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What’s in the Box?

Box Financial Planning’s Investment Bulletin - Summer 2014

Welcome to Box Financial Planning’s First Investment Bulletin, which we hope you will enjoy reading.

Financial markets have generally performed benignly in the opening months of 2014.

Developments have occurred in the context of slower than anticipated growth in the United States and slightly better conditions in the Eurozone with some peripheral countries improving better than anticipated.  For once, the United Kingdom appears to be moving ahead of some of its European neighbours as our recovery moves into the next phase of the Economic Cycle.

The markets seem to acknowledge that the tapering of quantitative easing (Stimulus Packages) will occur now, sooner rather than later and debt reduction in China may also signify a tightening of their growth, which will allow more normal economic growth to hopefully continue.

A large grey cloud on the horizon though, is the Geopolitical developments (Ukraine, Syria, Iraq, Turkey, the seas to the East of China and European elections for example) and this could potentially give cause for concern but markets have so far remained sanguine.

The United Kingdom
The economy is growing more robustly that previously indicated – but two concerns remain :

1) The Economy is not growing ‘evenly’- the Southern half of the country seems to be recovering much stronger than the Northern half; and
2) The Value of Residential Property in certain area (namely London) is growing at an uncomfortable rate.

Both the Financial Services Regulator and more recently the Treasury/Bank of England have implemented changes to procedures which may take some of the ‘froth’ out of the London market – without hurting the property price recovery.

The main two changes, of restrictions on the Help to Buy Schemes and tighter controls on lending levels regrettably though will not in itself resolve the problem – various commentators have stated the London property market has very little to do with UK property buyers – it’s primarily a large influx of money from overseas (China and Russia especially) which is driving up the price of premium properties, which then filters down to more normal properties. Therefore other measures, such as higher Stamp Duties for overseas buyers are being considered.

Also, on the 12th June, the Bank of England indicted that the very low interest rate policy is likely to change this year, with Interest Rate now predicted to rise slightly before the end of the year. Interest Rates have been predicted to rise to more normal levels, but this was the first time a formal indication of the date has been given.

Therefore, for people borrowing money, the assessment of the borrower being able to maintain repayments, at higher interest rate will more closely assessed.

The good news for savers will that Savings Rates should start rising and generally rates in excess of Inflation should be achievable by the end of the year.

How this will affect UK Equity markets is less clear – as although ‘risk free’ returns may well increase (which usually means risk returns must also increase, which usually means the price of equities will fall), a stronger economy should give companies better pricing power and greater sales potential – and so overall turnover and profit should increase, thereby increasing the price of equities.

The International Monetary Fund (IMF) has stated they believe the recovery in the Eurozone is not strong enough.

The IMF also says the European Central Bank (ECB) should consider buying financial assets with newly created money, if inflation remains low (similar to the UK and US stimulus programs). In other words – buy up existing debt with ‘newly created money’, allowing more money back into the economies.

Although these comments do seem to be fairly negative,  IMF's regular Eurozone health check does sees some signs of progress, and they have highlighted “Strong policy actions have laid the foundations for economic recovery".

North America
It is expected that Economic activity will continue to expand at a moderate pace and their labour market conditions will continue to improve. The economic boost from the US Treasuries stimulus program will be slowly lost though, as it is reduced. Removing the stimulus program will eventually occur – but like the UK, this will be a very gradual event to ensure the Economies which have benefited from it, do not suddenly have to go ‘cold turkey’ – which would be a double whammy, as the harsh winter, has been estimated at reducing US growth by 1%.

Far East and Japan
Japan, which still remains the world's third largest economy, has been struggling for growth, and their Government is expected to reveal another round of economic reforms later this month. The original ‘Dragon in the East’, still struggles though and the highs of the 1980’s are very much a distant memory. To highlight how Japan has languished, the Nikkei 225 remains around a 1/3rd of its 1989 high of just below 39,000 – and with recent highs of 16,291 and low’s of 12,834.

Economists remain unsure what Japan can do to break out of its doldrums.

The new ‘Dragon of the East’, China – continues to grow – and the importance of China’s economy was highlighted in June, with the UK Government ‘wining and dining’ the Chinese Premier which resulted in around £14 billion of deals being signed. Various warnings over the last 2 years keep highlighting that the Chinese Economy could go into reverse, but so far the Chinese Government has been able to control and mitigate the various bumps in the road, which could cause this to happen. Like the UK though, there is a growing imbalance and unhappiness in how the Wealth is being created – with rural areas generally lagging behind the urban areas. Economically and politically, this could cause some very significant damage in the future.

Asian stock markets are likely to be volatile over the coming months. The strength of the recovery in the US together with speculation over the reduction of the US stimulus package easing will remain key influences on the mood of the market. Nevertheless the outlook for growth remains positive. In the medium to long term, the strong economic fundamentals should allow the economies to continue to grow.

Emerging Markets and Other Global Events
The surprising success of the ISIS led insurgency in Iraq that threatens the fragmentation of the country and offers the possibility of a new State that also straddles parts of Syria, may also lead to an increase in oil prices (and indeed, at the time of writing, Oil Prices reached a 9 month high).  Such an event may slow the recovery in countries such as the UK and US where there has been an increasing expectation that interest rates will rise sooner than expected. 

Elsewhere, emerging countries such as Indonesia took advantage of low rates and tapped the European Bond markets for cheaper finance. 

In summary then, the Global Economy is getting much stronger and the outlook continues to improve – but significant worries, which could de-rail some economies, do still exist.

The need to review investments and re-balance them where needed is therefore crucial to maintaining appropriate and balanced portfolios.

Regulatory Changes
For those that have received Annual Statements recently, you may have noticed the projected fund values are lower.

For tax efficient savings (Pension and ISA’s) the maximum annual returns permitted are now 2.0%, 5.0% and 8% and for other savings (Unit Trusts and Bond’s for example) it’s 1.5%, 4.5% and 7.5%. However, where the provider believes the asset mix (i.e. what you are invested in) will provide lower levels of return; they will provide the illustration on lower return levels and will confirm what rates have been applied.

i.e. if you’re invested in ‘cash’ you are not going to get a net return of over 5%!

The illustration may also include a ‘Real Return’ projection, which will lower the above rates by 2.5%, to take into account Inflation – which means at the lowest projected rates, the illustration will assume a negative real return.

This should make projections more realistic in today’s lower return, low interest rate and lower inflation environment.

Should you like to discuss these issues more in depth, please contact us by calling 0118 929 8065 or e-mailing us on

Key Points
Please remember this article is for general guidance only and should not be taken as personal advice. The value of investments and income from those investments can fall as well as rise. Any comments about taxation or law is based on current legislation and this may change in the future.





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