FEATURE Watch out for changes to dividend and capital gain allowances

Watch out for changes to dividend and capital gain allowances

New tax rules will also affect some listed companies

While Jeremy Hunt may have stuck to the government’s promise not to raise tax rates, the Autumn Statement means more of most peoples’ income and capital will find its way into the Treasury’s coffers during the course of this parliament.

In order to fill the £55 billion ‘black hole’ in government finances caused by the energy support package and higher borrowing costs, the chancellor outlined £30 billion of spending cuts and £25 billion of tax grabs.

The reaction across the currency, government bond and equity markets was fairly muted, in contrast to the Kwarteng ‘mini-Budget’, which is as close to a seal of approval as it gets these days.

WHO ARE THE WINNERS?

The most obvious winners are pensioners, a key demographic for the Conservatives, thanks to the decision to reinstate the ‘triple lock’, which means the state pension rises by 10.1% next April in line with September’s consumer price index.

Weekly payments will rise from £185.15 to £203.85, while the annual payment rises to £10,600, topping the £10,000 figure for the first time.

Pension credit, which is a top-up benefit for pensioners on the lowest income, will also rise in line with inflation and could be worth up to £3,300 per year.

The downside for those approaching retirement is the state pension age review next spring is likely to recommend increasing the pension age from 66 to 68 earlier than previously planned.

Banks will be celebrating the news the banking surcharge is to be cut from 8% currently to 3%

Energy stocks stage relief rally after the Autumn Statement

Company

Centrica Drax Greencoat UK Wind Foresight Solar Fund SSE

Performance on day of Autumn Statement

5.4% 5.4% 3.2% 2.7% 1.5%

Table: Shares magazine • Source: Sharepad

Key numbers from the Autumn Statement

Income tax

Personal allowance (frozen to 2028) Higher rate threshold (frozen to 2028) Additional rate threshold (cut)

Capital gains tax

Annual exempt amount now Amount from April 2023 Amount from April 2024

Dividend allowance

Allowance now Allowance from April 2023 Allowance from April 2024

Table: Shares magazine • Source: Shares magazine

£12,570 £50,270 £125,140

£12,300 £6,000 £3,000

£2,000 £1,000 £500

next April, and electricity companies including renewable energy producers can consider themselves winners despite the introduction of a 45% windfall tax.

The devil is in the detail as the tax is temporary and it targets excess profits not overall profits. The pricing level at which it applies is higher than feared and there are investment allowances which can offset its impact to a large degree.

North Sea oil and gas companies will see their windfall tax extended to 2028, but again the tax is at a higher price level than previously anticipated.

Small businesses will benefit from a cut to business rates, which will reduce the burden on them by £5 billion next year, with retail, hospitality and leisure especially favoured.

However, a rise of 9.7% in the national living wage – which will help the low-paid – will add to the costs facing small and large businesses.

House buyers can celebrate a small win as the stamp duty cut has been extended to the end of March 2025, and by increasing taxes by the back door the chancellor has reduced the pressure on the Bank of England to raise rates as sharply, meaning the housing market is likely to deflate slowly rather than implode.

Also, around four million families living in rented social housing will receive help in the form of 7% cap on rent rises next year.

WHO ARE THE LOSERS?

The main losers are high earners, as the threshold for the 45% marginal tax rate comes down from £150,000 to £125,140 in a move expected to raise £12 billion.

Also, the tax-free personal allowance has been frozen from 2026 out to 2028 meaning it stays at £12,570 for basic-rate tax payers while the upper earnings limit and upper profit limit stay at £50,270 for 40% tax payers.

Freezing these thresholds for another two years means up to three million extra workers will move into higher tax brackets, saving the Treasury as much as £6 billion per year.

Exemption from capital gains tax falls from £12,300 to £6,000 and the dividend allowance falls from £2,000 to £1,000 in April 2023 and £500 in April 2024, which will impact anyone who doesn’t invest using a tax wrapper such as a SIPP or an ISA.

Demand for tax and investment advice is likely

to soar as is the use of higher-risk products and services such as VCTs (venture capital trusts) and spread betting, where capital gains are tax-exempt.

The cut to dividend allowances will also impact business owners who are paid via dividends, which attract a lower tax rate than earnings, while the cut to capital gains tax exemption will affect business sellers, owners of second homes and landlords.

Drivers and companies which use road transport will also be also worse off under a proposal by the OBR (Office for Budget Responsibility) to raise fuel duty by 23% or 12p per litre from next March.

This particular nugget was not included in the Autumn Statement but looks to reverse the 5p per litre cut made by Rishi Sunak when he was chancellor and reinstate the long-abandoned price escalator of CPI plus 6%.

