We’re certainly living through interesting times. Donald Trump’s election to the White House earlier this month provided another seismic political shock as we continue to grapple with the repercussions of the Brexit vote. While last week’s Autumn Statement begins to set out how the UK will prepare for the forthcoming exit from the EU there are many elements of uncertainty at play in the national and global economy at present, which affect our perceptions around investing.
It feels like 2016 has been a year for shocks and surprises and with geo-political turbulence all around us it’s easy to be hesitant about investment choices and defer decisions over how to make our money work for us. But are the circumstances we are living through really unique? Are we in a more unpredictable investment climate than that of previous generations? Should we show more caution than in previous years, which weren’t subject to the same levels of uncertainty?
A look back over the geo-political events of the last century might suggest otherwise. Pick any year between the present and the Great Depression of 1934 and you’re likely to find something to give you a reason to choose not to invest in the stock market. No sooner has the Depression passed than WWII begins. Within two years of the war ending, the template of the Cold War is set. And it’s not just the obvious points of conflict that provide a disincentive to investors. The general global power play of political, economic and demographic changes could constantly provide excuses for not investing if we were seeking them (for example, 1953: Russia detonates a hydrogen bomb; 1959: Castro seizes power; 1972: Largest US trade deficit in history; 1998: Russian currency devaluation). Each of these events could provide significant enough reason for some investors to hold back.
Climate of uncertainty
It is not difficult to understand why present-day investors are uncertain. We have our own national and global preoccupations to factor in to our investment plans. Last week’s Autumn Statement was anticipated more keenly than usual. The first big Government set-piece statement since the EU referendum, it was the opportunity for the Chancellor to set out his economic vision and to lay the economic foundations for Brexit: “I want to make sure that the economy is watertight, that we have enough headroom to deal with any unexpected challenges over the next couple of years and most importantly, that we’re ready to seize the opportunities of leaving the European Union.”
In terms of the meat of the statement, the Chancellor didn’t unveil any major tax or pensions changes that would set any hares running or have any immediate impact on the investment plans and portfolios of our clients. This is welcome news and means that investors can now plan for the tax year-end with confidence and clarity.
However, the broader environment remains febrile and the news wasn’t as positive from the Office for Budget Responsibility (OBR), which slashed growth forecasts for 2017. They revised down, forecasts for GDP growth from 2.2% to just 1.4%, attributing it to the effect of an impending Brexit. The IMF has already reduced its growth forecasts for the UK twice since the EU referendum, while the OECD has halved its growth predictions for the UK, warning of ‘very high uncertainty’ ahead.
As the pound’s value has lowered (reaching a 31-year low in October in response to speculation of a ‘hard Brexit’) concerns about a rise inflation have increased. Bloomberg reported that UK inflation accelerated in October at the fastest pace for two years, with Barclays also predicting that inflation in one year’s time would rise faster than at any time since 2011. An increase in inflation raises the prospect of savers losing money in real terms which, while maybe only a short-term situation, is nevertheless a further disincentive to some investors.
On the global stage, the election of Donald Trump, the sabre-rattling of Vladimir Putin and the ongoing conflict in Syria provide the factors of further uncertainty as the traditional geo-political network of allegiances is challenged by a new incoming president of the United States who professes his admiration for the Russian leader and has expressed a desire for closer links between the two countries.
Time will tell whether Trump will go ahead with his campaign plans to dismantle many of the US’ trade deals but his recent restating of his intention to withdraw from the Trans-Pacific Partnership from ‘day one’ would suggest he will. Many commentators see this as a boon for China, with definite implications for global trade figures and outlook, affecting countries and investors far beyond the US.
Taking the long view
So how should we respond to this uncertain national and global economic picture? The response of many investors here is to sit tight and not take any investment decisions. It’s at times like this that our job, as financial advisers, is to take the long view and provide perspective when offering investment advice. It can be tempting to think that our situation is unique, that the end of the world is nigh and we’re on the brink of apocalypse. Particularly in today’s 24-hour media saturated environment.
The truth is that timid investors can always find reasons not to invest, using the broader economic circumstances to justify their over-caution when, in reality, careful and informed investing over time has been shown to consistently deliver returns. From a purely pragmatic perspective, buying when the markets are low is a basic tenet of successful investing. Smart investors see this as an opportunity rather than a threat and that taking the long-term approach can deliver satisfying results. Our role is to reassure investors that markets can and do recover from the ups and downs of the geo-political and economic rollercoaster, and have been doing so for many years.
As an example, we can look again to our historical comparison with the events of previous years, through the many political and economic peaks and troughs of the 20th Century and back over 80 years to the Great Depression. If an investor had invested $1 million in the stock market at this point, in 1934, that sum would have grown to now be worth over $2.3 billion. As arguments for the value of investing come, that’s pretty convincing by anyone’s measure.
Additional information on the Autumn Statement
Investors follow these announcements closely for implications for their own saving and investing plans, but the Autumn Statement and Brexit are only part of what’s affecting our economic outlook, with recent geo-political events contributing to a cautious environment for the world’s economies.
Autumn Statement (some points of interest)
There was welcome news that pension tax relief remains untouched. It appears that now is still not the time for a major pensions shake up, but it could be the perfect time to maximise funding and secure higher rate tax relief.
The Money Purchase Annual Allowance (MPAA) – the amount you can save into a pension once you have already taken some money out – will be reduced as the Government seeks to get tough on savers claiming “double tax relief”. Currently set at £10,000, the MPAA will fall to £4,000 from April for people already taking benefits from their pensions. The Government is consulting on the impact of the changes but criticism of the move suggests it sends a mixed message over the Government’s approach to ‘pension freedoms’, having itself only been introduced in April 2015.
The reduction in allowance is most likely to affect people who will need to work later into life. A generation of people are realising that the traditional finishing line of 65 years of age may need to be extended and this is the demographic that will be hit hardest by the MPAA reduction as, once funds have been taken out, it will take that much longer to build up their pension pot again.
While tax perks for a range of ‘salary sacrifice’ schemes will be removed, pension contributions will not be affected, so salary sacrifice will continue to offer a tax efficient choice for pension savings.
The existing schedule for increasing income tax thresholds will remain in place. For the 2017-18 tax year the personal allowance will rise from £11,000 to £11,500 and the 40% higher rate threshold will move from £43,000 to £45,000. The Chancellor announced that these will rise again to £12,500 and £50,000 respectively by the end of the current parliament in 2020. The additional-rate or 45% threshold is unchanged, as is the income limit of £100,000.
As an aside, rising income tax thresholds over the years have meant that higher-earners are paying an increasing proportion of the UK’s total tax receipts. According to HMRC figures, the lower 50% of the population, by pre-tax income, are forecast to contribute just 9.9% of all income tax in 2016-17. The wealthiest 50% pay the remaining 90.1pc.
Some housekeeping from Hammond at the end of his speech saw him announce it was the last Autumn Statement he was planning to make, opting to move the budget to the autumn in future. He will deliver a Spring Statement, which would review the progress of Office for Budget Responsibility forecasts, but would not contain major Treasury policy announcements, expressing a desire to move away from making two major policy announcements per year ‘just for the sake of it’.
This article does not constitute financial advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner to take into account your particular investment objectives, financial situation and individual needs. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections.