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UK Government Spending Review – The axe has fallen

So, the axe has fallen. The question is now, how will the changes touch you?

In the Government Spending Review announced today, the coalition Chancellor George Osborne unveiled the cuts that will be made to the public sector. These will impact budgets across Whitehall, including business, work and pensions, education, defence and international development….even the Royal Family will feel the pinch! The UK waited with baited breath, uncertain of how swingeing the cuts would be.

Now we know. The measures are the most sweeping set of budget cuts we have seen from a UK government in decades. Under the banner of “Britain stepping back from the brink” and with an underlying message of fairness and that “we are in this together”, Osborne announced the following measures:

1. State pension age will increase to 66 by 2020 (this will now affect women as well as men)

2. Job losses – an estimated 490,000 public sector jobs are to be shed

3. Departmental budgets to be slashed by an average of 19% over four years

4. £7bil in further welfare budget cuts

5. Tax the banks the maximum sustainable amount over a number of years

6. Police budget to be reduced by 4% per annum

7. NHS funding to be protected, with spending to increase year on year

8. Schools budget also to be shielded, with yearly increases planned up to 2015

With such a sweeping set of changes, investors will be eager to take into consideration that today’s announcement may hold implications for their portfolios. Will the changes, such as the retirement age, demand a fundamental revision of the way you structure your finances? Or can you continue as normal?

More broadly, what does it mean for the UK economic outlook?  Does investing close to home still hold appeal or do the spending cuts mean more investors may look to international shores for their portfolios?

Clients of Barclays Stockbrokers may be interested to hear views from Michael Dicks, Barclays Wealth’s Chief Economist. A playback of Michael's immediate reaction to the Spending Review will be available from the evening of Wednesday 20 October.  Clients will be able to login and access this through the 'Comment' section under our Investment ViewPoint Connect tab.

Over the coming days we will be providing you with more information on how the government’s cutbacks might affect you.

UK Government Spending Review – How big will the scissors be?

This is a big week for the UK.

At some point in the afternoon on Wednesday 20 October, Chancellor George Osborne will announce the UK coalition government’s Spending Review. This is the most significant piece of output yet from the fledgling government and will likely set the tone for their term in power. There has been much speculation surrounding the content of this report…will the implications be huge (some say it will feel like four budgets rolled into one), or will it turn out to be an anti-climax?  The one guarantee is spending cuts, the question is how far will they go and where will the axe fall?

We will be keeping a close eye on events on Wednesday – watch this space for Investment ViewPoint reaction to the announcements as they happen, as well as what they could mean for you and your portfolio. 

You will also be able to listen the reaction of Barclays Wealth’s Chief Economist Michael Dicks as he considers the implications of the Spending Review.

Yet more pension changes…..but it looks like a step in the right direction.

Those who take an interest in pensions will no doubt be aware of the changes announced in recent years. Although wholesale change was due to come into full effect from next April, restrictions are already in place to prevent the wealthy getting full tax relief on large contributions ahead of time.

In its interim Budget, the coalition government announced that they were looking for a more straightforward way to achieve the target £4m reduction in tax relief on pension contributions. Almost anything would be easier to understand than the complicated formula that the Labour government had devised. Anyone earning over £130,000 at any point was left confused as to how much they could contribute and how much tax relief they would receive.

Given difficult economic situation, it was always going to be likely that the current £255,000 annual contribution limit would be reduced, but at least it now looks as though tax relief will be easier to understand.

Whilst the full details are not yet available, (crucial to understanding the full impact) it appears that everyone will be able to contribute, or have contributions made on their behalf (e.g. by an employer) of £50,000 pa. They will receive tax relief on their own contributions at their marginal rate. This means that from 6 April 2011 someone earning £200,000 (this year they would have been limited to just £20,000 of pension contributions on which 50% tax relief was available), will be able to get 50% tax relief on £50,000 of contributions. Any unused part of the £50,000 annual allowance can be carried forward for up to 3 years, so that those who have irregular earning patterns have some flexibility.

At £50,000, this annual limit is at the top end of the figures previously mooted and the simplicity of the arrangements will be welcome. However, it will be accompanied by a reduction in the Lifetime Allowance - the maximum value that all current and previous pension savings can reach before penal taxes are incurred. This will reduce from £1.8m to £1.5m, with effect from April 2012.

Whilst the government intends to consult on measures to protect those with savings already approaching these levels, anyone with significant pension savings should take this into account when considering further pension contributions. 

Changes have also been announced to the treatment of final salary pension schemes. Again these are not as draconian as had been thought possible, but would increase the probability of breaching the £50,000 annual limit and tax charges being incurred as a result. Full details will be available in due course, but the headline is that to determine the value of any increase in final salary benefits for tax purposes the increase will in future be multiplied by 16 rather than 10 at present. So members of final salary schemes may find themselves breaching the £50,000 limit with relatively modest percentage pay increases.

Concerning for some will be the potential for tax charges being incurred as a result pension benefits breaching the annual limit. The government has suggested that it is prepared to consider substantial charges of this nature being met by the pension fund rather than the individual, but nonetheless a potential concern for those in final salary schemes.

The government states that its intention through these reforms is to encourage pension savings amongst those on low and middle incomes. Given that 80% of the 100,000 people expected to be affected by these changes earn over £100,000, it looks like this will be the case. The ability to carry forward unused allowances will provide some flexibility for the self-employed, or those who receive one-off payments such as bonuses or redundancy payments.

