: Autumn 2016
Challenging times for Europe Having dropped during June following the UK’s shock Brexit vote, European equity markets rose during July, boosted by speculation over further stimulus measures. Nevertheless, confidence remained brittle, undermined by terrorist atrocities in France and Germany, and by continuing uncertainties surrounding Brexit. European Central Bank (ECB) policymakers believe that Brexit could have a “significant” effect and may create “negative spillovers” for the euro area.
Wells Financial is an independent financial advisor specialising in mortgage, insurance, pension and investment advice for individuals and small businesses.
The annualised rate of inflation in the euro area rose from 0.1% in June to 0.2% in July, boosted by higher prices for food, alcohol and tobacco. The eurozone’s economy posted secondquarter growth of 0.3%, compared with firstquarter growth of 0.6%. Having grown by 0.7% during the first three months of the year, France’s economy stagnated during the second quarter. The CAC 40 Index rose by 4.8% during July but has fallen by 4.3% since the start of the year. In Germany, investor confidence posted a sharp decline during July amid concerns over the possible impact of Brexit. The ZEW Indicator of Economic Sentiment fell to its lowest level since November 2012. The Dax Index rose by 6.8% during July but has dropped by 3.8% over the year to date. In the wake of the UK’s Brexit decision, the International Monetary Fund (IMF) downgraded its prediction for economic growth in the eurozone to 1.6% this year, and 1.4% next year. The IMF described the eurozone’s mediumterm growth prospects as “mediocre”, hampered by high levels of unemployment and indebtedness, and warned that the outlook could deteriorate further if Brexit negotiations prove protracted. The European Banking Authority (EBA) published the results of “stress tests” carried out on 51 banks in Europe and the UK to assess their ability to withstand a severe economic shock. Allied Irish Banks and Bank of Ireland both appeared towards the bottom of the table; however, by far the worst performer was struggling Italian bank Banca Monte di Paschi di Siena (MPS). MPS revealed a rescue plan that included the sale of €9.2 billionworth of bad loans alongside a €5 billionworth capital injection. During July, the IMF warned that Italy’s economy is not expected to return to precrisis levels until the mid2020s, and also highlighted the “strained” balance sheets of the country’s banks. The FTSE MIB Index rose by 4% over June, but has lost 21.3% of its value since the beginning of 2016.
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UK base rate cut to new low of 0.25% UK interest rates have been cut to a new alltime low. Bank of England (BoE) policymakers reduced base rate by 0.25 percentage points to 0.25% at their August meeting. Prior to their decision, the UK’s key interest rate had remained at 0.5% since March 2009 – their lowest level since the BoE was established in 1694. The rate cut – which was unanimously agreed by the nine members of the Monetary Policy Committee (MPC) – had been widely anticipated for some time; investors had been surprised by the MPC’s decision to maintain its monetary policy stance at its July meeting. Alongside August’s cut, policymakers signalled their readiness to take further action if required, perhaps even reducing base rate to nearzero levels if necessary. The BoE also expanded its stimulus measures and will purchase £60 billionworth of government bonds up to £10 billionworth of corporate bonds. In addition, the bank will also lend up to £100 billion to the UK’s banks in a new Term Funding Scheme designed to make sure the measures feed through to the real economy. The BoE warned that “recent surveys of business activity, confidence and optimism (suggested) that the UK is likely to see little growth in GDP in the second half of the year”, but maintained its forecast for 2% economic growth in 2016. Looking further ahead, however, the central bank slashed its growth forecast from 2.3% to 0.8% in 2017, and from 2.3% to 1.8% in 2018.
2016/17 limits for ISAs Individual Savings Accounts (ISAs) are taxefficient vehicles that allow individuals to save without paying tax on income or capital gains generated within their ISA. The introduction of the ‘New ISA’ (NISA) from 1 July 2014 brought substantial reforms to the ISA system, boosting flexibility and choice for investors. Savers can invest their entire £15,240 ISA allowance for the 2016/17 tax year into cash, stocks and shares, or any combination of the two. Moreover, investors can transfer their ISAs between providers freely (subject to their providers’ rules). Please note levels and bases of, and reliefs from, taxation are subject to change.
Keep track of your ISA progress Many people are quick to take advantage of the tax breaks offered by Individual Savings Accounts (ISAs). However, it is wrong to assume that you can just squirrel away your money and then forget about it. Although many ISA investors aim to put away their money for the long term, it’s still important to ensure that your chosen investments are working well and that they remain suitable for your needs and your appetite for risk. Remember, therefore, to keep abreast of performance – either online or through the financial press – as well as the level of fees that you are paying.
Living to 100 It has long been recognised that medical advances, combined with a greater understanding of the impact of our lifestyle choices upon our health, have led to an increase in life expectancy. Looking ahead, future generations are, on average, likely to enjoy much longer and healthier lives than their predecessors. Estimates from the Office for National Statistics (ONS) show that, of the 797,000 babies aged below one year and living in the UK in 2013, 123,000 boys and 151,000 girls are expected to achieve their 100th birthday in 2113. This means that millions of people will spend over onethird of their life in retirement. With this in mind, it has never been more important to consider how you intend to fund your retirement. An ageing population is putting our welfare system under significant pressure. A greater number of people not only need pension income, but also healthcare, incapacity support, and help within the home. There is, therefore, little reason to expect that a State Pension will provide anything other than the most basic of safety cushions when the time comes. If your retirement plans include holidays, visiting relatives and treating yourself on occasion, then it’s time to take control of your savings – and your future – and start building up your own retirement fund. The earlier you begin, the more scope you allow your savings to grow, so don’t put it off. For more information and guidance, talk to your financial adviser.
Coping with market volatility Experienced investors understand that different asset classes and industry sectors are liable to turn against then from time to time. When it comes to equity markets, there is no such thing as certainty, particularly in the short term. Notwithstanding periods of decline, history shows that equities have provided higher returns than cash or bonds over the long term. Nevertheless, over shorter periods, equity investments can be risky and prices can be volatile. It is important, therefore, to remember that an equity investment is not a shortterm investment, and investors should ideally only consider an equity investment if they can allow at least five years for their portfolio to develop and grow. If you are farsighted and have a degree of nerve, a fall in the stock market can actually create opportunities. Market downturns can be wideranging and indiscriminate, driving down the share prices of highquality companies alongside their lowerquality peers, and giving canny investors the opportunity to add to their portfolios at bargain prices. Understandably, when faced with a downturn, many investors tend to panic. They see only the shortterm loss on their portfolio’s balance sheet and forget their original reasons for investing. Sadly, this is the worst thing they can do – and it is why proper planning at the outset of any investment is worth every minute spent. Nothing in a portfolio is more valuable than the time you spend achieving balance and diversification and cementing your longterm objectives.
Considering a remortgage Most mortgage providers offer introductory discounts to attract borrowers that help to minimise the amount you pay each month when you first buy a house. However, once this introductory discount with a lender ends, you will revert to their standard variable rate (SVR) of interest – a rate set according to Bank of England base rates and company profitability. This can be quite high compared with any previous deal so, when it happens, you might want to consider remortgaging. Although house prices have fluctuated over recent years, they are still higher on average than during the financial crisis. Therefore, if you’ve owned your house for a while, you might find deals that were previously not available to you, simply because your equity in the property has increased. Of course, moving your mortgage will incur fees and you should balance these costs against the savings that you might make by moving. Some lenders might help with these costs or your existing lender might offer a rollover deal that could minimise these fees. Such deals are less common than they were a few years ago, when lenders were less discriminating about the amount and quality of business they took on. It is worth remembering that, if you took out a very competitive mortgage, you might find yourself trapped by early repayment charges, even after your discount has ended. However, rather than accepting whatever is on offer, it is always worth checking the alternatives. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
The benefit of advice The mortgage market is highly competitive and lenders constantly bring out new deals. They are required to provide Key Facts Illustrations, but many can only provide information – they cannot advise on whether their loan or another provider's is best for you. In the UK, residential mortgage advice is regulated by the Financial Conduct Authority (FCA). Advisers use their research skills and sourcing systems to keep abreast of all the latest mortgage products so they can find the best rates and deals to meet your requirements. So, if you want someone to do the hard work, ask an independent expert. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE