March 2020 - Lawsons Equity

Weekly Market Update : 23rd – 29th March

This week, the strongest market rally since the 1930s has followed the steepest, fastest slump in equities, leaving many to wonder where we are on the COVID-19 crisis.

It is important to realise however, that equities (and risk markets in general) will require two things to become durably positive:

Confidence that the spread of the virus has been halted and that there is a visible end to the strict containment measures in most countries

Confidence that the massive hit to the global economy will be short-lived.

Stocks hit a low point on Monday, as expectations rose for the United States to follow other developed economies, including France, Germany, Italy and the UK, in delivering a huge fiscal stimulus package, worth as much as $2 trillion. This dwarfs the $800 billion rescue package delivered during the financial crisis of 2008/09. Whilst central banks have tackled illiquidity in markets, governments have increasingly stepped up to the plate with fiscal support, designed to plug the sudden stop in economic activity, as countries adopt social distancing measures to counteract the coronavirus.

On Tuesday, the US Dow Jones index, which measures the share prices of 30 of the largest US companies, had its biggest one day rally since 1933, during the Great Depression, rising by 11.4%. In this week, the US Federal Reserve also pledged to buy an unlimited amount of US government bonds to act as back stop for the US investment-grade corporate bond market. US jobless claims surged by over 3 million, to a record 3.3m, and the US overtook China as the country with the largest number of coronavirus infections. Figures out of China on Friday showed a near 40% fall in industrial profits to the end of February, a drop of almost $60 billion.

Bear market rally or has a low point been reached?

As of 12pm London time on Friday, US equities have risen by 14.1% over the week, European shares rose 5.8%, with the UK market climbing 6.9%. Japanese shares rose 13.7%, whilst Australia’s gains for the week were all but wiped out on Friday, as Australian shares gained 0.5% over the week, as the rally in markets showed signs of petering out. Emerging markets increased by 6.0%, with South Korea returning 9.7%, whilst Indian shares fell 0.3%, having collapsed by 13% on Monday, their worst day on record, just ahead of Prime Minister Modi announcing a lockdown on its population of 1.3 billion people for twenty-one days.

As the US Federal Reserve, European Central Bank and the Bank of England, amongst others, pledged to buy bonds and provide liquidity, some semblance of normality returned to haven assets as government bonds rallied. The yield on 10-year US Treasuries, which moves inversely to price, fell to 0.78%, German bunds rallied to minus 0.45% and UK gilts 0.36%. The gold price, which has been buffeted by investors desperate for liquidity, rose by 10.1%, now trading at $1,638 an ounce. The US dollar, which appreciates as global liquidity dries up, eased this week, as it fell by 2.6% and 5.1% versus the Euro and Sterling, now trading at $1.10 and $1.22 respectively, having fallen beneath $.1.15 versus Sterling on Monday.

The bottom line is that we are further along to the end of this bear market, and the other side of the crisis could be very positive for risk assets, but we still need to be vigilant about the virus fallout and cannot sound the all-clear yet. We are nevertheless convinced that the massive economic damage will be mitigated by governments and central banks worldwide, and that it’s only progress on the virus itself that is holding markets back. When this crisis is over, we could well see another long-term bull market in equities and the opportunities will be rife.

Weekly Market Update : 16th – 22nd March

Extreme volatility persisted last week, with stocks declining sharply as the number of coronavirus cases globally continued to rise.

The effects of social distancing have taken a significant toll on the global economy, hurt employment, and major central banks and governments around the world announced measures to support the economy.

European countries announced a combined $1 trillion in new fiscal spending and the U.S called for a $1.2 trillion stimulus plan. The Federal Reserve cut rates by a full 1%, returning its policy rate back near zero in addition to restarting its bond-buying program.

As of 12pm London time on Friday, UK equities had fallen 4.1%, with most of the pain being experienced within mid and small-cap companies, with the UK mid-cap index falling 11.7% versus 1.9% for large-cap companies. Japanese equities rose 1.7% as the Bank of Japan announced that it would double its purchases of Japanese equities through exchange-traded funds to 12 trillion Yen a year, equivalent to $112 billion.

US equities experienced their single largest day loss since the crash of October 1987. US equities were down 11.1%, however, in Sterling terms, US equities were down 5.5%, as the US dollar appreciated dramatically against most currencies amidst a dollar funding squeeze. European equities were down 1.6% over the week, although in Sterling terms, they have actually risen 0.4% as Sterling came under pressure against most major currencies this week.

The Japanese market was further boosted by rising expectations for fiscal support from the Japanese government. However, for Australian equities, exposed to financial and mining stocks, the market fell 13.1% over the week. Emerging markets dropped 14%, with China and Hong Kong remaining relatively defensive, falling 4.9% and 5.1% respectively. India fell 12.3% and Brazil lost 17.4%, with the latter being hit particularly badly from a further collapse in the oil price during the week.

