Comment and views coming into the IFA Magazine office this morning include the following.
Henderson Global Investors
Co-Head of Multi-Asset at Henderson Global Investors Bill McQuaker said:
“What a night for the Conservative party. They out-polled all the predictions and will be staying in Downing Street to govern on their own, thanks to the small majority they look likely to achieve. Comparisons with 1992 seem valid: David Cameron is the New John Major, the man who confounded the pollsters!
“For the markets, the election was the dog that didn’t bark. Short-term uncertainty has been avoided and growth headwinds caused by electoral uncertainty have abated. Equities have rallied somewhat, and the pound has bounced. Looking further ahead, the markets seem unlikely to push these moves too much further. The likelihood of a fresh round of austerity probably means less growth and a different policy mix than seemed likely only yesterday. Slower growth may dampen equity market enthusiasm, while less upwards pressure on interest rates could keep a lid on sterling.”
“Politically, there remains the possibility of renewed challenges in the weeks and months ahead. The failure of the Conservatives to win more convincingly means the government will have its work cut out. After the 2010 election the coalition government held 364 seats. The Conservative government will be lucky if it has 329, when technically 326 seats is a majority (BBC data/projections). The weakness of Labour may help the Tories, but the guile of the Scottish Nationalist Party (SNP) will not. More importantly, problems arising within the Tory party may be a challenge to effective government. John Major had a much more stable platform than Cameron after the 1992 poll, yet struggled to govern convincingly. “In government but not in power” was the view of Norman Lamont, one of Major’s own MPs. Major struggled to deal with the rebels and backstabbers in his own party, and the Conservatives may reprise that experience in the years ahead, especially when the current generation of euro-sceptics seek to achieve their primary aim of leaving the European Union (EU). The fact that David Cameron has already announced he will stand down during the life of the next parliament likely diminishes his authority and raises the probability of fractious behaviour from his own side.”
The last Prime Minister?
“The second challenge that faces the government and the country post-election is what to do about Scotland. The disaster suffered by Labour north of the border means that Labour – like the Conservatives – is no longer a national party. The nationalists are the big winners in terms of seats, but because of Labour’s failure to do better in England they have no platform to influence what happens in government. This is a receipt for anger and frustration in Scotland. Whether that visceral response is harassed by the nationalists or defused by the Conservatives could be immensely important for the stability of the government and the country. Looking at the form books, you would fancy the nationalists to make the most of the opportunity they have won for themselves. The Scottish schism is real. Could David Cameron be the last Prime Minister of the United Kingdom?
“The third and possibly most important challenge for the new government is Europe. Business leaders have voiced their concerns about the dangers of ‘Brexit’, and under different circumstances you would expect the Conservatives – the party of business – to listen to their cries. But these are not ‘normal’ times, and Cameron is obliged to lead the country down the road to an In-Out referendum and, possibly, an exit from the EU. The clock won’t start ticking today, but it will at some point: if it looks like Cameron could fail to deliver a vote for staying ‘in’, the markets will take fright.”
The smiles fade
“Through the prism of party politics it was a good night for the Conservatives. But the challenges of delivering effective government, keeping Scotland in the Union, and dealing with a European issue that has split the Conservative party for the last 30 years may soon see the smiles fade. If that isn’t enough to worry about, demands for electoral reform will come thick and fast once the opposition parties have dusted themselves down. Today Cameron looks like John Major. He must be hoping people aren’t saying the same thing in five years’ time.”
Wellian Investment Solutions
“Today, Wellian Investment Solutions has said that an elected Conservative Government will make UK property funds an ‘increasingly attractive’ option for investors.
“Chris Mayo, Investment Director of Wellian Investment Solutions said: “Markets have unsurprisingly responded very well to the Conservative win and we can already see a sharp increase in the value of Sterling in light of today’s result. The markets have also shown that share prices of various estate agents have risen this morning which is a clear and positive indicator for the mid-term performance of property funds with exposure to London and the South East.
