News Updates - June
7th July 2021
Is gold the place to be as inflation looms large?
Gold suffered its biggest one-day percentage drop of the year on Thursday as a hawkish turn by the Federal Reserve lifted the U.S. dollar, sending prices for bullion to their lowest settlement in nearly seven weeks. Essentially, officials revising the timetable for interest rate hikes have brought a taper tantrum for the gold price. For investors, the opportunity cost of holding non-interest bearing assets have increased and gold has become a less attractive asset for them for now. Recent data showing surging prices had led many to believe the Fed would at least begin early discussions about reining in some of its ultra-accommodative policy aimed at cushioning the economy from the COVID-19 pandemic, but the policy statement was more hawkish than some expected. Gold prices have been under pressure, losing more than 5% so far this week. Based on the most-active contracts, Wednesday’s decline would mark the biggest one-day percentage drop since Nov. 9, when prices fell 5%. But commentators believe this sharp move lower is probably a temporary one, and the market will likely see, at a bare minimum, a mean reversion until the next catalyst arrives. That catalyst may come when Basel III international regulations come into play on June 28 for European banks, when gold will be reclassified to a Tier I asset, alongside cash and currencies, from a Tier III asset, the riskiest asset class. Since gold will have ‘risk free’ status, this could prompt banks around the world to continue to buy more. Investors should hardly be surprised about the prospects of a Fed interest rate increase in 2023, though the combination of a stronger U.S. dollar and rising yields do pose big hurdles for the precious metal. Whether it justifies a price slide on this scale is another matter, however. After all, gold had already fallen in recent days in anticipation of a possible change in direction on the part of the Fed. In most commentators opinions’, interest rate increases in two years’ time are too far off to warrant any such slump in price, especially as yields are well below the expected rate of inflation.
Japan and investment opportunities
Japan has often been described as the cheapest value market in the world, so how has been doing in the recent value rally? Some of the things that we often hear about Japan are things like, it’s a warrant on global growth, it’s a cyclical, you should buy it now or it looks like a cheap market so, you should buy Japan or some people at the moment say, Japan has had a relatively good Covid experience in that it was relatively less affected than other countries, fortunately. All of these things might mean that you might want to buy the Japanese market on a six-month view or a 12-months’ view but are these really good reasons to think about buying into companies in the long-term. In Japan there is nothing short of a corporate governance revolution happening. Experts who have been investing in Japanese equities for up to 20 years are seeing developments which they never expected to see in their investment careers. A lot of the things started back in 2014, when the then Prime Minister Abe put in motion a corporate governance code and a stewardship code and since then, momentum has really been building. What is noticeable is how dividends and share buybacks have been progressing. And there has been steady progress each year. Crucially, even last year, the pandemic year, we really didn’t see any major shift on this. While in the UK there are companies that had to stop paying dividends or they were told to stop paying dividends by the government in sectors like oil majors or banks and so on, Japan didn’t see any of that and Japanese companies have extremely strong balance sheets. Over 50% of them have net cash on their balance sheet. The equivalent figures in Europe or the United States are about 15%. So, it is a dramatic difference and there’s clearly a lot more to go for. Commentators expect that to play out over many years. Not only in terms of shareholder return, but also in other areas. Many investors believe that the Japanese stock market had a huge boom in the 1980s, that it suffered a mammoth bust at the end of that period and that it has malingered ever since under the weight of deflation and a shrinking population. Certainly, deflation and demographics have been a drag on the economy. Yet those returns of close to 10% a year illustrate the maxim that a stock market does not always reflect what is happening economically.
