Category: Guest Articles

Author: Tim Sharp

Researcher: Jack Williams

Published: April 19, 2023

Gold, the precious metal often viewed as a hedge against uncertainty, war, and inflation, has been in the spotlight as it approaches its all-time highs once again. After hitting a peak of 2074.88 USD in August 2020 amidst the breakout of the Coronavirus pandemic, investors are now speculating whether there are further gains in store for gold or if the metal has reached its peak for now. In this week’s chart of the week, we will examine the historical trends and recent developments in gold’s performance, including its relationship with silver and the mining stocks for both metals and how they interact with each other.

Historically, gold has been considered a seriously defensive asset by investors, coining it’s ‘safe haven’ image amidst the inflation-wracked 1970s, where gold emerged as the best performing asset class, solidifying its reputation as a hedge against inflation. However, in recent years, gold’s defensive qualities have been called into question by the investor community as to whether gold still serves as an effective hedge, particularly considering its muted response to certain catalysts, such as the early days of the Russia/Ukraine invasion.

In recent months, gold has once again outperformed, fuelled by a confluence of factors such as the reopening of the Chinese economy, banking sector uncertainties, and investors seeking a hedge to equity markets as prices decline across sectors. These factors have contributed to the upward momentum in gold prices recently, especially since the turn of the year. Notably, while gold has historically outperformed silver in terms of raw price over the long term, there has been an interesting trend reversal when it comes to mining stocks for both metals.

While physical gold has outperformed physical silver, Gold miners have historically lagged behind silver miners in terms of equity prices, but in recent months, this trend has been shifting. The spread between gold and silver miners has been narrowing, with both gold and silver miners moving more in tandem with each other than they previously traded. This suggests a potential changing dynamic in the precious metals mining sector, which could warrant further analysis.

Year to date, gold has returned 9.79% to investors holding the commodity, while silver has returned 2.4% in the same comparable period. However, when it comes to mining stocks, gold miners, as tracked via the VanEck Junior Gold Miners ETF, have returned 6.07%, compared to the 8.28% return from silver miners. This indicates that silver miners have been outperforming gold miners in recent months, which is a noteworthy development to consider.

Considering these trends and recent developments, it is important to analyse the factors driving gold’s performance and its potential for further gains. While gold has historically been seen as a hedge against inflation, geopolitical tensions, and economic uncertainties, its effectiveness as a hedge may be influenced by various factors, including changes in market dynamics, investor sentiment, and global economic conditions.

One key factor that has influenced gold’s performance in recent months is the reopening of China’s economy. China, one of the world’s largest consumers of gold, has been experiencing a rebound in economic activity following the containment of the COVID-19 pandemic and the countries brutal Zero-covid policy, which has contributed to the upward momentum on Gold since the back end of 2022 and start of ‘23.

Another catalyst driving gold’s performance is the recent banking sector uncertainties following the downfall of Silicon Valley Bank and the merger between Credit Suisse and UBS. The banking sector has been facing challenges, including concerns about rising interest rates, potential inflationary pressures, and regulatory changes. These uncertainties have prompted investors to seek safe haven assets, including gold, as a hedge against potential risks in the banking sector.

Across the winder banking sector, opinions are divided as to how gold will perform for the remainder of the year, with some houses predicting a fall, some further rises to break above all time high and others expecting the metal to remain flat on the year. Listed below are some recent Gold forecasts issued by prominent banks.

Gold Price Forecasts Per Institution
Société Générale	$1550 Year End Target 2023
Fitch	$1600 Year End Target 2023
Reuters	$1750 Year End Target
Commerz Bank	$1950 Year End Target
J.P. Morgan	$1860 Year End Target
Wells Fargo	$1900-$2000 Year End Target

 

 

Sources:

https://www.jpmorgan.com/insights/research/market-outlook#:~:text=Commodity%20price%20forecasts%20for%202023,the%20fourth%20quarter%20of%202023.

https://www.ytdreturn.com/gold/

https://www.thenationalnews.com/business/money/2022/09/20/is-gold-losing-its-shine-as-a-safe-haven-asset/

https://markets.businessinsider.com/news/commodities/commerzbank-reaffirms-its-gold-forecast–looking-for-prices-to-end-2023-at-$1-950-an-ounce-12267260#:~:text=Commerzbank%20reaffirms%20its%20gold%20forecast,2023%20at%20%241%2C950%20an%20ounce&text=A%20magnifying%20glass.

https://www.hattongardenmetals.com/articles/aa2754/socit-gnrale-sees-gold-prices-falling-to–in–and-recovering-to–by.aspx

https://www.fxstreet.com/news/gold-price-forecast-xau-usd-target-range-for-2023-set-at-1-900-to-2-000-wells-fargo-202212291421

Charts: RefinitivData, Van Eck, GlobalX

 

Author: Tim Sharp

Researcher: Jack Williams

Published: April 12, 2023

 

Small Caps have pulled back recently, with many investors taking note of the correlation to credit conditions, which have tightened a fair amount in recent weeks following the fallout of Silicone Valley Bank and Credit Suisse a few weeks back now.

Events such as the SVB fallout can cause banks to become more hesitant of lending to both individuals and businesses. This makes accessing credit, and at a decent rate, that much harder.