“As these funds invest in tangible bricks and mortar they sit comfortably in any multi asset portfolio and have the ability to generate a stable income stream. The newly appointed Tory Government will serve to act as a catalyst to ensure these funds see significant growth in the months ahead, making them a highly attractive option for today’s investor.”
Elliott Silk, head of employee benefits at Sanlam, said:
“A majority Tory government will bring security and profit for businesses and employers. The sterling rebound today proves that we need consistency at the top.
“This is also good news for savers as auto-enrolment will now continue and it is clear that the support for retirement freedoms is strong. It is vital that the newly-elected Pensions Minster is consistent and will stay in their seat for the whole term in order to carry through these changes. One of the goals of the new Minister should be to rethink the way we discuss pensions. Pensions carry fear and bad news for consumers – people just switch off. The new Pensions Minister needs to change consumers’ opinions of retirement as pensions often signify a life that is a long way off. Electing the people’s champion, Ros Altmann as a Conservative peer, will also add crucial campaign support for the long road ahead to change long-term savings behaviour.”
Wealth Management Association
Liz Field, Chief Executive of the WMA said: “ Educating people about financial services is a vital step the new government must take and it is something that should become a fundamental element in the learning process in the UK.
“There should be greater guidance, advice and education about financial services and products in the UK. The benefits of investing in businesses also need to be highlighted in relation to the growth of the UK.
“This education needs to be aimed at both children and adults, so that there is a cultural shift towards financial education becoming fundamental in personal education and towards investment becoming the “norm” as opposed to an abstract concept. We believe that retail investment in shares and other financial assets could become as “normal” as purchasing a property, which would stimulate growth for the UK economy.
“The apparent mystery surrounding investment and financial services, including the regulation of the industry, needs to be removed through increased education, which will involve a collaborative effort between the government, schools, consumer bodies and other relevant organisations.”
“If taxpayers and government want stronger, more accountable banks and organisations, one of the best ways to achieve it is to ensure the widest possible range of shareholders. Wider share ownership is an important vehicle for improving the wealth of millions of ordinary retail investors across the UK; individual shareholders are investors, not speculators, who look to the long-term and take an active interest in the performance of the companies they own.
“Mobilising the millions of UK private investors also helps to spur and maintain the UK’s economic growth. This aim can be achieved in a number of steps, including ensuring that retail investors are not excluded from participating in IPOs, abolishing stamp duty and SDRT on all shares, and increasing the over 50 ISA limit.”
Investec Wealth & Investment
John Wyn-Evans, Head of Investment Strategy at Investec Wealth & Investment: “The markets’ reaction to the result has been predictably positive, with the pound being the initial beneficiary. Gilt yields have also fallen on the prospect of more austerity and a lower deficit while shares are rising, unsurprisingly led by house builders, domestic retail banks and regulated utilities and outsourcing companies. To put things into perspective, though, that still leaves the index below where it was a week last Tuesday.
“However, without wishing to throw too much cold water on the celebrations, we will return to “business as usual” very shortly, and there is the small matter of a promised referendum on membership of Europe to negotiate. It has long been our opinion that, at the asset class level at least, UK markets will be more affected by global than domestic trends and influences. This has been especially evident in recent days in the bond market, with profit-taking in German Bunds sparking extraordinary moves in all developed market bonds.
“It is a similar story for global equities, where investors are grappling with the recent moves in currencies and inflation expectations as well as the jump up in bond yields. We don’t envisage this as being worse than a short-term correction, especially with the amount of liquidity being provided by central banks in Europe, Japan and to some extent China. We see further gains ahead for equities, but the summer promises continued volatility.”
Mark Dampier, Head of Investment Research: “Business as usual might be the order of the day from this election result. In 1992 when we had a similar surprise success, markets reacted strongly and I would expect to see the same again. However we shouldn’t overestimate the significance for the investment markets in the short term; investors might do well to keep a closer eye on the Bond markets than on the comings and goings in Downing Street.”
“Looking further ahead, there are uncertainties which may affect investors, such as a new legislative programme, the strength of the SNP in Westminster, and the question of a referendum on Europe.”
