News Updates - April
29th April 2021
Bounce-back optimism for investors
Investors searching for stronger returns post-Brexit are increasingly zooming in on the Far East, with Japan and China currently being the most attractive markets for UK investors. According to new data that City-based bank and brokerage firm Charles Schwab. Around 68% of investors in a recent survey consider Japan as a good investment destination. In comparison, the pan-European Stoxx 600 increased 18% during the same period, while the S&P 500 climbed just under 18% since October of last year. This shift to investing beyond Europe is borne out across the research. As British investors also view China as a significantly more attractive country for investment compared to a year ago. Charles Schwab found that China has seen the biggest rise in attractiveness, now appealing to 60% of investors, a jump of 15% since May 2020. Moreover, the U.S. has also become a more popular investment location. 67% of British investors consider it to be a more attractive market after November’s presidential election. As a result, nearly one in five investors said they had invested more in the U.S. over the last three months. Faced with sluggish recoveries in UK and European markets, British investors are going global, turning to Japan, China and the US for higher returns. More than half of UK investors, or 53%, are optimistic about the outlook for global markets in the next 18 months. This represents an eight percentage-point increase compared to May of last year, Charles Schwab found. In addition, almost half of investors have seen an increase in the value of their investments in the last three months. Again, this represents an improvement from May 2020 when just 29% had seen a rise in the value of their investments. Commentators believe we’re seeing British investors becoming more bullish as the performance of their portfolios improves. The combination of a strong bounce back in the Far East coupled with confidence in the Biden administration positions these markets as the Big Three outside of the UK for investors.
A mortgage price war could be in the offing as banks flood the market with fresh deals. Hinckley & Rugby Building Society will launched a two-year discount variable mortgage at 0.99% on Friday, the first sub-1% rate in a year. Meanwhile, a raft of state-backed 95% mortgages went live on Monday, Nationwide is boosting the amount first-time buyers can borrow and Santander is relaxing criteria for the self-employed. Experts say the surge in offers is a vote of confidence in the housing market and economy as the UK emerges from lockdown. Commentators believe it is pitching for a competitive, high-quality, low-LTV clientele that lenders like to have on their books to lower the overall risk of their lending proposition. Most lenders are returning to the 95% mortgage market with rates of around 4%, but competition will likely drive this down. This in turn will lead to lower rates on lower LTV products. This is because if there is little difference between the rate on a 90% and 95% mortgage, for example, borrowers will simply plump for the higher LTV offer to get a bigger deposit. But all eyes will be on whether lenders start bringing back rates below 1% on fixed-rate mortgages. The best fixed rate is being offered by Platform - at 1.06% for borrowers with at least a 40% deposit. Mortgage availability has improved in the first three months of the year but is expected to rise further thanks to a reduction in mortgage rates, an increase in high LTV mortgages and an easing of credit criteria. There are now 110 deals that offer 95% mortgages available to borrowers, including 38 under the government guarantee scheme. In January 2020, there were 313 first-time buyer mortgages available for those with a 5% deposit, but by June, these had all been pulled amid economic uncertainty. Now, the cheapest 95% five-year fix is at 3.45 per cent with Barclays Springboard. Among the deals that are part of the government guarantee, Halifax is offering the lowest rate with a two-year fix at 3.73%, although it comes with a £999 fee. Natwest is offering 3.9% with no fee. Although there have been a few products that have been briefly available during the pandemic, this is the first time we have seen mainstream lenders in the high LTV market in nearly a year. The new government backed mortgages are very competitive if you want a two-year fixed deal.
