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Chart of the Week: Investors Appetite for Risk On Growth Stocks Has Paid Off So Far in 2023

Posted on by admin@hottinger.co.uk

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

February Investment Review: Volatility in the Air

Posted on by admin@hottinger.co.uk

by Haith Nori

February saw a continuation of increases in equity markets in Europe after a positive start in January, while US markets have moved in the opposite direction. At the beginning of February many central banks including the Federal Reserve, the Bank of England and the European Central Bank all increased interest rates once more. After an initial drop in yields, US and UK 10 year bond yields at the beginning of February have recovered to levels higher than seen in January as many other 10 year bond yields have reached highs not seen in years. The US Dollar has once again strengthened as the price of gold has fallen. Global tensions continue to rise as Russia’s invasion of Ukraine reached its one year anniversary (24th February). Rishi Sunak is also attempting to push forward Brexit negotiations, having delivered the ‘Windsor Framework for Northern Ireland and Great Britain’.

On 1st February, the US Federal Reserve made the decision to raise interest rates by 0.25% to 4.75%, marking a notable reduction in pace from their previous increase of 0.5%. Markets responded positively to the news, with the Technology sector in particular outperforming others, however February saw a more general decline alongside US Equity indices. On 14th February we received a Valentine’s gift. US CPI data was released for the 12 months ending in January of 6.4%, down from December of 6.5% and 7.3% in November, continuing its gradual decline since June (9.1%)! Whilst this is still a decrease it is much lower than expectations and suggests a long-awaited slowing in the rate of progression. On Thursday 2nd February, in the UK the Bank of England announced an 0.5% increase in interest rates to 4%. As expected, they did not follow the US in targeting a reduced pace of 0.25%. Furthermore, in the UK CPI data released was 10.1% for the 12 months ending in January down from 10.5% in December, 10.7% in November and 11.1% in October. On this occasion, this was softer than consensus expectations and the reduction pattern is continuing in the UK. Also, on 2nd February the European Central Bank (ECB) announced a 0.5% increase in their interest rates to 2.5%, and the ECB have ‘pre-announced another increase of the same size for March 16’[i]. The ECB continues to  present itself as being particularly hawkish under the stewardship of Madame Lagarde.

In Bond Markets, ‘Germany’s 10-year yield, the benchmark for the euro area, rose 7 basis points (bps) to 2.66%, its highest since July 2011’[ii] and the same has been seen in both France and Spain where yields have hit their highest levels in many years. Both the UK 10 Year Gilt and US 10 Year Treasury Note yields have surpassed their January levels, both increasing to just under 4% after an initial drop at the beginning of February. The US Dollar has regained its losses from January against Sterling, the Euro and the Japanese Yen. Gold, after reaching a high level at the beginning of February has returned to levels at the start of January. Prices for gold at the end of February ‘were headed for their biggest monthly decline since June 2021 as a stronger dollar and fears that the U.S. Federal Reserve would keep raising interest rates weighed on the non-yielding asset’s appeal’[iii]. We are seeing a very uncorrelated performance from assets including what was once considered the safe havens.

On 11th February, Fumio Kishida, Prime Minister of Japan, nominated Kazua Uedo as the next Governor of the Bank of Japan, who is set to take the reins after 8th April when Haruhiko Kuroda steps down. This has come as a surprise as originally the Deputy Governor Masayoshi Amamiya was viewed as being the front runner.

After several countries, including the UK, the US and Germany agreed to send military battle tanks to aid Ukraine in January, President Volodymyr Zelenskyy of Ukraine has been touring Europe in an attempt to drum up more military support. Firstly, he flew to the UK to meet with Prime Minister Rishi Sunak whom, after their meeting, is providing NATO-style training to thousands of Ukrainian soldiers and marines from the UK. Rishi Sunak is also considering his options to offer fighter jet planes. Zelenskyy then flew to Paris meeting with Emmanuel Macron and Olaf Scholz before flying to Brussels where he addressed the European Parliament, meeting with twenty-seven heads of state asking for European Unity. In the run up to the one-year anniversary of Russia’s invasion of Ukraine (24th February), US President Joe Biden travelled to Kyiv on Monday 20th February and later met with NATO leaders on the eastern flank to highlight geopolitical tensions. We are seeing clear escalations in the Russia invasion of Ukraine.

On 27th February a new Brexit deal was signed by the UK and European Union known as the Windsor Framework, which attempts to deal with the problems created by the Northern Ireland Protocol, binding international law obligations. One of the key issues has been checks on goods travelling from Great Britain had created a border with Northern Ireland and hence certain goods were no longer able to reach them. The Windsor Framework will, as Rishi Sunak has said, ‘ease trade between Britain and Northern Ireland, firmly root the province’s place in the United Kingdom and give lawmakers there a say in whether they must implement EU law, with London having a veto’. [iv] There is a long way to go and this needs to be approved by all parties but is a positive step forward for Brexit and will hopefully open up more lines of trade.

Overall, February has been reasonably volatile across various asset classes, with Large-Cap UK Equities in particular having hit an all-time high. Brent Crude fell sharply in value at the beginning of the month (below $80 per barrel) but has since recovered to c.$84 a barrel. 10 year bonds are increasing in yield, with various countries now having reached all-time highs. The US Dollar has gained strength back from its lows of January against Sterling, the Euro and the Japanese Yen. Geopolitical tensions are rising with Russia’s invasion of Ukraine.

[i] https://www.reuters.com/markets/rates-bonds/hawkish-ecb-comments-push-up-rate-hike-expectations-2023-02-17/

[ii] https://www.reuters.com/markets/global-markets-wrapup-1-2023-02-28/

[iii] https://www.cnbc.com/2023/02/28/gold-faces-worst-month-in-nearly-two-years-on-us-rate-hike-dread.html

[iv] https://www.reuters.com/world/uk/risk-taken-uks-sunak-announces-windsor-framework-2023-02-27/

We Ask Questions of Buy and Hold Strategies

Posted on by admin@hottinger.co.uk

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.

Chart of the Week: Natural Gas Prices Deflate As Equity Markets Rise

Posted on by admin@hottinger.co.uk

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)

 

January Investment Review: New Year Bounce Back

Posted on by admin@hottinger.co.uk

by Haith Nori

January has seen an increase in global equity markets after a slightly volatile December. Central Banks are hosting their next interest rate meetings at the beginning of February, giving January a little rest. China has continued to open up after intense lockdowns with a release of 3% GDP growth in 2022, the second slowest rate of economic growth since the 1970s. Many emerging market economies are also coming back into the limelight offering lowly valued equity markets and attractive sovereign bond yields.

On 12th January, promising data presented itself for US inflation which, for the 12 months ending in December, came in at 6.5%, down from 7.3% in November and continuing its gradual decline since June, marking the sharpest monthly fall in US CPI figures since mid-2020! Furthermore, in the UK CPI data released was 10.5% for the 12 months ending in December, down from 10.7% in November and 11.1% in October. Whilst progress is slower than in other parts of the world, a trend is beginning to emerge in the UK inflation data. The next meeting about interest rates will be 31st January – 1st February for the US Federal Reserve and 2nd February for both the European Central Bank and the Bank of England. Global markets are waiting with bated breath to see how Central Banks approach their next steps in controlling inflation and if we are to see a reduction in the scale and frequency of hikes. ‘UK wages grew at the fastest rate outside the pandemic period at the end of 2022’[i] up 6.4% on an annual basis, marking the largest increase since 2001. The rise in wages strengthens the case for the Bank of England’s Monetary Policy Committee to keep raising interest rates, although any further hikes should be finely balanced in the context of weaker economic growth expectations and a more challenging housing market. Whilst wage growth is good news for households in the UK, figures have still failed to keep up with inflation. Both the US 10 Year Treasury Note and the UK 10 Year Gilt have decreased in yield since the beginning of January 2023. On Wednesday 18th January, the Bank of Japan made no policy changes as expected, keeping its yield curve control targets in place (0% for 10year yield and -0.1% for short term interest rates).