As we learn more detail, we will provide updates in the coming days.

Ernst & Young Pension update

Is it all fun and games for emerging markets?

The Commonwealth Games have once again focussed the world’s attention on the emerging and developing markets. It is not all rosy for this year’s host – India, as some questioned the organisation of these games. Let us hope Glasgow fares better in 2014….

The more interesting point for us is whether these events have an impact on India as an investment region? This remains to be seen.

However, the fact that developing markets are hosting global events is testament to their impressive growth over the past 20 years. There are some people that would not have thought India would get to host the Commonwealth Games, or that South Africa would hold the football World Cup.  

Indeed, attracting a global sporting event is becoming something of a trend for the emerging nations – the Olympics went to China in 2008, the next European football championship will be co-hosted by Poland and the Ukraine, not to mention Brazil’s upcoming World Cup and Olympic Games double header in 2014 and 2016. Read the Brazil Nut (a previous ViewPoint), for further insight into Brazil.

Two recently published pieces of research agree that the investment case for these regions remains strong. The Credit Suisse Global Wealth Report ¹(published October 2010), takes a comprehensive look at the state of world wealth. The report details that “wealth growth in India has been fairly steady”, “the rise of personal wealth in Indonesia has been spectacular during the past decade, with average wealth growing by a factor of five” and wealth in China is “close to the pre-crisis peak”.

These are big figures. South Africa, the football-loving nation mentioned earlier, is held up as “the economic model for many African countries.”

Both the concept and the statistics are important.  Most analysts agree that growth potential in emerging markets will depend largely on the development of an internal consumer culture. Spending power goes hand in hand with wealth and the affluence of a country will not grow without purchasing power.

Building a globally diverse portfolio can have its advantages. The latest issue of Barclays Wealth’s Compass report ² (login to view Compass), diagnosed developed countries (like ours) with a “failure to thrive”. Following the severe economic crisis of recent times, developed economies have not recovered at the speed that many had hoped they would. However, growth rates in the emerging markets moving faster.

The malaise plaguing the developed countries “adds one more powerful reason to shift risk into the world’s most rapidly growing regions”. Emerging markets can help to diversify your portfolio and are already a popular choice with many clients. Emerging markets carry greater risks than those of the developed regions; particularly in some of these areas which have unstable political and economic systems.

However, there are ways to ease yourself in – and give you exposure to emerging markets companies and industries, without having to do a lot of research on the specifics. With ETFs you can simply track the market or region of your choice, whereas with funds, you are investing in the expertise of a fund manager and delegating the investment decisions in an emerging market to them.

These are popular methods for investors to tap into the emerging markets growth story.  In fact if you look at many of the entrants in our weekly top 10 ETF purchases or monthly top 20 fund purchases, you will see several emerging markets products rank highly, such as iShares MSCI Emerging Markets (IEEM) and iShares MSCI Brazil (IBZL) on the ETFs list and funds such as Aberdeen Emerging Markets and First State Indian Subcontinent.  Many of our clients are already playing the game!

Remember that investment into emerging markets using ETFs or funds is not without risk. The value of your investments can fall as well as rise and you may receive back less than you invested.

1. Credit Suisse, Research Institute, Global Wealth Report

2. Barclays Wealth Compass, Investment Recommendations, Europe, Middle East & Africa

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Is BP back for good?

As the rumours about BP swirled last week, investors’ attention was once again firmly focussed on the oil and gas sector. How will Bob Dudley, BP’s new chief executive, handle the challenge? Will BP bring back its famous and beloved dividend sooner than expected?

Speculation from investors triggered a rally in the share price, which prompted many clients to sell their BP holdings. On Wednesday 29 and Thursday 30 September, BP was the most frequently sold stock by Barclays Stockbrokers clients.

The initial rush to sell (capitalising on the buoyant share price) was swiftly followed by a shift to purchasing. Does this mean that investors are once again pursuing BP for their portfolios?

BP was not the only oil and gas player to take centre stage.  First up, Encore Oil, which was the most traded stock on Monday 4 October. On Monday, Encore announced it had discovered an impressive amount of oil in the North Sea, leading to a 13% increase in its share price. Clients responded by trading heavily; Encore Oil accounted for 6.8% of all trades on Monday, 70% of which were purchases.

Other high-octane trading levels were demonstrated in Gulf Keystone Petroleum, Rockhopper, Nighthawk Energy and Regal Petroleum.

We have also seen huge interest in the mining sector. Red Rock Resources was extremely popular on Monday 27 September, when their share price gained nearly 80% to reach a record high. This rally in share price came after a tip in the Mail on Sunday and a revaluation of its gold and mineral interests in Australia, Columbia and Kenya.

Solomon Gold tells a similar story. The Brisbane-based gold company recently produced strong results after a gold sampling project, which led the stock to occupy the top spot on Thursday 23 September and 15% of all trades that day.

Our clients are on the pulse when it comes to the oil and gas and mining sectors. To keep up with the stock trading trends, visit our top ten trades webpage, which is updated daily.

You might also be interested in finding out more about Oil & Gas – read our recent Oil & Gas Sector Focus

This is the trend of the moment; can you pick the next one?

Remember that the value of shares can fall as well as rise and you may get back less than you invested.