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Emergency Budget Investment ViewPoint

Yesterday saw the Chancellor deliver the most eagerly anticipated budget of recent times. This budget is also probably the first one where the public has been softened up in advance of the painful measures.

The current economic climate and a budget deficit forecast to be £149 billion by the end of this year, means that tough measures are necessary. Chancellor George Osborne has opted to administer 80% of the pain via cuts in public expenditure and the remaining 20% in tax rises. The Chancellor hopes that these measures combined will help to rebalance the books by 2014/15.

In summary, the key areas likely to impact private investors are:

• Rise in Capital Gains Tax (CGT) from 18% to 28% for higher rate taxpayers. The change is effective from midnight on 22 June 2010; however,  CGT will remain at 18% for basic rate taxpayers.
• CGT exemption remains at the current level of £10,100 for the current tax year. This is expected to rise in line with inflation thereafter
  
  
• VAT will rise from 17.5% to 20%, effective from 4 January 2011
  
  
• The level at which basic rate tax is incurred, will rise by £1,000 to £7,475 from April 2011
  
  
• The link between the basic state pension and earnings is to be restored from April 2011

More detail will undoubtedly emerge over the coming days, providing depth to the headlines, but we have outlined the key take-aways for private investors at this point. An in-depth analysis of the emergency budget, prepared by Ernst & Young, will be available in the on our website from today.

If you wish to protect your investments from the higher rates of CGT, consider making your full annual contributions to ISA, which allow you to protect  £10,680 pa from CGT. You might also consider putting your long term retirement savings into a SIPP, in order to receive a tax rebate of up to 50% and to protect growth and income from tax*.

Find out more about the Barclays Stockbrokers and the SIPP from Barclays Stockbrokers.

Please note that Barclays Stockbrokers is unable to provide tax advice. Tax rules can change at any time. If in doubt you should consult a tax adviser who will be able to assess the best course of action available to you.

Please note that Barclays Stockbrokers is unable to provide tax advice. Tax rules can change at any time. If in doubt you should consult a tax adviser who will be able to assess the best course of action available to you.

* Please note that the 10% dividend tax is deducted at source and can not be reclaimed.

Noisy neighbours – the Eurozone

In a week where complaints about the vuvuzela, the ear-shattering horn being used in South Africa, have reached a crescendo there are similar rumblings of discontent continuing across the Eurozone.  This week’s Investment ViewPoint Comment takes a look at some of the headlines across the Eurozone and assesses what this means for investors and markets alike.

Noise vs insight

A famous football manager once said “football is nothing without its fans” and perhaps the same can be said that football in South Africa would not be the same without its vuvuzela.  The incessant noise certainly does catch your attention but what would it be like without it?  Would the quality on the pitch be any better?  The noise does appear to generate an atmosphere in the stands but perhaps there needs to be more focus on what is actually happening on the pitch!  The same can be said for financial markets.  It is important to focus clearly, ignore the noise and concentrate on the important matters. There is often background noise – short-term market movements, rumours and conjecture are all difficult to ignore but it is essential to remain focussed on important matters – if the fundamental reasons for making an investment remain solid, then the distractions should be ignored.  So let us take a look at some European countries central to the ongoing economic crisis across the Eurozone and see how they are lining up to meet the economic challenges ahead.

Germany vs Greece/Spain/Portugal

Football fever has truly captured the attention of the watching world as the greatest show on earth enters its second week. As expected Germany made a strong  start to the tournament beating Australia 4-0, but subsequently being beaten by Serbia shows that even this footballing and economic powerhouse is not immune from setbacks.    Having announced decisive action to address its budgetary deficit , the German economy looks set to  benefit from the weak Euro to export its way out of recession. Last week German bunds held up despite bond prices falling in Greece and Spain after Moody’s finally cut Greece’s credit rating to junk status, underlining the volatile nature of Greek markets at this point. Greece’s opening defeat in South Africa was damaging but having pulled out their first ever world cup win against  Nigera, they are showing the determination needed to turn things around … if only the economy responds in the same way.

Traditionally investors will look for safe havens in times like this with Germany  continuing to be viewed as a popular destination.   The DAX Index is currently trading at around 6320,up around 16% from a low of 5450 just 4 months ago.  German companies tend to dominate the pan-European indices (eg EUROSTOXX 50) and with a European market of circa 500 million people as well as a weak Euro to boost exports, the odds are that they will remain strong.

