Sententia Articles 2019

In this issue

 

Monetary policy, election and Brexit – who holds the cards to win this important vote?

In the last month, with the election and Brexit looming, the news has been flooded with details of manifestos, spending plans and electoral debates, with a range of promises and budgets and varying considerations of what they might mean for both individuals and the industry, not to mention where the economy currently sits in the midst of electoral campaigning...

 

Meeting the growing demand for ESG investing with a little help from DFMs

With more and more clients seeking to invest sustainably, how do you ensure that you can meet the demand? Contrary to popular belief, it isn’t just the rising influence of millennial investors that is driving the increase in demand; earlier this year Morningstar reported that when they ‘compared the average sustainability preference scores of three generations: millennials, generation X, and baby boomers’ they found that ‘the average preference score for millennials and gen X were statistically equivalent.’ Clearly, the growing belief that value extends beyond financial returns has long since left the realms of niche investing...

 

Monetary policy, election and Brexit – who holds the cards to win this important vote?

In the last month, with the election and Brexit looming, the news has been flooded with details of manifestos, spending plans and electoral debates, with a range of promises and budgets and varying considerations of what they might mean for both individuals and the industry, not to mention where the economy currently sits in the midst of electoral campaigning.

On 7 November 2019 the Bank of England published its Monetary Policy following the meeting of  the Monetary Policy Committee (MPC) the day before, in which they voted with a majority of 7-2 to maintain the Bank Rate at 0.75%. The report confirmed that the Committee’s new projections for activity and inflation were based on the assumption of an orderly withdrawal from the European Union, and a deep free trade agreement.

The Bank of England did acknowledge that underlying UK GDP growth had slowed in the last year, due in part to the domestic impact of Brexit related uncertainties, but following the flexible extension of Article 50 in October 2019 the likelihood of a no-deal Brexit has fallen and sterling has therefore appreciated, with UK GDP growth currently expected to increase during 2020.

Business investment growth is projected to pick up, as shown in the below graph:

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Source: ONS and Bank of England calculations.

Against the backdrop of a somewhat more optimistic and reassured economy, the political parties began to release their political manifestos to explain the plans they hope to be able to deliver as the next government. As with any election this naturally leads to financial analysis and scrutiny of plans to try to determine which are financially viable and the effects that they may have on the economy, and more specifically the finance industry.

Corporation Tax

It's always difficult for parties to agree upon tax measures, and, having done so, to implement the changes. The tax system in the UK is quite complex and any changes will obviously have knock on effects on the performance of individuals, corporations and the economy as a whole. The Institute of Financial Studies (IFS) has carried out comprehensive financial analysis for each of the major parties’ promises on tax.

Maintaining a competitive level of Corporation tax is key to helping stimulate entrepreneurship, company performance and economic growth, as well as generating revenue for HMRC. The current Conservative government had promised to reduce Corporation tax to 17% by 2020. The three large parties have since proposed differing plans for corporation tax; Labour wish to increase corporation tax from 19% to 21% from April 2020, and to 26% by 2023. This would potentially generate £23bn (also allowing for the increase in “small profits rate”). The Liberal Democrat party has proposed raising corporation tax back to 20% (where it was in 2015), creating a revenue of £10bn, and the Conservatives plan to maintain corporation tax at 19%, scrapping original plans to lower it to 17% by 2020.

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Source: Institute for Fiscal Studies (IFS).

It is important to note that changes do have a direct impact on companies, many of whom have been planning and budgeting for a continued reduction in corporation tax for 2020. This will therefore not only affect businesses but will likely also impact workers, customers and shareholders.

Capital Gains and Dividends

One of the Liberal Democrat’s key proposals is the abolition of the Capital Gains allowance. The current Capital Gains tax allowance is £12,000 for 2019/20. Any capital gains on top of this are taxed at 10% (basic rate payers) and 20% (higher or additional payers). The proposed action would be expected to raise £5.7bn of revenue, but would mean many more people would need to complete a self-assessment form, and would impact investors with assets outside of a tax efficient vehicle such as a Stocks & Shares ISA or a SIPP. Labour instead intends to tax Dividends and Capital gains in line with income tax brackets (current rates shown below) and abolish entrepreneur’s relief, raising an additional £14bn. The Conservative party has stated that there will be no increases to Income Tax, National Insurance or VAT. However, they have not specifically commented on Dividends, Capital Gains or Inheritance tax, so this avenue would be available to them if the need to raise additional revenue were to arise.

Rate

Tax Band

Income tax rate

Dividend tax rate

Starting Rate for Savings

£1-£5,000

0%

N/A

Basic rate

£1-£37,500

20%

7.5%

Higher rate

£37,501-£150,000

40%

32.5%

Additional rate

£150,000+

45%

38.1%

 

Brexit

Brexit still remains an important factor, and although an extension has been granted, the various party commitments are made working on different assumptions about the Brexit scenario. The Conservatives are committed not to extend the transition period beyond 31 December 2020. The Liberal Democrats are wishing to revoke Article 50 which assumes national income would be £50bn (2%) higher in five years. Labour want to achieve a ‘softer Brexit’ or allow the people to choose no Brexit at all. This softer Brexit would include a single market relationship which would boost growth.

Public Finances will be impacted, and all parties have acknowledged that spending needs to increase, but disagree greatly regarding the extent. Such spending increases would be to a higher level than previously anticipated, and quite high on an international level.

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We will await the election results on 12 December with great interest, but will need to wait a little longer to see what policies will be implemented, as well as what the outcome of Brexit will be. Policies still have to be agreed and passed through Parliament, and therefore the election of any one party neither guarantees nor rules out the implementation of a new policy.