Tom McPhail, Head of Pensions Research: “After the seismic changes in the 2014 Budget, further changes to pension taxation seem inevitable, particularly for higher earners. In particular given the manifesto proposals, anyone with plans to make pension contributions in the immediate future and particularly those paying higher rates of tax should consider acting sooner rather than later.”
In their pre-election Manifesto, the Conservatives announced plans to cut pension tax relief for high earners.
A £40,000 annual allowance currently applies to pension contributions. For every £2 of income an investor receives over £150,000, their annual allowance will fall by £1. Investors with income over £210,000 will have a £10,000 annual allowance.
- £150,000 total taxable income or less = £40,000 annual allowance
- £170,000 total taxable income = £30,000 annual allowance
- £190,000 total taxable income = £20,000 annual allowance
- £210,000 total taxable income or more = £10,000 annual allowance
There is currently a provision which allows an investor to contribute more than the annual allowance by ‘carrying forward’ any unused annual allowance from the last three tax years. The Conservatives have not confirmed if they plan to target this opportunity.
McPhail: “We’ve also seen bond yields edging upwards in recent weeks (15 year Gilt up from 1.7% on 30th January to 2.3% on 7th May), which could mean annuity rates getting pulled upwards in the days and weeks to come but we have had so many false dawns in the annuity market over the past 5 years that investors should be wary of pinning their hopes on a significant improvement in the rates.”
IHT, investor tax and financial planning
In their manifesto, the Conservatives pledged to take the family home out of tax by increasing the effective Inheritance Tax threshold for married couples and civil partners to £1 million. The way this works is by each individual being given an additional, family home IHT free threshold of £175,000 on top of the standard nil rate band of £325,000.
Danny Cox, Chartered Financial Planner: “With all the changes to the taxation of the death benefits from pensions, inheritable ISAs and the prospect of the end of deeds of variation and now the potential for a higher nil rate band, investors should be looking at their Wills and estate plans to check they are still fit for purpose.”
The Conservatives have also pledged not to increase VAT, National Insurance contributions or Income Tax; they also pledged to raise the 40p Income Tax threshold to £50,000 over the course of the parliament.
Despite this the principals of good tax planning remain: the sooner investors take advantage of their tax free allowances, the greater the tax benefits they are likely to enjoy. And the flagship personal tax haven is the ISA.
Nearly 14 million people subscribed to an ISA in the 2012/13 tax year (source: HMRC) and they are clearly one of the nation’s favourite ways to save and invest tax-efficiently. Remember, in an ISA investors pay no tax on interest, no further tax on dividend income and no capital gains tax (CGT).
Successive Governments have recognised the importance of ISAs and we’ve seen many improvements in the last couple of years including:
- Increasing the allowance to its highest ever level of £15,240
- Any accumulated ISA allowance can now be inherited by a surviving spouse or civil partner
- Wider choice of ISA investments including AIM shares
- Freedom to transfer between Cash ISAs and Stocks & Shares ISAs
In addition, following March’s Budget, later this year we should see the introduction of increased flexibility for withdrawals and reinvestments into ISAs, as well as the introduction of a new Help to Buy ISA. No party has proposed further changes to ISAs beyond those announced in the last Budget.
Lombard Odier Absolute Return Bonds
Geneva-based Gregor MacIntosh, CIO of Lombard Odier Absolute Return bonds, said:
“David Cameron won’t have missed the fact that UKIP suffered a disappointing election in terms of seats won; and the fact that he will have to manage the divisive impact of a dominant SNP north of the border. This combination relieves some of the pressure on him to move ahead wholeheartedly with an early EU referendum.
Already UK capital markets – sterling and equities – have recovered some of the uncertainty that was weighing on them in the run up to this difficult-to-call election. Sure, the outlook is favourable for UK equities and sterling but Europe and the wider world will make most of the difference in the months ahead.
And on that note, all eyes are on the US payroll data due out this afternoon.”