Given that Spain is due to raise money to help fund the €16.2 billion of debt that is set to mature on July 30, market sentiment is of paramount importance. It takes us back to when the Greek bond maturities required ECB and IMF intervention via a bail out package to stabilise the situation. A degree of contagion has no doubt already been built into the current level of the Euro, but if the doom mongers take hold and serious concerns surrounding Spain find foundations in the fundamentals of that economy, the scale of the resulting crisis may well dwarf what has been seen so far.

Keep abreast of the fast moving events of the Eurozone through the Barclays Wealth daily briefings and for more in depth analysis login to your account to see the latest see Compass and Signpost publications

Those seeking exposure to the performance of the major Eurozone companies may wish to consider the iShares EUROSTOXX 50 (Ticker: EUE).  This is an designed to track the performance of the EUROSTOXX® 50 Index which offers investment exposure to 50 of the largest Euro zone companies, and could be well placed to benefit from any growth in European exports.

4-4-2 formation, £4.42 Commission

Whatever your own investment tactics, remember that we have changed ours and while England are competing in the tournament, we are lowering our online commission to £4.42 per trade. Find out more about the Laws of the Game and our Player Profiles on our website.

Bear in mind that you cannot win them all, the value of investments into products such as managed funds, Exchange Traded Funds (ETFs) and equities, can fall as well as rise. Your capital is at risk and you may score an own goal and get back less than you invested.

EUR/USD – the eye of the storm

As tension and excitement builds in anticipation of the greatest show on earth in Africa over the next month, there is a different type of pressure continuing to build across Europe. This weeks Investment ViewPoint Comment takes a snapshot of the current economic landscape in Europe and while core currency markets have been relatively calm we consider whether we are merely in the eye of the storm with further volatile headwinds in the distance.

Macro economic background

This year Europe and in particular Greece’s fiscal deficit troubles and its plans to adopt austerity measures have been well documented with phrases such as ‘economic contagion’ and ‘sovereign debt’ now rolling off the tongue. Regular followers of Investment ViewPoint will recall how we commented on Greece’s debt problems in ‘Special FX – blockbuster times for global currencies’ commenting that Greece may have to bow to pressure from the EU and accept a rescue package in order to avoid a currency crisis in the Euro. Greece in the end relented and accepted support with Europe agreeing a package of €500 billion to stabilise the crisis. Greece has also had to endure strikes and protest from the Greek people unwilling to adopt some of the new fiscal measures required by the EU. This economic backdrop has weighed heavily on the Euro which has consistently fallen over the course of the year (see charts below). While there is a clear downward trend, EUR/USD has largely moved sideways for periods at a time, range trading for days as markets continue to look for signs of recovery or indeed further risk for the downtrend to continue.

On the horizon

Moving closer to the UK and Spain hit the headlines this week with ‘economic contagion’ potentially developing in the summer hot spot. With over 1 million public sector workers on strike at the moment, contributing to the 20% national unemployment rate it is clear Spain’s economic problems are nearing crisis levels should they fail to get their economy back on track. A collapse of Spain’s economy could be catastrophic for the EU. Market commentators suggest that as Spain’s debt is largely owned by foreign banks it means if they default then potentially deposits would not be paid to customers across Europe, not just in Spain. Just this month, Spanish bond yields have risen sharply reflecting this nervous sentiment across investors and markets alike with the 10 year government bond climbing to 4.66% on Monday. This rise causes concern given Spain is due to raise money to help pay for the €16.2 billion of debt that is set to mature on 30 July. Should Spain default on this payment, we could see a Greek style crisis rapidly develop in Europe’s 4th largest economy.

Targets and trends

With EUR/USD hardly moving this week it has allowed momentum and sentiment to unwind without necessarily impacting the overall downtrend that has dominated trading this year. Barclays Capital research analysts continue to stay bearish on EUR/USD focusing on 1.1435 as the next low lying target over the coming weeks and months, selling rallies in the meantime. With so much going on across Europe and the potential for further economic uncertainty coming out of Spain it will be interesting to see if this pressure continues to influence the Euro and indeed the output from research analysts at Barclays Capital.

If you would like to find out more about Barclays Capital research and how this can help hone your trading strategy, contact our dedicated BARXdirect: FX team on 0845 300 9050* who will be happy to help you. Alternatively, you can open a BARXdirect: FX account and gain access to daily fundamental and technical analysis from Barclays Capital, in order to support your trading endeavours. You can also keep track of currency movements by accessing our live streaming FX rates for your iPhone by clicking on the following link www.barxdirect.fxinside.net

Remember, Barclays Stockbrokers does not give advice. If you are in any doubt as to the suitability of investments mentioned in this Investment ViewPoint, please seek professional financial advice. Leveraged foreign exchange trading carries a high level of risk to your capital and you should only deal with money you can afford to lose.

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