Brexit | Wells Gibson

Budget date confirmed and here’s what it could contain

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It has been confirmed; the Budget will take place on Wednesday 11th March 2020.  The Chancellor of the Exchequer, Sajid Javid, has launched the beginning of the Budget process, announcing that it will take place only a few weeks before the end of the tax year. 

During a visit to the new £350 million Trafford Park tramline project in Manchester, the Chancellor set out plans to use the Government’s first Budget to deliver change.  He plans to use the Budget as a platform for unleashing Britain’s potential, delivering world-class public services and levelling up the whole country.  

The Chancellor of the Exchequer, Sajid Javid, said, “People across the country have told us that they want change.  We’ve listened and will now deliver.  With this Budget we will unleash Britain’s potential – uniting our great country, opening a new chapter for our economy and ushering in a decade of renewal.” 

Javid is expected to set out plans in the March Budget to open a new chapter for the UK’s economy and prepare it for the decade ahead.  He aims to deliver on the Government’s promises on tax, to help tackle the cost of living for hard-working people. 

Furthermore, he would like to make good on the commitment to level up and spread opportunity, including by investing billions of pounds across the country. 

At the Budget, the Chancellor will update the Charter of Fiscal Responsibility with new rules, taking advantage of low-interest rates to invest appropriately and responsibly, while keeping debt under control. 

Although at Wells Gibson, we don’t like to speculate, we pay little attention to economic forecasts and, we can’t know exactly what the Budget will contain, until it’s announced in the House of Commons, there are a few areas where proposals seem very likely. 

New legislation will be introduced in April 2020 to stop the abuse of National Insurance and tax contributions relating to off-payroll labour in the private sector.  Therefore, if you are a contractor, you need to consider whether you fall inside or outside the IR35 rules by April 2020. 

On property, there is likely to be significant changes to Capital Gains Tax, especially for Lettings Relief and Principal Private Residence relief.  On 6th April 2020, Lettings Relief will be adjusted to only apply on the case where the owner is in shared occupation with a tenant. 

In respect of primary residences, PPR relief could be reduced from 18 months to 9 months if you buy a new home before you sell your old house.  This change will mean that individuals set on moving will need to stay in their home until it is sold or ensure that a sale of their old property takes place within nine months of them moving out to avoid a potential CGT charge. 

The March Budget could also introduce some changes to Inheritance Tax.  Last summer, the Office of Tax Simplification published its second report making proposals to reform the Inheritance Tax system.  This report covered the main areas of complexity for the tax, along with some of the technical issues caused by the current system.  They proposed several significant changes to the Inheritance Tax system, supported by a common perception that IHT rules are overly complicated and ideal for reform. 

Pensions could come into the firing line for the Chancellor in his Budget statement.  As things stand, tax relief on pension contributions tends to benefit higher earners disproportionately.  There are also widespread concerns about limits on pension contributions, with doctors and senior NHS staff, in particular, facing punitive charges, some taking early retirement or refusing to work additional shifts as a result. 

It’s likely the Budget will prioritise the environment and build on recent announcements to boost spending on public services and tackle the cost of living.  These spending announcements include investing in new hospitals, training thousands of new police officers, funding vocational education and the biggest ever cash increase to the National Living Wage. 

We look forward to seeing what the Budget will deliver, and whether it can indeed start a new chapter for the UK economy, seizing the opportunities that (as Boris would say) come from getting Brexit done. 

How to keep your investment head during Brexit

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As the old Chinese curse has it, “May you live in interesting times”.  With Brexit negotiations ongoing, it’s certainly interesting times in British politics, with likely consequences for investment markets.

There’s still a great deal of uncertainty over the outcome of Brexit. The anticipated ‘decisive vote’ has been postponed, for now, so Theresa May can seek more reassurances around the Irish border backstop.  We’ve also had confirmation from the European Court of Justice that the UK can unilaterally withdraw its Article 50 notice and effectively cancel Brexit, without seeking approval from other EU countries.

We can’t know for sure what is going to happen next.

One possible scenario is a lost vote in the House of Commons followed by the resignation of Theresa May, and then a new leadership election within the Conservative Party; possibly even a General Election in the New Year.

We do know that investment markets dislike uncertainty.  As we move ever closer to the 29th March departure date, that uncertainty only grows.  With global markets already displaying some volatility in recent months, that growing uncertainty could result in greater volatility, market corrections and (understandably) nervous investors.

Despite this uncertainty and its potential impact on investment portfolios, at Wells Gibson, we are clear about how we will navigate any choppy investment market conditions ahead.  In simple terms, our approach towards investment planning and management remains unchanged.  Here’s why.

The portfolios we recommend for clients are globally diversified. This means that we don’t recommend putting all of your eggs in one basket, instead spreading portfolios across several investment asset classes, sectors and themes.  This diversification is a really important aspect of risk management when investing money.  Furthermore, it’s probably the only free lunch available when investing.

From the perspective of any Brexit induced volatility, diversification means our clients are not overly exposed to investment assets which are most likely to respond to domestic turmoil.  It means that, when the newspapers and newsreaders are being sensationalist and screaming about billions of pounds being wiped off the value of the FTSE 100, this is only one part of your investment portfolio.

