MPA Financial Solutions Ltd

05/12/2024

December Market Commentary
Introduction
The US election provided another definitive moment in what has been a politically charged year. With many countries holding elections in 2024, analysts have been second guessing what markets will do for some time. Whether Trump is popular outside the US is debatable, but his election victory was convincing and markets have responded positively so far.

UK
Unlike Trump, Keir Starmer and Rachel Reeves have not come into power supported by a positive economic tailwind. Their first budget in 14 years has created an enormous amount of noise, and the economic headlines in November have not helped them ride it out.

The UK economy grew by just 0.1% in Q3 2024, marking a shift down from the above-trend growth rates seen over the first half of the year (0.5% in Q2, and 0.7% in Q1). The slowing was greater than most analysts had predicted, which was expected to be 0.2%.

The ONS said a fall in manufacturing output and a lack of work in the IT sector pulled back the economy in September, despite a rise in car sales. Business investment increased 4.5% from the same period in 2023, but Britain’s trade position deteriorated further after a third consecutive fall in exports. The damage to trade was offset by a fall in imports as consumers cut back on purchases of foreign goods.

The budget inevitably received a fair share of the blame for this, based on a lack of decision making in anticipation of the budget and now a lack of confidence from businesses faced with higher National Insurance costs and the potential slowing of interest rate cuts.

Some of this may be unfair on the new Chancellor given her short time in the job. However she has placed such emphasis on stimulating growth in the UK economy that she will ultimately be judged on this sole factor whether she is to blame or not.

The base rate was cut a further 0.25% to 4.75% in November but there is an expectation that the budget will slow further cuts. Another cut in December is not expected by the money markets. That said there is little to suggest that the medium term direction of travel towards interest normalisation has changed.

Europe
The euro zone’s economic woes continue. Manufacturing activity fell sharply in November, following some improved signs in October. A further decline in demand has probably scotched any hopes for an quick recovery. The drop in demand has resulted in factories reducing headcount.

Germany and France are performing particularly badly, with Italy not far behind. Hamburg Commercial Bank’s euro zone manufacturing Purchasing Managers’ Index (PMI), compiled by S&P Global, dropped to 45.2 in November, well below the 50 mark which separates growth from contraction.

“These numbers look terrible. It’s like the euro zone’s manufacturing recession is never going to end. As new orders fell fast and at an accelerated pace, there’s no sign of a recovery anytime soon,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.

Foreign demand is also falling and a 10% tariff on imports into the US will hurt manufacturing further.

France is also troubled by more political turbulence. PM Michel Barnier’s budget proposal could result in a far-right led no-confidence vote designed to unseat his government. French bonds and stocks have suffered.

Inflation nudged up in November. Consumer price inflation in the 20 countries sharing the euro moved to 2.3% in November, according Eurostat, up from 2.0% in October but still broadly in line with expectations. Underlying inflation held steady at 2.7%. As in the UK and US, this is unlikely to change the overall policy of the European Central Bank, but could slow down rate cuts.

United States
The US presidential election was decided on 5th November.

Markets responded positively to the news. As we have said many times, markets don’t care about politics but they do care about certainty and predictability. A Trump win seemed to be priced in for some time. Despite his public unpredictability, his second term may be easier to form an advance view on than his first.

The main area of concern for economists is the President Elect’s aggressive stance on trade tariffs. President Biden continued with a number of the trade tariffs imposed by Trump in his first term, and even added a few more of his own. However the threats of tariffs of up to 60% are an escalation on what came before. Whether this is Trump posturing ahead of milder tariffs is unclear, but a number of major manufacturers are now accelerating plans to move their factories out of China to avoid the most obvious outcomes of a trade war.

The Fed will met on 7th November and made a further 0.25% cut to interest rates. As in other parts of the world they added a note of caution around further cuts but are not expected to change policy. They remain more concerned about the job market than inflation.

Far East
In response to economic headwinds this year, the Chinese government introduced a substantial stimulus package, including the issuance of 2 trillion yuan in special sovereign bonds and a 50 basis point cut in the reserve requirement ratio. These measures aim to bolster domestic demand and support sectors such as real estate. There were early signs in their economic data that this was starting to improve the economy. Manufacturing showed increases in new orders and production, including a rise in new export orders. Employment rates continued to decline, but at a slower rate. Chinese equity markets were volatile, and the Trump election added to the uncertainty. BBVA Research believe the tariffs could reduce China’s growth by 1%.

