Investor outlook

Tentative signs of economic growth

Tentative signs of economic growth, receding risks, plentiful nearly free liquidity and financial markets on fire – what was not to like about the investment landscape at the end of 2013? It is tempting to believe that what happened ‘yesterday’ will happen again ‘tomorrow’ (especially if momentum has been paying off, as it did in 2013). So what is the potential outlook for investors this year?

Global bond markets for the remainder of 2014 are expected to pay close attention to the actions of the US Federal Reserve (Fed), which has started to wean the US (and global) economy off its $85bn per month quantitative easing programme.

The news that the Fed would initially taper its programme by $10bn per month according to Jupiter Investment Management Group (30 January 2014) was at the dovish end of expectations and was greeted well by bond and equity markets. The lower-for-longer tone to the Fed’s forward rate projections was also positive. It underscored that the Fed believes the economic recovery still has some way to go and affirmed the central bank’s desire not to relinquish control of the yield curve and cause undue weakness in the economy and markets.

Credit markets
The outlook for credit markets in 2014 is also optimistic, with economic data broadly meeting expectations and the market factors in an orderly process. Under this scenario, there is potential for high yield bonds to produce decent returns. However, the Fed faces a formidable task. There is a risk that economic data will come in a lot stronger than expected. This may lead to a market panic over the pace of rate rises and potentially bring forward expectations for a rate increase to later in the year, igniting a 1994-style market reversal.

This seems unlikely for now, as low US inflation is currently giving the central bank cause for concern and a justification for maintaining a gradual approach to tapering. In his speech, the former chairman of the Board of Governors of the Federal Reserve, Ben Bernanke, highlighted that the Fed may consider further action if inflation did not move up towards its 2% target. However, should growth start to accelerate, US inflation data will receive close scrutiny and is likely to be a particularly important indicator for shaping bond market sentiment in the coming year.

UK economic growth 
Closer to home, the Bank of England recently responded to a pickup in UK economic growth by bringing forward expectations for when unemployment would fall to its 7% target to December 2014, some 18 months earlier than previously indicated. While this was largely expected by the market, a further acceleration of growth in the UK economy at a time when the Fed is withdrawing stimulus may cause headaches for the Governor of the Bank of England, Mark Carney, and push gilt yields higher.

In Europe there is mounting evidence that the economy is bottoming out and we are now in a situation where growth is not great anywhere, but growth is everywhere. Although mindful of the difficulties the European Central Bank (ECB) faces in addressing the economic divide between Germany and the region’s weaker economies, there is encouragement by efforts (such as the bank asset quality review) to boost confidence and ultimately promote credit growth in the peripheral economies. However, the ECB may be forced towards more unorthodox policies should the shift in the Fed’s stance force interest rates higher in the region.

European high yield bonds 
In terms of strategy, the view is that European high yield bonds present some of the most compelling opportunities available for investors in fixed income. The region is enjoying low default rates, companies continue to focus on repairing balance sheets, the economic backdrop is stabilising and interest rates are likely to remain low for a prolonged period. These conditions contrast with those in the US where companies are more confident and therefore more willing to take on leverage.

The value of investments and income from them may go down. You may not get back the original amount invested. Changes in the rates of exchange between currencies may cause your investment and any income from it to fluctuate in value.Commentary may be subject to change and this is particularly likely during periods of rapidly changing market circumstances and should not be interpreted as investment advice. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given.

Tax attack

Legitimate planning could save you money by reducing a potential tax bill

With tax increases the prospect for the foreseeable future, it is essential that you make the most of every available tax relief. Using the tax breaks available to you also makes good financial sense.

Different ideas will suit different people. If you would like to discuss any of these opportunities, we can recommend solutions that are tailored to you. We’ve provided some examples of the ways in which legitimate planning could save you money by reducing a potential tax bill in the run up to the tax year end on 5 April 2014.

Retirement
Investing in a pension is one of the most tax-efficient ways to save for your retirement. From 6 April 2014, the pension lifetime allowance (LTA) is being reduced from £1.5m to £1.25m which could radically affect your retirement strategy. The LTA is important because it sets the maximum amount of pension you can build up over your life and benefit from tax relief.

