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Eleonore Bylo

5 Healthy Financial Habits you shouldn’t Ignore

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How to get your finances in order to make more of your money.

Do you feel like your financial life has been turned upside down during the coronavirus (COVID”19) pandemic? Or, has the start of the new year focused you on getting your finances in order to make more of your money? Whatever the answer is, it’s important to adopt healthy financial habits.

But just as bad habits can get you into financial trouble, good habits can help keep you out of it – and help you spend wisely, save well and, most importantly, reach your biggest financial goals faster. To help kick-start this process, we’ve put together five habits for you to consider.

1. Pay yourself first

Before you pay any bills, develop a habit of paying yourself first. That means saving and investing a portion of your earnings before you do anything else with your money. In the book The Richest
Man in Babylon, written by George S. Clason, the parables are told by a fictional Babylonian character called Arkad, a poor scribe who became the richest man in Babylon. How did he achieve this? By following the first law of wealth: ‘Save at least 10% of everything you earn first and do not confuse your necessary expenses with your desires.’

It’s great to start somewhere – saving something is better than nothing. The important thing is that you’re building a new habit around making some of your hard-earned money work for you, as opposed to someone else. After you’ve paid yourself, the rest of your earnings can then be used to pay bills and purchase the things you need.

2. Spending less than you earn

The problem is that if you routinely spend more than you earn, you could be building up more and more debt. In many cases, that may mean turning to a credit card and not paying of the balance each month, leaving you with potentially exorbitant fees and interest rates that can take years to pay of. When considering spending on something you want – always ask yourself if you genuinely need it.

3. Emotions should not affect your financial decisions

For many people, money habits are tied to emotions and how we feel. It’s easy to fall into the trap of spending money when we’re disappointed, or angry, or even happy. While emotions are important, they aren’t helpful when it comes to making financial decisions. Develop a habit of taking your time and making levelheaded, rational decisions about money rather than allowing spending, saving and investing habits to be dictated by the way you’re feeling at a moment in time.

4. Control your debt

Debt is not necessarily always a negative; in some cases debt can be a positive stepping stone to help get you closer to a more prosperous future. For example, although a mortgage is a form of debt, purchasing a home could be a necessity for you. Similarly, borrowing money to enhance your education could allow you to get a better paid job. You might even be borrowing money to set up a business.

On the other hand, using credit cards, for example, to cover extra spending is generally considered a bad use of debt, as the repayment terms and interest payments can often be onerous as well as expensive if it’s not paid back on time. It’s generally considered good practice to avoid carrying a credit card balance over from one month to the next, as over the longer term this can often become very expensive, very quickly.

5. Speak to your professional Financial Adviser

When it comes to managing your money, planning to build wealth, securing your future, and, above all else, drawing up an effective plan for fulfilling your objectives, talk to us. We will provide a wealth of knowledge, qualifications and experience that is difficult or impossible to achieve yourself.

Perhaps the main benefit, more so than any other, is the chance for relaxation. You can properly relax, safe in the knowledge that we are taking care of a wide range of challenges and questions that you would otherwise have to deal with. And if you do have any questions or concerns, you know you can easily contact us to get answers in a timely manner.

How to build new habits into your daily life

  • Know your why – what’s your reason for making the changes?
  • Set realistic, measurable goals that are achievable
  • Break up bigger goals into smaller actions
  • Don’t make too many changes at once
  • Use rewards as a motivator (within reason) to treat yourself once you meet your goals

Soon enough, these good habits will become hard to break.

Need help developing better financial habits in 2021?
Making the right decisions now can bring peace of mind by offering a clearer future for you and your family. Together, we’ll create a wealth plan that goes beyond simply finances, taking care of what really matters in every aspect of your life. To discuss your situation, we’re here to listen.

The value of your investments (and any income from them) can go down as well as up, and you may not get back the full amount you invested.

Life Goals

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Are you building the future you want?

Creating a financial roadmap for the future you want involves a close analysis of your personal finances and an assessment of other building blocks.

Lifestyle matters look at how to balance work and leisure, how to make smart choices for the future and many other items regarding how to help you enjoy the journey.

‘How do you ensure the plans you make are going to get you to where you want to be financially?’ ‘How can you achieve the life you want?’ Your financial roadmap should provide you with clarity
about your future. It should detail every aspect of your vision – your hopes, fears and goals. It should also describe exactly how your future will look and help you to know exactly where you are headed and when you are likely to arrive.

Life can change – the birth of a child, the death of a loved one, the loss of a job, a major purchase – which will readjust your financial roadmap. At these major life events, it’s important to chart a
new course to ensure you meet your financial, lifestyle and retirement goals.

Take some time and ask yourself these questions:

  • Can I sleep comfortably knowing I’ll have enough money for my future?
  • Do I have the security of knowing where I’m heading financially?
  • Am I going to be able to maintain my current lifestyle once I stop working?
  • Do I feel empowered financially to live the life I want today and tomorrow?
  • Have I made sufficient financial plans to live the life I want?
  • Do I have a complete understanding of my financial position?
  • What is ‘my number’ to make my current and future lifestyle secure?