Japan’s core inflation continues to grow, fueling expectations that the Bank of Japan will hike interest rates by a further 0.25% in December. At the same time factory output fell and corporate recurring profits were down. Clarity on US trade tariffs appears to be stalling some investment.

Emerging Markets
Emerging markets experienced varied performance influenced by global economic conditions, currency fluctuations, and geopolitical developments.

The US dollar appreciated, driven by President-elect Donald Trump’s support for its global reserve status and warnings against alternative currencies. This strength exerted pressure on emerging market currencies, leading to depreciation in several cases. Meanwhile the Brazilian real reached a record low, trading above six per US dollar, amid investor concerns over the government’s fiscal policies.

Trump’s commitment to reducing energy costs by increasing oil production presented mixed outcomes. While beneficial for oil-importing emerging markets through lower energy expenses, it posed challenges for oil-exporting nations reliant on higher prices for economic stability.

In India, despite challenges faced by conglomerates like the Adani Group, foreign investor confidence remained robust, supported by strong economic growth and a burgeoning consumer market.

JPMorgan upgraded Mexican equities to “overweight,” citing strong US growth and favourable remittance dynamics, which bolster consumer spending.

Conclusion
One more key date in the political calendar has passed now that US presidential election has concluded. Whilst Trump is famously unpredictable, the markets seem to be more comfortable with his second term than they were with his first.

Equity portfolios always benefit from positive performance in the US given their global significance.

We are still confident that interest rate normalisation will carry on into 2025, despite the hesitancy brought in by Labour’s first budget and the threat of great US trade tariffs. This may slow normalisation down but we believe the direction of travel remains the same.

And Finally…
Did you know that a day on Venus is longer than a year?

On Venus, a single day lasts longer than a year, as the planet takes 243 Earth days to rotate on its axis but only 225 Earth days to orbit the Sun.

Sources
Market data
https://www.reuters.com/markets/europe/euro-zone-nov-factory-activity-fell-sharply-outlook-gloomy-pmi-shows-2024-12-02/
https://www.reuters.com/markets/europe/euro-zone-inflation-edges-up-underlying-price-growth-steady-2024-11-29/
https://www.marketwatch.com/story/frances-bond-yields-match-greeces-for-first-time-amid-political-instability-in-paris-deb88602
https://www.reuters.com/markets/asia/chinas-nov-factory-activity-growth-hits-5-month-high-caixin-pmi-shows-2024-12-02/
https://www.reuters.com/markets/asia/china-nov-manufacturing-activity-expands-second-straight-month-2024-11-30/
https://www.marketwatch.com/story/china-to-raise-local-government-debt-ceiling-by-840-billion-c654eec1
https://www.reuters.com/world/japan/japans-factory-activity-falls-fastest-pace-8-months-pmi-shows-2024-12-02/
https://www.reuters.com/world/japan/japans-stronger-q3-corporate-capex-points-solid-domestic-demand-2024-12-02/
https://www.reuters.com/markets/asia/core-inflation-japans-capital-accelerates-november-2024-11-28/
https://www.reuters.com/markets/us/global-markets-view-usa-pix-2024-12-02/
https://www.ft.com/content/1e6c82f6-86cc-4963-90bb-3f90b1f81097
https://www.reuters.com/business/energy/trumps-low-oil-price-promise-is-risk-boon-emerging-markets-2024-12-02/
https://www.reuters.com/markets/adani-wipeout-hurts-wont-derail-foreign-investor-faith-india-2024-11-28/
https://www.reuters.com/markets/jpmorgan-upgrades-mexican-equities-us-growth-downgrades-brazil-2024-11-27/
Outlook on Emerging Markets | Lazard Asset Management
Market Data – Latest Financial News & Data – BBC News
Markets data – stock market, bond, equity, commodity prices – FT.com
All Market data dashboard | London Stock Exchange
Global Markets Data | Breaking Stock Market News | Reuters

Business and commentary:

https://www.bbvaresearch.com/en/publicaciones/china-economic-outlook-november-2024/
Business | Latest News & Updates | BBC News
https://www.theguardian.com/business/2024/nov/15/uk-economy-third-quarter-2024-ons-labour
https://www.cbi.org.uk/articles/economy-in-brief-november-2024/
Industry Reports | Choose From 100s of Global Industries (mintel.com)
Economic output and productivity – Office for National Statistics (ons.gov.uk)
Global Weekly Commentary – Insights | BlackRock
Market commentary | Vanguard UK Professional
Market Insights | J.P. Morgan Asset Management (jpmorgan.com)

05/12/2024

Is Giving Money Away an IHT Planning Option?
Labour’s new policy on inheritance tax means that more estates could pay inheritance tax (IHT) in future. Whilst there are plenty of legitimate ways to reduce an IHT liability, there’s one which we often forget despite it being very simple. That’s giving money to your loved ones.