Rate expectations in the US have fallen in recent months and despite stubborn inflation, interest rates are now seeing cuts being priced in for as early as Q2 23’ from some analysts. The question is, what are the fed to do? Risk growth deteriorating and causing a potential recession or, cut rates and unlock growth where inflation could then spiral.

As pictured on the left, rate expectations are coming down, with analysts predicting multiple cuts through to Q1 2024. The chart shows the current rate expectations in blue compared to its expectations a month ago in dotted line.

Strangely enough, consumers seem to be holding up. Amidst high inflation, rising costs of credit, an uptick in mortgage rates and cost of living pressures, consumers have weathered the current environment better than feared. Many investors had their hat hung on a recession due to a weak US consumer but have yet to see it fully materialise. While certain items have seen demand reduce, many companies are holding the line in terms of margins and being able to pass additional costs onto consumers.

Labour markets remain extremely tight, traditionally supportive of consumer behaviour, this data paints a differing picture than other economic indicators such as PMI’s which have been weak in recent reading and remain in contractionary territory.

 

 

 

 

 

 

Charts – Bloomberg / Barclays Research

https://www.forbes.com/uk/advisor/personal-finance/2023/03/23/inflation-rate-update/

https://live.barcap.com/PRC/servlets/dv.search?contentType=PDF&docviewID=6435d2cabba1a914d01ac9ab

https://live.barcap.com/PRC/publication/FC_TEJ-IH4gfiB-IH4g_6435d2cabba1a914d01ac9ab

https://www.ft.com/content/cb0f2aba-dee4-4ddb-b00a-61c5f6759092

https://www.bloomberg.com/news/articles/2023-04-09/end-may-be-in-sight-for-global-rate-hike-cycle-as-fed-nears-peak

Author: Tim Sharp

Researcher: Jack Williams

Published: March 22, 2023

 

Amidst the chaos in the banking sector this week, comes the destruction of Credit Suisse’s AT1 bonds, sending ripples through fixed income markets and causing hefty losses for bond giants such as Pimco who saw losses of $340 million on the banks AT1 product.

The deal between UBS and Credit Suisse leaves CoCo holders to bearing the losses while shareholders receive a small token with one share of UBS being exchanged for every 22.48 shares of Credit Suisse held.

Shown above is the WisdomTree AT1 CoCo bond UCITS ETF, which combines various AT1 products from across the banking universe to form a diversified ETF. Since the turn of the month, the funds value has fallen by nearly 12% and by more than 7.5% in the past 6 days alone showing the serious concerns of investors holding CoCo bonds, and investors uncertainty surrounding European banks in general. The fund now trades a mere 20 cents from the low it marked back in March 2020 when Coronavirus made its debut appearance.

AT1 bonds, otherwise known as CoCos (Contingent Convertible Bonds), have unique features dissimilar to other bonds investors may hold, they are issued by banks to raise capital. AT1 bonds are unique in the way they are designed to absorb losses in the event the issuing bank experiences financial distress. These bonds once again dissimilar to other bonds can be converted into equity or written off completely if certain conditions are met, such as falling CET1 ratios.

While CoCo’s tend to pay an exacerbated yields in comparison to other banking bonds, this is justified by being amongst the first few rungs of debt to be potentially restructured or written off when a bank comes into trouble such as we have seen with Credit Suisse in recent days.

While UBS has stepped in and made a deal for Credit Suisse, investors remain concerned about the wider banking market as seen by the huge declines in banking stocks across the EU, U.K and U.S. over the past week. Furthermore investors are now posing questions as to banks profitability after long swathes of time in low interest rate environments where deposits may have been hedged using fixed income securities now trading well below their waterline due to the rapid pace of interest rate increases employed by central banks around the world.

A mere month ago, financials was one of the most overcrowded, overweight sectors positioning wise. Now investors are reassessing the sector once again, having seen shares slide to the downside, this poses the question are the banks an opportunity at these levels, or something to avoid.

 

 

 

https://www.reuters.com/markets/rates-bonds/pimco-lost-340-mln-with-credit-suisse-at1-bonds-write-off-source-2023-03-21/

https://www.pimco.co.uk/en-gb/investments/gis/capital-securities-fund/inst-gbp-hedged-inc

https://www.theguardian.com/business/2023/mar/18/bank-runs-bailouts-rescues-are-the-ghosts-of-2008-rising-again

https://www.ft.com/content/fcfaea32-7288-49f8-acb0-84c846b157d9

https://www.theguardian.com/business/2023/mar/20/at1-bank-bonds-credit-suisse-bondholders-cocos

Charts:

1^st: Wisdomtree AT1 CoCo Bond Fund – LP68490358 1Yr Chart

2^nd : PIMCO GIS Capital Securities Inst GBP Hgd Inc – LP68227330

3^rd : Wisdomtree AT1 CoCo Bond Fund – LP68490358 3.5Yr Chart

Author: Tim Sharp

Researcher: Jack Williams

Published: March 12, 2023

Recent emergence of bearish data on the US economy, alongside the failing of two prominent financial institutions in the states such as Silicon Valley Bank, has prompted investors to reassess both the outlook for the US recession in the coming months, and the Fed’s ability to raise interest rates further.

Construction job openings in the US dropped heavily in January, plunging by more than 240,000, representing a near 50% fall from the prior month’s construction job postings figure.

Construction in the USA is a massive contributor to GDP and while it’s contribution as a percentage of GDP has been gradually falling in recent years, the sector still makes up around 3.90% of the overall GDP figure.

The near 50% fall witnessed in January was the largest ever monthly decline in construction job openings data history which has been running for nearly 20 years. On a wider lens, overall job openings dipped only slightly in January suggesting the wider economic picture is still at somewhat of a strength.

Figure 1 – US 2021 GDP By Sector

This matters as fed members in recent months have renewed their hawkishness and are looking to push ahead with further rate hikes, both of the recent banking collapses and the recent release of construction jobs data, which throws a spanner in the works, further complicating the issue.

Many investors believe the economic impact from the 4.5% worth of interest hikes the Fed has already delivered over the past 12 months have not been felt fully by investors. Economist Milton Friedman wrote in length regarding his view on the lag that monetary policy works with; Friedman claims it can take years for Fed interest rate changes to make their way through to the economy. Although useful to note, most of his monetary policy work was published in the late 60’s and the makeup of economies now are very different from what they were in the period his work was published, the interest rate was still relatively high around the time of his publications 4.6-5.7%.

This theory has already started being priced into markets with fed swaps pricing no additional rate hikes as the most likely scenario, and around an 80% probability being priced for no rate hike on the March 22^nd meeting. Vastly different from the probabilities the market was pricing even this time last week.

 

 

https://www.statista.com/statistics/248004/percentage-added-to-the-us-gdp-by-industry/

https://www.jstor.org/stable/1828534

https://live.barcap.com/PRC/publication/FC_TEJ-IH4gfiB-IH4g_640f47431055c101cec9f9ee

https://www.axios.com/2023/03/09/construction-softness-underscores-feds-tough-call

https://www.marketwatch.com/story/bank-debt-swoons-as-fed-moves-to-contain-fallout-from-sbv-signature-bank-collapses-9588e016

https://www.ft.com/content/7e7fdddb-724c-42fd-98ee-5d7248d53334

https://www.ft.com/content/b860ebb6-f202-4ec6-a80c-8b1527c949f4

 

Author: Tim Sharp

Researcher: Jack Williams

Published: March 8, 2023

XRT – SPDR Retail Sector               XLE – SPDR Energy Sector               

                          XLV – SPDR Healthcare Sector        XLK – SPDR Technology Sector

February surprised investors as the uncertain macro backdrop and market volatility gave way for risk on assets to outperform once again, defying many market commentators and veteran investors’ theories that the recent rise in equity prices were down to little more than a bear market rally.

The graph above shows relative performance from the start of 2023 across sectors replicated via ETF’s. While XRT, the S&P’s retail sector focused ETF, gained traction early in the year, gains were parsed and overtaken by XRK, the S&P’s Technology sector focused ETF, which now sits at a YTD return of around 15% compared to Retail stocks, who have seen their 25% gain seen towards the end of January deteriorate to current levels representing roughly a 10% return on a year-to-date basis.

.STOXXE – Europe                        .SP500 – USA                               .N225 – Japan                         

.HSI – China                                  EWU – United Kingdom

 

On a global front, the markets which saw huge inflows at the beginning of the year, such as China’s Hang Seng Index which was buoyed by the news of zero covid policies ending in the region, have now parred their gains compared to their global peers. Looking at year to date returns, European equities have outperformed peers with the EuroStoxx50 Index sitting at a near 10% year to date return.

China’s Hang Seng Index is the second-best performer, holding onto 5% returns as of this point in the year, although down dramatically from the over 15% return investors would have seen from the index from the start of the year to the end of January.

The MSCI U.K index saw healthy returns of nearly 3% in the month of February buoyed from rising flash PMI’s and weaker than expected inflation data. The UK’s main blue-chip index hit a fresh all time high in February reaching over 8000 points to many investors’ delights.

Investors are now wondering where performance will stem from moving forward through 2023, which is no doubt harder to ascertain given the numerous conflicting data points the market has been given in such a short period of time.

With inflation still running at elevated levels and government bonds yielding around 4% on the high end, investors still have an appetite for inflation beating returns which seems to explain growth sectors being the ones which have rallied the hardest since the start of the year. In what has been for many months now a risk off environment, it has been growth stocks as of recently that have outperformed, both on the upside in January and in February on the downside.

Whether this trend will continue remains to be seen, but investors are watching numerous data points in an attempt to pre-empt where the flow of capital will be directed towards next. Corporate earnings are being followed diligently, with analysts having cut their targets by as much as 3.4% in the first two months of the year, while companies so far have surprised to the upside with their earnings (on average +1.6%). Demonstrating that the true effects of central bank policies and slowing economies are yet to be felt. Corporate’s ability to weather these headwinds will dictate the strength and direction of their share price, until a clearer macroeconomic picture develops, giving investors renewed confidence.

 

Sources:

Data/Charts – Hottinger/Refinitv Data

MSCI – https://www.msci.com/documents/10199/3b75b636-55c0-4ce8-a8aa-6bb70e12b99d#:~:text=The%20MSCI%20United%20Kingdom%20Index,market%20capitalization%20in%20the%20UK.&text=The%20MSCI%20United%20Kingdom%20Index%20was%20launched%20on%20Mar%2031%2C%201986.

https://markets.businessinsider.com/news/stocks/stock-market-earnings-expectations-profit-analysts-interest-rates-fed-sp500-2023-3

Many investors over the past 12-24 months, with the benefit of hindsight, may have found themselves wishing they had crystallised some gains before the market correction affected high flying, more interest rate sensitive sectors such as technology. It has also renewed the debate as to whether an actively managed investment portfolio can be physically maintained alongside legacy buy and hold strategies.

