Tag Archives: Retirement Planning

HMRC Focusing On Tackling Tax Avoidance by the Wealthy

17 Jan

HMRC Letter 480

It’s official, HM Revenue & Customs is doubling its team tackling potential tax avoidance of wealthy individuals. The number of inspectors has increased to over 200 inspectors.

The Affluent Compliance Team is to begin recruitment of 100 additional inspectors. The focus of the unit has expanded from those with annual incomes from £150,000 and accumulated wealth of £2.5 Million to £20 Million; to include those with wealth above £1 Million.

HMRC has reported that the unit had received additional tax receipts of £75 Million (by the end of December 2013). This is expected to rise to a target of £586 Million by the end of 2015.

Exchequer Secretary David Gauke says: “The team has made a great start by bringing in £75m in additional tax that would otherwise have been lost to the country…… Dodging tax is immoral, illegal and unaffordable and the minority who cheat are increasingly finding that, thanks to the work of the Affluent Team, they have made a big mistake.”

Director of the Affluent Team Roger Atkinson says: “Good quality intelligence is central to catching the cheats and so we are expanding our Affluent Intelligence Unit fourfold. This is very good news for all honest taxpayers.”

Bill Mott and Neil Woodford Issue Warnings For 2013

15 Jan

Neil Woodford has warned investors to expect further downgrades to profits forecasts for those companies more sensitive to the economic cycle.

Neil Woodford (manager of the Invesco Perpetual Income and High Income funds) paints a pessimistic story for the rest of 2013. He has grave concerns pertaining to the existing problems (eg the ongoing crisis in Europe, a possible slowdown in the US and reductions in borrowings across the western world) will limit the pace of global economic growth. Conversley, in his monthly update, he states he believes there is a “population of stocks that can grow consistently through this difficult period”.

Bill Mott (manager of the Psigma Income fund), has always raised his concerns over the effect of central bank policies,  he has warned that these have raised the chances of increasing inflation by continually introducing unprecedented policies into the market. He believes that these have increased the expectation of a growth in inflation.

“To some extent, inflation is already with us. The Bank of England has exceeded the middle of its target inflation range for 38 months in a row. What is remarkable is that despite this persistent inflation, the UK gilt market is trading at such low yields. Real interest rates on bonds have been negative for some time. Are low gilt yields telling us that the bond markets are relaxed about the inflation numbers? Or is it rather that the same target-busting Bank of England has been the most enormous buyer of gilts and has successfully subverted all price signals?”

Bill Mott has avoided investing in bank shares through the portfolio he manages, Psigma Income Fund. This has caused poor returns (short-term) against his peers. Time will tell if his decision is correct, as there has been a recent period of price rallying in this sector but is this a “true” rally or rather a “relief” rally. The latter will see the prices collapse, or could the pricing be sustainable?

Personally, I have concerns over the banking sector as there are several unknowns which carry a huge risk and could derail the recent optimism, One major issue with this sector is the lack of clarity of information and the continual fiascos constantly being unearthed. I see the comments about RBS and Libor, where the fines could be significantly worse than those suffered by Barclays (but expected not to be as large as those suffered by UBS). This is just an example and who knows what next?

Investment Bulletin – My Views For 2013

7 Jan
Fireworks explode over Times Square as the crystal ball is hoisted before New Year celebrations in New York December 31, 2012. REUTERS-Joshua Lott
What a year 2012 has been. It has not been an easy year and with the Christmas & New Year break, life has been put back into perspective and some sanity has returned. 2012 has ultimately been a good year for my clients and despite the challenges, we have made good gains. The challenges that faced the markets have been considerable:-

  • Disappointing economic growth and corporate earnings
  • US Presidential Election won comfortably by Barak Obama
  • Worrying geo-political developments, such as, in the Middle East and China
  • The ongoing debt crisis in the Eurozone (at times threatening the very existence of the Eurozone)
  • Easing political risk in Europe but still minimal Eurozone growth
  • Consumer confidence growing in the US
  • Relatively successful Chinese growth expected in 2013

Looking ahead, we’re beginning to see signs that a more positive outlook is developing. In the US, in particular, the recovery we see in the housing market could have a meaningful impact on growth prospects. Does this mean that the 30-year bull market in bonds is coming to an end? And should we be braced for an imminent increase in interest rates, reminiscent of the US Federal Reserve’s 2.5% worth of hikes that clobbered bond markets in 1994? I don’t think so. The Fed has said that it won’t raise rates until 2015 and while it could do so earlier, I think that next year would almost certainly be far too soon.

