News Updates - March
12th March 2020
Income concern as dividends face pressure
Investors are braced for savage cuts in dividends across the FTSE 350 as companies hoard cash to see them through the coronavirus crisis. A wave of dividend suspensions and cancellation of buybacks last week at companies spanning William Hill and Marks and Spencer has heaped further pain on shareholders already suffering losses in their portfolios from the market sell-off. The pandemic appears set to end the decade-long run of bumper pay-outs for income-hungry investors. Since the end of the financial crisis, FTSE 100 dividend payments have almost doubled from £46bn in 2009 to about £90bn in dividends declared so far for 2019, according to stockbrokers AJ Bell. Special dividends and buybacks have been paid out on top. Analysts had expected a further 2% increase in dividend payments to £91.5bn, but experts say that this is “starting to look optimistic. More than a dozen companies have already cut or suspended payouts in the UK. Many are in consumer-facing industries, such as pub groups Marston’s and Wetherspoons, while the cancellation of sporting events forced William Hill and Playtech to take action. Investors are now worried that dividend cover from earnings has become overly optimistic given an unprecedented drop in consumer demand across industries, and the knock-on effect on areas such as manufacturing and supply chains. With many governments pursuing a ‘close everything down' strategy, the deterioration in corporate cashflows is growing by the day. A sustained downturn in economic activity could weigh on commodity prices, and in turn on pay-outs from groups such as Glencore, while BP and Shell are in focus, given the sharp fall in oil prices. As well as cutting dividends, companies could also find themselves unable to pay a final dividend if they are forced to delay or suspend their annual meetings.
Gold sell off
The way stocks have been selling off lately, one may have thought that a safe place to park your cash was in precious metals, such as gold and silver. These have always been considered great “flight to safety” instruments, as they are viewed as a store of value. When there is a financial crisis, there is always the possibility that some assets “may not be around” when its all said and done. However, throughout history, precious metals have always provided a home for cash when other assets were failing. However, during the current sell off in risk assets, cash has not necessarily rotated out of stocks and into precious metals. Just one week ago, gold put in a near term high at 1703.60. Over the course of the next 5 trading days, including today, the price of gold from high to low has sold off 14.8%, but held just above prior support near 1445.8.That level also coincides with the 161.8% retracement level from the lows on February 5th to the highs on March 9th. What does this mean? It means that when the crisis started (before we know it was a crisis), money was flowing the usual flight to safety pattern out of stocks and into gold. However, as the coronavirus spread throughout the world and stocks continued to move lower, precious metals had to be sold so that cash could be raised. The cash was needed for 2 reasons;
1) to meet margin requirements
2) to build a cash reserve in case of “worst case scenario” (which is also one of the reasons stocks continued to sell off).
Its important to be aware that just because stock markets around the world are being sold off, that doesn’t always mean there will be a rotation into precious metals. Sometimes, cash is the best position to be in.
Pension scam risk
Pension savers face a greater risk of being targeted by fraudsters, new research from the All-Party Parliamentary Group on Pension Scams (APPG) has revealed. The government has advised more people to stay at home amid the coronavirus crisis, which could increase their chances of being contacted via phone or online. Investment markets plunging over recent weeks may also make people more susceptible to pension scams as they attempt to recover losses from their retirement savings. The figures show that up to £10 billion may have been stolen by fraudsters in 2018, with the average pension scam victim losing £82,000, the APPG found. Current legislative initiatives are falling short of protecting retired workers, the APPG has found. For example, the government’s ban on cold calling still leaves room for scammers to target people if they claim to represent a major pension provider. If the person happens to have a pension with the company stated, they may not realise that the call is fraudulent. The APPG on Pension Scams is calling for the government to do more to protect retired workers. This includes improving early warning systems and communication between advisers, providers and regulators to prevent scams before they happen. Simplifying official channels to help people identify and report fraud could also help reduce the risk of pension scams occurring.