Owners of electric vehicles will also be worse off from April 2025 when they will be expected to pay vehicle excise duty.

While extending the duty will come nowhere near replacing the £30 billion per year raised from fuel tax, which will disappear once the roads are dominated by electric vehicles, it does signal a change in attitude as electric cars and vans become more mainstream.

Martin Beck, chief economic advisor to the EY ITEM Club, summarised the measures as follows: ‘In the end, the statement was a package of tax rises, mainly on energy producers, high earners and unearned incomes, and public spending restraint, peaking at £55 billion per year, or just over 2% of GDP (gross domestic product), in 2027-28.

‘The size of the package was broadly in line with expectations. What also met predictions was that most of the planned fiscal tightening will not kick in until the second half of the decade, when, in the EY ITEM Club’s view, the economic situation may give a future chancellor the option to change course.’

By Ian Conway Companies Editor

MON£Y & MARKET$

LISTEN TO OUR WEEKLY PODCAST Listen on Shares’ website here

You can download and subscribe to ‘AJ Bell Money & Markets’ by visiting the Apple iTunes Podcast Store, Amazon Music, Google Podcast or Spotify and searching for ‘AJ Bell’. The podcast is also available on Podbean.

Japan’s chance to shine – find out why this time is different

Seasoned investors will have seen many false dawns from the Japanese stock market. After an extraordinary run of performance in the 1970s and 80s, the Japanese stock market reached a peak in 1989 that, more than 30 years later, it is yet to surpass. Now, however, the stars appear to be aligning for a prolonged period of better performance. Here we explore the reasons why and explain how the Schroder Japan Growth Fund plc is poised to benefit.

Under-owned

Most global equity portfolios today are underexposed to the Japan stock market. Years of underperformance and dashed hopes of recovery have led to many investors progressively giving up on the region. Gradual capitulation on this scale can eventually be the friend of the disciplined, contrarian, long-term investor. It may feel comfortable following the herd, but there is always elevated risk in a crowded trade. There is less risk, however, investing in parts of the global equity market that are less congested, because valuations tend to be much more modest.

Under-valued

As the chart below demonstrates, that is certainly the case for the Japanese stock market today.

Japanese equities are cheap in absolute and relative terms

8 Sep-11 Sep-13 Sep-15 Sep-17 Sep-19 Sep-21 Topix - 12m forward PE S&P 500 - 12m forward PE Global lethargy towards this once highly respected regional stock market has increasingly weighed on valuations. With the exception of the dislocation associated with the start of the Covid pandemic in 2020, Japanese equities have been becoming steadily cheaper in price/earnings terms for more than a decade. Many other regional stock markets have become much more expensive during this time, as typified by the US S&P 500 index shown on the chart. This leaves the Japanese stock market in attractive valuation territory in both absolute terms, and relative to other regions.

Meanwhile, the value-oriented investment approach employed by Masaki Taketsume and Schroders’ investment team in managing the Schroder Japan Growth Fund plc, means the portfolio is keenly focused towards the most attractively valued parts of the Japanese market. The portfolio typically consists of 60-70 of the highest quality undervalued companies that can be found in Japan, with a current bias towards mid and small cap companies with excellent growth prospects.

Under-rated

Japan is still perceived by many to be a low growth economy, with poor returns and an anachronistic corporate culture. We would agree that the Japanese economy continues to have its problems, including poor demographics and a high government debt to GDP ratio, but many other mature economies will soon face similar dynamics.

Indeed, in many other respects, Japan has changed dramatically in recent years, as we

explore below. Much of the rest of the world has not yet given Japan the credit it deserves for this transformation, and the gap between the old perception and the new reality, means Japan has a golden opportunity to surprise positively from here. Recent corporate results support this thesis, as Masaki explains:

“Overall, the most recent earnings season saw results again coming in ahead of expectations and profit margins appear to have remained resilient. With many companies having made conservative forecasts for this fiscal year, there is scopefor upward revisions.”

Masaki Taketsume, Portfolio Manager, Schroder Japan Growth Fund plc

Japan’s new dynamics

Experienced investors will have heard much of this before – several times. So, it is important that we explore the changes that Japan has been undergoing which make the current environment a genuinely interesting time to be considering investment in the region.

The first of these changes relates to corporate governance. Historically, the structure of corporate Japan has been dominated by the keiretsu system, which is a structure of cross-shareholdings and close relationships between customers, suppliers, their banks and competitors. As the Japanese economy has struggled over the last thirty years, this system has been increasingly criticised from a governance perspective, because it can lead to inefficient capital allocation and poor decisionmaking. The system has also made it hard for shareholders to agitate for management change and has fostered a culture that was generally unresponsive to shareholder demands.

Corporate Japan is changing, however. The transformation began in 2014, when the late Shinzo Abe’s government commenced a push to overhaul corporate governance as part of a broader effort to make Japanese companies more competitive on the global stage. A new corporate governance code was introduced in 2015, and ongoing revision since then have focused on specific issues, including the unbundling of cross-shareholdings. As Taketsume explains, this is already having a meaningful impact for investors.

“We remain very positive on the ongoing improvements in corporate governance and the scope for this to generate real value for investors. Although this is partly a qualitative assessment through our discussions with company managements, there are also measurable impacts such as improving Return on Equity and a record level of share buybacks.”

Masaki Taketsume, Portfolio Manager, Schroder Japan Growth Fund plc

This transformation is illustrated in the chart below, which shows dividends and share buybacks at all-time highs. The fact that Japanese companies are generally in good financial health, with high cash levels compared to their counterparts in the US and Europe, should help this trend to continue.

Meanwhile, the second major change to consider is the economic environment which, for the first time in decades, paints Japan in a favourable light compared to its global peers. The Japanese economy has been blighted by deflationary pressures for years, but may now be heading into a period of sustainably positive inflation. Indeed, the Bank of Japan may be the only central bank to welcome some of the global inflationary pressure seen in 2022. By contrast, inflation is seen as a threat in the west. The Japanese economy, however, is not seeing the same level of inflation as that being experienced in the US and Europe, which is a relative positive. Masaki describes the Bank of Japan as “a clear outlier in global monetary policy”, with interest rates being maintained at very low levels, which provides support for the domestic economy and indeed its stock market. Consensus forecasts continue to point to modest growth for the Japanese economy in 2023, at a time when much of the rest of the developed world is increasingly at risk of recession.

This more benign economic environment, coupled with the prospect of improving returns, could help underpin an attractive long-term opportunity in Japanese equities.

Japanese inflationary pressures are more modest than elsewhere

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 US CPI Ex Food and Energy YoY Japan CPI Ex Fresh Food and Energy YoY Eurozone CPI Core YoY

Source: Schroder, Eikon as at 27 September 2022

Capturing the opportunity with the Schroder Japan Growth Fund plc

Masaki Taketsume was appointed as portfolio manager of the Schroder Japan Growth Fund plc in July 2019, and performance since then has been encouraging. Market conditions have favoured his value-oriented investment style during a period in which the growth style has faltered. Alongside good stock-picking, this has led to top of peer group performance over the last three years, in terms of both share price and net asset value. Despite this, the discount between the trust’s share price and net asset value is yet to narrow.

The portfolio contains a good balance between domestic and export exposure. Despite the travails of the last thirty years, Japan remains the third largest economy in the world and, in addition to a huge domestic opportunity, it is home to many world-leading companies with capabilities that are often under-appreciated by investors. The portfolio also has a small cap bias, particularly within the domestic service sectors, where Masaki anticipates a strong recovery. As a long-term fundamental investor, with the backing of Schroders’ small cap specialists in Tokyo, he sees consistent opportunities to add value in small cap, given how underresearched this part of the market is compared to larger Japanese companies.

Overall, it does finally feel as though the time may have arrived for the Japanese stock market to shine brightly once more, and we believe the Schroder Japan Growth Fund plc is well positioned to capture this long-term opportunity.

Disclaimer

This information is a marketing communication. This document does not constitute an offer to anyone, or a solicitation by anyone, to subscribe for shares of Schroder Japan Growth Fund plc (the “Company”). Nothing in this document should be construed as advice and is therefore not a recommendation to buy or sell shares.

Any reference to sectors/countries/stocks/ securities are for illustrative purposes only and not a recommendation to buy or sell any financial instrument/securities or adopt any investment strategy. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on any views or information in the material when taking individual investment and/ or strategic decisions.

Past Performance is not a guide to future performance and may not be repeated.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of investments to fall as well as rise. Schroder Japan Growth Fund plc have expressed their own views and opinions in this document and these may change. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy.

Third party data is owned or licensed by the data provider and may not be reproduced or extracted and used for any other purpose without the data provider’s consent. Third party data is provided without any warranties of any kind. The data provider and issuer of the document shall have no liability in connection with the third party data. The terms of the third party’s specific disclaimers, if any, are set forth in the Important Information section at www.schroders.com.

We recommend you seek financial advice from an Independent Adviser before making an investment decision. If you don’t already have an Adviser, you can find one at www.unbiased.co.uk or www.vouchedfor.co.uk

Issued in November 2022 by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU.

Registration No 4191730 England. Authorised and regulated by the Financial Conduct Authority