The outlook for returns in 2013 will depend on where you invest, I am confident that there are still attractive investment opportunities in several areas of the investment universe. In these conditions, a flexible approach and experienced active management can really prove their worth.

Markets will worry about the Italian elections in 2013 (likely to be brought forward thanks to PM Monti’s resignation) and in Germany (likely in September 2013) and even about the stability of the coalition government in the UK.

Currently, the most likely outcomes seem to be a strong vote for Merkel and her CDU/CSU grouping in Germany and the election in Italy of a coalition with a strong commitment to the Euro but a rather weaker commitment to structural reform of the economy. 

Worries about the possibility of a hard economic landing in China in 2012 abated with a soft landing and expected growth should be robust in 2013. Although Obama’s re-election does not solve the issue of political gridlock within the polarised system in Washington, growing consumer confidence underpins hopes that the US economy is on the mend.

Above all, markets still take heart from the extraordinary support offered by central banks across the developed world, with ultra-loose policy keeping interest rates and bond yields low, providing liquidity for the financial system and helping governments finance budget deficits cheaply. There may yet be worrying consequences from this grand monetary experiment, but for now investors should think twice about betting against the tide of central bank Dollars, Pounds, and perhaps increasingly Euros and Yen that are expected to keep flooding the world economy.

Will 2013 be the year in which the world really starts to emerge from the shadow of the global financial crisis? Perhaps that is too much to hope for, but there are good signs that the healing process in the global economy and markets can continue. Growth in the major developed economies is likely to remain quite subdued – slightly more robust in the USA, but still close to zero in the Eurozone.

 

The Economy 

Economic developments around the world now range from tangibly-improved in the United States, through apparently-improved in China and India, to less-bad in Europe. A return to financial markets driven by fundamentals is long overdue but first we need to consider the political ramifications of 2012 and prospects for 2013 :-

  • Risks from the Middle East are higher
    • displacement of US influence in Egypt by the Muslim Brotherhood
    • civil war in Syria
    • this clearly fragile balance of power leaves the region less stable than a year ago
  • Elections were a feature of 2012
    • two in Greece
    • France (with the arrival of a wave of socialism, which already appears to be on the wane)
    • Barrack Obama’s re-election in the US
    • Re-election of Shinzo Abe in Japan.
  • Risks from the Eurozone are lower and falling
    • It appears very likely that Angela Merkel will be re-elected in Germany
    • The Italian election, which must be held by April 2013, will determine whether the reform process Mario Monti was able to begin during his tenure continues or whether it reverses
  • The time for forgiveness is late 2013
    • The German election will likely coincide with Greece’s return to primary surplus. 
    • This could mean that Greece’s debt could only be forgiven if it defaults, and thereafter no more fiscal transfers would be possible. The appeal for the creditor countries is that it reduces the risk of political extremists gaining power and forcing the long-feared Grexit – an event which carries unquantifiable risk to the broader financial system.
  • Will profits matter more than politics?
    • The chances of markets being driven by fundamentals, rather than politics, are clearly higher for 2013 than they were for 2012.
    • I expect equities to trade according to their earnings growth.
  • In the UK, general share capital growth is expected to be positive, combined with attractive potential dividends
  • In the US, stronger earnings growth but a lower yield and a slight softening of the dollar will mean a more sedate return in sterling terms.
  • European companies seem well placed to capitalise on the region’s export performance. The modest valuation of European shares offers an attractive yield, and positive trade dynamics are supportive of further gains.
  • Japanese equities are currently heavily overbought and I expect profit taking might be in order. With the country back in recession, I expect modest total return from Japanese shares.
  • The rest of Asia, however, looks set to enjoy robust earnings growth which encourages me to think positively about the potential for strong equity returns.