Christoph Riniker, Head Strategy Research and David A. Meier, Senior Economist at Julius Baer said:
“Overall assessment – uncertainty is fading but some open points remain
Incoming results of yesterday’s general elections are unveiling some surprises: Incumbent prime minster David Cameron of the Conservatives (“Tories”) seems to be able to maintain the power. Not only that, even the widely-expected scenario of a “hung parliament” is not yet certain, as a majority is still in possible for the Tories. This comes due to surprising weakness of the Labour party, which seems to have been devoured in Scotland by the Nationalists (SNP), it’s left-wing rival. As of the time of writing, the Tories have grasped 260 of 650 seats, while Labour is left at 213, with 90 seats still have to be counted and 326 needed for a majority.
The SNP for its part is becoming the 3rd largest party with 55 seats, replacing the Liberal Democrats, which literally are being wiped out and have so far only won a mere 7 seats. A loser has also been the UK Independence Party (UKIP), which won only one seat so far, as the fist-past-the-post voting system prevented a lager fraction. Other parties are currently sharing 21 seats. After the final results the Tories will celebrate, even if coalition building will be on the agenda due to a hung parliament. We do not expect the defeat of Labour to bring back pound strength. The large SNP delegation and the Tories’ election promise, the EU exit referendum, keep political risks elevated.
More fragmentation in the political landscape
Generally speaking it is the shift of the political landscape which is complicating the situation. Over the past five years, fragmentation has increased, with smaller parties gaining importance, such as the UK Independence Party (UKIP), the Scottish Nationalists (SNP) or even the Greens. Decisive could also be the performance of the Liberal Democrats, last time the third-largest party and preferred ‘bride’ for the Tories. This situation will make it more challenging for the Tories to govern in the future. Based on the status quo, Tories and Liberal democrats currently reach exactly the majority, nothing more. Building a coalition always means that the Tories have to make concessions, offering the smaller parties considerable bargaining powers. However, based on the current situation the risk of near-term re-elections (as outlined in earlier publications) has clearly diminished.
Uncertainties which are here to stay are the Brexit discussion and more autonomy for Scotland. We still expect an EU referendum sometimes in late 2017 which fuels the Brexit discussions. However, current polls suggest that the UK will rather stay in the EU than leave it. With the very positive outcome for the SNP yesterday, discussions about more autonomy in any form for Scotland are most likely going forward. In contrast to the EU referendum this will be rather a near term event to be taken care of by the government.
Sterling – weaker due to uncertainty
Due to the above-mentioned uncertainties, we see further downside potential to the pound sterling, which already began to soften after weak inflation data and the Q1 2015 growth disappointment had questioned a beginning of Bank of England rate normalisation this year still. We therefore revised down our 3-month forecast which now lies at a bearish EUR/GBP 0.75.
Fixed income – no meaningful impact from elections in the short term
The impact on government bonds is rather of medium term nature. Political decisions can have an impact on the macro development and with that bond yields but it needs time to evolve. In the short term we stick to our existing forecasts in the fixed income area. UK Base rates should see an increase to 0.75% in Q1 2016 while 10-year government bonds in the coming months should fluctuate between 1.8% and 2%.
Equities – remain underweight
The outcome is better than expected for equities. As backtesting shows a conservative government provides better performance than a Labour leadership. In the case of a potential EU referendum UK banks and UK companies with substantial EU exposure could be most affected. One possibility to limit such exposure is an overweight in UK smaller caps (FTSE 250) which have outperformed large caps for a lengthy period of 16 years now. In terms of valuations we don’t think that the UK equity market is overvalued. In fact, when comparing to its own history it looks quite attractive. Given the facts that there remain some uncertainties for the UK and that there are plenty of investment opportunities elsewhere in the world we are not ready to change our underweight stance immediately but would rather conduct further analysis first. However, a short term positive move in the coming days is highly likely.”
Founder and chief executive of deVere Group Nigel Green urges the Tories to be bolder with taxation policy and to leave pensions alone. He said:”I suspect David Cameron’s slender majority in the Commons outcome will be met with an immediate sigh of relief by investors. However, this might be the calm before the storm.