Emerging market debt has come back onto investors radar screens following a difficult period in which the US dollar rose strongly. When the dollar rises, many developing countries local currencies tend to depreciate given typically high external debt positions, which are most often financed in dollars. They will see higher imported inflation with food and oil prices. Dollar strength tightens financial conditions for some emerging market countries and can affect the availability of credit. ‘The dollar has depreciated 7% since its highs in October, pushing EM assets higher’ [ii] as the two have historically have an inverse relationship. Analysts have suggested there could be room for further outperformance from emerging markets as the dollar may continue to depreciate. Many of the emerging market countries began increasing interest rates early in 2021, long before the Federal Reserve and many other Central Banks of developed countries across the world, which has resulted in many emerging market countries offering some very attractive yields. Examples, of where some 10 year Government Bonds are yielding are: Brazil c.13.19%, Mexico c.9%, Egypt c.20.1%, Zambia c.30.19% and Turkey c.10.7% to name just a few.

The CBOE (Chicago Board Options Exchange) Volatility Index (VIX), which is a real time index representing market’s expectations for volatility over the coming 30 days, has been on a steady decrease since October which coincided with the US dollar’s all-time high. Gold has also been on a steady increase in price since October. Both Sterling and the Euro have increased against the dollar steadily since the end of September 2022. China has continued to show positive signs of growth since it began to re-open after lifting its zero-covid policy. This has been especially helpful for business over the period of Chinese New Year.

The International Monetary Fund (IMF) on Tuesday 31st January raised its Global Growth outlook for 2023. This is due primarily to demand in the US and Europe, alongside China’s re-opening and a significant easing in European energy costs. The IMF has ‘said global growth would still fall to 2.9% in 2023 from 3.4% in 2022’, [iii]  however this is an improvement from the October 2022 prediction of 2.7% with the warning of the world tipping into recession. Following the 2023 prediction, the IMF has also stated that global growth would accelerate to 3.1% in 2024. Whilst progress is slow, there is at least some positivity that can be taken from their outlook, in which they revised China’s growth forecast much higher for 2023, from 3% to 5.2%.

Many countries have been answering the calls of Ukraine for additional support in the ongoing crisis with Russia. Germany made an announcement on 25th January to supply 14 military battle tanks and encouraged other European countries to do similar The US later that day also declared further aid with the supply of 31 tanks. Finland, Poland, the United Kingdom, Spain, the Netherlands and France are also considering making contributions. This is a major development in the situation.

Overall, January has welcomed back some positivity within global markets. Brent Crude dropped sharply in value at the beginning of the month but has recovered its value above the December highs, ending at just under $85 per barrel back up from the lows of December ($76.10). US and UK bond yields continue to fall and are becoming less attractive relative to some emerging market bonds, which have the potential to deliver very attractive real returns to investors.

[i] https://www.ft.com/content/b25fd8d7-f7bd-4501-8a32-21d338846f85

[ii] Look who’ emerging as the biggest star of 2023–Points of no return, John Author’s

[iii] https://www.reuters.com/markets/imf-lifts-2023-growth-forecast-china-reopening-strength-us-europe-2023-01-31/

Chart of the Week: Personal Savings Rates Crater While Bank Deposits Soar

Posted on by admin@hottinger.co.uk

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

Chart of the Week: Greyscale BTC Trust Dislocates from Bitcoin Price

Posted on by admin@hottinger.co.uk

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.

 

Chart of the Week: Vanguard U.K. 100/250 Spread at Widest since 1986

Posted on by admin@hottinger.co.uk

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)

December Investment Review: Central Banks Attempting to Restore Calm

Posted on by admin@hottinger.co.uk

by Haith Nori

Global equity markets in December saw a slight decline from their November highs in the run up to the holidays. Central Banks have hinted at slowing their interest rate hiking programme with the FOMC, BOE and ECB all raising interest rates by 50 basis points, lower than previous interest rate hikes of 75 basis points. This may pave the way for a potential end in sight. China has been easing lockdowns, re-opening areas around the country and lifting international travel restrictions. China’s re-opening should be better for business globally. The Bank of Japan also made a surprise announcement to change its bond yield control policy.

