside for the sector to be frank.
The other thing to recognise is that popular shares are populated by more investors who have acquired them for the trend and thus the falls can be far more exaggerated as the investors are less experienced and have less grasp of fundamental underlying ‘value’ and are more likely to sell-out at any price to avoid more pain. This is compared to ‘unpopular’ stocks which are held by more longer-term, value investors who have not bought on the ‘trend’. This should protect them more on any major upset as well.
Sainsbury’s deal to sell £0.5billion of supermarkets to LXI (which has suggested it will sell new shares to fund it) seems to have spooked the commercial property market which is already wondering what ‘Recession’ may mean for tenants, borrowing costs (and the owners who have borrowed too much money) and commercial property values. We see some great value there now – it is irritating ‘they’ have fallen by as much as 30% these last few months as a consequence but the actual ‘results’ are looking very good and underlying values are holding-up well even if there is hesitation in the property market place. Half the trouble is that if LXI does do a fund-raising issue, some owners of the ‘others’ will feel they have to sell shares elsewhere to raise the money to do so and hence the extra pressure short-term on the share prices of these REITs.
Meantime, as with this deal, rents linked to inflation and with solid tenants who are not going to default are a very attractive diversified asset class and worth tucking-away. I mean… are you going to stop buying your groceries? We can regret not trimming some of ours at the top but is that simply being greedy? Remember though, on whatever metric you are looking, for 50p you are buying as much as £1’s worth of commercial real estate and receiving the rent of £1’s worth too so that will come good in the end, I assure you.
Is this reaction a portent to what could happen to residential property prices and the market here though… it is already drying-up we hear and then it’s not what price you secure but you just can’t sell at any price as conditions have changed so dramatically. Builders’ shares have plummeted on the slowed housing market. A few repossessions and forced sales and the whole pack of cards could come tumbling-down in the face of high mortgage costs. At least with commercial property REITS the utility value of the underlying properties is not expensive now and hasn’t been for years frankly – with houses, the ‘utility value’ could be as much as 60% below present over-inflated prices, even with high rents.
So in 2021, according to Credit Suisse’s latest research, including our homes the number of millionaires in the UK increased to 2.85million. That may have changed over the last few months but even so, that ranks us fourth, ahead of France and Germany, which slipped backwards. The Company expects the UK to have even more by 2025, despite our having the highest growth in numbers in Europe.
The US, China and Japan are the top. The top 1% in the UK own 21.1% of the UK’s wealth, a fall from the 22.1% the year before so less inequality too but that inequality rises in Germany, the US, India and China.
Pension transfers from deferred schemes
On Friday, Gilt yields rose by just under 0.5% – in one day, the most for decades. This is not only the interest the State has to pay for borrowing new money but it links across to other interest rates and ‘liabilities’ and is the market’s expectation of the ‘future’. It also means that the capital value of investments paying fixed interest fell as their rates are not as attractive as they were compared to present rates.
In simple terms, an irredeemable government bond could have fallen by 15% on one day; so much for safe bonds for investing. Fortunately, we don’t have any of those but it has impact in other ways (such as rental incomes which don’t change instantly but that affecting the capital value of the asset and other forms of fixed income returns). One of the biggest impacts will be on Pension Transfer values for those with deferred, salary-related pensions.
Transfer values have already fallen significantly but there may be merit in people seeking transfer values for schemes immediately as they hold for three months and actuaries are not the quickest to adjust factors, so you can bank a figure based on previous yields. This is the biggest factor affecting transfer values.
Remember, if you have one of these you do NOT HAVE A FUND. You are simply a liability to the scheme. If your liability falls as the scheme doesn’t have to hold as many assets to generate the return required from things like bonds, so do transfer values.
My best wishes,
Philip J Milton DipFS CFPCM Chartered MCSI FPFS FCIB
Chartered Wealth Manager
Fellow Of The Personal Finance Society, Fellow Of The Chartered Institute Of Bankers