Sententia Articles January 2019

In this Issue

 

 / Brexit and the Global Markets

As we approach the Brexit deadline we talk about the latest updates and discuss what might lie ahead. We then turn our attention away from the EU and to the global markets – how they performed in 2018, and how they might be expected to perform in 2019.

 

/ ISA Subscriptions 2018/19

It's time to look forward to the year ahead and focus on ensuring tax free allowances are utilised before tax year end; we look at the ISA allowance in this context and at the value of saving in a tax free environment.  

 

 

Brexit and the Global Markets

Since our last edition we have been witness to a great deal of activity on the Brexit front. On 12 December we found out that the number of no confidence letters had reached the minimum threshold of 48 required to trigger a vote of no confidence. This meant all Conservative MPs were asked to cast their vote for or against Theresa May as leader of the party. The Prime Minister won by 200 votes to 117, giving her a majority of 83. However, this still meant that over a third of the conservative party did not back her. Theresa May has now set a new date for a government vote on the withdrawal agreement, which will take place the week commencing 14 January.

As we await the final vote and confirmation as to whether the United Kingdom will leave the EU with or without a deal, we turn our attention to the global markets. Most industry professionals would champion a diversified portfolio, and now more than ever there may be benefit to looking at opportunities globally.

So how have key global markets performed in 2018, and how might they be expected to perform in 2019?

 

Asia Pacific Including Japan

One of the best performing sectors over the last five years has been Asia Pacific (including Japan). The Investment Association (IA) specifies that funds in this sector must invest at least 80% of their assets in Asia Pacific equities including some Japanese content. The Japanese content must make up less than 80% of assets. Over the last five years the sector has performed well and returned 58.5%.

Cumulative performance – as of 31 December 2018

 

1m       

3m       

6m       

1yr       

3yr       

5yr       

Asia Pacific inc Japan

-3.9

-8.4

-7.2

-7.3

44.8

58.5

Source: Financial Express

We have seen a number of big headlines from the region in the last few weeks. In December it was announced that Carlos Gohn, former Chairman of Nissan Motor Co Ltd was to be indicted on the grounds that he was conspiring to understate his income. Within the same week news broke that the Chief Financial Officer of Huawei, Wanzhou Meng was arrested as part of an investigation into whether the company broke trade sanctions against Iran. This inevitably lead to sell offs in the Japanese and Chinese markets.

As we look forward into 2019 and 2020 the sector is broadly expected to perform well. The Indian general election is set for March 2019, and reports suggest this will be a close race. Australian and New Zealand economies may slow as difficulties in the housing market and rising prices take hold. Japan is expected to do well and see a boost from large construction works as it prepares for the 2020 Tokyo Summer Olympics.

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China and Greater China

The China and Greater China sector is often considered one of those with great opportunity for long term growth. The sector has performed well over the last five years, returning 52.1%. The IA sector specifies that funds must have at least 80% of their assets directly or indirectly invested in equities of the People’s Republic of China, Hong Kong or Taiwan. Funds may invest in one of more of these countries.

Cumulative performance – as of 31 December 2018

 

1m       

3m       

6m       

1yr       

3yr       

5yr       

China/ Greater China

-4.4

-8.8

-14.8

-14.5

42.1

52.1

 

Source: Financial Express

China has dominated the news in recent months as the trade war with the US continues. On 1 December President Donald Trump and President Xi Jinping agreed to a 90-day trade war truce, which will come to an end on 1 March. For the duration of the truce Trump has agreed not to increase tariffs on Chinese goods from 10% to 25%. Both parties hope that the 90-day trade war truce will allow negotiators enough time to come to an agreement on new tariffs. If not, there is a possibility that the truce might receive a small extension.

 

In the third week of December China held its annual Central Economic Work Conference. This is an annual gathering of Chinese state leaders, ministers, provincial governors and senior advisers who are tasked with building economic policies for the country’s most important economic issues. Following online rumours that there would be no tax cuts, the Chinese leadership used the conference to deliver a clear message. It was announced that taxes would be cut, and fiscal spending boosted, in order to help stimulate the economy in 2019.

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North America

The IA specifies that North American funds must invest at least 80% of their assets in North American equities. The sector has performed very well, returning 75.2% over the last five years. Both the Dow Jones and Nasdaq have performed well through the majority of 2018, but suffered in Q4 as trade war tensions rose.

Cumulative performance – as of 31 December 2018

 

1m       

3m       

6m       

1yr      

3yr      

5yr       

North America             

-9.1

-13.5

-6.2

0.7

42.3

75.2

 

Source: Financial Express

US growth was above 3% for the first two quarters of 2018, and above 2% percent for the third. Job growth has continued and is averaging around 200,000 new jobs per month, which is considerably higher than previous estimates. The Fed has been gradually increasing interest rates, and this is expected to continue in 2019. However, the full effects of such increases are not felt immediately so  their long term effect on the economy is not yet apparent. There are however signs that investment spending might be starting to weaken. Housing construction has slowed down and the economic conditions in Europe, as well as the trade war with China, might pose some challenges. That being said, the outlook for 2019 is expected to be positive and there is confidence that the US can tackle its immediate issues.

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Europe Excluding UK

The IA specifies that funds in the sector must invest at least 80% of their assets in European equities and exclude UK securities. The sector has performed well over the last five years, but has not been as strong as some others. More recently it has suffered from Brexit uncertainty and what might fall upon the rest of the EU in the event of a no deal Brexit.

