|So the Autumn Statement is behind us. Taxes are up and so we now face the highest tax burden since WW2 as well as ‘enjoying’ the biggest public spending since the 1970s.|
The ‘Office for Budget Responsibility’, a relatively recently created quango and chaired by Richard Hughes, (Ed Miliband’s former policy adviser who was a researcher at the left-leaning think tank, the Resolution Foundation), seems to hold the sway there, despite the usual mixture of failed forecasts from the OBR of what the future holds (the problem with all economic forecasts).
State of the nation?
So, is the Government giving too much credibility to the OBR and thus over-taxing and still over-spending? The cynic could say that the ‘Left’ succeeds if taxes on the ‘able’ rise, benefits increase by inflation (however high) and public spending continues to escalate rather than seeing efficiency cuts. Economically this does all catch-up in the end as excessive tax dampens growth and productivity. Governments are not known for spending our money wisely either.
One great shame is that the ill-fated mini-budget (whatever one thinks of that) gave a clear signal that the UK was the place to come for sensible tax levels and a growth agenda and now the opposite seems the message. It is interesting that the growth projections under Mr Hunt for 2027/8 etc are exactly the same as those in that mini-budget. I have shared before that Kwazi and Liz’s previously unannounced tax cuts were relatively tiny overall.
Even Mr Hunt has only a few billions of leg room after his swingeing tax projections now. If we overtax and overspend, we frighten away investment – already Shell has said that the higher Windfall taxes may jeopardise its proposed £25billion capital investment for example. These things do not operate in a vacuum.
The system needs reform too – as do the public infrastructure entities and public services, of which many have strong unions rejecting all change. On top of that, there are almost nine million ‘economically inactive’ adults in the UK now – 22% of 16-64 year-olds. These figures exclude those in full-time education, the retired, carers and the disabled, etc… The statistics say that is 21% of all white people and 27% of people from ethnic minority backgrounds (who typically are concentrated in areas where deprivation can also be higher perhaps). This is from Government reports – Economic inactivity Naturally, women are higher figures as child responsibilities are involved too. However measured, something appears broken in the facts about our Nation and constructively, something must be done about it as otherwise that sense of resentment will rise. The fewer in work, the less the economic growth, the lower the taxes raised, the bigger the overall benefit cost and the more the fewer bigger taxpayers have to pay to provide the ‘system’.
On top of this, the biggest increase ever in the Minimum Wage next April means that for a 40-hour week, employers have to pay an extra £1,997pa, let alone the extra costs of pensions, NI, holiday cover, etc. Of course, when the biggest employer is the State too, then this means that public sector budgets will have to be cut to pay the bigger salaries. Presently there are acute employment shortages but we must now expect unemployment rising as cutting jobs will be the easiest and biggest saving which businesses, public organisations and charities can make.
For investors, suddenly the attraction of ISAs and Pension Investments for those with reasonably-sized cash funds and investments becomes crystal clear – make sure you use your allowances regularly. With smaller tax freedoms, you will start paying higher taxes on interest income on your deposits, dividends and capital gains so the umbrella offered by an ISA or a Pension is even more attractive. Plan in advance and not after the event!
Government’s debt costs
The price which our government had to pay for its debt peaked in late 1974 at 17%pa and that heralded four golden decades for ‘bonds’ which culminated in the lowest rate of 1.4%pa being seen after the Pandemic trough, in 2020. Almost half of global governments’ bonds were on offer at minus interest rates where you had to pay to lend them money. That bull market has ended.
Sadly, too few launched very long-term debt (or even undated debt, now ‘frowned-upon’), to fix the cost at these stupidly low rates. This means that as the debt launched over these years matures, it will need refinancing at higher rates and at greater cost to government budgets. And remember how inflation works – it kills the real value of your money. If you bought rock-solid British Government Bonds (Gilts) in 1974, you would have lost 96% of your money in real terms. That is happening to your cash and deposits today.