Making wise financial decisions

Part of this process is to understand ‘your number’ – in other words, the amount of money you’ll ultimately need to ensure complete peace of mind in knowing your future lifestyle is secure and making sure you don’t run out of money before you run out of life. The process starts by identifying your goals for the future and following up by setting a timeline for achieving them.

If you do not know where you are going, how will you know when you get there? This is very true about financial goals. You need to set financial goals to help you make wise financial decisions, and also as a reward for your efforts. Goals should be clear, concise, detailed and written down. Unwritten goals are just wishes.

How to make smart choices for the future

In order to achieve all your goals, you will need a plan. Starting from assets you already have available, you will need to determine how much more you need to accumulate and when you will need it. Don’t neglect to consider that the price of your goal items might actually increase as well.

We’re ready to listen

We’re here to make this process as simple as possible for you so that you can have peace of mind knowing that everything is taken care of. When it comes to planning for your future and that of your family you’ll want to be sure that you have everything covered – and that’s where we can help. To discuss your future plans, please speak to us.

Planning for tomorrow, today

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4 pension facts to help you create a happy and wealthy retirement.

The future may seem far away. Regardless of your retirement goals, there are things you can do to increase your chances of success.

It is important to look objectively at your plans and adapt them as your priorities change over the years and you go through different life events.

Your retirement will be as individual as you are and it may arrive earlier than you had anticipated. Time really does fly. Planning ahead is almost certainly going to give you more choice and freedom and pensions can be the most tax-efficient way to save for your retirement.

1. Tax Relief

Most UK taxpayers receive tax relief on their pension contributions, which means that the Government effectively adds money to your pension pot.

Basic rate tax relief: The pension scheme administrator will claim the basic rate tax relief for you from HM Revenue & Customs (HMRC). With basic rate Income Tax at 20%, for every £80 you pay into the pension plan you receive basic tax relief of £20 which is also paid into your plan. The total amount paid into the plan is therefore £100.

Scottish taxpayers and tax relief: Scottish taxpayers receive tax relief based on Scottish Income Tax rates and bands. If you pay tax at the Scottish starter rate, HMRC will not ask you to repay the extra tax relief claimed by the pension scheme administrator.

Welsh taxpayers and tax relief: From 6 April 2019, the Welsh Assembly has devolved powers to set their own Income Tax rates. Currently they have set the rates at the same level as the UK rates.

Please note that the Scottish and Welsh rates may change in the future

Higher rate and additional rate tax relief: Intermediate, higher or top rate tax payers may be able to claim further tax relief from HMRC. If you are eligible for further tax relief on your payments, you can ask HMRC to change your tax code by contacting them or you can complete a Self-Assessment Tax Return after the tax year has ended.

2. Employer Contributions

The Government introduced auto-enrolment as a way of helping employees save for retirement. It means that employers must automatically enrol certain staff into a workplace pension scheme.
When you pay into a workplace pension, your employer and the Government also contribute. The amount paid depends on your employer’s pension scheme and your earnings, but minimum contribution rates are set.

Unlike other ways of saving, a workplace pension means you aren’t the only one putting money in. Your employer has to contribute too, as long as you earn over £6,240 a year. You will also receive
a contribution from the Government in the form of tax relief. This means some of your money that would have gone to the Government as income tax, goes into your workplace pension instead.

You and your employer must pay a percentage of your earnings into your workplace pension scheme. The earnings trigger is one of the three key factors which ultimately governs who gets enrolled into a workplace pension scheme through automatic enrolment (the existing threshold is £10,000 for the tax year 2020/21, which runs from 6 April to 5 April the following year).

Under auto-enrolment schemes, you make contributions based on your total earnings between £6,240 (Lower limit qualifying earnings band) and £50,000 (Upper limit qualifying earnings band) a year before tax.

Your total earnings include:

  • salary or wages
  • bonuses and commission
  • overtime
  • statutory sick pay
  • statutory maternity, paternity or adoption pay

From April 2019 the amount of total minimum contributions increased to 8% – your employer will contribute 3% and you will contribute 5%. These amounts could be higher for you or your employer because of your pension scheme rules. They’re higher for most Defined Benefit pension schemes.

In some schemes, your employer has the option to pay in more than the legal minimum. In these schemes, you can pay in less as long as your employer puts in enough to meet the total minimum contribution.

3. Flexible access

A Defined Benefit pension scheme pot is highly flexible from age 55. Almost all pensions allow you to take some of your money as tax-free cash. With this option, you can take some or all of your 25% tax-free cash first. What’s left in your pension pot remains invested, giving it a chance to grow; however, as with all investments, your money can go down as well as up.

After you’ve taken all of your tax-free cash, any money you take out will be subject to tax. This means that you can take money from your tax-free amount first and then take the taxable amount when you need it. Remember, you don’t have to take all of your tax-free cash in one go.

To help you minimise the tax you pay, you can take the taxable money whenever you like. So, for example, you can take it over a number of different tax years. This spreads it out, and if you do it this way it could help keep you in a lower tax bracket.