The spectre of inflation becomes a reality
UK inflation jumped in March, driven by the higher cost of petrol and clothes in a signal that prices are moving to an upward trajectory as the economy recovers from the coronavirus pandemic. The Office for National Statistics (ONS) said the consumer prices index rose to 0.7% last month, up from 0.4% in February. The increase was slightly below the 0.8% forecast by City economists. However, the cost of food fell back on the year, as some staples such as bread, cereals and chocolate biscuits were cheaper than at the start of the pandemic. Economists expect inflation to rise further after lockdown amid a burst of pent-up demand for goods and services, fuelled by £180bn in additional savings built up by mainly wealthier households while large parts of the economy were closed. Andy Haldane, the Bank of England’s outgoing chief economist, has likened the risks from inflation to a “tiger” that could be easily roused, raising the prospect of higher interest rates from the central bank. To keep inflation low and stable, the government sets Threadneedle Street a target to steer inflation to 2%. The Bank forecasts inflation will reach 1.9% by the end of 2021. However, many economists expect it will exceed the 2% target before then. Supply pressures linked to disruption to global trade – caused by Covid-19 restrictions and Brexit – are also expected to push up inflation, as well as the increase in Ofgem’s energy price cap in April, rising oil prices and the end of the government’s VAT cut for hospitality and tourism.
Semiconductor stocks set to gain from microchip shortage
The COVID-19 pandemic has brought about a rapid shift to digitization, accelerating the demand for various products and devices dependent on chips for their functioning. As people were forced to stay and work from home to curb the spread of the virus, it led to increased demand for PCs, smart phones and so on. Moreover, as places of entertainment were shut, people also had to rely on at-home entertainment options and in turn, sales of gaming hardware and consoles increased. Meanwhile, over the years, the automotive sector has also evolved to include more electronic components in vehicles that rely on semiconductors. Markedly, following a dip in sales last year due to the pandemic, auto sales are also looking to make a comeback this year with the IHS Markit predicting global light vehicle sales to increase 9% in 2021. However, such increased demand for chips along with the pandemic constraining supply chains and manufacturing, has led to a global shortage of semiconductors in recent times. Notably, a MarketWatch article stated that analysts expect this shortage to last at least through the end of the year. Nonetheless, this ongoing shortage of chips is sure to prove beneficial for the semiconductor market. In fact, the International Data Corporation (“IDC”) predicted that the global semiconductor market is expected to increase 7.7% in 2021 and reach $476 billion, following an increase of 5.4% in 2020. Notably, IDC stated in the report that factors like the availability of COVID-19 vaccines along with the reopening and gradual recovery of economies will also provide the necessary boost to the semiconductor market this year. Markedly, IDC estimated mobile phone semiconductor revenues to grow 11.4% in 2021 to reach $128 billion while non-memory automotive semiconductor revenues are estimated to grow 12.6%. Meanwhile, adding further fuel to the demand for semiconductors, the global gaming market is set to increase at a CAGR of 10.5% from 2021 to 2026, per a report by Mordor Intelligence. Reflective of the positive estimates, semiconductors have already started 2021 on a positive note. Per a report by the Semiconductor Industry Association, global semiconductor industry sales for January 2021 were $40 billion, witnessing an increase of 13.2% year-over-year. Moreover, the PHLX Semiconductor Index (SOX) has already gained 8.9% year to date, highlighting this rising demand for semiconductors.
Second home owners under the cosh
Second home owners face a clampdown over a tax loophole that can save them money by claiming the properties are available for holiday lets. Currently 60,000 properties classed as holiday lets are liable for business tax rather than council tax, which in the vast majority of cases currently means paying nothing at all. The Treasury said it would "ensure that owners of properties that are not genuine businesses are not able to reduce their tax liability by declaring that a property is available for let but make little or no realistic effort to actually let it out". It was announced as part of a raft of consultation documents on tax published by the Treasury which also included plans to shake up air passenger duty (APD). The holiday lets move relates to properties in England which the owner declares are intended to be made available to let 140 days in the coming year, making them liable for business rates rather than council tax. In 96% of cases, they have such a low rateable value that they qualify for small business rates relief which means they pay nothing at all. There is currently no requirement for checks to verify that the properties are actually commercially rented out. Following a consultation launched in 2018, the government said it would now legislate to tighten the rules. Also included in the series of consultations were proposals to cut down on inheritance tax red tape, reducing the paperwork families need to fill out. The government also published an interim report on its review of the business rates system - long the subject of calls for change from the retail sector - detailing responses from some firms. But a final report will not be published until the autumn.