Most investors enjoy watching the stocks they own, develop, and grow in value over time, but at what point does that growth become a hindrance to the diversification, safety and opportunities within the rest of your portfolio?

Buy-on-dips or buy-and-hold strategies have been a key strategy since the Global Financial Crisis (GFC) particular as the volume of passive investment strategies has grown, and Quantitative Easing (QE) turned asset markets into a one-way bet, however, the point of entry matters over time. Absolute Strategy Research (ASR), the Independent Macro-Strategy Research Provider to Hottinger, point out that strong equity returns in the medium to long term tend to rely on a sound starting valuation. We believe it will be very challenging to attempt to trigger a new bull market equity rally with stock market indices priced at around 20 times price-to-earnings valuations, and it can often take a long time to recover from a significant drawdown following peak valuations: examples would be 29 years after the 1929 crash and 15 years following the 2000 tech market bubble. We would argue that the rally seen in cyclical stocks since the start of the year smacks of investors looking to re-invest after the 2022 drawdown, especially in technology stocks, without giving due consideration to the entry point. Indeed, ASR point out that the correlation between cyclical stocks and the ISM New Orders Index has broken down as the New Year rally pushes ahead of fundamental economic data.

A buy-and-hold strategy since the GFC will have amassed some significant gains in some now mega-cap companies, and the maintenance of such a portfolio requires the trimming of positions in order to maintain the integrity and diversification of the portfolio as a whole. Running a portfolio with many out-sized positions could lead to unintended consequences on the upside through sector rotation and the downside when certain sectors re-value as with technology in 2022. As a discretionary investment manager, we would consider investment decisions to be the main consideration when constructing and maintaining an investment portfolio and any decisions surrounding taxation to be secondary. We believe allowing taxation to dominate investment decisions will lead to questionable decision-making and a less efficient deployment of capital.

In the UK, many investors have made good use of the capital gains tax annual allowance to trim positions thereby reducing the tax liability created through the crystallisation of gains. Afterall the decision to pay capital gains tax (CGT) could be considered voluntary because the decision to crystallise a gain is voluntary. However, we would argue that having made the decision to create an investment portfolio, and perhaps seek professional advice,  the investor has decided that they wish to employ a strategy that promotes investment decision-making. The 2022/23 CGT individual allowance is £12,500 and the government has announced plans to halve the capital gains tax to £6,000 this year, and again to £3,000 in 2024. This will increase the difficulty of using the allowance to maintain an efficient, balanced portfolio meaning many investors may find themselves with larger CGT liabilities going forward.

While we do not provide tax advice and do not run investment management strategies based primarily on tax efficiency, there are certain options investors may wish to consider in coming months as the deadline for CGT allowance cuts approaches and we would advocate seeking professional advice where appropriate. We also appreciate that current UK government policy is open to any policy change or amendment proposed by any future administration.

Currently, a lifetime buy-and-hold strategy will see all unrealised gains nullified on death by the prospect of pending inheritance tax considerations, however, such a strategy for those with the prospect of many years of investing ahead of them could suffer from many of the disadvantages already discussed. A CGT allowance is a ‘use it or lose it’ type of tax system, meaning unused allowances cannot be carried into the next year. Considering the allowance halving this year, then halving again the next, it could well be worth thinking about making the most of the current £12,300 individual allowance if not already done so.

Historically, many investors tend to opt for living off the income derived from capital thereby paying income tax on dividends at their personal rate rather than paying CGT. However, it may be useful to note that CGT rates are dependable on an investors income band, and it can, in some cases, be more tax efficient to take a CGT gain rather than potentially raising their income tax band, which also has a knock-on effect to CGT rate. If a spouse has a different tax band an investor may wish to seek advice about transferring assets without creating a tax event.

There are a number of tax wrappers that allow an investor to build an investment strategy without tax considerations namely ISA’s, investment bonds, and Self Invested Pension Plans (SIPPS). Indeed SIPPs also have the benefit of all contributions being gross of income tax. Furthermore, the use of open-ended investment funds also allows the fund manager to manage the portfolio and the tax considerations within while the end investor only deals with such considerations at disposal.

Alternatively, if an investor does not wish to manage out-sized gains within a portfolio, there may be an option available to ring-fence such positions more efficiently in an execution-only account and allow their managed investment strategy to continue without the incumbent distractions. However, this does not stop such investments from impacting on the overall estate of the investor so absolute confidence in the decision to make lifetime hold decisions for tax reasons should be taken with due consideration under professional advice.

In a world where economic and investment cycles seem to be shortening giving rise to short term periods of extreme volatility it may pay to be nimble, agile, and responsive to both threats and opportunities in these challenging times by focusing on key investment management decision-making. As the CGT allowance falls to £3,000 from April 2024 onwards celebrating profits on good investments net of tax considerations and maintaining a suitable investment strategy that allows for appropriate decision-making could be key to maximising future returns.