4. Effects of compounding

While it is never too late to start saving and planning for retirement, the earlier you start, the better. Starting earlier means more time for your savings to benefit from the effects of compounding returns. Conversely, the longer you wait, the less time you have for your money to grow and the harder you’ll have to work to reach your retirement goals.

The basic concept is simple. Compounding returns is where the profits you earn on your money are re-invested and start earning more money, which is then re-invested again and so on. With compound returns, it’s less about how much you can afford to put aside and more about for how long the money has time to grow, with your money snowballing into a pot.

Are you approaching retirement, or about to retire?

In the years leading up to retirement, you might start to wonder if you have saved enough to retire comfortably and thought about everything you need to consider. Are you ready to retire? Do you know what you might get? Do you understand your income options, tax and your State Pension? Please speak to us to discuss your options.

Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits and is not suitable for everyone. You should seek advice to understand your options at retirement.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change. Tax rules are complicated, so you should always obtain professional advice. A Pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. Pensions are not normally accessible until age 55. Your pension income could also be affected by interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

Festive Financial Gifts

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Deciding on the right investments for the children in your life

As the festive season approaches, have you thought about gifting your children or grandchildren something different this Christmas? Giving them a good start in life by making investments into their future can make all the difference in today’s more complex world.

Many parents and grandparents want to help younger members of the family financially – whether to help fund an education, a wedding or a deposit for a first home. Christmas is a time for giving so what better gift to make to your children or grandchildren than a gift that has the potential to grow into a really useful sum of money.

There are a number of different ways to get started with  investing for children that could also help you benefit from tax incentives to reduce the amount of tax paid, both now and in the future. Don’t forget that tax rules can change over time so it is important to obtain professional financial advice before making financial decisions.

Ownership of the investments

Investing some money – either as a one-off lump sum or on a regular basis – is an ideal way to give a child a head start in life. There are a number of options available when it comes to ownership of investments for a child. Children receive many of the same tax-efficient allowances as adults, so it’s a good idea to consider specialist child savings accounts.

Some people prefer to keep investments for children in their name; that way, if a future need arises in which you require access to the funds, it is still available to you as it has not yet been transferred to the child.

If you retain personal ownership of the investment, it will be your tax rates that apply as opposed to the child’s. If the investment remains in your estate upon death, more taxes could be payable, so be aware of this.

Bare Trusts

You can hold investments for your child in a bare trust or designated account. Bare trusts allow you to hold an investment on behalf of a child until they are aged 18 years (in England and Wales) or 16 (in Scotland), when they’ll gain full access to the assets.

Bare trusts are popular with grandparents who would like to invest for their grandchild, because the investments and/or cash are taxed on the child who is the beneficiary. This is only the case if you are not the parent of the child. If you are and if it produces more than £100 of income it will be treated as yours for tax purposes.

Grandparents can contribute as much as they like as there is no limit to how much can be invested each year into this type of account. This can be a beneficial way of reducing a potential Inheritance Tax bill if a grandparent would like to make gifts to a child.

Discretionary Trusts

A discretionary trust can be a flexible way of providing for several children, grandchildren or other family members. For example, you might set up a trust to help pay for the education of your grandchildren. The trust deed could give the trustees discretion to decide what payments to make, depending on which children go to university, what financial resources their families have and so on.

A discretionary trust can have a number of potential beneficiaries. The trustees can decide how the income of the investment is distributed. This type of trust is useful to give gifts to several people, such as grandchildren. However, it’s worth keeping in mind that the tax rules can become complex when using a discretionary trust and the investment and distribution decisions are taken by the trustees (of which you can be one).

Junior ISAs

If you want to ensure the money you give to your children remains tax-efficient, a Junior Individual Savings Account (JISA) is available for children born after 2 January 2011 or before 1 September 2002 who do not already hold a Child Trust Fund.

The proceeds are free from income tax and capital gains tax and are not subject to the parental tax rules. They have an annual savings
limit of £9,000 for the current tax year which runs from 6 April to 5 April the following year.

A child can have both a Junior Stocks & Shares ISA and a Junior Cash ISA. From the age of 16, children can have control over how their JISA is managed, but cannot withdraw from it until the age of 18.

Child Junior SIPPs

It is never too early to start saving for retirement – even during childhood. While it may seem a little early to be thinking about retirement as the parent of a child, it’s worthwhile. The sooner someone starts saving, the more they will gain from the effects of compounding. There are significant benefits to setting up a pension for a child. For every £80 you put in, the Government will top it up with another £20, which is effectively free money.

A Junior Self-Invested Personal Pension Plan (SIPP) is a personal pension for a child and works just like an adult one. Parents and grandparents can save up to £2,880 into a SIPP for a child each year. What’s great about this gift is that the Government will top it up with 20% tax relief. So you can receive up to £720 extra, boosting the value of your present to £3,600. This can help a child to build a substantial pension pot if payments are made every year.

But while starting a pension for your child or grandchildren will benefit them in the long run, you need to consider that they won’t be able to access their money until they are much older.