The US Federal Reserve made the decision to increase interest rates by 0.50% on 14th December 2022 which confirmed what the markets were expecting. This is the first 0.50% increase as the past four consecutive meetings, the US Federal Reserve have increased by 0.75%. Promising data has presented itself for US inflation for the 12 months ending in November 2022 of 7.3%, continuing its gradual decline since June. The decision to opt for a 50 basis point hike shows positive signs that inflation is reducing and confirmed that the beginning of a reduction in the pace of policy tightening has started. For the first time UK CPI data was encouraging, releasing a figure of 10.7% for the 12 months ending in November. Whilst this figure is still very high, we have seen a reduction from October’s figure of 11.1%. On 15th December 2022, The Bank of England also decided to raise interest rates by 0.50% to 3.5%, as analysts had been expecting, which, like the US, was also a reduction from the previous hike of 0.75%. On the same day the ECB made the decision to join the interest rate train by also increasing interest rates by 0.50%, pledging ‘further hikes and laid out plans to drain cash from the financial system as part of its fight against runaway inflation’[i]. Global Equity Markets reacted negatively to the interest rate news, which was all released in two consecutive days. The UK 10 year Gilt yield, the US 10 year Treasury Note yield and the 10 Year Bond yield all increased after the news was released and ended the month higher than at the beginning of the month. Global Markets reacted negatively to the Central Bank announcements in December 2022 but had a late surge, or Santa Rally, in the run up to the Christmas holidays. Sterling continued to decrease for the latter half of December against the dollar following the interest rate decisions, whereas the euro, after an initial decline, recovered to the end of December. Reaching the end of 2022, the US equity markets have had their worst year since the financial crash in 2008.

Elon Musk made an astonishing announcement that he would generate a survey amongst his 122 million followers as to whether he should step down as CEO of Twitter and pledged he would honour the decision of the results of the poll, be it negative or positive. A total of c.57% voted yes and Musk has since stated that he will step down once a suitable replacement is ready to take the reins.

On 20th December 2022, The Bank of Japan shocked markets ‘with a surprise tweak to its bond yield control that allows long-term interest rates to rise more, a move aimed at easing some of the costs of prolonged monetary stimulus’[ii]. Following the unexpected news, Japanese shares reacted negatively whilst both Japanese bond yields and the Yen increased. This caught many investors off guard given that analysts widely expected no change to yield curve control, especially in the run up to Governor Haruhiko Kuroda stepping down in April 2023. The decision was meant to ignite the dormant bond market. Hopefully, stability will be restored.

In the UK, manufacturing has seen a decline as there is less demand for new business. December saw the fifth consecutive month of contraction, as ‘British manufacturers are starting 2023 on the back foot, after they reported one of their sharpest falls in activity since the 2008-09 recession last month, reflecting a sharp fall in new orders and ongoing job cuts’[iii].  Unemployment rates have also risen in the UK as there are less vacancies available.

With China coming out of lockdown and ending their Zero-Policy Covid restrictions the country is seeing stocks improve in price on the basis that business, both domestic and international, will hopefully resume. Travel restrictions have been lifted allowing international travel from China but many countries including the US, the UK, Italy, India, Israel, Spain, Canada, South Korea, and France are all imposing the need to have a negative Covid Test and in Spain’s case, proof of vaccination. This is a positive step forward as ‘China may finally return to normal as the nation joins the rest of the world in learning to live with the virus’[iv]. There is still a long road to recovery ahead for China, but Global Markets will benefit from the good news and the new opportunities it will present.