Cumulative performance – as of 31 December 2018

 

1m       

3m       

6m       

1yr       

3yr      

5yr      

IA Europe excluding UK

-5.5

-12.7

-11.0

-12.2

19.7

30.7

 

Source: Financial Express

The Eurozone economy slowed in the third quarter of 2018, with GDP growth just 0.2% over the previous quarter. The German economy contracted for the first time in over three years in the third quarter. Germany’s growth has certainly been impacted by struggles in the global economy, but on the home front has been hindered by disrupted car production due to new emission tests. Italy’s economy recorded zero growth in the third quarter. This was largely due to slow industrial production, lack of EU growth and declining business performance. France however, saw a recovery in its economy in the third quarter with good household spending figures and higher expenditures throughout the energy and transport industries.

The Eurozone is likely to be affected by uncertainty in the event of a no deal brexit. Even if the UK were to agree a withdrawal agreement before March there is still likely to be a certain degree of unrest during the transition period.

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Whilst Brexit is a historical and significant event for the global economy, it is important to recognise other global events and the impact and opportunities in different sectors. There are many areas to watch in 2019, and plenty of places to invest. The graph below shows how growth forecasts for different nations have shifted between 2018 to 2019 – in other words, the higher in the graph, the greater the acceleration.

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Source: Bloomberg Economics, Data: IMF

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The impact of investing the full ISA allowance

With Christmas now behind us, it’s time to look forward to the next significant date in the calendar - the end of the tax year and in particular, your clients’ ISA subscriptions.

A Stocks & Share ISA is an excellent way to invest money for your clients in a tax efficient manner. One of the key efficiencies is that Capital Gains Tax does not apply. Most investment products are subject to tax on gains exceeding the Annual Exempt Amount (AEA), also known as the Capital Gains tax-free allowance which is currently £11,700 (increasing to £12,000 in April 2019). This tax is waived for investments in an ISA, making them an effective vehicle for long term investing. Because there is no need to periodically realise gains to stay under the AEA, ISA money can stay invested to benefit from long term investment growth without spending time out of the market.

The ISA allowance for 2018/2019 is £20,000 per person and you have until Friday 5th April 2019 to make full use of this allowance for your clients. The amount which can be invested into a tax free investment is particularly relevant now that the pensions Tapered Annual Allowance can be reduced as low as £10,000, which is a reduction that implicates higher rate earners and reduces their ability to invest in a tax free investment environment.

For information on utilising the Annual Allowance for money purchase pensions, please see our earlier content available here.

We can illustrate, in simplistic terms, an investor utilising the full ISA subscription every year (£20,000 p.a.) over a 15-year period, and also illustrate how much CGT would be saved by using an ISA rather than the same investment being disinvested in a General Investment Account.

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Year

Cumulative Subscription Amount

After 5% Growth

Potential CGT Liability (Full Disposal)

Year 1

£20,000.00

£21,000

£0

Year 2

£40,000.00

£43,050

£0

Year 3

£60,000.00

£66,203

£0

Year 4

£80,000.00

£90,513

£0

Year 5

£100,000

£116,038

£808

Year 6

£120,000

£142,840

£2,168

Year 7

£140,000

£17,098

£3,796

Year 8

£160,000

£200,531

£5,706

Year 9

£180,000

£231,558

£7,912

Year 10

£200,000

£264,136

£10,427

Year 11

£220,000

£298,343

£13,269

Year 12

£240,000

£334,260

£16,452

Year 13

£260,000

£371,973

£19,995

Year 14

£280,000

£411,571

£23,914

Year 15

£300,000

£453,150

£28,230

Assumptions Used
Growth rate 5.00% after charges
ISA subscription limit remains at £20,000 p.a.
AEA of £12,000 is utilised before any CGT liability arises
Client is a higher rate tax payer
The figures shown above are for illustrative purposes and this illustration does not constitute advice or guidance

 

Bed & ISA

If the client holds a General Investment Account (GIA) then assets can be disinvested and the proceeds used to make ISA subscriptions. This is known as Bed & ISA, and can be useful where a client wants to utilise the full ISA allowance but doesn’t have enough cash available off-platform. Bed & ISA can also make regular use of the AEA which is a ‘use it or lose it’ allowance. If there is a gain that exceeds the AEA then there could be a CGT liability arising. Novia’s tools can add value here.

CGT Tool

If you have a client on the Novia Platform you can use our CGT tool to establish whether there is any gain on the investments if you were to sell down, which will help you with your financial planning for the client. An example of the output produced from an Unrealised Capital Gain/Loss is shown below:

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To access the CGT Tool, you would need to log into the platform via the Adviser Access, select your client and then proceed to the CGT Calculator.  This can be found within ‘Client Maintenance’You can run a Realised Gain report, either by tax year or a particular date range, which shows gains and losses that have already been realised; or you can produce an Unrealised Gain report (as above) which shows the current potential gains and losses based on the value of the investments as they stand.

ISA Subscription Report

To assist you with your clients’ ISA subscriptions Novia has a report available in Report Zone, which will provide you with a list of your clients and any outstanding subscriptions they have available in this current tax year.  The report is called ‘Remaining ISA Subscriptions in Current Tax Year’ and can be located under the heading ‘Reports about Clients/Wrappers’.

The report also confirms the limits for your clients who do not hold ISAs on the platform. You should be aware that your clients may have made ISA subscriptions elsewhere which will not show up on this report.

To ensure that your clients do not miss out on maximising their allowance, please click here to read our recent Adviser Update detailing our Tax Year End deadlines.

 

 

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