Planning to give the children in your life a financial gift this Christmas?

A gift of money to your children or grandchildren at Christmas can be a wise choice, especially if you take a long-term approach. Many families want to give their children or grandchildren a head start for their future finances. When it comes to investing for children, tax can make a big difference to returns over the longer term. We can help you decide on the right investments for the children in your life. Please contact us to discuss the options available.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change. The value of investments and income from them may go down. You may not get back the original amount invested. Past performance is not a reliable indicator of future performance.

Investing with a Conscience

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Placing money in companies that bring positive change. Issues such as climate change and sustainability have become increasingly hot topics globally and often the subject of conversation. As a result, Environmental, Social and Governance-linked (ESG) investment strategies continue to dominate financial headlines.

These strategies, which include impact investing, are not new, but momentum is growing as shareholders demand greater action and consumers hold businesses to a higher standard. Increasingly, a significant number of UK investors expect their investments to align with their personal beliefs and continue to express interest in sustainable investing.

Potentially higher returns

Findings from new research identified that UK millennials are less likely to compromise their personal beliefs in order to benefit from potentially higher returns compared to their global counterparts[1]. ESG is a set of standards seeking to reduce negligent corporate behaviour that may lead to environmental degradation, armament sales, human rights violations, racial or sexual discrimination, harmful substances production, worker exploitation and corruption, though this list is by no means exhaustive and remains disputed.

More sustainability conscious

This study of more than 23,000 people who invest from 32 locations globally revealed that in the UK, only 20% of millennials, who are often perceived to be more sustainability conscious, would compromise their personal beliefs if the returns were high enough. Globally however, 25% would be willing to be flexible with their values. According to the UK results of the Global Investor Study, some 50% of Britons aged 71+, 23% of baby-boomers and 22% of those classed as Generation X would trade their personal beliefs for higher returns.

Excluding ‘sin-stocks’

In the UK almost a third (24%) of those who class themselves as having ‘expert/advanced’ investment knowledge are substantially more likely to trade their personal beliefs for better investment returns compared with 18% of ‘beginner/rudimentary’ investors. A total of 78% of Britons said they would not invest against their personal beliefs, and for those who would, the average return on their investment would need to be 21% to adequately offset any guilt. Socially Responsible Investment (SRI) generally focuses on excluding ‘sin-stocks’ from the investment pool based on negative screening guidelines.

Entering the mainstream

In the last two years, sustainable investing in the UK has increased, with 48% of people now frequently investing in sustainable investment funds compared with 34% in 2018, sending a positive market signal that sustainable investing is entering the mainstream. Overall, 40% of UK investors stated that investing sustainably was likely to lead to higher returns. Some 51% said they were attracted to investing sustainably due to its wider environmental impact. Globally, expert or advanced investors are the most likely to think sustainable investments have the most potential to offer higher returns (44%) and the least likely to think investing this way will ultimately disappoint (9%).

Top three ‘behaviours’

Opinion was split among investors globally in terms of how asset managers should address challenges that arise from the fossil fuel industry. Just over a third (36%) said managers should withdraw investment from companies in these industries to limit their ability to grow. However, over a quarter (27%) said managers should remain invested to drive change. Furthermore, investors said that the top three ‘behaviours’ companies should be most focused on were their social responsibility, attention to environmental issues and the treatment of their staff.

Is your future in sustainable investing?

What used to be viewed once as a niche investment philosophy is now firmly planted in the mainstream, with investors aligning their personal values around sustainability and social progressiveness. If you’d like to explore an ESG investing journey with us, please speak to us for further information.

Source data:
[1] In April 2020, the Schroders Global Investor Study 2020 commissioned an independent online survey of over 23,000 people (aged 18-37) who invest from 32 locations around the globe. This spanned countries across Europe, Asia, the Americas and more. This research defines people as those who will be investing at least €10,000 (or the equivalent) in the next 12 months and who have made changes to their investments within the last ten years.
Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change. The value of investments and income from them may go down. You may not get back the original amount invested. Past performance is not a reliable indicator of future performance.

October 2020 Economic Update

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All views expressed in this article are those of the author Roger Martin-Fagg and do not necessarily represent the views of Ellis Bates Financial Advisers.

In this update I will continue to give evidence for my optimistic outlook. I do understand that many of you will consider my assessment as unrealistic. I see my purpose as giving you the facts insofar as we know them and then it is up to you to decide on the future progress of our economy and your role and response within it.

As far as I am able to discern currently the infection rate in the EU and the UK is rising. The much vaunted R is above 1 but not yet 2. The predicted second wave is upon us. There is increasing evidence that if an individual is reasonably fit, not overweight, exercises in the fresh air and sunlight they will not die from CoVid 19. They will feel ill, and like flu it is unpleasant but not life threatening. However if they are significantly overweight and have underlying health issues then the risk of becoming very ill and possibly dying rises with age. 90% of deaths have been those who are old and unhealthy.

The issue for the Government is how far to go with lockdown and isolation for the majority to protect the most vulnerable. It is a very difficult judgment to make. There is growing evidence that if there are sufficient hospital ICU beds available, care homes have the necessary support and there is an effective track and trace system then the balance should be in favour of letting the nation get on with normal life.

I believe public opinion is skewed by the mawkish media who seem to revel in portraying the suffering of the unfortunate few. And most people will have a story of a friend who has suffered. But equally they will know of friends who only suffered mild symptoms. If we look at the experience of our European neighbours, Italy stands out as the least affected by the second wave. And it would seem this is because of an effective test and trace system.

My guess is that we will not have a national lockdown but there are and there will continue to be local restrictions applied. The 10pm curfew is clearly an error and I suspect it will be dropped. A well-run pub or restaurant will be a much safer space than a large household with plenty of alcoholic refreshment. And why is anyone surprised that there are spikes in infection when schools and universities reopen?

All that follows assumes no national lockdowns in the UK and the EU.

Basically the economy is all about how much money is created by banks and how quickly that money changes hands as individuals buy stuff and pay debts. If we begin with how much money is being created the numbers are staggering in their magnitude.

The money supply in the USA is expanding at nearly 4x the normal rate.
In the EU it’s 2x normal.
In the UK it’s 3x normal.

Globally the monetary stimulus is 17% of Global GDP. This is a massive increase in potential purchasing power. If this had happened last year, the scribblers would be headlining “hyperinflation is on its way”. However, all this new money is not flowing through the system at normal rates. Anyone in the hospitality, travel, aerospace, public entertainment, sports and events industries will be suffering significant falls in customer spend and income. This is what lockdown, social distancing and the need to self-isolate causes. In addition the number of hours worked has reduced by around 15%. However thanks to furlough schemes incomes have fallen by less. So there is what is called an inflationary gap.

Graphic Illustration of an Inflationary gap

It is generally accepted that individual prices are determined by supply and demand at a point in time (think of eBay bids). The same can be said of aggregate demand and supply. If in the economy as a whole there is more spending power than immediately available goods and services, average prices rise, albeit with a time lag. The time lag exists because most prices of goods and services are not determined as they would be at an auction but are administered by companies who tend to mark up on unit cost after annual price reviews. The market which responds quickest (apart from commodities) is real estate. Over this next year thanks to Covid we will see central city commercial property prices falling and rural house prices rising. It is difficult to be accurate but I guess central city offices and shopping centres prices will fall 10-20%. And rural house prices rise 5-8%.

To reiterate: since March actual earnings have been higher than the volume of goods and services produced. The inflationary gap is because people have been paid whilst not producing.

In the UK an inflationary gap opens up whenever the money supply begins to grow consistently above 6% per annum. Its currently growing at 12% pa. The new job support measures are quite different; there is effectively no money without output. One would think the gap was closed, but it isn’t, the new money is in the system somewhere and it will get spent sooner or later. The Baltic Exchange freight rate for containers is a very good indicator of global trade volumes. The chart suggests strong demand from Northern European consumers for Asian goods. It is of course possible that container ship capacity has been reduced since March, but I imagine such vessels are probably the safest places to be assuming all the crew are tested a few days before embarkation. Global output is now only 5% below Jan 2020 levels.

Exports from China are rising at 10% year-on-year, the fastest rate for nearly two years. The reasons for all this are of course that since lockdowns were relaxed there has been a surge in consumer demand.
As I write this there is a high level of uncertainty for individuals and families and much discussion on the arrangements for Christmas!

If you are running a business you will have higher levels of cash than normal. You will be trying to guess demand, decide on how many employees you will need over the next years or so, and probably preparing for the worst but hoping for the best. The following data supports this view. The chart reflects the GDP performance of each country. Germany had the smallest contraction in Q2, the UK the largest at 20%. The question is what will happen to unemployment? Overall the average rate will rise to around 8% of the workforce. This means that 92% of the available labour supply will be gainfully employed. And it does not mean our economy and in particular the housing market will shrink. Although the media seem convinced otherwise.

From 1980-1989 the average unemployment rate was 8%, there were recessions at the beginning and the end of the decade, but the average GDP growth rate was 2.5%. It was a decade of blue collar unemployment as UK Manufacturing raised its productivity and either did well or ceased to exist. In the early Eighties the pound was overvalued by about 20% due to North Sea oil, so thin margin exporters failed. The deep-mined coal industry disappeared as low cost open cast Columbian and Australian coal was imported. Most of the unemployment was structural. This means the job was gone for good, and regardless of total spend in the economy would never return.

The unemployment we will experience over the next ten years will also be structural. This time it will be white collar jobs disappearing from the back offices of service companies. Smart systems are replacing legal clerks, HR personnel are being replaced by clever recruitment software; orders, dispatch and invoicing all automated. This has been around for at least 10 years but now it will be become generalised. The good news is many white collar workers have transferable skills, so an HR manager, with a bit of training, could design employment systems and processes. Covid is accelerating this change, along with how and where people work.