Although gifting is simple, and might be something you already do without thinking, there are a few rules you should be aware of:

Annual Exemption: Each tax year, you can gift up to a certain amount without incurring any IHT. As of my last update, this amount was £3,000 per tax year. Unused annual exemptions can be carried forward for one year only.
Small Gifts: You can make small gifts of up to £250 to as many individuals as you like, and these gifts are exempt from IHT.
Wedding and Civil Partnership Gifts: You can give cash or gifts worth up to a certain amount without paying any IHT. The current limits are £5,000 for wedding gifts by a parent, £2,500 for wedding gifts by a grandparent or great-grandparent, and £1,000 for wedding gifts by any other person. For civil partnerships, the limits are the same as for weddings.
Gifts Out of Normal Expenditure: You can make gifts out of your normal income without incurring IHT, as long as you still have enough income left to maintain your usual lifestyle. If the gift would have a detrimental impact on your lifestyle it might not qualify as a gift.
Seven-Year Rule: If you make a gift and survive for at least seven years afterwards, it will not be counted towards your estate for IHT purposes. However, if you die within seven years of making the gift, it might still be subject to IHT.
Potentially Exempt Transfers (PETs): Gifts made during your lifetime that exceed the annual exemption and other allowances are known as Potentially Exempt Transfers. If you survive for seven years after making these gifts, they become exempt from IHT. However, if you die within the seven-year period, they may be subject to IHT on a sliding scale known as taper relief.
Exempt Beneficiaries: Some gifts to certain beneficiaries are exempt from IHT regardless of when they were made. For example, gifts to a spouse or civil partner who has a permanent UK domicile are generally exempt.
Gifting is something we all do from time to time, and it’s often done without thinking about the tax consequences. However it can also be a key part of an estate planning strategy with the right safeguards in place. We are always happy to advise where required.

05/12/2024

Estate Planning and Blended Families
Blended families are formed when two people live together with children from previous relationships. They are increasingly common in the UK, and can work extremely well. However it is worth considering the estate planning implications.

It is possible to accidentally leave family members without any inheritance due to a lack of planning or appropriate legal advice.

If a will was written with a previous partner clearly this will need to be revisited. Some wills can be voided on re-marriage.

Where no will is written at all, intestacy laws kick in. This means the estate will typically be inherited by the surviving spouse, and the children left with nothing at all. There is often concern that the spouse may not then pass that inheritance on to the deceased’s children from his or her previous relationship, and instead leave the whole estate to their own children. This can happen intentionally or accidentally if the correct legal advice is not obtained.

Intestacy law was not written with blended families in mind. As a result it is too easy for the wrong thing to happen, and this can occur purely by accident.

In all cases, we strongly recommend that parents of blended families seek professional advice and engage in open dialogue to ensure that nobody is surprised by what happens to an estate on death. This can involve difficult conversations, but it is better to deal with this now than in a more vulnerable moment after a bereavement.

05/12/2024

Is Trump the Christmas Grinch?
With Christmas looming and President Elect, Donald Trump, promising the introduction of greater trade tariffs, the toy manufacturing industry is in a rush to move away from Chinese factories.

Whilst news of greater tariffs under Trump has created more urgency, this isn’t a new problem. Toy giants such as Mattel and Hasbro have been trying to diversify away from production in China for some time, relocating to factories in India and Vietnam. This has not been easy, and the result may be increased prices for consumers.

Trump spared toys, and some other consumer goods, from tariffs in his first presidency, but it is not clear whether they will be spared the second time around. Most US industries have been seeking alternatives to China for some time, as the Biden administration left many Trump tariffs in place and added some new ones.

Hasbro is already part way through a $750m cost-cutting exercise, in which moving away from China is just one piece of the jigsaw. They are negotiating with suppliers and changing their designs to make them easier to produce. Even Jenga blocks are receiving an manufacturing overhaul which will see only one type of wood used.

Data from the US government’s Census Bureau shows US imports of games, toys and sports equipment was worth around £42bn in 2023, with around £32bn of that coming from from China, highlighting the continued dominance of China in export markets despite some diversification away from it.

Sources: https://www.wsj.com/business/trump-tariffs-hasbro-toys-china-329ab211?mod=djemlogistics_h

https://adamtooze.substack.com/p/tariffs-and-toys-the-trump-non-linearity?utm_campaign=post&utm_medium=web&triedRedirect=true

Great links, images and reading from Chartbook Newsletter by Adam Tooze

05/12/2024

eNews - December 2024

Hello,

As the year draws to a close, we hope you're enjoying the festive spirit and finding time to reflect on a year well-spent. December is the perfect month to wrap up your financial goals for 2024 and start thinking ahead to the opportunities the new year will bring.

With tax deadlines and investment opportunities on the horizon, now is a great time to ensure your plans are in order. Whether it’s making the most of your allowances or setting fresh objectives, thoughtful preparation now can lead to a successful start to the year ahead.

Amid the holiday bustle, don’t forget to take some time to recharge. Whether it’s enjoying winter walks, gathering with loved ones, or simply savouring a quiet moment with a hot drink, a little balance can make the season even brighter.

As always, we’re here to support you with any questions or advice you may need.

We're wishing you a joyful December!

Kind regards,
Mark

14/11/2024

Trump, The Fed and The Markets
With no clear indication of who the winner will be ahead of the 5th November, the convincing nature of Trump’s win came as more of a surprise than the victory itself.

Markets may have been pricing in a Trump win for some time, as he was polling well ahead of Biden earlier in the year. However, there has been considerable market volatility over recent months so it is best to avoid too many hard conclusions.

Equities, bond yields and the dollar were all considered future winners as taxes were expected to be cut under Trump. Harris was being seen as bringing clearer trade policy and international relations but, despite her promise to cut taxes for lower earners, she never shook her association with higher taxes and was perceived as less favourable to business.

It was Harris and the Democrats’ failure to convince the US electorate that the economy was the success it has recently become that ultimately brought their downfall. The economy, and more specifically higher living costs, were the number one concern for Republican voters. Whatever the economic growth figures show now, inflation meant that the benefits had not been felt in voters pockets by 5th November. The latest national statistics did not reflect lived experience for too many people.

The US economy certainly has been roaring back. Third quarter GDP growth came in at a healthy 2.8% quarter-on-quarter annualised, confirming that the US is outpacing other developed economies by some way. It is performing well ahead of the UK and Europe. Third quarter earnings season began with strong results from the banking sector. Results were mixed for technology companies, particularly those reliant on semiconductor demand, which caused some volatility. There is a continuing belief that whilst the big tech stocks may not be delivering at the pace set in recent times, there is plenty room for other sectors and stocks to grow, and recession will be avoided.

Trump can now ride this wave of economic growth. Where he may come unstuck is a trade war with China, in particular, as high tariffs could push prices up further. He will hope that these can be offset by lower taxes, and increased domestic production. This will also be a concern outside the US. Markets in the UK and Europe, closely tied to the U.S. and Chinese economies, may react negatively if a trade war seems likely. There is a global ripple effect from US-China tensions.

The Fed cut interest rates as expected by another 0.25% on 7th November and this was widely expected regardless of the outcome of the election. They remain more concerned about the job market than inflation. However, they will keep a close eye on whether tariffs bring in more inflation.

Trump is famously unpredictable, another concern typically for markets, but this is not his first stint as President. Markets were cautious when he won in 2016, fearing the worst, but gradually grew in confidence and the markets rose. This time around they seem to be more positive immediately, and markets have already seen an uptick. He may be unpredictable, but they may feel they have seen this movie before.

Business friendly tax cuts may help finance and tech stock earnings. Defence stocks got a boost in his last term with increase military spending and energy stocks will be hoping for a reduction in regulatory restrictions. Each sector will be watching for threats and opportunities.

As we have said many times before markets are not political, they just prefer certainty, so now that the election is out of the way they should settle down.

Sources

https://edition.cnn.com/business/live-news/fed-meeting-november-11-07-24/index.html

https://am.jpmorgan.com/gb/en/asset-management/adv/insights/market-insights/market-updates/monthly-market-review/

Read our summary of the major market moves over the last month, covering the global economy as well as major assets classes.