Overall, December has still been slightly volatile for Global Markets but did not experience too many significant market shocks. Brent Crude continues to trade below $85 having dipped to a low of c.$76.10. The Federal Reserve has hinted at maintaining lower levels of interest rate hikes whilst the ECB stated there is still a large fight against inflation to go. Central Banks are continuing action to bring inflation down but at a calmer pace. The re-opening of China brings positive news to Global Markets. Japan has made a surprise move in its control of bond yields causing a shock. Bond yields have increased since the start of the month following the interest rate decision release.

[i] www.reuters.com/markets/europe/ecb-slow-rate-hikes-lay-out-plans-drain-cash-2022-12-14/

[ii] https://www.reuters.com/markets/rates-bonds/japan-set-keep-ultra-low-rates-doubts-over-yield-cap-grow-2022-12-19/

[iii] www.reuters.com/markets/europe/uk-manufacturing-ends-2022-low-orders-shrink-pmi-2023-01-03/#:~:text=LONDON%2C%20Jan%203%20(Reuters),orders%20and%20ongoing%20job%20cuts.

[iv] https://edition.cnn.com/2023/01/02/china/china-2023-lookahead-intl-hnk-mic/index.html

End of Year Investment Review: In Search of Optimism

Posted on by admin@hottinger.co.uk

by Adam Jones

As 2022 draws to a close we wanted to briefly highlight the exceptional uncertainty in investment markets as we head into 2023. We retain a cautious stance in portfolios overall but also see compelling arguments as to why things might turn out to be far less gloomy than seems widely expected.

Despite global PMI’s stabilising but still being in contractionary territory in November, December ISM Services data pointed to a very robust US consumer, whose confidence in spending has apparently yet to be curtailed by tighter monetary policy. Except for housing there appear few signs of restraint in broader US activity, giving rise to suggestions that the lag in monetary policy effectiveness may be longer than originally thought (and may not be evident until the end of H1’23). Recent declines in both oil prices and headline inflation data might also provide additional support for ongoing strength in consumption trends.

Source: Hottinger Investment Management / Refinitiv Datastream

 

In China, zero-covid policies have weighed on economic sentiment so much that recent street protests have led to a relaxation in policy that saw the Hang Seng index in Hong Kong become the strongest performing equity market in November, although most of these gains have since been erased given the recent uptick in new cases. On the economic front, one of the metrics we follow closely is known as the ‘credit impulse’ which simply measures the growth in new credit being provided to an economy relative to its GDP. In China the credit impulse has risen materially over the past few months and has historically led expansions in the global monetary base as defined by M2 (a measure of money supply which includes both cash deposits and instruments which are easily convertible into cash). While we do not consider ourselves to be explicit monetarists, it is interesting to note that expansions in global M2 have themselves tended to lead many of the major business cycle indicators such as manufacturing and output.

Should inflation continue to dissipate as global economies stabilise, this dynamic could turn out to be very supportive for risk assets in general. In this scenario investors, whose perspectives are almost universally bearish according to some measures of sentiment, are potentially at risk in being under-allocated to global equities.

This is the period when strategists and economists publish their forecasts for 2023 and Absolute Strategy Research (one of Hottinger’s key research partners) are not alone in believing that core inflation in US and Europe will be below 3% by the end of next year. Supply chains have generally normalised, the tightness of the labour market has not led to a wage spiral, falling commodity prices, and falling housing costs all combine to create a disinflationary trend. Central banks tend to be slow to cut rates, preferring to see consistently worse data and we believe there is a possibility that there are demographic changes involving retiring baby-boomers that could keep the labour market tighter than expected and over a longer transition period.

Source: Hottinger Investment Management / Refinitiv Datastream

 

Looking at corporate bond markets we also note that despite US high yield credit outperforming investment grade credit this year (even while lower-rated credit spreads have doubled), overall spreads remain well below levels witnessed in prior periods of forthcoming recession. We believe part of the explanation for this dynamic is that many businesses took advantage of exceptionally low refinancing rates post-Covid in 2020 to lock in lower rates over longer time frames (and hence significantly extended the maturity profile of their debt). If this is the case, then it stands to reason that a tighter monetary policy environment is likely to exert less of an effect on the corporate sector than it may have done historically.