“The prospect of an in-out referendum of Britain’s EU membership has gone from risk to a reality. Since this is likely to take place in several years’ time, this could lead to numerous years of ongoing uncertainty – something the markets are allergic to – and, in response, investors need to take precautions against a fall in the value of UK assets. They can do this by increasing their exposure to overseas investments. With many UK investors lacking geographical diversification, favouring a home bias, this should be a wake-up call to start a much-needed rebalancing to increase their exposure to international stocks, bonds and maybe property. Now is certainly the time to think more globally.
“I would urge the PM and his colleagues to be bolder with taxation policy. Cutting income tax, as has been promised, is a step in the right direction as hardworking people will get to keep more of their money to provide for their families. It reduces a barrier to aspiration. Similarly, it must now keep its pledge on inheritance tax – which was meant to only ever be paid by the wealthiest in our society and which has been pulling more and more of the already ‘Squeezed Middle’ into its net.
“IHT is universally regarded as one of the most despised taxes as it is, essentially, a form of double taxation, and passing on a decent legacy to our loved ones is a very human instinct.
“However, in an increasingly globalised world, more must now be done to remain tax competitive in the world of business. This is perhaps particularly true within the financial services sector. The government must be aware of a real and present threat of endless current and proposed fiscal raids.
“After eight increases in four years of the bank levy introduced by George Osborne, the bank bashing must end.”
On pensions Green said: “It can be expected that there will be a temptation by the newly elected MPs to ‘review’ the pensions landscape. As contributions are subsidised by taxpayers, politicians think that they have an inherent right to continually tinker with pensions.
“This must not happen. Pensions must now be left alone. More changes will do more harm than good as it could add further layers of complexities and further impede the appetite for saving. In short, if pensions once again become a political football, the move could undermine what should be a relatively simple concept: saving for one’s retirement. This would affect both individuals’ retirement ambitions and the country’s long-term, sustainable economic growth.
“In the last five years, savers, retirees and the pension industry have seen mammoth changes to the state pension, public sector pensions and company pensions, with the recently rolled out pension reforms capping off a monumental amount of change.”
Baring Asset Management
Alan Wilde, Head of Fixed Income at Baring Asset Management, said: “There is only one poll that matters and that is the election itself. The result is something of a surprise given the pre-election polls had predicted a hung-Parliament. No single party was forecast to emerge with a majority but as the last votes are tallied the Conservative Party will have the chance to govern with what looks like a slim overall majority. As this was not priced in by markets, sterling has rallied sharply overnight up more than 1.5% versus the US dollar and just over 2% from the 5pm close versus the €uro. Gilts will open stronger but in the context of global bond markets rallying after several days in free-fall.
“The upside potential from here for sterling is, in our view, limited but importantly the risk of a lurch lower in the pound is also less likely as financial markets are reassured by continuity and the prospect of further fiscal consolidation. This should ensure interest rates remain lower for longer. The job is clearly not done (in reducing the debt/GDP burden) but this morning that will largely be forgotten in the euphoria of a relief rally. Further down the road the new Government will be anxious about the lack of productivity growth in the UK and dependency on the consumer for growth and a lower exchange rate, particularly against the €uro, may be a means to rebalance the economy and underwrite growth.
“For gilts, the recent rout in global bond markets has impacted all markets but the UK bond market has offered some protection against the rise in German bund yields and the 10 year yield pick-up from owning gilts has narrowed from around 1.5% to 1.3% making gilts less compelling at today’s levels but still attractive compared to European bonds. The next movements are likely to be driven by external factors and today the US payroll data will assume massive importance for global bond markets.
“Longer term, the next worry for investors will be an In-Out Referendum on continued membership of the European Union which PM Cameron has vowed to hold in 2017. It will be interesting to see if the poor showing of UKIP changes the PM’s determination to hold this ballot. If it goes ahead, the business community will bring strong support to both sides during what could be a long and damaging debate but quoted companies would almost certainly want to avoid a divisive Referendum with all the attached risks it would bring to investment and expenditure plans until resolved.”