Investors must clearly treat these opinions with caution, as equities are volatile. I am an advocate of asset combining to take advantage of the differing asset performance related correlations, helping to manage both risk and volatility. I believe, however, that the potential for markets to reflect fundamentally attractive valuations should give investors optimism about the prospects for 2013.

Launch of Waverley Court Consulting Ltd – Website www.waverleycc.co.uk

18 Dec

I am pleased to announce the launch of my website – http://www.waverleycc.co.uk

After much work, reviews, re-writing and editing my website is now live. Let me know your thoughts on the content, design and presentation. Personally, I am most pleased with the Testimonials sections – every one who kindly provided their comments presented their views of our relationship.

The Current Market is a Stockpicker’s Paradise

17 Dec
The best time to be able to add value to portfolio performance is during times of troubled markets. Now the markets are clearly troubled, or in crisis, or in panic, or in confusion…
A stock-picking approach is vital during these times and a strong stockpicking discipline is possibly the best way for investors to ensure their money survives the current recessionary environment.
Many industry commentators have suggested that a combination of low-interest rates and low growth is a nightmare for managers who take a bottom-up approach. Maybe more so than ever, investors need to become students of the political scene as much as the macro-economic environment. You, as investors, more than ever need to focus on a company’s fundamentals. We are clearly in unprecedented times, The Bank of England interest rate has been at 0.5% for over two years (the lowest ever in history). This is not the time to be aggressively taking on risk, I believe we have to stay defensive, and the way we do that is by being very selective about which holdings, sectors and niche markets we pick. Although, we also need to remember when to break this rule as there are opportunities – suitable asset combining is essential to manage the potential for success with a capital preservation overtone.

Stockpicking has been a style that can prosper even in the most difficult markets. 

The Launch Of My Corporate Website

11 Dec

We are almost there !!!

I expect within a few days my website will be up and available.

The official corporate Financial Services site for Welshmoneywiz is Waverley Court Consulting Ltd.

Autumn Budget Statement

10 Dec

You have to give George Osborne his dues…we all knew there were failings in the assumptions from the Summer Budget. He didn’t duck the bullet. Rather than just guidelines and review of the Summer Budget (normally what seems to be the Autumn Budget), it was more an introduction to the Spring Budget 2013, giving details of  some of the fiscal changes ahead.

A benefit of knowing about tax policy to be introduced from a future date is, it gives us a chance to plan now.

Registered Pension Schemes

George Osborne made proposals to cut back on the tax advantages of registered pensions.

The bad news :-

 Annual allowance to be reduced from £50,000 to £40,000 from tax year 2014/15.
 Lifetime allowance to be reduced from £1.5m to £1.25m from 2014/15

The good news :-

 Allowances to remain unchanged for 2012/13 and 2013/14 (at up to £50,000)

 Carry Forward remains unchanged for tax years 2010/11, 2011/12, 2012/13 and 2013/14 (at up to £50,000)

 Fixed protection available – enabling benefits to be taken up to the greater of the standard lifetime allowance and £1.5m without any lifetime allowance charge

1.  Election by 5 April 2014

2.  Protection lost where further accrual/contributions on or after

      6 April 2014

 Personalised protection option – a possible additional transitional protection

1.  Provides a lifetime allowance of the greater of the standard lifetime

     allowance and £1.5 million, but without the need to cease

     accrual/contributions on or after 6 April 2014.

2. Available to individuals with pension benefits with a value of at least

     £1.25 million on 5 April 2014.

 Maximum capped drawdown income to be increased from 100% to 120% of the relevant annuity rate determined from the GAD tables – date to be confirmed.

Planning Opportunities

The reduction in the annual allowance was expected and was only to £40,000 (it could have been worse). The reduction doesn’t apply until tax year 2014/15. Carry Forward of unused annual allowance of up to £50,000 for each of tax years 2010/11, 2011/12, 2012/13 and 2013/14, is available.

