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January 2010
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A brighter outlook published by NEWTON SMITH CONSULTING LLP - CAMBRIDGE
In this issue We now seem to be emerging from the worst financial and economic crisis the global economy has seen since the end of the second world war. Last year confidence was battered and fears of a great depression seemed real and imminent. Thankfully, since then there has been a change in the general outlook, from depression to recession. The improved sentiment and greater liquidity has helped support the rally in global stock markets, which now seem to move together like synchronized swimmers. Investors who held their nerve and persevered with shares after the dramatic 2008 stock market setbacks have enjoyed the biggest rally in decades. Despite a backdrop of rising unemployment and increasing UK government debt the FTSE 100 index of Britain’s biggest shares has soared by more than 50% since its low point of 3,512 on March 3rd 2009. The stock market does not correlate with the real economy as it looks forward. The reason for significant market gains was that prices were forced down to unrealistic levels as a result of extreme pessimism and have since returned to fair valuations. However, the pace of the stock market rally is likely to slow as lost ground is recovered. One of the driving factors in the stock market rally has been that the Bank of England has continued to support the economy by increasing its controversial quantitive easing scheme to £200 billion pounds. At some point this will have to be reversed and 2010 could become a year of quantitive tightening. Central Banks are keen to get their policy back to normal but at present are restraining themselves from changing their tactics in case they upset the fragile economic recovery.
Emerging Markets ISA Options Life Expectancy Investing in Gold Another major factor has been that rock-bottom interest rates have driven investors away from cash and into the markets. The importance of low interest rates to help the economy will prevent the Bank of England from raising them in the short term and it is expected that interest rates could stay low for a long period. Interest rates are usually used to restrict inflation, but the attitude towards controlling the inflationary threat may become more relaxed as inflation can be used to devalue the significant amount of public and private debt. Undoubtedly there are rising headwinds for the British economy to cope with. The current recession has resulted in declining tax revenues and spiralling public spending. As a consequence the UK national debt has ballooned to ÂŁ830 billion - the highest peacetime level on record. This January VAT returns to 17.5%, and other taxes will need to increase in conjuction with reduced public spending. This is going to be a difficult situation for a new government to inherit come the general election due in May 2010. For a UK-based investor it will be ever more important to be invested globally, as the short term outlook for the UK economy and Sterling is poor. The best hope for sustainable growth is via exposure to emerging markets, which have come through the global crisis in a strong position. The key driver of the next decade of growth will be the developing world, inevitably led by China. 2010 will be challenging for the global economy, but world trade is recovering and the economic outlook is a little brighter.
Jason Smith IFA Senior Partner
NEWTON SMITH CONSULTING LLP - 29 Coppice Avenue, Great Shelford, Cambridge, CB22 5AQ
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Shanghai, China
Emerging Markets During the past decade, the strongest source of demand has been the US, but the 300 million consumers in the US are loaded with debt. In 1990, the BRICS (Brazil, Russia, India & China) represented 5% of world GDP (gross domestic product); they now represent 15%. The emerging economies generally have demographics that are more favourable to growth than the developed world. The balance of world economic activity is now shifting towards the emerging economies. The role of emerging economies will be greater than ever and, while the actions of their governments will be crucial, what we have seen from the BRICS is encouraging. Western economies will stabilize and the real growth opportunities will lie in the emerging markets. China has one of the world’s fastest - growing economies, making it one of the most influential investment regions. As it develops, its appetite for commodities grows and indeed, alongside the weak dollar, its demand for oil has consistently helped to push up oil prices. Interestingly, China’s outstanding economic progress has taken a long time to be
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reflected in the performance of its stockmarket which, until only last year, remained in line with the world average. However, there is still a lack of transparency in business and shareholders are not given the same rights as in Western markets. There could be opportunities, but one needs to consider the risks. China’s development has already had an impact on almost every area of the global economy. Strong demand for its cheaply manufactured products has helped the economy expand rapidly, although the Chinese government did seek to cool down the country’s rampant export-fuelled growth. However, an insatiable appetite for raw materials, driven by the rapid development of its infrastructure and booming demand for its exports, helped to stoke commodity prices. Like every other country, China has been affected by the fallout from the credit crunch and falling food and energy prices have seen previously high inflation turn more recently into deflation. In common with the rest of Asia, China was unlikely to be immune to the effects of a global slowdown, and this has at least helped to curb the economy’s growth rate in the short term. Looking ahead, though, China’s growing influence on the world economy has led to speculation about its longer-term position in the global pecking order. For now, the US is the economic powerhouse, but China is already proving it is a force to be reckoned with.
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Individual Savings Accounts Why let the tax man take a cut of your savings ?
Switch Don´t forget you can also transfer existing ISAs that no longer suit your needs or are underperforming to a different investment house. Now could be an ideal opportunity to review your existing ISAs and rebalance your portfolio.
Transfer out of cash
Use it or loose it !
The current low interest rates on Cash ISAs may make you consider transferring yours into a Stocks & Shares ISA, which includes corporate bonds. Money already saved in previous year’s Cash ISAs can now be transferred in part or whole into Stocks & Shares ISAs without affecting the current year’s allowance.
Whatever your saving needs, you’ll want to make sure you choose the most tax efficient option. Remember, you can save into an ISA either monthly or annually.This tax year’s ISA allowance expires on 5th April 2010 and cannot be carried forward so if you don’t use it you’ll loose it.
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Reminder of previous changes to Individual Savings Accounts (From 6th April 2008) Mini & Maxi ISAs no longer exist and have been replaced by Cash ISAs & Stocks and Shares ISAs. The total annual investment allowance into an ISA has been increased from £7,000 to £7,200 per tax year. This can now be divided between a Stocks & Shares ISA and a Cash ISA in any proportion subject to a maximum investment in a Cash ISA of £3,600. For example, you could mix and match by saving £1,000 in a Cash ISA and £6,200 in a Stocks and Shares ISA with the same or a different provider. Money already saved in previous years Cash ISAs can now be transferred in part or whole into Stock & Shares ISAs without affecting the current years allowance.
The Benefits of an Investment Platform Fidelity Funds network is an investment platform that allows you to access over 1,100 leading funds from over 60 different investment houses. Buying an ISA using a platform enables you to split one year’s ISA over many different fund managers. You can switch between funds and companies quickly, easily and cost effectively whenever you need to. You can also keep all your ISA investments in one place, so you can get an overall valuation of your portfolio at anytime.
All PEPs have also been reclassified as Stocks & Shares ISAs. The new rules will not permit the transfer of a Stocks and Shares ISA into a Cash ISA.
(From 6th October 2009) The annual ISA limit will go up from £7,200 to £10,200 from 6th October 2009 for people aged over 50 years old. For everyone else this new limit will apply from 6th April 2010. The cash limit in the overall allowance will rise from £3,600 to £5,100. The remainder of the allowance can be invested in shares as before.
This information does not represent personal advice and persons who do not have professional experience in matters relating to pensions and investments should speak with a financial adviser before making an investment decision.
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This means average life expectancy has nearly doubled since the ONS (Office of National Statistics) Stats Series started in 1841. Although not obvious at first, the older one becomes, life expectancy improves. To demonstrate this and how it has changed, in 1950, a 65-year-old male could expect to live a further 12 years, whereas a male of 65 today, can expect to reach the age of 82. It is predicited that by 2050, a 65-year old male could be expected to reach the age of 90. These figures are averages, meaning, around half of those retired will live longer, some considerably more so If a woman reaches 65 today, she can most likely live on to 85. Women typically outlive men by approx. 4 years and about 90% of individuals aged 110 years of age are female. In 1911 there were only 100 centenarians in the UK, by 2008 this number had grown to 9,600. Several years back, scientists predicted that the first person to live to 150 years old had already been born. With advances in medicine, improvements in diet and a greater increase in disposable wealth, you will be hard pressed to find many people betting on a reversal of the trend for increased life expectancy.
Living Longer
Obviously, people will be spending longer in retirement and this raises real issues on how to fund your golden years. With the demise of final salary pension schemes and the continued erosion of State benefits, people will need to make sure they make adequate provision for their retirement which could be considerably longer than anticipated.
Life expectancy in Britain has hit its highest ever level. Figures from the Office of National Statistics show that with no further improvements in life expectancy a boy born today can expect to live to 77. A girl born today, can on average, expect to live to 81.
With the state pension age rising to 68, people are unfortunately going to have to work longer anyway. This situation is made particularly difficult, as less than 46% of people have a pension with their current employer.
NEWTON SMITH CONSULTING is a Limited Liability Partnership. Registered Office: 6 Cottenham Road, Histon, Cambridge, CB24 9ES. Registered in England & Wales Nยบ:OC318202. Newton Smith Consulting LLP is Authorised and Regulated by the Financial Services Authority. This leaflet is Issued by Newton Smith Consulting LLP, which is authorised and regulated by the Financial Services Authority. The content of this news letter does not contain advice and should not be taken as a recommendation to purchase or invest in any of the products mentioned. Before taking any investment decisions, we suggest you contact us for professional financial advice. The Financial Services Authority does not regulate taxation advice. All figures and data contained within this document were correct at time of writing.
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Gold Fever When the financial markets are unstable, as they have been, the appeal of gold, and investments linked to gold, become more attractive. The recent crisis has caused the price of gold to surge as investors look for a safehaven. The price of gold per troy ounce was around $270 at the beginning of 2000 and around $700 when the financial crisis first hit. Gold then rose to a record high of over $1,150 per troy ounce towards the end of 2009. The growing demand from emerging markets, particularly from Asia, is pushing up the value of precious metals, such as gold, even higher. Investors worried about the quality of their holdings in currency or Government bonds usually seek the reassurance of gold, as it is often seen as a hedge against inflation and an alternative to paper currencies. While inflation eats away at the spending power of every currency, gold tends to hold its relative value. The expectation that US interest rates will remain low has put pressure on the dollar, making gold more desirable as an investment. Should investor sentiment towards the financial markets improve, gold could be sold off, possibly causing the price to fall as fast as it has risen.
Although it is difficult to recommend investing when prices have risen sharply, gold offers an alternative type of asset. It is often considered as an integral part of a diverse portfolio, especially by those prepared to be more speculative. Funds such as JPM’s ‘Natural Resources Fund’ and Black Rock Gold & General Fund, offer the investor access to gold, mining and precious metal-related shares.
Gold Facts Gold has been sought after since prehistoric times, but the total amount ever mined - approx. 150,000 tonnes would fit into a cube shaped tennis court. The amount of gold in the world is finite and production has not grown in relation to the world economies Gordon Brown infamously sold off more than half of the UK’s gold reserve between 1999 and 2002 when the price was at a 20-year low, raising a total of 2.2 billion pounds. At today’s prices it would be worth 8 billion pounds. India has led the way being the largest consumer and importer of gold (25% of the world’s supply)
In fact, gold has not always been a great investment over the long term, because unlike shares, there’s no income. If gold had simply kept pace with inflation since the early eighties, today it would sell for approximately $2,400 per troy ounce. This may explain why most people invest in gold mining companies through mutual funds rather than the physical asset itself.
Gold purity is measured in carats. 24 carat is designated pure gold, 18 carat as 75 percent pure, 12 carat as 50 per cent and so on.
Gold can be used as a short-term instrument when markets are volatile or as a long-term investment.
Nitric acid has long been used to confirm the presence of gold in items and this is the origin of the colloquial term ‘acid test’.
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The chemical symbol for gold is AU, from the latin aurum, which means ‘shining dawn’.
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