Cladding property nightmare
Reserve funds raided to pay for replacement cladding are predicted to cause a surge in dilapidated homes. While management firms’ emergency funds are drained to pay for the removal of dangerous cladding, desperate leaseholders will be forced to inhabit dilapidated buildings with rising service charges and falling property values. A building safety crisis across the UK has emerged, four years on from the catastrophe of the Grenfell Tower fire. Experts have warned that the cost of making homes safe will set off a new, years-long disaster of missed repairs: the ‘long Covid of the cladding scandal’ ‘Building reserve funds’, pots built up from service charges to cover basic maintenance costs, have been looted by management companies. The money has been used to pay for temporary fire-safety measures, such as ‘waking watches’; personnel employed to walk round a building at night. Mary-Anne Bowring of Ringley, which manages more than 12,000 properties, said freeholders have abandoned all other repairs to carry out the fire safety works. There are apartment blocks where 100% of the reserve funds have been spent on replacing cladding. Experts have warned that leaseholders will be in for a shock when all the work is complete. They will receive a £120,000 bill for lift replacements, for instance, but there will be nothing in the kitty to pay for them. This will be the long Covid of the building safety crisis. According to ARMA, the average block has only £84,000 left in reserves, which is worrying when it is considered that a new roof could cost several hundred thousand.
Pensions triple lock could cost £4bn
Chancellor Rishi Sunak has said the triple lock on pensions remains government policy after it emerged that he may have to spend £4bn more on pensioners from next year if he sticks to the pledge. Sunak was grilled on the issue in an interview with GB News, after ONS data published earlier in the week revealed there was a record jump in earnings. The triple-lock pledge ensures that pensions rise annually by the highest out of average earnings growth, inflation or 2.5%. This means Sunak would need to link pensions to earnings growth if it remained at this level. However, the ONS said the 5.6% increase has been distorted following a big fall in earnings during the first lockdown last year, while many jobs axed in the pandemic have also being lower-paid roles. During the interview with Andrew Neil, Sunak was asked whether he would be prepared to pay the bill amid criticism over the funding provided to help children catch up on missed school lessons. “The triple lock is the government policy but I can’t pre-empt, there’s a statutory review that happens in the autumn through a parliamentary process and it’s not right for me to pre-empt that,” the chancellor said. Sunak claimed the figures were “speculation” and when questioned on whether he would pay the bill if earnings turned out to be the highest, he said: “That’s how the triple lock works. That is the government policy.” Pension experts have already highlighted concerns about fairness between the generations, with many of the working population are facing pay freezes amid the coronavirus crisis. The Treasury, which has already hinted that it faces a balancing act with the issue, said the focus was to “ensure fairness for both pensioners and taxpayers”, according to the Financial Times.
The perfect time to re-mortgage?
Platform and NatWest last week launched fixed-rate deals with the lowest ever interest rates seen on a two-year and five-year fix respectively, according to brokers. But while these mortgages won't necessarily be best for everyone, the headline-grabbing rates of 0.95% and 1.17% indicate that competition between lenders is currently fierce. Here are the key details of the two new mortgage deals launched by NatWest and Platform (Platform is a mortgage intermediary that's part of the Co-op Group):
- Rates are fixed at 0.95% for two years with Platform and at 1.17% for five years via NatWest. This means the interest charged cannot increase or fall over the period of the fix, even if rates elsewhere move, including the Bank of England Base Rate.
- Platform's two-year fix is available to those looking to purchase a home (including first-time buyers) and those looking to re-mortgage. However, NatWest's five-year fix is only for re-mortgaging.
- You'll need a minimum 40% deposit or 40% equity in your current home for the Platform deal or a minimum 40% equity in your current home for the NatWest offer.
- Both fixes come with an expensive product fee. Platform's is £1,499 and NatWest's is £1,495.
- Both fixes come with early repayments charges.
Despite the headline rate you may be able to get a cheaper deal elsewhere.
What next for the economic recovery?