It is clear home working will be the norm for perhaps 40% of employees. And on the evidence to date is it is more productive. The central office will be reconfigured for more meeting/social interaction space and less rows of screens. New build housing will have to include studies, even if they are small. And for the professional couple, two study rooms or another in the garden will be seen as essential. In short we are entering a period of rapid change with reconfiguration of workplaces. This will create many new income streams for entrepreneurs who spot niches and act quickly to supply.

The example I particularly like is the massive increase in demand for domestic garden pizza ovens! I do not have one nor do I plan to but round here pizza parties for six are popular. The key point is these structural changes will increase GDP per capita so long as companies and employees embrace the opportunities.

The Housing Market

I read on a daily basis commentary which forecasts a collapse in house prices next year. Figures abound but the range is between minus 10% and 20% (the same forecasters predicted house prices would fall 7% this year, when so far they have risen by three percent!). The reason given is banks will be unwilling to lend and individuals unwilling and or unable to borrow because of actual or fear of job loss.

The banks know that their mortgage business is a Walmart operation: pile it high and sell it cheap. The margins are small so the volume has to be large and almost all the process can be automated. The losses on mortgage books currently are under one percent. Next year they may rise a bit but they will always be less than losses on lending to SMEs, which are likely to escalate. But with unemployment doubling the housing market will surely weaken, it’s obvious!

Well, no it isn’t.

Take a look at history:
House prices from 1980-1990 rose at an average annual rate of 13%. In the nineties unemployment steadily fell but house prices remained subdued on average growing at 3% per annum. The reasons are found in the behaviour of banks. In the eighties Barclays and NatWest were both determined to be the UK’s biggest banks, measured by total assets. Mortgages are nearly 60% of banks’ assets. So they slugged it out, and then Building Societies were allowed to become banks which meant they could start manufacturing money. Thus regardless of employment levels the wall of money was created.

In the early nineties Barclays and NatWest were close to insolvent due to reckless lending and the fall in interest rates reducing profit margins. Also Basle1 came into force which required them to be more prudent. I conclude that unemployment has little or no impact on prices but a recession does reduce the number of transactions. Assuming no national lockdown the UK economy will grow 10% next year despite job losses. Today’s money supply determines next year’s average house price. Money is virtually free and will remain so for the next two years. This means house prices next year will rise between 5 and 8%. For a change London will suffer but relatively depressed rural areas will boom. I accept that airport-dependent places such as Crawley and Luton will suffer.

Covid will do more to ‘level up’ between the regions than Government policy.

But you will say, this is all well and good, but it’s the deposit requirement which prevents youngsters from buying. Thanks to Covid many of the 25-34 year olds have been forced to save because of lockdowns. And many have had no commuting expense. And the bank of mum and dad has higher cash levels than normal. Why hold cash earning 0.1% when you can help a sibling get a house? If inflation doubles next year to 4%, the desire to buy property will increase. An inflating capital asset which is tax free. I rest my case.

Rising house prices increases consumer confidence via the wealth effect. Evidence suggests that households hold very little precautionary saving if their main asset is growing in value. Given the structural changes taking place, its likely half retail spend will be online by the end of 2021. The outlook for commercial property is a different ball game. Large sheds for online retail will still be in demand but city centre retail and office space will not. So we can expect both rent and capital values to fall on the latter. Some suggest by 20%.

Creative Destruction

An Austrian economist, E.F. Schumaker, was fascinated by innovation as a cause and effect in economic growth. He concluded that whereas inventions are random, innovations (which is an invention put to use) seem to cluster at particular points in time. We have known since 1922 that there are long waves in economic life which are around 50 years in duration. There are 30 years of above trend growth followed by 20 years of below trend. Its during below trend periods that clustering takes place and it is this which creates the next above trend wave of growth.

Since 2008 Western Economies have been below trend growth and Covid is accelerating technological change. There are many examples but the one I would like to mention is Quantum Computing. It is going to be the next big thing over the next 10 years. Google has already demonstrated a machine which within a few minutes made a calculation which would take thousands of years on current classical hardware. The ability to crunch masses of data at speed will transform everything in particular the application of AI and the Internet of Things.

BUT for success a large number of related and supporting activities have to be combined. This is why science parks next to Universities are so important and why silicon valleys exist. It is the combining of discrete activities which creates the wave. And destroys the old way of working. The resulting productivity gains simultaneously increase GDP per capita and structural unemployment.

The next 18 months:

Take a look at the chart. Normally the red line moves in line with the black line because when a bank lends it creates the money. When banks stop lending, as in 2011-2014, the central bank has to take over by creating new money which it uses to buy mostly Government debt. Covid has required more money than the commercial banks are willing to create so the Bank of England is creating it. We know so far Covid has cost £3k per person. None of this is funded from taxes, all of it has come from the Bank, in total just under £200Bn.

The crucial point is this is the equivalent of giving every citizen £3k to spend. Over the next 18 months I am convinced there will be another £1.5k per person spent by the Government and financed by the Bank. Remember debt = money. This is the largest economic stimulus we have seen since WW2.

Only when the new money is flowing freely through our economy will the Government claw some of it back through higher taxes. Next year Boris has to show the nation and the EU that the UK performs better outside the club than within it. Hence the stimulus will be maintained until higher growth is a reality.