It gives a high earners the chance to maximise contributions before the reduction in the allowance bites. Also, for very high earners, if action is taken before the end of this tax year, they may be able to secure the 50% tax relief.

The changes to the lifetime allowance will mean that any one likely to be affected by the reduction and looking to retire in the near future will need to consider all means to reduce/avoid any lifetime allowance charge. This includes :-

  • Electing for fixed protection and/or, if available, personalised protection.
  • Considering drawing some or all of their benefits in 2012/13 or 2013/14 when these will be set against the current £1.5 million lifetime allowance.
  • Consider how benefits are taken.

Income Tax

So, it seems fair to say, there is actually only a very small change in the potential tax bill payable. Personal allowance has increased and the basic rate band has shrunk. The unlucky few are worse off but in most cases the situation seems to either be neutral or possibly a slight improvement.

The personal allowance is to increase by £1,335 to £9,440 in 2013/14 – an improvement in the terms announced in the Summer Budget.

In 2013/14, the basic rate tax limit will reduce from £34,370 to £32,010. This is offset by the increased personal allowance.

The result of these changes is that all taxpayers who are fully entitled to a personal allowance (where net income is less than £100,000) will be better off. At the lower end, the extra increase in the personal allowance will lift a quarter of a million people out of tax altogether.

From 6 April 2013, additional rate income tax will reduce from 50% to 45%. This rate applies for those who have taxable income of more than £150,000. For those affected, there is an incentive to make investments before 6 April 2013 and defer the resultant income until after that time.

In terms of planning for married couples/registered civil partners, this will mean that:

 There is scope to shelter income from tax if a higher/additional rate taxpayer is prepared to transfer income-generating investments (including possibly shares in a private limited company) into a non-taxpaying spouse’s name

 There is an incentive for lower rate taxpayers to make increased contributions to registered pension plans with a view to ensuring that any resulting pension income falls within the personal allowance.

Age Allowance

As the personal allowance increases, the age allowance is gradually being phased out. The amounts of age allowance are frozen at £10,500 for those born between 6 April 1938 and 5 April 1948 and £10,660 for those born before 6 April 1938.

For those who satisfy the age conditions, the age allowance is still currently worth more than the personal allowance. However, the allowance is cut back by £1 for each £2 of income that exceeds the income limit. The income limit will increase from £25,400 to £26,100 in 2013/14.

For those who are caught in this income trap, you should take appropriate planning i.e. reinvesting income-producing investments into tax-free investments (ISAs, VCTs, EISs, SEISs) or possibly tax-deferred investments (single premium bonds) or by implementing independent taxation strategies.

Business Tax

The Government will reduce the main rate of corporation tax by an additional 1% in April 2014 to 21% in April 2014.

The small profits rate of corporation tax for companies with profits of less than £300,000 will remain at 20%.

The capital allowance known as the Annual Investment Allowance will increase from £25,000 to £250,000 for qualifying investments in plant and machinery for two years from 1 January 2013. This is designed to encourage and incentivise business investment in plant and machinery, particularly among SMEs.

A simpler income tax scheme for small unincorporated businesses will be introduced for the tax year 2013/14 to allow:

Eligible self-employed individuals and partnerships to calculate their profits on the basis of the cash that passes through their business. Businesses with receipts of up to £77,000 will be eligible and will be able to use the cash basis until receipts reach £154,000. They will generally not have to distinguish between revenue and capital expenditure.

All unincorporated businesses will be able choose to deduct certain expenses on a flat rate basis.

Tax Avoidance and Evasion

As expected the Government unveiled a bundle of measures aimed at countering tax avoidance and tax evasion.

Areas of particular interest are:-

•  The introduction of the General Anti-Abuse Rule. This will provide a significant new deterrent to people establishing abusive avoidance schemes and strengthen HMRC’s means of tackling them. Guidance and draft legislation will be published later in December 2012;

•  Increasing the resources of HMRC with a view to:

•  Dealing more effectively with avoidance schemes

•  Expanding HMRC’s Affluent Unit to deal more effectively with taxpayers with a net worth of more than £1 million

•  Increasing specialist resources to tackle offshore evasion and avoidance of inheritance tax using offshore trusts, bank accounts and other entities, and

•  Improving technology to help counter tax avoidance/evasion

•  Closing down with immediate effect for loopholes associated with tax avoidance schemes.

