The Budget is done, now we wait for the US election. I’m afraid the seat belt signs are on for this next one!
The Budget
We will be holding our Budget webinar next Wednesday at 6:00pm, so I won’t go into too much detail here. Suffice to say that, from a tax perspective, it’s not going to be too big a deal for individual savers and investors. All the main tax allowances and savings vehicles came through largely unscathed, with a modest increase in capital gains tax. The heavy lifting to raise tax receipts is falling on companies through the 15% plus hike in employer’s national insurance (NI), both in terms of the rate and the point where it kicks in. It’s probably a smart move, as NI is a very hard tax for employers to avoid.
The exception is the inheritance tax (IHT) treatment of pensions, previously outside of your estate for IHT, the Government proposes to include them in your estate for IHT from 2027. Importantly, this does not impact transfers between spouses. Arguably the current treatment is a bit too generous, so it was not entirely unexpected. It is also something we can plan for – it won’t bite for most of our clients for 20-30 years, giving us plenty of time to plan to avoid the worst of its impact. It is complex in application, with lots of practical challenges for pension providers, and we are already seeing differing opinions amongst tax specialists as to how it will apply. We will hope to bottom some of these opinions by Wednesday and give our view on its impact and some planning strategies to mitigate it.
From a UK economic perspective, even optimists like me are struggling to see how this Budget will be pro-growth, and it certainly does not bode well for shareholders of companies operating in the UK.
The UK bond market saw most of this coming, but the extent of planned borrowing and spending, and therefore the number of Gilts the UK will need to issue, has seen Gilt yields rise. My view is that this Budget will also likely feed inflation, so I think base rate reductions will be lower than expected and higher long term bond yields are here to stay. It’s probably not a great Budget for UK house prices, as the recent modest fall in fixed rate mortgages has already reversed.
UK Bond Markets & Tideway’s Fixed Income Investments
Here is the 10-year Gilt yield, which has risen from around 3.8% in the middle of September to 4.4% today.
In isolation 0.6% might not seem like a big increase, but on a 10-year bond this means it will be down 6% (10 X 0.6) since mid-September. The risk of this happening, which we highlighted earlier in the year, is why we have avoided longer duration bonds.
If we look at our Balanced bond portfolio versus the UK Gilt Index and the average corporate bond manager, we have protected capital well in those weeks.
Protecting against losses is always important. A 4% loss, as experienced in the average UK Gilt fund in the last 6 weeks, will require a 4.2% gain to get back into profit. That’s going to take almost a year. We generally have bonds with much higher yields than Gilts, so we expect the upward trend on our fixed income portfolios to resume much more quickly.
Equities and The US Election
Speculation is rife as to which President would be better for equity markets and who might win. As is often the case, it is all very close to call. Markets hate uncertainty, which probably explains the volatility of the last few weeks. If Trump were to lose and then challenge the result, this could extend the uncertainty – hence my seat belt warning!
For sure, equity valuations in US mega caps are relatively high. This may be warranted with the impact of AI; it may be overdone if the applications to monetise AI prove hard to find. Time will tell.
We have decided not to make any changes to portfolios ahead of the election result, as overall we believe we are well placed for most eventualities.
The content of this document is for information purposes only and should not be construed as financial advice.
Please be aware that the value of investments, and the income you may receive from them, cannot be guaranteed and may fall as well as rise.
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