Author: Tim Sharp

Researcher: Jack Williams

Published: February 8, 2023

A warmer end to the year in Europe, better than expected Q4 earnings and a weaker dollar have formed the perfect storm, fuelling a strong start of the year for equity markets considering the challenging macro-economic environment in the background.

European bears have had their eye on the Natural Gas price for months now, with a colder than average winter forecasted earlier in 2022, European investors are now breathing a sigh of relief as natural gas prices, catalysed by the ongoing war between Ukraine and Russia, plummet from their highs.

ICE’s natural gas futures ($NGLNQC) marked it’s 2020 low around June at a price of $10,  the following 18 months saw contract prices appreiate to a high of around $780, a move of over 750% for investors early to the trade.

With EU power supply heavily dependant on Natural Gas, this tends to feed into energy prices and in turn inflation, causing concern amongst Investors and Governments alike. With Nat Gas having fell so dramatically from it’s highs and the back end of winter in sight, many investors once with eyes fixed on commodities are now starying to look at main markets once again for oppertunities.

January has been a welcomed start to the year, bringing a 7% advancement in global equities companred with the 4% sell off seen in december. The UK’s Blue Chip 100 Index has advanced nearly 4% at time of writing, alongside breaching it’s all time high of 7877, trading through the 7900 level while the STOXX600 Index has appreciated 6.66% YTD.

In the US, Markets bounced heavily, favouring Tech, Industrials and Banking sectors, the US’s Nasdaq100 index advanced 15.2%, US500 gained 7.27% while the Dow, still in positive territory, lagged behind producing 1.94% worth of gains.

 

(Data/Sources: Charts – RefinitivData, Bloomberg, J.P. Morgan, Barrons Inc. 2023)

 

Author: Tim Sharp

Researcher: Jack Williams

Published: January 31, 2023

The relationship between personal savings rate and checking deposits is an important aspect of finance. Personal savings rate refers to the percentage of one’s disposable income that is saved, while checking deposits refer to the money held in a checking account.

A high personal savings rate is an indicator of financial discipline and stability. It means that a person is able to control their spending and save a significant portion of their income. A high savings rate also provides a cushion for unexpected expenses and can be used as a source of funds for large purchases, such as a home or a car.

Checking deposits, on the other hand, refer to the money that a person holds in their checking account, which is accessible and can be used to pay for everyday expenses. Checking deposits provide convenience and security.

A dwindling savings rate, as seen above, shows people are finding it harder to save a portion of their disposable income, whether this is due to the prices of goods rising with inflation, changes in lifestyles since the pandemic or stagnant wages. Inversely, high checkable deposit rates, as shown above, could mean people feel generally uncertain about spending in this period of time. Again, this is further shown when looking at consumer confidence which remains near to historical lows in both the U.K, Eurozone and USA.

These three data points, checking deposits, savings rates and consumer confidence, are being watched eagerly by investors at the moment. If consumer confidence picks up, perhaps the dam of savings accrued by individuals since the pandemic, and yet to be spent, could make its way into the economy. While on the other hand, if savings rates tick up, this could mean wage growth translating through to the general population which would mean for a healthier consumer and in turn perhaps trickle down into the economy.

 

Data & Charts – Refinitiv Data, Bloomberg Data, Gemstock Data, Gemstock Fund, Statista Inc. 2023

Author: Tim Sharp

Researcher: Jack Williams

Published: January 25, 2023

Greyscale Bitcoin Trust, a widely used vehicle for investors looking to gain exposure to Bitcoin whilst remaining within the safety of a stock exchange, has been on a wild ride the past 24 months. A journey that in early 2021 saw the trust NAV exceed the price of the BTC it holds within, now trades at a steep discount to the real Bitcoin asset itself.

NAV or the Net Asset Value is the value of the underlying asset relative to the price of the trust it is held within. Discount to NAV on Greyscale has climbed as investors offloaded cryptocurrency and growth stocks in recent months as inflation and interest rates soared.

Once trading at a 26%+ premium to the Bitcoin price, Greyscale Bitcoin Trust now trades at a steep 48.23% discount to Bitcoins price of $17,000 at the current time of writing, meaning Greyscale’s Bitcoins are currently worth around $9200 on a NAV adj basis.

 

Author: Tim Sharp

Researcher: Jack Williams

Published: January 18, 2023

Through 2022, a period of global instability, uncertainty and constant investment landscape changes, the U.K.’s blue chip index shown below (Vanguard FTSE100 ETF)  has been the best performing developed index of the year. Thanks to the structure of the constituents within the index, following rises in energy prices, sterling slipping against the dollar, and even throughout the Trussenomics debacle, UK blue chip investors have seen positive returns of +3.76% (1Y) compared with the UK 250’s less impressive return of -15.47% (1Y)

U.K 100 ETF’s have enjoyed strong earnings from Oil, Gas and Mining companies along with weakness in sterling fuelling gains, while the UK’s Vanguard FTSE250 ETF with higher sensitivity to the U.K economy has shed almost a fifth of its value through 2022 and now sees the largest price disparity compared to its blue-chip counterpart since 1986. Shell and BP, both Vanguard FTSE100 ETF constituents, have reported some of their most profitable periods in their company’s history, BP recently doubled its earnings to $8Bn and Shell beat its all-time profit record set in 2008 of $31Bn.