•  Conducting a review of offshore employment intermediaries being used to avoid tax and NICs. An update on this work will be provided in the Budget 2013.

•  From 6 April 2013 the Government will cap all previously unlimited personal income tax reliefs at the greater of £50,000 and 25 per cent of an individual’s income. Charitable reliefs will be exempt from this cap as will tax-relievable investments that are already subject to a cap.

Inheritance Tax

The inheritance Nil Rate Threshold is to increase, although by only 1% in 2015/2016 to £329,000. Currently, the Nil Rate Threshold is £325,000 and has been frozen since 2009 until 2015. This means, from 6 April 2015, if the first of a married couple to die does not use any of his/her nil rate band, then the survivor will have a total nil rate band (including the transferable nil rate band) of £658,000.

We await the outcome of the consultation on the taxation of discretionary trusts which is due to be released in December. Hopefully this will incorporate some simplification to the current complex system.

Capital Gains Tax (CGT)

The CGT Annual Exemption (£10,600 in 2012/2013) will increase to £11,000 in 2014/2015 and £11,100 in 2015/2016. We do not know what it will be in 2013/14.

Gains that exceed the annual exempt amount in a tax year will continue to be subject to CGT at 18% and/or 28% depending on the taxpayer’s level of taxable income.

Trustees pay a flat rate of 28% on gains that exceed their annual exemption.

Individual Savings Account

The current maximum investment in an ISA is £11,280 in a tax year (maximum of £5,640 in cash). With effect from the tax year 2013/2014, the maximum will increase to £11,520 (with the cash content not to exceed £5,760). Use of the allowance should always be maximised as any unused allowance cannot be carried forward.

The Junior Isa and Child Trust Fund maximum annual contribution limit will move from £3,600 to £3,720 from 6 April 2013.

The Government will consult on expanding the list of Qualifying Investments for stocks and shares ISAs to include shares traded on small and medium enterprises (SMEs) equity markets such as the Alternative Investment Market and comparable markets. This could lead to ISAs becoming even more appealing as a tax shelter.

Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS)

The rule changes, mostly approved months ago, revolved mainly around opening up more companies for investment from VCTs and EIS, and increasing how much can be invested.

The size of companies that the schemes can invest in has been increased from £7 million to £15 million and the number of employees from 50 to 250.

The limit on the amount an individual can invest in an EIS has increased from £500,000 to £1 million, while the amount an EIS or VCT can invest in an individual company has increased to £5 million.

Ian Sayers, director general of the Association of Investment Companies (AIC), commented, ‘The proposed rule changes allow VCTs to invest in a wider range of companies which is a welcome boost to the sector and businesses desperately seeking finance.

‘The Chancellor’s removal of the £1million limit on VCT investment in a single company will ensure more efficient support to smaller businesses in the UK.’

However, the Budget also finalised plans to subject VCTs and EIS to further scrutiny in relation to the investments that they make.

The government will introduce a ‘disqualifying purpose test’, designed to exclude VCTs or EIS that do not invest in qualifying companies and are set up solely for the purpose of giving investors tax relief.

Although the schemes escaped any changes to their individual tax benefits, the Budget introduced a cap on tax relief, in an effort to prevent high income taxpayers getting away with very low tax rates.

The new rules will set a cap of 25% of income on anyone seeking tax relief of over £50,000 but, while the proposals are not particularly clear, it appears EIS and VCTs will be exempt.

Paul Latham, managing director of Octopus Investments, explained, ‘The good news is that the government’s new cap only applies to tax reliefs which are currently classed as “unlimited”. This means that tax-efficient investments, such as EIS and VCTs, are unaffected by this legislation.’