If you build up pension savings worth more than the LTA, you’ll pay a tax charge on the excess, potentially at 55%. However, some affected individuals could elect for ‘Fixed Protection 2014′ before 6 April 2014, and the £1.5m limit can be preserved. From 6 April 2014 (until 5 April 2017), individuals will also have a fall-back option of electing for ‘Individual Protection 2014′ to preserve their individual LTA at the lower end of £1.5m, the actual value of their pension fund at 5 April 2014 or the standard LTA (i.e. £1.25m in 2014/15).

If the total of all your pension funds is likely to be at or near £1.25m by the time you retire, you should quickly seek professional advice on whether opting for Fixed Protection 2014 and/or Individual Protection 2014 is appropriate.

The annual contribution limit for an individual (the total of personal contributions and those made by an employer) is £50,000, within pension input periods (PIPs) ending before 6 April 2014, and you receive tax relief for the contributions at your highest marginal tax rate. But from 6 April 2014, the maximum reduces to £40,000.

If you have not made contributions up to the limit in 2010/11, 2011/12 and 2012/13, then the unused relief may be available for carry forward into 2013/14. However, you must have been a member of a registered pension scheme in the tax year giving rise to the unused relief, and any contributions made in the year reduce the amount available to bring forward.

A pension contribution paid before 6 April 2014 also reduces both your tax bill for 2013/14 and, if appropriate, your payments on account for next year.
Tax relief is available even for non-taxpayers, so you can invest in a pension for a non-earning spouse. Non-earners can contribute £3,600 per tax year (the Government will automatically pay £720 in tax relief, reducing the amount you pay to just £2,880).

A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.

Individual Savings Accounts (ISAs)
Make sure that you use your 2013/14 ISA allowance to shelter your savings from tax. There is no capital gains tax or further income tax to pay on investments held in an ISA, making them one of the most tax-efficient ways to invest.

In the current tax year you are permitted to invest up to £11,520 into a Stocks & Shares, or alternatively you can invest up to £5,760 in a Cash ISA and the remaining amount in a Stocks & Shares ISA. In the new tax year (6 April 2014 – 5 April 2015), the limit rises to £11,880, meaning in the next few months a couple could shelter £46,800 from tax using both years’ allowances.
Junior Individual Savings Accounts (JISAs) enable parents or grandparents to save up to £3,720 a year, tax-efficiently, for their children or grandchildren.

The value of investments and income from them may go down. You may not get back the original amount invested.

Inheritance 
If appropriate, consider making individual gifts of up to £3,000, which you can do each year free from Inheritance Tax (IHT). You could also use any unused allowance from the previous year, meaning a couple can give away up to £12,000 now and a further £6,000 on 6 April, potentially saving £7,200 of IHT (charged at 40%).
Have you made a Will? A good Will should minimise tax and give your family flexibility and protection. Dying without one means your assets will be distributed to your family without reference to your wishes using the intestacy laws, potentially after IHT at 40% is paid.
If you already plan to make substantial gifts to charity in your Will, leaving at least 10% of your net estate (after all IHT exemptions, reliefs and the ‘Nil Rate Band’) to charity could save your family IHT.

In many family circumstances, the use of a formal trust can help you protect and enhance your family’s future finances. The timing of creating a trust may have significant tax implications so, if you have long-term financial goals, the sooner you seek expert advice on your options the better.

Inheritance Tax Planning, Will Writing and Trust Advice are not regulated by the Financial Conduct Authority (FCA).

Capital gains
Everyone has a capital gains tax (CGT) free allowance of £10,900 in the current tax year. If you haven’t realised gains of this amount, take a look at whether assets can be sold before 6 April 2014. If you have used up your allowance, consider deferring selling assets until the next tax year or transferring them to a partner. If your spouse either pays no tax or at a lower rate, you could reduce the tax bill substantially.