As rates continue to rise, investors seem hesitant to onboard risk assets, seeking bulletproof earnings and expandable markets as they search for some safety in this uncertain period. While UK100 ETFs continue to climb, just 77 points from the index’s all-time highs, UK250 ETFs continue to be unloved by investors. With inflation and borrowing costs affecting the appeal of risky assets, UK250 ETFs appears somewhat inversely correlated to peak interest rate expectations. After the Government’s disastrous mini budget, rate expectations for 2023 sat near 6%, leaving UK250 ETFs in oversold territory within indicators. With government stability somewhat returning, and rate expectations having somewhat cooled from their highs, investors are questioning whether a potential peak in Gilt yields or Rate expectations could give the index some room to rise. Charted below is the Vanguard FTSE100 ETF and Vanguard FTSE250 ETF comparatively showing the huge spread between the two.

Vanguard FTSE 100 UCITS ETF (GBP)

Vanguard FTSE 250 ETF

Vanguard FTSE 100 ETF GBP (White) Vanguard FTSE250 ETF GBP (Blue)

Author: Tim Sharp

Researcher: Jack Williams

Published: December 21, 2023

 

The charts published show three indices that represent markets on a global, U.S and U.K scale. The red line represents the current price of the index (MSCI), while the blue line is the Blue Angels Implied Price (calculated using forward earnings multiplied by forward P/Es).

Looking at the first chart, you can see on a global scale, the market trades around a 15.25x multiple compared to the USA which trades at a premium of over 17x.

The chart below shows the U.K trading at a steep discount in comparison to the general global market and even more so to the U.S market. UK MSCI currently trades around a 6x multiple, almost 300% lower than the USA and 250% below the general global market.

One of the main reasons for this has been the high percentage of cyclical companies that make up the index. With a large proportion of constituents in the Banking space or the Energy sector, traditionally with lower valuations than of those that comprise the likes of the US indices which include a wider range of growth names.

That being said, this can be both a positive and negative for investors as the market has grown at a slower rate. We have seen the U.K market much more resiliant to the kind of market volatility seen this year in the USA. Over the past year, the FTSE has returned a positive 2.06% compared to the S&P500 in the U.S which has seen declines of -15% over the past 12 months.

https://www.yardeni.com/

https://www.yardeni.com/pub/int-mscina.pdf

https://www.yardeni.com/pub/int-msciex.pdf

https://www.yardeni.com/pub/int-msciwl.pdf

Author: Tim Sharp

Researcher: Jack Williams

Published: November 21, 2023

Millions more around the U.K will be paying more in tax come the new year as Jeremy Hunt, the latest appointed chancellor, tries his hand in taming inflation and calming the markets with his Autumn Statement.

On Thursday morning, Chancellor Jeremy Hunt embarked upon £55Bn of savings as he cuts public spending and attempts to raise funds through a round of “stealth” taxes that will likely affect millions the length and breadth of the United Kingdom.

Independent forecasts from the Office for Budget Responsibility (OBR) have revealed that the statement will see Britain face the biggest hit to living standards on record, with £30Bn of delayed spending cuts and £25Bn in backdated tax increases.

The announcement comes after inflation hit a new 41-month high, reaching 11.1% in the middle of the U.K.’s cost of living crisis.

While no one seems to be safe from the Chancellor’s sweeping plans, which touch everything from dividends to defence spending, many families and investors are probably wondering what this means for the markets, their finances and their families.

Key Announcements

45p Tax Rate

The 45% top rate of tax, recently poised to be scrapped by Truss’ government has been reinstated, while the threshold has been lowered from £150,000 to £125,140. This means those earning £150,000 or more will now pay around £1200 more per annum in tax.

Income allowance, National Insurance and Inheritance Tax

The Conservatives announced a freeze on income tax personal allowances, national insurance and inheritance tax until April 2028, while benefits and state pensions are set to rise in line with inflation.

Windfall Taxes

The government has pulled a 180-degree U-turn on its prior stance of opposing the uprating of the tax upon oil and gas producers’ excess profits, increasing the levy from 25% to 35% while imposing a further 45% rate on energy generators making “extraordinary profits”. This affects businesses where electricity is being sold above 1.5x the average 10Y electricity price, meaning a headline rate for affected businesses of 70% once corporation tax is factored into account.

Nuclear Energy

The Government has confirmed its plans for the Sizewell-C nuclear plant, calling Britain “a global leader in renewable energy” in the Chancellor’s statement. Hunt also spoke about furthering the green agenda, pointing towards offshore wind and carbon capture as future areas to explore while promoting nuclear as the solution to the U.K.’s energy mix.

Dividend Allowance

The past five years have seen a dividend allowance of £2000 in place, down from the prior £5000, which has now been halved from 2023 to just £1000, and from 2024 halves again to just £500. Although this is on top of the £12,500 personal income allowance which everyone gets, from 2024 it will be just 10% of where the allowance stood in April 2018.

Capital Gains Tax Allowance

Jeremy Hunt has decided to increase the tax on growth as well as income for investors by halving the current capital gains tax allowance from £12,000 to £6000 from April 2023, before being slashed again by 50% in 2024/25 to a £3000 p.a. allowance.

• The Chancellors statement has resulted in a United Kingdom with the highest tax burden since records began.
• On only three occasions in history have disposable incomes fallen, in real terms, for two consecutive years as they have over the past 24 months in the U.K.
• The economic decline is expected to return living standards back down to 2013/14 levels, with current rates not being recovered for an estimated six years.