 

Global Review On 30 November 2012

3 Dec

So where do we start, there is always a “silver-lining” – not all the data was bad. There again even though the concerns over the Eurozone are real and serious, growth figures from many developing economies are declining, and many other problems. These are all known and expected, what more they are less worse than earlier in 2012. 

What does this mean in English? The likelihood of a doomsday scenario is less likely. There is more support for the argument, “we are struggling our way through”. 

What this means to me, the markets will remain volatile and economies will drop in and out of subdued technical recessions – this is an opportunity for the professional investor.

Moody’s cuts AAA rating of ESM Rescue Fund

Moody’s has cut the AAA rating of the European Stability Mechanism (ESM) euro rescue fund by one notch to Aa1 and given it a negative outlook. This follows a downgrade earlier this month of key ESM-backer France.

Moody’s also cut rating of the mechanism’s predecessor, the European Financial Stability Facility (EFSF)

Managing director of the ESM and EFSF chief executive, Klaus Regling, described the ratings agency’s decision “difficult to comprehend”. In a statement, Mr Regling was critical of Moody’s approach, which “does not sufficiently acknowledge ESM’s exceptionally strong institutional framework, political commitment and capital structure.”

The largest backer of the two schemes, Germany, remains at the top-level of Aaa.

The European Stability Mechanism (ESM) was launched in October as a permanent agency, based in Luxembourg. From 2014 it will have up to 500 Billion Euros to help countries in difficulty.

The rescue fund is available to the 17 Eurozone countries, but loans will only be granted under strict conditions, demanding that countries in trouble undertake budget reforms.

Economic growth slows in India, Brazil and Canada

Canada’s slowdown was in part due to weakening activity in its oil and gas sector. A string of major economies have reported disappointing data. Economic growth slowed in India in the third quarter, while in Canada and Brazil it dropped surprisingly sharply.

Meanwhile in the Eurozone, unemployment hit a new high of 11.7% in October, as German retail sales fell unexpectedly and French consumer spending dropped.

In the US, citizens saw their incomes stagnate in October, while spending fell slightly (in part due to disruption from Storm Sandy).

The department’s Bureau for Economic Analysis, which compiled the report, said that much of the underlying data was not yet available, and the drop in spending largely reflected its own estimates of the likely loss of business due to Storm Sandy.

Other recent data from the US has pointed to a strong rebound in the world’s biggest economy, including a surprise upward revision of the country’s third quarter annualised growth rate from 2% to 2.7%.

In contrast, Canada’s economy fared far worse over the summer with  a sudden drop in the country’s exports and weakening activity in its oil and gas sector pulled its’ annualised growth rate in the Third Quarter to 0.6% (many economists had previously announced expectations around 0.9%).

Similarly, Brazil’s growth rate for the Third Quarter was 0.6% (In 2010, growth was 7.5%); and previously, the market estimates were nearer 1.2%.

India’s growth rate was 5.3% for the third quarter and was as expected. They have clearly hit a soft patch in the last 18 months.

 

The Eurozone

The picture remains bleak. European Central Bank president Mario Draghi said on Friday that the region would not exit its crisis until the latter half of next year, although he conceded that the ECB’s recent monetary interventions had helped put an end to the months of financial market stress experienced up until the summer.

We seem to be in a two-speed Europe. The southern European economies of Italy and Spain have been in recession all year, thanks to government spending cuts, troubled banks that have been cutting back their lending, and in Spain’s case a steadily deflating property bubble. It seems unemployment has continued to rise in both countries, while in Germany the jobless rate held steady close to a record low.

UK banks may need more capital, Bank of England says

Major UK banks may need to raise more capital as protection against possible future losses, as reported by the Bank of England’s Financial Policy Committee.

Bank governor Sir Mervyn King said there were “good reasons” to think current capital ratios did not give an accurate picture of financial health.

The report suggested that the ‘Big Four’ UK banks need £5bn-£35bn of new capital.

The main UK banks include HSBC, Barclays, Royal Bank of Scotland and Lloyds.

Mervyn King said there were three reasons why the Bank of England thought that the banks were not strong enough :-

  • Future credit losses may be understated.
  • Costs arising from past failures of conduct may not be fully recognised.
  • Risk weights used by banks in calculating their capital ratios may be too optimistic.