Trusts avoid overhaul on ‘Tax Day’
The government has shied away from any immediate overhaul of the way trusts are taxed, stating that it will instead review specific areas on a “case-by-case” basis for now. Having consulted on how such vehicles are taxed between 7 November 2018 and 28 February 2019, the government has now published a summary of the responses, adding that these “did not indicate a desire for comprehensive reform of trusts at this stage”. Once viewed as a way to shield wealth from the taxman, nowadays trusts are often used by individuals who wish to pass on assets while retaining a level of control over them. However, trusts do have some advantages relating to inheritance tax (IHT). Most transfers of assets into trusts are subject to an immediate 20% entry charge, but only if the amount transferred across within the last seven years exceeds the individual’s IHT nil rate band of £325,000. Individuals can therefore set up trusts up to this amount, tax-free, every seven years. The government noted that a “significant number” of respondents to the consultation had criticised the immediate entry charge, saying this added complexity, made trust usage less attractive and produced results respondents did not consider “neutral”, in terms of the tax treatment of trusts versus alternative approaches. Some added that the charges were out of step with cases where individuals either held onto the assets or made an outright gift, given that unlimited gifts can be made to other individuals before death without incurring an IHT charge. The “relevant property” regime, where a charge of up to 6% is levied on a trust every 10 years to collect an amount over 30 years that roughly aligns to an IHT bill on an individual’s death, also came up. Respondents warned that some double charges could arise under the regime. They also criticised the 6% rate, arguing it should not be raised, as well as the 30-year period. Some also called for a revised system of charges for trusts that move capital to minors or young adults.
Top commuter villages in which to buy
Building society Nationwide last month announced its 13,000 office workers would be given the choice of where they work from. And auditing giant PwC recently told employees they can spend around half their working hours at home and end shifts early on Fridays in the summer. With other major firms also discussing a push towards flexible working, many of London's office workers could now look outside the city for a cheaper and quieter life. Now estate agents Savills has analysed property prices in village parishes within 10km of all stations within a 45 minute journey of London. The analysis, published by the Telegraph, only includes villages with top ranked primary schools in them. The top ten are:
- Wooburn Green, Bucks
- Thornborough, Bucks
- Haddenham, Bucks
- Manuden, Essex
- Great Amwell, Herts
- Ardingly, West Sussex
- Lindfield, West Sussex
- Turners Hill, West Sussex
- Ryarsh, Kent
- Cranleigh, Surrey
Stamp duty charges for overseas buyers
In a political move designed to address concerns that overseas buyers are pushing house prices beyond the means of UK residents, the Government has introduced new legislation that will add an extra 2% to the tax payable on such purchases. The Government have previously suggested that the funds raised will be used to help alleviate homelessness whilst also directly contributing to UK residents getting onto the property ladder. The new charge will apply from 1 April 2021 and affect residential purchases in England and Northern Ireland. The legislation introduces new rates of Stamp Duty Land Tax (SDLT) for purchasers of residential properties in England and Northern Ireland who are not resident in the United Kingdom. The new rates will be 2% higher than those that apply to equivalent purchases made by UK residents. The surcharge will apply to freehold property and leasehold property (where the remaining term is more than 7 years). The Government confirmed in the recent March 2021 Budget that the introduction of the surcharge will go ahead, despite the temporary “SDLT holiday”. It will also be added to the existing 3% surcharge which applies to purchases of second homes. This means that if, for example, an overseas individual (or certain UK-resident companies controlled by non-residents) buys a second home, they could have to pay SDLT at a top rate of 17%. Acquiring a property within a trust can be a little more complicated and the SDLT position will usually depend on the type of trust. Beneficiaries under life-interest and bare trusts and trustees of other types of trust could also be caught by the surcharge.