What does this mean for U.K. investors and what can you do?

Investors in the U.K will likely see a notable difference coming into the new year from the governments statement on Thursday. Forecasts from the Institute for Fiscal Studies (IFS) identified middle income families to be the worst affected with the typical U.K household taking a permanent 3.7% income hit.

However, by utilising different strategies, investors may be able to mitigate some of the negative impacts from Jeremy Hunt’s statement last week.

Combining Capital Gains Tax (CGT) Allowances

Couples are reminded that, if married or in a civil partnership, they can combine their CGT allowance. Couples where only one of them is using their CGT allowance can merge with their partner to ensure maximum use of the lowered thresholds.

Using an ISA

ISAs offer an annual tax-free allowance of £20,000 and may be considered one of the most efficient ways to mitigate tax on investments. However, liquidating a portfolio to fund an ISA may trigger CGT if the gain is above the CGT allowance.

Start Ups to Mitigate Tax Impacts

Investing in start-ups, when done efficiently, might also mitigate some of the impact of the Chancellors statement.

Venture Capital Trusts (VCT’s) invest in emerging British businesses and offer a number of tax reliefs such as 30% upfront income tax relief, tax-free dividends, and an exception from capital gains tax on shares should they rise in value, provided they are held for a minimum qualifying period.

Enterprise Investment Scheme

The Enterprise Investment Scheme (EIS) is a governmental incentive that provides a source of funding to early-stage U.K companies while offering tax benefits to holders.

EIS is seen as one of the most tax-advantaged of government schemes, with opportunities to mitigate income tax, capital gains tax and inheritance tax; designed to support growth-focused, early-stage and unquoted companies to raise funding they may have otherwise struggled to attract due to their early stage and therefore higher risk status.

While early stage ventures come with a higher risk and growth potential, EIS can offer relief to investors in the form of tax and loss benefits such as income tax relief (Investors can claim up to 30%, £1m maximum p/a for a maximum of £300,000 worth of income relief), tax free growth (any growth in an EIS investment is 100% tax free), capital gains deferrals (a gain made on the sale of other assets can be reinvested in EIS and differed over the life of the investment) and loss relief (ability to offset the loss on an EIS investment against their Capital Gains or Income Tax).

Summary

While moves aimed at pushing the U.K back towards sustainable finances may be fit for the job at hand, the Bank of England, OBR, and government forecasters all agree that the U.K is now on the brink of a recession, with the normal counterbalance of fiscal stimulus remaining firmly off the table.

The question is, how do U.K investors protect themselves against a recessionary environment? There is no single solution, however while Hottinger does not offer tax advice, there are schemes, incentives, and avenues of opportunities available that may make the most of current allowances and bolster one’s finances looking forward depending on each investor’s risk tolerance.

 

https://commonslibrary.parliament.uk/research-briefings/cbp-9643/

https://www.bloomberg.com/news/articles/2022-11-18/uk-s-middle-income-households-squeezed-hardest-by-fiscal-plan

https://ifamagazine.com/article/autumn-statement-reaction-from-investment-and-financial-experts-to-chancellor-hunts-announcments/

https://www.gov.uk/guidance/venture-capital-schemes-tax-relief-for-investors

https://www.gov.uk/guidance/venture-capital-schemes-apply-for-the-enterprise-investment-scheme

https://www.gov.uk/government/publications/enterprise-investment-scheme-and-capital-gains-tax-hs297-self-assessment-helpsheet/hs297-enterprise-investment-scheme-and-capital-gains-tax-2019

https://www.syndicateroom.com/eis#:~:text=No%20tax%20on%20EIS%20gains,must%20already%20have%20been%20claimed.

https://www.bbc.co.uk/news/uk-england-suffolk-63664140

https://www.theguardian.com/uk-news/2022/nov/17/biggest-hit-to-living-standards-on-record-as-jeremy-hunt-lays-out-autumn-statement

https://www.theguardian.com/politics/live/2022/nov/17/autumn-statement-2022-live-jeremy-hunt-to-unveil-budget-plans-as-labour-says-12-years-of-tory-economic-failure-holding-uk-back-rishi-sunak-latest-updates

https://www.ft.com/content/8af720e0-1946-4c42-8dcb-ee6ea679bbb6

By Miguel Fraga

Launched in 1995, the Alternative Investment Market (AIM) is a sub-market of the London Stock Exchange which allows young fledgling companies to float their shares with a more flexible regulatory system than that applied to the main market. Since inception, the AIM market has grown substantially from just 10 to now 765 listed companies with a combined total market capitalisation of over £89bn, diversified across 40 different sectors and operating in more than 100 countries. Many of these companies operate in exciting and dynamic high-growth industries including those providing renewable energy solutions such as hydrogen power, software services to a myriad of end-markets, pioneering medical equipment manufacturers, business communication facilitators and smart metering services.

 

And with the market down 35% YTD and 37% from its recent peak, now may be a very good time to invest. Valuations are now approximately 50% cheaper compared to peak with prospective P/E and EV/EBITDA multiples at 18.2x and 12.5x respectively, well below long-term median levels of 23.9x and 19.6x, respectively. In addition, investments in the AIM market offer a powerful benefit in helping clients seek shelter from the impact of inheritance tax (IHT).