Sir Mervyn added: “The problem is manageable, and is already understood at least in part by markets. But it does warrant immediate attention…..Mis-selling costs, inadequately capitalised banks hold back economic recovery and undermine investor confidence”.

The Bank is being granted greater regulatory oversight over banks from next year when it takes over the Financial Services Authority. One of its primary roles will be to make sure UK banks have sufficient capital to support the economy.

US economic growth rate revised up to 2.7%

The US economy grew at an annualised rate of 2.7% in the third quarter of the year, revised data has suggested.

The figure is significantly higher than the 2% initial estimate that the Commerce Department released just before the presidential election. Much of the growth was due to companies rebuilding their inventories, and is not expected to be sustained.

Developments in the US housing market are being watched closely by economists, as they are likely to determine the durability of the recovery. A rebound in the housing market could help to sustain the US economic recovery

Normally, periods of recovery in the US economy are led by residential construction, as building firms quickly get back to work on a backlog of projects as soon as the recession is over.

But this time round, the recession was in large part caused by the bursting of a housing market bubble, that left behind a glut of unsold homes, bankrupted many homebuilding firms, and saw the sharpest and most sustained collapse in homebuilding activity in recorded US history.

Who can drive the Global Recovery?

In the aftermath of the global financial crisis, countries like Germany, China and Brazil were the engines that kept the global economy expanding, but recent evidence suggests that they are losing steam.

The World Bank expects a soft recovery, with global growth of 2.5%. But within that there appears to be a clear divide between developing economies, which are forecast to grow by 5.3%, and advanced economies by just 1.4%.

Is China’s economy heading for a crash?

Of the major developing economies, only China appears to have recovered from a worrying slowdown before the summer, with a string of positive economic data announced just ahead of the country’s decennial leadership transition earlier this month.

China’s economic growth has slowed for six quarters and the period of rapid economic growth may be over. China’s export model may no longer be working as well. The Chinese government and many economists are now expecting growth to slip below 8% this year, with some even predicting doomsday scenarios of a crash.

So what are the prospects for China’s economy?

China is not only the world’s second-largest economy and leading exporter, it is also the world’s largest construction site. Construction has come to dominate China’s economy, accounting for roughly 25% of all activity and about 15% of all jobs.

Most analysts take comfort from the fact that there are no sub-prime mortgages or complex financial derivatives in China.

Japan

Japan is still recovering from last year’s devastating tsunami and nuclear crisis.

Recent data have shown that Japan, one of the world’s top exporters, was not exporting as much as it used to. In fact it has been massively importing – including energy, which has pushed the country’s energy bills sky-high after Tokyo stopped nuclear reactors.

The strong yen has also hurt exporters, making their products more expensive to foreign buyers.

The Bank of Japan forecast the economy would grow 2.2% in the current fiscal year and 1.7% the following year. The rosy growth projections were enough for the central bank to hold off on further easing to boost the economy.

“Japan’s economic activity has started picking up moderately as domestic demand remains firm mainly supported by reconstruction-related demand” following last year’s natural disasters, the Bank of Japan has said.

Start of A Stock Market Rally Into Spring 2013?

26 Nov

Up until the end of last week, the market had given up a little more than 8.0% since the September peak (an 8% pullback is about the average size of a normal bull market correction), and while that could imply a reversal of fortune may be due, more downside may be in store before a good technical floor is found.

This is a tricky situation. On the one hand, stocks are oversold and due for a bounce.  On the other hand, the momentum is still pessimistic, and we have to assume that trend will remain in motion until we clearly see it isn’t.

The bullish case is bolstered by this weeks positive results, which stopped the previous declines.  The market’s previous fall of 8.8% from the September high is right around the normal bull market correction.  So, the reversal clue materialized right where it theoretically should have.

The bearish case:  There’s still no assurance that the bullish days will continue. In fact, the stockmarkets could carry on gaining  and still not snap the losing streak ( as compared to September’s highs).

Any additional clues from the CBOE Volatility Index?  No, not really.