Bed & ISA is one effective way to use your CGT allowance. By selling your shares or funds and immediately buying them back inside this year’s ISA as a contribution, you can harvest gains, sheltering future growth from tax.

You can increase your CGT annual allowance by registering any investment losses on your tax return. Once they have been registered, you can use them to offset gains made in the future, effectively increasing your CGT allowance.

If you have substantial investments, consider rearranging them so that they produce either a tax-free return or a return of capital taxed at a maximum of only 28%, rather than income taxable at a maximum of 45%.

Tax advice is not regulated by the Financial Conduct Authority (FCA).

Advanced investments
Tax-paying, sophisticated investors who are prepared to take higher risks in return for the potential for higher rewards should be aware that attractive income tax reliefs are available. If you are a tax payer, you will receive a tax rebate of up to 30% (subject to your total income tax bill) when investing in a Venture Capital Trust (VCT). Enterprise Investment Schemes (EIS) income tax relief of 30% – up to a maximum of £300,000 reclaimed tax in any year. Seed Enterprise Investment Scheme (SEIS) income tax relief of 50% for subscriptions for shares of up to £100,000, irrespective of the investor’s marginal tax rate.

The value of investments and income from them may go down. You may not get back the original amount invested. Some funds will carry greater risks in return for higher potential rewards. Investment in smaller company funds can involve greater risk than is customarily associated with funds investing in larger, more established companies. Above average price movements can be expected and the value of these funds may change suddenly.

Generating market-beating returns

How much risk are you willing to take?

It is impossible for an active manager to always outperform the market, but through the process of stock selection, active management introduces the potential of generating market-beating returns.

For those willing to take on the additional risk that comes with stock market investment, an actively managed fund may help you reach your financial goals in a way that some other forms of investment, such as cash savings, cannot.

Continuing market uncertainty
With continuing market uncertainty, we understand investors’ caution towards exposing their hard-earned money to risk in order to potentially achieve positive returns. However, we believe that even in turbulent times there is value to be found and that investing in shares and/or bonds over the long term could present a greater opportunity for reaching your financial goals.
These are a few key considerations for
all investors:

1. Focus on your goals
As life expectancies continue to increase and with retirements often lasting as long as 20 years, planning ahead and investing for the future is becoming more and
more important.

Yet with interest rates showing no imminent signs of rising, investors may not reach their financial goals if they choose to leave their money in cash over the long term. The reason being that current inflation levels are eroding away the real value of any interest earned. Therefore, a key challenge for investors is to decide whether they are prepared to take on a level of risk and to what extent in order to achieve their investment goals.

2. Why consider shares and bonds?
Making the investment decision to leave your money in cash until the markets recover could mean missing out on the opportunity of future market rises. Volatile markets can present some opportunities offering far more significant growth prospects than those found in stable and rising markets. However, it is important to remember that greater returns potential also introduces increased risk of losing the money you originally invested.

There are various types of funds to choose from. From those which predominantly invest in a particular asset type, class or region to those which invest across asset classes on your behalf, seeking to spread your investment risk in the event of a particular asset class suffering losses.

In addition, you could choose to invest in a multi-manager fund, which is a single investment portfolio consisting of multiple funds. Each underlying fund may invest across different sectors or markets offering a one-stop solution to the difficulties of fund selection and diversification. The managers use their expertise to aim to invest in the right managers and funds, in the right combination, at the right time, in order to deliver the best potential returns.

3. Investing for the long term
Negative commentary often results in investors taking flight in difficult markets and selling their investments in reaction to a sudden fall in price. This can be a costly strategy. Short-term movements in the prices of shares can be smoothed out over the long term, putting dramatic losses and sudden gains into perspective. Staying invested can increase the likelihood that your investments will benefit from rebounds in the market and minimise the overall impact of volatility on your potential returns.

The value of investments and income from them may go down. You may not get back the original amount invested. This information sets out the basics of portfolio diversification. It is not designed to be investment advice and should not be interpreted as such. Other factors will need to be taken into account before making an investment decision. The value of an investment can fall as well as rise and is not guaranteed. You may get back less than you put in. Past performance is not a guide to future performance.