Sensible-term investors can be reassured that equities will revert to the very long-term norms of a 4%pa risk premium they offer over bonds; inflation kills cash and bonds. Whilst it can destabilise and destroy certain companies, in general terms they outdo it in time as they have pricing power and real assets – and borrow cash, paying it back with tomorrow’s cheapened earnings.
Yes, the ‘market’ can be stupid and especially in the short-term. Readers will recall how I reflect on certain situations from time to time and maybe yes, we enter some for clients too soon (better than too late!).
Take Abrdn Plc for example, which also encompasses the old Standard Life, a multi-hundred-billion investment fund group whose shares fell and fell and fell… as low as £1.33 in October and kicked-out of the FTSE100 as a result. We kept buying and buying and buying… (the lowest we paid was £1.36) and whilst they’re still only back to levels they saw in April (and that’s 40% of what they were in 2015) but they will be back in the FTSE100 now and have risen by a whopping 60% in just over a month. We had one ex-client telling us what rubbish it was at £1.33. We’ve had dividends too and as a result of this rise (and because we kept nibbling-away at lower levels as we prioritised purchases), it is now one of our largest direct share holdings.
Or there is the rather more speculative Hammerson, the property company whose shares hit 17.25p in September, now 25.25p, so up 46%. They could easily be £1 and still ‘dirt cheap’. Or Currys which hit 55p on 29 September and since have rebounded by 51%. We may not have many of these direct stocks but every little helps add to the bottom line.
What else? The Pound has risen by 17.5% since its artificial overnight low at the end of September (or rather the Dollar has fallen against most major currencies too). That cuts the price of our imports so a good effect on inflation where goods (including oil and gas) are priced typically in Dollars – unless their prices have reacted as a consequence! Oil is trying very hard to fall hard too, which is good and despite OPEC’s endeavours to keep propping-it-up. It’s off a quarter since June’s peak.
Of course, it is never all just good news, though for us there has been much more of that of late than bad! But what is De La Rue doing – struggling from one calamity to another and the extra windfall from printing new banknotes for the Country and the Commonwealth following the Queen’s death. Yet more poor results and the shares go back to July levels but still the Chairman wants to hang-on – though activist investor Crystal Amber has launched a motion to eject him – and we have voted our shares likewise. Still, a fair value for this company would see the shares three times higher than the present levels, but how long might we have to wait for that now and there can never be any guarantees!
So October saw the Gold price fall for seven months on the trot, last experienced like that in 1869, the longest losing streak in 300 years. We hold silver and believe gold is still ‘expensive’ as a reserve asset. It is a good asset usually when the world faces a calamity but when interest rates start to rise, holding/financing costs increase so it has a less-attractive pull as well.
Silver has more practical uses, though is clearly less attractive, as it’s so much cheaper so you need a big room to hold the same value’s worth – and transporting it in a hurry isn’t so easy! However, silver has been the cheapest against gold since WW1 so that adds to the attraction. One is too dear and the other too cheap is the logic!
At the same time that central banks have ramped-up their gold purchases (the fastest quarterly pace of buying in a decade), gold is also being withdrawn from vaults to make into jewellery, from Shanghai and Mumbai to Istanbul and Moscow and it will underpin its value – inflation adjusted.
We have long had a soft spot for Latin America though investors must always tread warily – as do we. However, we have done very nicely and especially this year, sporting one of the few overall winning spots across the Globe. We may only have say 5% of clients’ overall money there in aggregate, but that makes a difference (as it is also not in the popular things in the US which have gone down).
We’re watching what the new, socialist Premier in Brazil will do next too. Did you know Brazil is larger than Australia and feeds 10% of the global population? It is the biggest exporter of soya, beef, sugar and coffee and near the top for pork, corn and cotton and such agriculture counts for 25% of its economic output.
The Country is also the Region’s biggest producer of oil and the second-largest producer and consumer of biofuels (also consuming plant waste, dead animals and used vegetable oil). The stock market trades at a very lowly multiple with a good income yield, especially compared to the US so maybe it is worth a bigger punt!
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