Just for some perspective, there’s still plenty of room and reason for the stockmarkets to keep tumbling.  Point being, if the bulls are serious here, there’s not much of a foundation they can use as a push-off point.  Then again, the VIX is clearly hitting a ceiling at its 52-week moving average.  Until and unless it can be hurdled, the bulls don’t have an enormous amount to worry about (they just have a little to worry about).

So could the recent corrections and this weeks swing be the formation of a swing low of an intermediate market-bottom being formed? 

Typically the stock market will rally fairly aggressively out of one of these major intermediate bottoms, often gaining 6%-8% in the initial phase. At that point the market will dip down into a half cycle low that will establish the trend line for this particular cycle.

The Dollar (USD) is now, based on its daily cycle, overdue for a move down into a short-term low . This, I would expect, should help drive the first half of that 6%-8% move, followed by a short corrective move (as the dollar bounces) and then rolls over quickly into a another phase down.

If this is the case, I believe the cycle would be due to bottom around the first of the year and should drive the stock market generally higher into early January 2013.

We could continue to see the dollar generally heading lower with intermittent bear market rallies until it puts in a final three year cycle low in mid-2014. This should keep the stockmarket generally moving higher at least until the point where commodity inflation collapses Consumer Spending. Once that occurs the stock market will stagnate. The fear is that the US Federal Reserve may continue to print money, and this may cause the environment of artificially high money supply, which could lead to creating the conditions for the next recession.

As has been the case in the 1970s and also during the last cyclical bull market in 2007, I think we will probably see the stockmarket at least test the all-time highs, if not a marginal break above them, before rolling over into what I expect will be a very complex bear market bottoming sometime in 2015.

As with all predictions. They are dependent on sentiment, market forces and behavioural economics and as such I reserve the right to change my views and expectations, based on information as and when it arises in the future. The scenarios suggested and dates predicted are based on current information. The future is unknown and will change the potential outcome as estimates become actuals.

This is why we carry out sensitivity analysis, stress-test portfolios and incorporate diversified portfolios because the one fact we can be sure of is everything will change.

ECJ Judgement and the effect on Discounted Gift Trusts

26 Nov

This article summaries the judgement provided by the Court of Justice of the European Union (ECJ) regarding gender discrimination in relation to insurance premiums and its effect on Discounted Gift Trusts (DGT).

The Decision

On 1 March 2011 the ECJ issued a judgement that stated that the insurance services sector will no longer be able to offer gender specific premiums or benefits from 21 December 2012.

How does this impact Pensions, Annuities and Insurance?

This ruling is expected to affect these areas of financial services and following the 21 December 2012, we will see how this will be embedded into our existing legal framework and processes.

How does this impact DGT valuations?

When calculating the open market value of an income stream to arrive at a discount, HMRC guidance provides the use of certain gender specific mortality tables. HMRC have indicated they will review their guidance to take account of the judgement. However, it is likely that any change would not happen until late 2012. For DGTs declared before any change to the HMRC guidance on valuations, this judgement should have no impact, as the basis of the discount calculated will be relevant as at the date the trust is declared not the date of death of the settlor(s).
 
It should be remembered that the discount is just one factor in deciding whether a DGT is a suitable arrangement as part of your Inheritance Tax planning strategy.

The Rationale for the Judgement


Directive 2004/113/EC prohibits all discrimination based on gender in the access to and supply of goods and services. 

This means that from 21 December 2007 the Directive prohibited the use of gender in the calculation of insurance premiums and benefits. However, the Directive allowed exemptions to Member States regarding the use of gender specific premiums and benefits so long as the Member State ensured that the underlying actuarial and statistical data of which the calculations are based are reliable, regularly updated and available to the public.

The judgement considered if the intention of this exemption was to allow gender specific premiums and benefits to continue indefinitely. The Court concluded this was not the case and that gender specific premiums and benefits works against the achievement of the objective of equal treatment between men and women and therefore it was appropriate to bring this practice to an end.

Concluding that gender specific premiums and benefits would be regarded as invalid with effect from 21 December 2012.