14/11/2024

24% CGT? Is Rachel Reeves Having A Laffer?
The Laffer Curve is a concept accredited to economist Dr. Arthur Laffer. Laffer admitted that whilst he gave it a name, it’s been around as an idea in one form or another since the 14th century, when Muslim philosopher Ibn Khaldun wrote about it. It was also referenced in John Maynard Keynes work.

In simple terms, Laffer’s theory suggests something about taxation which is fairly obvious. It states that there is a relationship between the amount of tax a government collects and the rate of taxation. If tax rates are too low, they will bring in too little revenue. However, if tax rates are too high it will change people’s behaviour and ultimately that will also reduce tax revenues. Discouraging taxed activities, like consumption, selling shares and investing money, can have a negative net impact on how much money the government receives in tax.

The Laffer Curve suggests there is an optimum ‘position’ for tax rates – not too high and not too low – which brings in enough tax revenue but doesn’t change behaviour.

It is especially pertinent when considering Capital Gains Tax, and the Chancellor’s decision to increase this particular tax to 24%. It was nothing like the increase some had expected, rumoured at one point to be as high as 39%, and is expected to generate some but not a massive amount of additional tax revenue.

Why 24%?

There is a precedent in very recent history. Jeremy Hunt changed the CGT rate for people selling their second home from 28% to 24%, as of April 2024. It was a partly a sweetener to soften the blow of additional taxes on second home owners elsewhere. The main purpose of introducing this slightly lower rate of tax was to encourage more people with second homes to sell their properties. Not only would this generate more tax revenues through sales, it would free up more homes for first time buyers in a market severely short of housing stock.

Hunt was advised by Treasury officials that 24% was the right rate of tax, hitting the sweet spot on the Laffer Curve.

Robert Peston suggested on X that the CGT change to 24% was not as radical as hoped because ‘HMRC lacked the resource to properly work through the consequences of root-and-branch change, so instead Reeves has opted for the path of least resistance’.

However, it seems unlikely that she would have been unaware of the reports from Whitehall which showed that a more fulsome increase in CGT rates would most probably see an overall reduction in tax revenues because people would change their investment behavior. 24% is the perfect rate for CGT on the Laffer Curve, she will most likely have been advised.

We will probably never know the true answer to why the change to 24% was made, but it does suggest that regardless of where the sweet spot is, most politicians and economists recognise that there is only so far tax rates can be pushed upwards before they cease to be effective.

14/11/2024

Triple Lock Benefits Pensioners Again
Pensioners will be handed an extra 4.1% per annum via the state pension in April 2025, thanks to the ‘triple lock’.

The triple lock is a government policy which means that the state pension increases every April in line with whichever is the highest of:

CPI (Consumer Prices Index) in September the year before;
the average increase in total wages across the UK for May to June of the previous year; or
2.5%
The earnings figure has just been revised upwards following some new employment data released in October which means the final number has moved from 4% to 4.1%. This is the highest of the three figures and will be used for the state pension from April 2025 assuming nothing else changes. The cost of the extra 0.1% is estimated at £100m.

The triple lock was introduced in 2010 by the coalition government and Rachel Reeves promised to keep it as part of Labour’s manifesto. It was suspended once in 22/23 for exceptional circumstances when inflation figures were warped by Covid and furlough influenced earnings figures, so the government temporarily removed the earnings measure from the equation to help with Treasury finances. The triple lock went back the following year to deliver a 10.1% state pension increase.

It has attracted criticism due to the cost to the tax payer, and because other benefits do not enjoy similar ‘highest of’ protections. Universal Credit, Housing Benefit, Maternity Allowance and Statutory Sick Pay, for example, are usually tied to September’s CPI figure alone so an increase of just 1.7% is likely for those benefits.

Assuming it is ratified the state pension will change from:

£221.20 a week to £230.30 a week for the full, new flat-rate state pension, external (for those who reached state pension age after April 2016)
£169.50 a week to £176.45 a week for the full, old basic state pension, external (for those who reached state pension age before April 2016)
Sources:

https://www.bbc.co.uk/news/business-53082530

https://www.morningstar.co.uk/uk/news/AN_1728987850427977900/uk-government-faces-extra-gbp100-million-bill-for-state-pension-rise.aspx

https://www.moneysavingexpert.com/news/2024/10/state-pension-benefits-rise-2025/

The full State Pension is set to rise by £362.65 (4.1%) a year for most pensioners on 6 April 2025, under what's known as the 'triple lock' guarantee.

17/10/2024

And finally, our quote of the month...
"Failure is the condiment that gives success its flavour."

Truman Capote