It was also a difficult week for defensive assets, despite the Federal Reserve enacting an emergency interest rate cut of 1% on Sunday, taking rates to a range of 0% to 0.25%. The stress came from a US dollar squeeze, as demand spiked from countries and companies funded in dollars to keep themselves financed. This culminated in liquidity drying up, as investors increasingly turned to their most liquid assets as cash was required, leading to a selloff in government bonds and, once again, gold.

Yields, which move inversely to price, on 10-year US Treasuries rose to a peak of 1.26% on Thursday, having traded as low as 0.65% at the beginning of the week, whilst UK Gilts went from a yield of 0.40% to 1.01%, and German bunds swung from minus 0.58% to minus 0.15% over the same period. The government bond market started to behave more normally as the US Federal Reserve announced on Thursday that it would open up US dollar swap lines with more central banks globally.

This coincided with the Bank of England cutting interest rates to 0.1% and expanding its bond-buying programme by £200bn, and the European Central Bank announcing a plan to buy $750bn of bonds. This led to government bonds rallying, with 10-year yields on US Treasuries falling to 1.01% by Friday, with German Bunds trading at minus 0.28% and UK Gilts 0.58%. Similarly, the gold price fell from $1,560 an ounce on Monday, to $1,451 at its lowest point on the same day, before clawing back some of those losses during wild durations over the remainder of the week, and now currently trading at $1,507 an ounce.

The Coronavirus Budget – 2020 Summary

Chancellor Pumps Billions Into Economy To Combat Coronavirus

In this Government’s first budget and the first since the UK left the EU, the Chancellor, just four weeks into his role, was faced with a number of challenges.

A lot of the material content of this Budget had been in respect of existing areas that had been foreseen. However the global economic effect that the current Coronavirus outbreak, combined with the devastating effect that flooding has had on certain areas of the UK has led to the need for all of these issues to also be incorporated, whilst ensuring this is a Budget that delivers on the promises made by the government to lay foundations for the UK’s future prosperity.

What will be greeted with a sigh of relief for the financial services industry is there has only been a minimal amount of tinkering. It is widely hoped that the current uncertain economic climate will only be temporary in nature and that the situation will be a little more settled by the time the Autumn Budget comes around.

Key Announcements Made by Mr. Sunak in his First Budget:

Income Tax

The tax-free personal allowance will remain at £12,500 for 2020/2021.
The higher and additional rate tax thresholds remain unchanged as do the starting rate for savings income, dividend allowance and personal savings allowance.
The Scottish Government presented its Budget for 2020/2021 on 6th February and set the starter and basic rate thresholds at £2,085 and £12,658 respectively. All other thresholds remain unchanged.
Top Slicing Relief (TSR) on life insurance policy gains – Following a recent First‑Tier Tribunal case, the government will legislate in Finance Bill 2020 to put beyond doubt the calculation of TSR by specifying how income tax allowances and reliefs can be set against life insurance policy gains. This measure will apply to all relevant gains occurring on or after 11 March 2020.

Capital Gains Tax (CGT)

Effective from 11 March 2020, the lifetime limit on gains eligible for Entrepreneurs’ Relief (which offers a reduced 10% rate of Capital Gains Tax on qualifying disposals) will be reduced from £10 million to £1 million.
The annual exempt amount increases to £12,300 from 6 April 2020.
Trustees will benefit from an annual exempt amount of £6,150 although this amount will be diluted where the settlor has created more than one trust subject to a minimum of £1,230 per trust.

Inheritance Tax (IHT)

The only IHT related change is the already known raising of the residential nil rate band to £175,000.

Corporation Tax

The main corporation tax rate will remain at 19% rather than pressing ahead with the previously planned reduction to 17%.

Pensions

The lifetime allowance will increase to £1,073,100 from 6 April 2020.
Changes to the tapered annual allowance from 6 April 2020.
Following the proposals to compensate senior NHS clinicians who have been subject to the annual allowance charge, the two tapered annual allowance thresholds are being raised by £90,000. This means that those whose “threshold income” is £200,000 or less will not be affected by the taper at all, while those whose “adjusted income” is between £240,000 and £300,000 will have a reduced annual allowance of between £40,000 and £10,000.
For those with total income (including pension savings /accrual) over £300,000, the tapered annual allowance will reduce further, to a minimum of £4,000. For example, someone with total income of £312,000 or more will have a tapered annual allowance of £4,000.
In view of the revision in the tapered annual allowance thresholds, the proposals to offer greater pay in lieu of pensions for senior clinicians in the NHS pension scheme are not being adopted.
The government will shortly be publishing a call for evidence regarding the disparity in the tax relief position for low earners making pension contributions dependent on the method of tax relief adopted by the pension arrangement.
Following the Civil Partnerships (Opposite-sex Couples) Regulations 2019, individuals can derive or inherit a State Pension from an opposite-sex civil partner.

ISAs

The ISA annual subscription limit will be £20,000, while the Lifetime ISA annual limit will remain £4,000, for the 2020/21 tax year.
However JISA and Child Trust Fund subscription limits will be significantly increased from £4,368 to £9,000 for 2020/2021.

National Insurance

The National Insurance contributions (NICs) Primary Threshold and Lower Profits Limit, for employees and the self-employed respectively, will increase to £9,500 from April 2020.