 

Inheritance Tax is a tax imposed on the estate of someone who has died including all property, possessions, and money when this is passed on to successors. The standard IHT tax rate in the UK is 40% and is usually charged on the part of the estate that’s above the tax-free threshold (nil rate band) which is currently £325,000. Many of the listed shares in the AIM market qualify for Business Property Relief (BPR), which if held for a minimum of 2 years, may provide up to 100% exemption from inheritance tax on transfers of value at death.  To put this into perspective, the inheritance tax saving of 40% expected from an AIM portfolio that has been invested for at least two years would more than offset the steep market decline of 37% from peak witnessed to date.

 

The general rule for a company to qualify for Business Property Relief is that it must be running a business that benefits the economy rather than simply making money on investments. However, the ultimate assessment is made by HMRC at the time of death, and therefore there cannot be any guarantee that an AIM company that qualifies for BPR today will remain BPR-qualifying in future.

 

At Hottinger, we offer the AIM Portfolio Service. This is a discretionary managed investment service presented to clients, particularly those seeking to mitigate their IHT liability, which invests in a diverse portfolio of 25-35 AIM-listed companies that may qualify for BPR and thus, IHT exemption at the time of purchase. There is no definitive list of BPR qualifying shares issued by HMRC so the exemption is established at the time of death subject to the rules and regulations governing IHT at that point. We conduct extensive due diligence and in-depth research on target companies, identifying those having compelling and sustainable business models which we believe offer strong growth potential over the long-term.

 

Recent additions to our AIM portfolios have included Advanced Medical Solutions Group, a world-leading developer and manufacturer of advanced surgical and wound care products, as well as CVS Group, one of the largest vertically integrated veterinary services providers in the UK. Both companies maintain strong market share in sectors witnessing good secular growth, coupled with quality management, strong profitability and cashflow visibility as well as robust balance sheets to withstand even the harshest of expected recessionary headwinds.

 

While the benefits of AIM-listed investments are attractive, it should also be noted that shares in AIM companies generally carry higher risk than those of the main market, with less stringent regulations both for admission and reporting. The requirement that companies should have three years of trading history does not apply to AIM, shareholder approval is only needed for the largest transactions, and financial disclosure and reporting requirements are also less demanding. In addition, shares in AIM-listed companies may exhibit higher volatility and lower liquidity than other shares listed on the London Stock Exchange. This means that if you look to sell shares, you may not be able to sell them immediately and you may have to accept a price that is less than the real value of the companies. We would, therefore, recommend that investors considering an investment as part of their estate planning discuss its appropriateness with their advisers.

For further information on the Hottinger AIM Portfolio Service: https://hottingergroup.wpengine.com/services/investment-management/

By Carol Frizelle

Seeking some respite from the UK’s current economic situation I thought I would take the opportunity to share my daughter’s recent success at the 2022 Commonwealth Games held in Birmingham in August.

It was here that my oldest daughter Gemma became the first ever Welsh Rhythmic Gymnast to win a Gold medal with the Hoop at the Commonwealth Games!

This was a huge achievement and something Gemma has worked tirelessly toward since a very young age.

[i]

Delivering a routine which shows clean, balanced movements alongside perfect technique is the goal of every gymnast but was something that Gemma had felt less confident in being able to deliver heading into the Games. The interruption of COVID (and the resulting lack of competition) coupled with both injury and nerves did not bode well for her performances or her confidence.

Despite all these difficulties I, of course, knew she could do it!

Her coach would tell me that judges often approached Gemma whilst at competitions overseas and complimented her on how graceful and skilled she was. She was even once told that she might be among the best gymnasts in the world if she could perform consistently clean routines. This was the message we were getting but, at the end of the day, it was only Gemma that could go on to deliver.

As the games approached Gemma suffered a painful spinal injury during an intense training camp in Baku. For several weeks it really was touch and go as to whether she would be able to compete at the Commonwealth Games.  It was such a stressful time for her, having to entertain the idea that all she had trained for and worked towards over the past four years might go to waste.  Thankfully, a team of local specialists were able to support Gemma with her medical condition and just one week before the games, was given the go ahead to compete! I was so thrilled for Gemma but also unsure of how it would go. I believed she was a medal contender under any normal circumstances but given the difficulties surrounding the injury I felt unusually apprehensive as the Games approached.

On day one of the competition Gemma hit the floor clearly meaning business and went on to deliver a series of fantastic routines.  She successfully qualified for the overall Finals and went on to qualify for a further two individual finals on day three (with her best apparatus I may add). Day two had been slightly more difficult and I could see that she was battling pain and suffering from the intensity of her efforts on day one. Despite this she still fought hard and competed well.

On the morning of the individual Finals, I text Gemma, as usual, and simply said:

“You’ve got this!!”

She knew exactly what she needed to do.

I had a positive feeling that morning that she was going to place highly. She went into the day ranked in 5^th place, but I simply knew she could do better. Gemma later told me that she too felt confident in being able to secure a medal or, at the very least, place in 4^th!

The rest is history.

Gemma came onto the floor and delivered a fantastic routine. I knew it was good, but it wasn’t until the final score appeared that I knew just how good it was. We then had to wait nervously for 5 other gymnasts to compete before learning that she had won the Gold Medal!!!!!

Proudest Mum ever.

[i] https://www.bbc.co.uk/sport/commonwealth-games/62442968