In recent years, this diversification within the portfolios we recommend and manage has moved further from the UK to include a higher proportion of global assets.  Thinking about the UK equity holdings within client portfolios, there’s an interesting consequence of the high proportion of overseas earnings from FTSE 100 companies, for example.  In the aftermath of the Brexit referendum, many investors were surprised to witness the FTSE 100 rise by more than 10% in three months.  During this time, the weakness of Pound Sterling was boosting the profits of FTSE 100 companies with overseas earnings.  Around 70% of FTSE 100 earnings come from outside of the UK, making a weak Pound Sterling beneficial for these companies.

We’re not suggesting that a Brexit meltdown, leading to a collapse in the Pound, will have the same positive impact on UK equities next time, but it’s worth keeping in mind that things aren’t always as simple as they first seem when it comes to investing money.

Our approach towards investment advice and management also remains unchanged because our clients are long-term investors.  Any increased volatility we experience over the coming days, weeks and months will likely be short-term, having little meaningful impact on the long-term performance of portfolios.  One exception could be where clients are making withdrawals from their portfolios in retirement and in this case, we can allocate a sufficient amount to cash in order to avoid needing to drawdown from invested assets during periods of extreme market correction.

We’re staying the course because we know that attempting to time investment markets is futile.  When markets are volatile, there’s always a temptation to try and sell before they have fallen to the bottom and then buy again before they rise to the top.  Nobody can do this consistently well. The more likely outcome is selling low before buying high and, if you do this on enough occasions, this can lead to wealth destruction.

We understand that it can be unpleasant to watch investment market volatility and experience falls in the value of your portfolio.  Regardless of how often we remind investors and our clients that volatility is a normal part of the long-term investing journey, our heart is bound to overrule our head on occasion, especially when the media does its level best to be sensationalist.

If you’re feeling nervous about investment markets in the wake of the Brexit news this week, talk to Wells Gibson.  We’re always happy to discuss any concerns you might have.

Brexit and your Wells Gibson portfolio

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Whichever way one voted, it is hard not to be dismayed by the shambles that is Brexit, created by all sides. In the event that any deal agreed gets voted down in Parliament, or there is no deal, there is a material chance that the government could fall.  One or both of these events would come with great uncertainty.

Wells Gibson sets out three key investment risks relating to Brexit and three key strategies embraced by Wells Gibson to help reduce these risks.

Risk 1: Greater volatility in the UK and potentially other equity / share markets

In the event of a poorly received deal or no deal, it is certainly possible that the UK equity / share market could suffer a market fall as it tries to come to terms with what this means for the UK economy and the impact on the wider global economy.  A collapse of the Conservative government and a Labour victory would add further uncertainty.

Strategy 1: Diversify globally across equities / shares

Although it is the world’s sixth largest economy (depending on how you measure it), the UK produces only 3% to 4% of global GDP, and its equity / share market is around 6% of global market capitalisation.  Well-structured portfolios hold diversified exposure to many markets and companies.  Changing your mix between bonds and equities / shares would be ill-advised.  Timing when to get in and out of markets is notoriously difficult.  Provided you do not need the money today, you should hold your nerve and stick with your strategy.

Risk 2: A fall in Sterling against other currencies

In 2016, after the referendum, Sterling fell against the major currencies including the US dollar and the Euro.  There is certainly a risk that Sterling could fall further in the event of a poor or no deal.

Strategy 2: Own non-Sterling currencies in the growth assets

In the event that Sterling is hit hard, it is worth remembering that the overseas equities that you own come with the currency exposure linked to those assets.  Remember too that a fall in Sterling has a positive effect on non-UK assets that are unhedged i.e. the investment manager is not using strategies to offset the impact of currency fluctuations. Whereas, the bond element of your portfolio should be hedged to avoid mixing the higher volatility of currency movements with the lower volatility of shorter-dated bonds.

Risk 3: A rise in UK bond yields (and therefore a fall in bond prices)

The economic impact of a poor or no deal and/or a high-spending socialist government could put pressure on the cost of borrowing, with investors in bonds issued by the UK Government (and UK corporations) demanding higher yields on these bonds in compensation for the greater perceived risks.  Bond yield rises mean bond price falls, which will take time to recoup through the higher yields.

Strategy 3: Own short-dated, high quality and globally diversified bonds

Any bonds you own should be high-quality to act as a strong defensive position against falls in equity / share markets.  Avoiding over-exposure to lower quality (e.g. high yield, sub-investment grade) bonds makes sense as they tend to act more like equities / shares at times of an economic and equity / share market crisis.

Some thoughts to leave you with

Even if you cannot avoid watching, hearing or reading the news, it is important to keep things in perspective.  The UK is a strong economy with a strong democracy.  It will survive Brexit, whatever the short-term consequences, and so will your portfolio.  Keeping faith in global capitalism and the structure of your Wells Gibson portfolio, as well as holding your nerve, accompanied by periodic portfolio rebalancing is key.

‘This too shall pass’ as the investment legend Jack Bogle likes to say.