Stamp Duty

Non-UK resident Stamp Duty Land Tax (SDLT) surcharge – The government will introduce a 2% SDLT surcharge on non-UK residents purchasing residential property in England and Northern Ireland from 1 April 2021.

Coronavirus support

To support the NHS and other public services, there will be a £5bn emergency response fund.
A £500 million hardship will help vulnerable people.
Support with sick pay will be available with statutory sick pay paid to all those who choose to self-isolate, and Contributory Employment Support Allowance benefit claimants will be able to claim sick pay from day one.
Sick pay payments will be refunded for two weeks for firms with fewer than 250 staff.
Business interruption loans of up to £1.2m will be available for small firms.
Business rates will be abolished for firms with a rateable value below £51,000 in the retail, leisure and hospitality sectors.
The Science Institute in Weybridge, Surrey which is analysing coronavirus samples will get a £1.4 billion funding boost.

Consultations and Other Forthcoming Legislation

The Government:

is legislating to clarify when fund management services are exempt from VAT and will set up an industry working group to review how financial services are treated for VAT purposes.
will publish an evaluation of the introduction of Making Tax Digital for VAT, along with related research.
will have a call for evidence on raising standards for tax advice available to individuals.
together with the UK Statistics Authority (UKSA), is launching a consultation on the shortcomings of the Retail Prices Index (RPI) measure of inflation. This closes on 22 April 2020.
will consult to ensure that where tax legislation makes reference to the London Inter-Bank Offered Rate (LIBOR), which is being replaced in 2021, it continues to operate effectively.
will legislate to take further action against those who promote and market tax avoidance schemes.

Miscellaneous

No fuel or alcohol duty rises.
Pubs will benefit with business rate discounts rising this year from £1,000 to £5,000.
A plastic packaging tax will come into force from April 2022.
Emergency relief funding of £120 million will be provided for communities affected by the recent flooding and additional £200 million will be available for flood resilience. In addition to this, over the next 5 years, the total investment in flood defences will be doubled to £5.2 billion.
A new ‘nature for climate fund’ will be set up with £640 million of funding to protect natural habitats. This will also fund 30,000 hectares of new trees.
By the middle of 2025, more than £600 billion is set to be spent on roads, railways, broadband and housing.
Over 5 years, £2.5 billion will be made available to fix potholes and resurface roads.
An extra 6,000 places for rough sleepers will be provided under a £650 million package to tackle homelessness. This will be funded by the stamp duty surcharge mentioned earlier in this summary.
After the Grenfell Tower fire, a £1 billion fund has been set aside to remove all unsafe combustible cladding from all public and private housing higher than 18 metres.

Keep your financial plans on track after the Budget 2020 with Lawsons Equity. To discuss the announcements made by the Chancellor of the Exchequer and their implications on you, your family and your business, please do not hesitate to contact us.

We look forward to hearing from you

Oil Crash Shakes Financial Markets

An international row between two of the world’s biggest oil producers – Saudi Arabia and Russia – has triggered a price war just at the time when the coronavirus crisis threatens the global economy.

Oil prices crashed by more than a fifth plunging and spurring a rush into government bonds as investors sought havens.

The FTSE 100 suffered its biggest intraday fall since 2008 this morning as the outbreak and plunging oil prices dragged the index below 6,000 points and sent stock global stock markets crashing.

London’s blue-chip index fell by as much as 8.7 per cent to just 5,899 points as it opened following a weekend of coronavirus turmoil.

It then rebounded slightly as traders scrambled to find their bearings, but stood 6.6 percent lower by 11.30am at 6,038 points.

The price of crude oil is about half the level it hit in early January.

The root cause of that is the coronavirus. It has hit demand for oil and some of the big exporters have been trying to stabilise its price. Last week a group of them discussed production cuts.

But the biggest producer among them, Russia refused and the oil price fell further.

Cheaper oil is obviously a benefit for users. Airlines have been hit by a decline in bookings, but cheaper fuel will offset that a little. And in time, there will be an impact on the price that motorists pay, although in many countries, including Britain, tax accounts for most of what they pay.

The Saudis are the biggest oil exporter in the world with the cheapest cost of production. The state-owned producer Aramco can get oil out of the group for less than $3 a barrel, which puts them in a stronger position to survive a price war.

But a prolonged battle would put pressure on even the Saudis’ finances, which is why they are keen to diversify their economy under ruler Mohammed Bin Salman’s Vision 2030 programme. Ratings agency Fitch estimates the Saudis need a price of $82 a barrel to balance the books.

What does it mean for the UK?

The UK is a net oil importer, so firms across the country will have cheaper production costs. Motorists should also feel the benefit at the forecourt, although the majority of a litre of petrol is made up of fuel duties and VAT.

A low oil price should provide a modest tailwind for an economy likely to be ravaged by coronavirus in the next few months. The Bank of England could soon be writing a letter to the Chancellor explaining why inflation is more than 1 percentage point below its official 2pc target.

Month: March 2020