There has been talk of negative interest rates, which is a system where you pay the bank to deposit money and they pay you to borrow. It is designed to stimulate bank lending and money creation. The chart above is clear: we do not need further monetary stimulus. So negative interest rates will not happen in the UK.

If inflation rises next year, will interest rates follow? No, because it is likely that the B of E will look at average inflation over a number of years before changing rates. The Fed has just adopted this approach in the USA. So money will be virtually free for the next 18 months.

The exchange rate illustrates how much political risk plays a role when the financial variables are similar. There will be a deal with the EU, so Sterling strengthens, then Boris says he will walk away and it weakens. Similarly with Trump’s utterances for the dollar.

I guess at a range of $1.30-1.38 and Euro 1.10-1.15 And as you can see I still expect strong growth next year. The IMF forecast is for global growth to be back at pre-Covid levels by the end of this year. Currently we are at 95% of pre-Covid output.

The performance of our economy over the next 18 months will depend on attitude. I am fortunate enough to be in touch with a range of SME owners in the UK. Their resilience, adaptability, and care for their employees is remarkable. And they are already trialling new business models with considerable success. As SMEs produce 60% of our national income their performance is critical. My optimism is the result of the attitude of these leaders: they do not whinge, moan, or give up.

They think, act, and create sustainable businesses. Some work in the hospitality sector and they are succeeding.  I do not believe in Boris’s bluster, but if the media would publish more good news stories I believe it would have a more positive effect on attitude in general. Finally, there will be a bare bones trade deal with the EU, neither side can afford not to, but the detail will take years to settle. And yes there will effectively be a border in the Irish Sea.

The Bottom Line: Why Shrewd Customers Use An Adviser | Independent Financial Adviser

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By Grant Ellis, Director Ellis Bates Group

Let’s face it – Financial Advisers have a bit of an image problem. In the public’s mind they probably rank alongside bankers, second-hand car dealers and estate agents in the trustworthiness stakes, and every investment fraud and mis-selling scandal that’s gleefully reported by the press does nothing to improve this. Then there’s the thorny issue of fees, and the anecdotal view that Adviser fees are unjustifiably high, and that they’re all simply out to line their own pockets at the customer’s expense.

So, is this image and reputation deserved? Should Financial Advisers be viewed with suspicion or is this all a myth? Let’s take a look at a few facts.

In 2017 the ILC-UK published its report The Value of Financial Advice, which quantified, for the first time, the real value of taking financial advice. The results strongly demonstrate the positive value of financial advice for consumers – both amongst those who are wealthy and those less well-off too.

The report concluded that those who were wealthy and took financial advice accumulated 17% more in liquid financial assets and 16% more in pension wealth than those who hadn’t consulted an Adviser. For those ‘just getting by’ the figures were even more dramatic – 39% more liquid assets and 21% more pension wealth for those who took advice; all more than enough to justify the fees charged by the Adviser.

Alongside demonstrating real value for their customers, evidence from this report also reveals that the experience of taking advice is highly satisfactory – 9 in 10 people were satisfied with the advice received with the vast majority deciding to go with their Adviser’s recommendation.

In December last year ILC-UK issued an updated analysis which not only reinforced their 2017 findings but in addition demonstrated that fostering an ongoing relationship with a Financial Adviser leads to even better financial outcomes. For example, those who reported receiving advice at both time points in ILC’s analysis had nearly 50% higher average pension wealth than those only advised at the start.

So, given this independent assessment, it begs the question why Advisers have such a poor image, and since advice has clear benefits for customers, why more people don’t seek it? The ILC-UK report sheds some light on this too.

The two most powerful driving forces of whether people sought advice were whether the individual trusts the Adviser providing the advice and that individual’s level of financial capability. Clearly therefore the more Advisers can demonstrate trustworthiness, the more likely they are to attract customers.

There are a number of ways you can assess an Adviser’s credentials – checking they are actually on the FCA register and how long they have been in business is a good starting point. The most effective check however is to ask their customers. Get the prospective Adviser to give you testimonials from satisfied customers along with the number and scoring of verified reviews they’ve had from clients.  At Ellis Bates Financial Advisers we encourage all our customers to leave a review of the service they have received with an independent review company. Check out the following link for more information https://www.ellisbates.com/about/reviews/

The International Longevity Centre UK (ILC) is the UK’s specialist think tank on the impact of longevity on society. The ILC was established in 1997, as one of the founder members of the International Longevity Centre Global Alliance, an international network on longevity.