Sources:

https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-report/2019/november/monetary-policy-report-november-2019.pdf

https://www.ifs.org.uk/election/2019/manifestos

https://www.ifs.org.uk/uploads/IFS-General-Election-Analysis-Stuart-Adam-Tax_.pdf

https://www.ifs.org.uk/uploads/Manifesto-analysis-2019-welfare-and-the-labour-market_latest.pdf

https://www.ifs.org.uk/uploads/IFS-General-election-analysis-2019-Christine-Farquharson-Spending-on-public-services.pdf

https://www.ifs.org.uk/uploads/IFS-General-election-analysis-2019-Carl-Emmerson-The-Outlook-for-public-finances.pdf

 

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Meeting the growing demand for ESG investing with a little help from DFMs

With more and more clients seeking to invest sustainably, how do you ensure that you can meet the demand?  Contrary to popular belief, it isn’t just the rising influence of millennial investors that is driving the increase in demand; earlier this year Morningstar reported that when they ‘compared the average sustainability preference scores of three generations: millennials, generation X, and baby boomers’they found that ‘the average preference score for millennials and gen X were statistically equivalent.’  Clearly, the growing belief that value extends beyond financial returns has long since left the realms of niche investing. 

In January 2004 the former UN Secretary General Kofi Annan wrote to over 50 CEOs inviting them to take part in a joint initiative, under the UN and with the support of the International Financial Corporation (IFC) and the Swiss Government. The aim of the initiative was to find a way to incorporate ESG into capital markets. This is regarded by many as the kick start to getting ESG considered and represented throughout the investment world.

However, with an industry standard yet to be established, how does an Adviser know that they are delivering true ESG portfolios for their clients, rather than simply investing in assets given an ESG veneer in order to cash in on the increasing demand from investors?

So what is sustainable investing? Is simply removing assets that invest tobacco, oil and weapons enough? What does ESG really mean to different investors? Lots of investors think that ESG or ‘sustainable’ investing relates only to ‘green’ companies or initiatives trying to help the planet. This is where the ‘SG’ falls off the ‘ESG’ headline, which can be damaging not only to investors, companies that are trying to make positive change, but also companies that are neglecting their social and governance responsibilities.

So what does ESG actually stand for?

ESG stands for Environmental, Social and Governance factors. Some examples of what this covers are:

Environmental:

  • Climate change
  • Natural resources such as water and wood
  • Pollution and waste
  • Deforestation

Social:

  • Human capital – working conditions, slavery, child labour
  • Local communities, including indigenous communities
  • Conflict
  • Health and safety
  • Employee relations

Governance:

  • Corporate Governance
  • Executive / Board pay
  • Bribery and corruption
  • Political lobbying
  • Tax

Greenwashing, a term coined in the 80s for assets with unsubstantiated or misleading ESG claims, is still a concern for investors today. How does an investor or their Adviser know that the claims made in promotional materials really reflect reality? Do the companies in which they are investing really walk the walk?  Without completing in-depth research, how does an investor or Advisers know?  Over recent years, fund managers have been increasing the size of their ESG investment teams to deliver on the increasing oversight required to create true ESG funds. Without an agreed industry standard it is helpful to refer to those who have been focussed on ESG globally.

The Global Sustainable Investment Alliance (GSIA) is a collaboration of the seven largest sustainable investment membership organizations in the world.  Their definitions of sustainable investment, most recently published in the Global Sustainable Investment Review 2018, aim to provide a global standard of classification. These are:

1. NEGATIVE/EXCLUSIONARY SCREENING: the exclusion from a fund or portfolio of certain sectors, companies or practices based on specific ESG criteria;

2. POSITIVE/BEST-IN-CLASS SCREENING: investment in sectors, companies or projects selected for positive ESG performance relative to industry peers;

3. NORMS-BASED SCREENING: screening of investments against minimum standards of business practice based on international norms, such as those issued by the OECD, ILO, UN and UNICEF;

4. ESG INTEGRATION: the systematic and explicit inclusion by investment managers of environmental, social and governance factors into financial analysis;

5. SUSTAINABILITY THEMED INVESTING: investment in themes or assets specifically related to sustainability (for example clean energy, green technology or sustainable agriculture);

6. IMPACT/COMMUNITY INVESTING: targeted investments aimed at solving social or environmental problems, and including community investing, where capital is specifically directed to traditionally underserved individuals or communities, as well as financing that is provided to businesses with a clear social or environmental purpose; and

7. CORPORATE ENGAGEMENT AND SHAREHOLDER ACTION: the use of shareholder power to influence corporate behaviour, including through direct corporate engagement (i.e., communicating with senior management and/or boards of companies), filing or co-filing shareholder proposals, and proxy voting that is guided by comprehensive ESG guidelines.

So how can an Adviser hope to ensure that they can build a portfolio to meet the many and varying ESG aims and desires of their clients?   Perhaps this is where a discretionary fund manager can assist.   They can do all the work to research and create ESG portfolios and provide the information you need for your clients to make the choice appropriate to their ethical investing beliefs.

Since launch, Novia has provided access to a wide range of DFMs on the platform, offering a plethora of investment approaches.  Many of these have specialist ESG portfolios available and some will even build bespoke portfolios to suit your requirements. To find out which of the DFMs offer ESG portfolios, visit our DFM page and look for the Tree icon.  We will continue to add to this list as we are notified of DFM’s ESG offerings. 

To find out more about investing with Novia please contact our Sales team on 0345 6000 3055.

 

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