The fastest monthly growth of the services sector since 1997 and a fall in the number of workers on furlough signalled that the UK’s recovery from the coronavirus crisis remained on track in May, as lockdown restrictions were relaxed across all four nations of the UK. A steep fall in unemployment claims in the US and new data showing an acceleration in the recovery across Europe also indicated that the Covid-19 vaccination programmes across the developed world were helping drive a rebound in economic activity. However, the improved economic situation failed to ignite financial markets after analysts cited concerns about the potential for the boom to peter out due to severe constraints on essential supplies and a lack of skilled workers. There are still so many factors for investors to weigh, such as whether the economy will overheat or whether new Covid variants could prompt a further economic downturn. There is also an element of having to second guess how central banks and governments will respond to the rapidly shifting backdrop. All of this uncertainty is making it tricky for the markets to make concerted progress as we move towards the halfway point of 2021. In its monthly snapshot, IHS Markit and the Chartered Institute of Procurement and Supply (CIPS) reported the biggest surge in UK business and consumer spending in May in the services sector for the last 25 years. Employers reported the strongest rate of hiring for more than six years amid a spring boom in the economy, which follows the worst recession for more than 300 years in 2020. The monthly survey of businesses in the sector that includes hotels, restaurants, finance and IT showed mounting pressure on staff wage bills, raw materials and transport fuelled the steepest rise in costs since July 2008. The IHS Markit/CIPS purchasing managers’ index (PMI) – a closely watched gauge of activity in the services sector, which is responsible for almost 80% of the UK’s national output – increased to 62.9 in May, up from 61.0 in April. Any reading above 50 denotes that the sector is expanding. The snapshot comes as employers sound the alarm over staff shortages exacerbated by the pandemic and Brexit, as fewer EU workers travel to Britain to find a job. Separate figures from HMRC showed that 1.3 million fewer workers accessed the furlough scheme in March and April, as hiring picked up with employers preparing for the reopening of the economy. According to the tax records, 3.4 million employees remained on furlough at the end of April. Rishi Sunak said the figures showed the government’s programme of job support was working.
How much for a comfortable retirement?
Couples typically need £26,000 and single people need £19,000 a year for a comfortable retirement, new research reveals. This amount would cover essential bills plus regular short haul holidays, leisure activities, alcohol and charity giving. A couple would have to save private pensions worth £154,700 between them to hit their retirement target, while an individual would need to build a pot worth £192,290, according to the study by consumer group Which? That is based on people investing their pension at 65 and drawing it down over 20 years, with investment growth of 3%, inflation at 1% and charges of 0.75%. A single person needs to save much more into private pensions to account for only having one state pension, and only benefiting from one tax-free personal allowance. The amount of savings required is also much higher if you want your income to be guaranteed until you die, by buying an annuity rather than relying on stock market returns, which can be very volatile. A couple would need combined savings of £265,420 to buy an annuity at 65, not including inflation and paying 50% to the surviving partner, to help them generate the target sum. An individual would require a pot worth £305,710 to buy an annuity that helped them reach their target income. People need to save even more for a luxurious retirement, defined by Which? as including long haul holidays to farther flung destinations, health club membership, expensive meals out and a new car every five years. Couples need £41,000 a year to achieve this kind of lifestyle, while single people need £31,000.
State pension underpayments scandal
The state pension has been underpaid for an estimated 200,000 women, and Britons are being urged to check their entitlement. State Pension payments are understandably important to millions of people right across the UK as a source of income in retirement, however, due to an error at the Department for Work and Pensions (DWP), thousands of women may find they have been underpaid their entitlement. The issue arises for those claiming the old state pension due to rules about how much a woman could receive. Under the system, married women who were looking at a limited state pension in their own right were permitted to claim a 60% basic state pension sum. This was based on the National Insurance record of their husband at the time. Women were only allowed to undertake this action, however, if the sum was bigger than the state pension they would have received based on their own National Insurance record. An uplift to the state pension sum should have been applied automatically since March 2008. However, due to a system error, in certain circumstances some women did not have this increase automatically applied. Individuals retiring before this date needed to make what is being described as a “second claim” to uplift their state pension sum. These women will have needed to take action, however, the DWP stated it wrote to those affected telling them what they could do next. Issues, however, arose when certain women stated they received no such correspondence and were thus left out of the loop. Women who have been impacted will have missed out on potentially years of higher state pension payments. However, another issue is arising for women which is causing further strain. Under present rules, individuals can only get backdated payments for the boosted state pension sum for 12 months. This means many have missed the opportunity to receive years of contributions. Rectifying the issue, though, is likely to provide significant peace of mind to the female state pensioners who have been impacted. The DWP is now taking action to reach out to those individuals who may have been hit by the error. However, experts such as former pensions minister Sir Steve Webb have urged women to take action by contacting the DWP if they feel they have been affected.