The counterargument to this more optimistic view of 2023 is that savings rates in the developed world have now fallen back to (and in some cases below) pre-Covid levels in many countries. When coupled with recent witnessed spikes in credit card spending data this suggests a growing need for consumers to supplement the cost of living through short term finance. This is not typically a sustainable trend over any reasonable period, and we speculate may be a contributing factor to the weakness in US November retail sales last week.

Source: Hottinger Investment Management / Refinitiv Datastream

 

So, while global equities may have rallied approximately 10% over the last 2 months our baseline view remains that this represents a bear market rally. Equity and credit markets appear unwilling to price a more recessionary earnings outlook and cyclical sectors have barely underperformed more defensive sectors. It is only government bond markets which strongly suggest a forthcoming recession, with the yield curve having now inverted by more than 70bps (that is to say that 2yr bond yields are now greater than 70bps lower than 10y yields). In our opinion there are inconsistencies in 2023 forecasting based on the idea that investors have no reliable evidence of the monetary policy lag that will likely catalyse recession.

At the crossroads there are several scenarios, ranging from a soft landing to long and variable monetary policy lags causing a deep recession in 2023. The distribution of potential outcomes remains exceptionally wide due to high levels of prevailing uncertainty. Indeed, the last time an inflationary environment required so decisive a tightening cycle as that we have recently witnessed was back in the early eighties. We would argue that the global economy has evolved markedly since then in terms of demographics, labour market structure, global trade, technology, information dissemination and the implementation of monetary policy itself (forward guidance as an example). Such comparisons are therefore difficult and potentially misleading.

We remain cautious at this point, with an asset mix in favour of quality over cyclical growth, a preference for strong balance sheets, high cash flow yields and low levels of gearing with an overweight position in cash and government fixed income, where rates have become attractive for the first time in many years. We believe that despite a level of prevailing pessimism the spectrum of potential outcomes may lead to increased volatility and swift market reactions that would make disengaging from markets in a meaningful way a risky strategy for the long-term investor.

Chart of the Week: Where in the world are we trading?

Posted on by admin@hottinger.co.uk

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

November Investment Review: Return of Confidence

Posted on by admin@hottinger.co.uk

by Haith Nori

November has welcomed back some much-needed positivity within the Global Equity Markets. In China, c.412 million people have further been affected by lockdown measures, due to their zero Covid policy, as cases have increased rapidly. There is civil unrest as people are protesting against President Xi Jinping and demanding that he resigns due to the handling of the current Covid situation. Russia continues to attack Ukraine, attempting to target their energy infrastructure, and has reportedly left Kyiv without running water or electricity. In the UK, the Autumn Budget was finally released announcing a number of significant changes. In the US, the FOMC have signalled a reduction in the pace of its aggressive interest rate hiking cycle. COP 27 has embraced world leaders once again who are attempting to act collaboratively to reduce climate change.

Since the start of November, sterling has strengthened against the dollar. The dollar has also weakened against both the euro and the yen as well ‘after U.S. economic data provided further evidence that inflation was starting to ease, improving investor appetite for riskier assets and reducing demand for the safe-haven greenback’[i]. Bond yields have begun to decrease with the US 10 year note, now offering a yield of c.3.6% and the UK 10-year Gilt offering c.3.1%. This is a dramatic change when just a few months ago, they were both yielding above 4%! Interest Rates are still increasing and in theory, the yield should increase but we are seeing an unusual correlation. The Federal Reserve is hinting at slowing the interest rate increases to reduce over tightening. After the minutes were released 23rd November from the Federal Reserve’s November meeting, European stocks went on to hit three-month highs. The US Federal Reserve increased interest rates by 0.75% for the fourth consecutive time which takes them to the highest levels since 2008. Jerome Powell has hinted at a change in policy at the next meeting or two. In the UK, the Monetary Policy Committee voted 7-2 to increase interest rates by 0.75% to 3%, the largest rate hike since 1989. On Thursday 10th November, the US released CPI data for the 12 months ending in October of 7.7%, which was lower than expectations and lower from September of 8.2%. This is positive news as, even though we are seeing small changes over the past 5 months, there has been a clear decrease: 9.1% in June, 8.5% in July, 8.3% in August, 8.2% September. There is still a long way to go for the CPI figure to reach the overall target of 2% but finally a positive trend has been witnessed. In the UK, the CPI data released November 16th for the 12 months ending in October was 11.1%, the most since October 1981, up from 10.1% in September, and 9.9% in August. The main driver of the headline figure has been ‘surging household energy bills and food prices pushed British inflation to a 41 year high’[ii]. The data was released one day before Jeremy Hunt released the Autumn Budget where the hope is that his tax hikes and plans to reduce spending will assist in reducing the CPI figure. The next meetings for the FOMC, BOE and ECB will all be held in mid-December where they will assess whether to increase interest rates once again.