Using your ISA to boost your retirement
It’s easy to dismiss Isas — individual savings accounts — as being irrelevant to our generation. For many millennials, saving and investing seem like unaffordable luxuries. Those saving into the tax-free accounts tend to be older people. The latest statistics (for 2016/17) show that only 17% of Isa savers that year were under 35, but half were aged over 55. According to Scottish Friendly, the numbers of adults holding Isas fell in every age group between 2009 and 2016 except one — baby boomers. But in 2017, the Lifetime Isa (Lisa) came along to help young people saving for a first home or investing for retirement. Open an account at age 18, subscribe the maximum £4,000 every year until you turn 50, and you could net a 25% government bonus worth up to £32,000. Every UK adult gets an Isa allowance of £20,000 every tax year (which begins on April 6). You can split this allowance between different Isa products. Young people can pay up to £4,000 of this into a Lifetime Isa. You have to be aged 18-39 to open an account, but you can keep paying into it until the day before your 50th birthday. Whichever you choose, every pound you pop into the Lisa is topped up by 25p, with the bonus paid monthly. Save the full £4,000 and you could get £1,000 free cash towards your savings goals every year. If you use the Lisa for your retirement, you can access the money tax-free from age 60. But beware — you will be heavily penalised for withdrawals made for any other purpose.
Most pensions changes unlikely in forthcoming Budget?
There are several pension changes that many hoped would get the green light on funding in this Budget, which now may not happen. These include increases to auto-enrolment minimum contribution rates, changes to threshold levels on earnings and extended coverage to young workers under age 21. Much will be made, of course, of the initiatives already in hand, such as plans in the current Pension Schemes Bill for pension dashboards, collective defined contribution schemes and greater punitive powers for The Pensions Regulator. But there will probably be little new beyond that. On pension tax allowances, it is anticipated the chancellor will announce some easing of the tapered annual allowance rules with effect from the start of the next financial year, 2020/21. Not that this will be enough to satisfy the critics of the policy as it stands. It is believed the taper is having a perverse effect on pension saving and should be scrapped. There are many other ways of limiting and controlling tax relief levels, if necessary, such as by means of an earnings cap. Better these are considered as part of a fuller review of the tax relief system as a whole, rather than the piecemeal tinkering approach that has done so much harm to the system to date. In this context, it is worrying to note the persistent rumours circulating in recent weeks to the effect the government may be contemplating abolishing higher-rate tax relief and introducing a flat rate of 20% for all contributors, as currently allowed for standard-rate taxpayers.
Property tax changes
Those selling residential property in the UK need to be ready for changes to Capital Gains Tax (CGT) rules from early April, one of the UK’s Top 60 accountancy and business services firms is advising. There are currently different rules for the payment of CGT, depending on whether or not you are a UK resident and, for land and buildings, whether the property is residential or commercial. Up until 5th April 2020, UK residents pay all CGT under Self-Assessment. However changes will shortly come into effect. From 6th April, CGT on residential property sales must be declared and a payment on account made to HMRC, within 30 days of completion. Non-residents have been required to pay CGT on disposals of UK residential property within 30 days since April 2015, unless the individual is under Self-Assessment, in which case the normal Self-Assessment payment date has applied. From 6 April 2019, this extended to direct disposals of non-residential UK property by non-residents and indirect disposals of interests in a ‘UK property rich’ entity. However, from this 6th April, all CGT due by non-residents on disposals of UK land and property, and on indirect disposals of interest in UK property rich entities, must be paid within 30 days even if the individual is under Self-Assessment.
Coronavirus and the markets: greed and fear in action
Warren Buffett once described fear and greed as diseases that infect investors. As the novel coronavirus rampages across the world and ravages stock markets, investors are quoting the billionaire investor as they try to hold their nerve. "Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community," the Berkshire Hathaway CEO wrote in his 1986 letter to shareholders. "The timing of these epidemics will be unpredictable," he continued. "And the market aberrations produced by them will be equally unpredictable, both as to duration and degree." "Therefore, we never try to anticipate the arrival or departure of either disease," Buffett added. "Our goal is more modest: We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful. Buffett doubled down on his stance in a CNBC interview this week, arguing long-term investors should be thrilled by the current selloff as it presents an opportunity to buy shares in quality businesses at a discount.