The delayed UK Government’s Autumn budget, announced on 17th November, saw changes to the National Living Wage, several Tax changes and the cap on energy bills increasing to £3,000 from £2,500 for 12 months from April 2023. The key points that will have a significant impact in the new tax year (6th April 2023 to 5th April 2024) are the reduction in the Capital Gains Tax Allowance, Dividend Tax Allowance, and the Additional Rate Income Tax threshold. For individuals the Capital Gains Tax Allowance will be reduced from £12,300 to £6,000 and for most trusts from £6,000 to £3,000. The Dividend Tax Allowance will be reduced from £2,000 to £1,000 and, finally, the Additional Income Tax Rate threshold will reduce from £150,000 to £125,000. Effectively, these measures are an attempt at creating a budget tightening of £55 billion to restore the country’s credibility under new Prime Minister Rishi Sunak’s Government with Jeremy Hunt announcing these measures as being ’tough but necessary’[iii].

COP 27, which concluded on 20th November, saw a number of global leaders agreeing to work together once more to combat climate change. One key take away is that nations have, for the first time, agreed to establish a fund which is dedicated to providing pay-outs for developing countries that experience damage from issues relating to climate change, such as, storms, floods, and wildfire. China and the US have rekindled their relationship as China’s President Xi Jinping met with US President Joe Biden in Indonesia agreeing to ‘restart cooperation on climate change after a months-long hiatus due to tensions over Taiwan’[iv].

China has become a point of discussion around the globe. Over this past year China has been in and out of lockdowns both national and local due to its Zero Covid policy. After the latest surge in Covid cases and new lockdowns put in place, anti-lockdown protests rallied in multiple cities around China. Finally, at the end of November the Chinese Government have announced they are now attempting to ramp up their efforts to vaccinate the elderly. On the back of the announcement the Hang Seng closed 5% higher on Monday 28th November.

Overall, November delivered some positive returns for global equity markets, which are now up 11% from the October 12th lows. Brent Crude has returned to trade below $90 per barrel having fallen from c.$98 per barrel at the start of the month. Sterling has ended the month trading c1.21 against the dollar which is a significant rise since its tumble after Kwasi Kwarteng’s budget announcement at the end of September. Both the Yen and the Euro have also strengthened against the dollar since the beginning of November. Bond yields are decreasing whilst central banks hint at slowing the pace of interest rate hikes to hopefully give a soft landing at the beginning of 2023.

[i] www.cnbc.com/2022/11/15/forex-markets-federal-reserve-interest-rate-hikes-inflation-japan-yen.html

[ii] www.reuters.com/world/uk/uk-consumer-price-inflation-hits-111-october-ons-2022-11-16/

[iii] www.reuters.com/world/uk/uk-consumer-price-inflation-hits-111-october-ons-2022-11-16/

[iv] www.reuters.com/business/cop/key-takeaways-cop27-climate-summit-egypt-2022-11-20/

U.K Government Announces November Statement – What does it mean for Investors?

Posted on by admin@hottinger.co.uk

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

An Update on the AIM Portfolio Service

Posted on by admin@hottinger.co.uk

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/