Ellis Bates Financial Advisers are independent financial advisers with offices across the United Kingdom.  They specialise in active investment management of over £1 billion of assets on behalf of clients, who have given them a 4.9/5.00 score with Trustist. https://www.ellisbates.com/about/reviews/

For more information please visit their website www.ellisbates.com

Market Commentary – July 2020

560 315 Eleonore Bylo

Navigating Change (Again)

“She stood in the storm, and when the wind did not blow her way, she adjusted her sails.” – Elizabeth Edwards

2020 has been interesting. To the end of June, year to date our Growth, SRI (Socially Responsible Investment) and Passive portfolios are effectively flat and ahead of benchmarks (and significantly also over 1 / 3 / 5 year timescales) although the journey has clearly been anything but steady. The Income portfolios have been more adversely affected as companies have reduced / cancelled dividends, while withdrawing forward guidance on earnings and income forecasts – effectively leaving a void where previously there was generally boring certainty and stability. Interest rates are verging on negative, oil futures in the US briefly went negative, the Federal Reserve is buying junk bonds, and in the UK, the government is offering £10 discounts on your meals out (Mon-Wed throughout August at all participating restaurants). I do not recall any of this being covered in my Economics A-Level back in the early 1990s. Some updated textbooks (digital of course) and theories will be needed for the current crop of home-schooled students.

Change is always fascinating and that is exactly what we have got. What the digital age ensures is that change is at a much-accelerated pace, and adoption of new technologies is often far quicker than anticipated, while necessity is still the mother of invention. This is demonstrated in the data from the Office of National Statistics (below) showing the sharp rise in “Non-Store retailing” (i.e. online) as the Covid-19 economic shutdown forced shoppers to opt for delivered goods and abandon reliance on traditional physical stores.

Figure 1: A sharp uplift to already increasing sales for non-store retailing during the coronovirus pandemic, while non-food stores and fuel show growth in May 2020 from the lowest levels on record in April

This change in purchasing behaviour is likely to be a continuing trend although the non-food and fuel sales will probably rise to a more normalised level while still falling ever further behind online activity. The adoption of all things digital and the move to a cashless society is likely to accelerate further which will present clear challenges and opportunities depending on the relevant business sector. This helps explain the drastic variation of fortunes in the outlook and share prices of various businesses over recent months, with exuberance and despair seemingly the two overriding moods of the markets.

The punishment for being in unfavoured sectors of the market has been brutal, and the UK stock indices have suffered more than most. In our own portfolios the bottom performing fund this year has been a UK focused income fund concentrating on smaller companies, while the top a global technology holding – with a 70% disparity of returns between the two over the first 6 months of 2020.  The economic data, as expected, has been appalling with the UK registering its biggest ever monthly drop in GDP in April (-20.4%) and the rise in unemployment levels globally seem set to escalate. The unprecedented steps taken by the Chancellor in the UK to support jobs highlights the concerns the government has about the inevitable impending increase in unemployment, particularly when the furlough support ceases and if further lockdown periods are deemed necessary.

However, there is some optimism that the recession may have already hit its worst, and while the return to previous levels of economic activity and employment may take considerable time, signs are that we are on an upward trajectory. Of the largest 12 global economies, 6 now have readings in excess of 50 on the Manufacturing Purchasing Managers Index – readings over 50 signal expansion. This supports some views that this will be a savage, but brief recession and while economic activity may recover quickly, the labour market globally may be more severely affected.

The continued role of central bankers and their “blank cheque” mentality is providing much needed liquidity in the markets and, potentially, supporting sentiment as the fastest correction in the S&P 500 in history was followed by its biggest ever 50 day rally. Jerome Powell, Chair of the US Federal Reserve, gave this unequivocal statement at his Congressional Testimony in June:

“The Federal Reserve is strongly committed to using our tools to do whatever we can for as long as it takes to provide some relief and stability to ensure that the recovery will be as strong as possible and to limit lasting damage to the economy. The Fed will continue to use these powers forcefully, proactively, and aggressively until we’re confident that the nation is solidly on the road to recovery.”

The mantra of “don’t fight the Fed” may be in play for now, but relying entirely on emergency measures from central banks and governments would be careless when perennial issues such as Brexit, the China vs US trade dispute and the small matter of a US election in November will add further uncertainty to the current situation. There is also the question of who is going to foot the bill for furlough benefits, SDLT holidays, and the endless monetary expansion that will create unprecedented levels of debt? Longer term there are implications, with the most material impact likely to revolve around whether prolonged low growth and deflation or inflation will be more prevalent. There are legitimate arguments for either outcome, but clearly the ramifications will be significant.

We are in a period of substantial change, and the mistake is to think that change is not normal – a simple glance through history shows it is ever present. While on an individual basis we grow accustomed to our own ways and preferences, humanity invariably collectively advances through forces of supply, demand and genetic desires that are impossible to rationalise into a simple formula. The combination of data-driven statistical theory aligned with the gloriously idiosyncratic behaviour of individuals is what makes the investment markets so fascinating and unpredictable.

One of the joys of investing is that occasionally when the wind blows a different way you can adjust your position if needed. The next 12 months will be intriguing as we adapt to different economic realities – but we will adapt and much of the change is merely accelerating the trends that were already in place. Given the increased uncertainties and extremes in valuations of various assets we believe adopting a well-diversified approach and incorporating the skills of some excellent fund managers will continue to protect and enhance our client’s financial wellbeing.

This is something we have done since we were established in 1980, and it is reasonable to assume our 40th year has given us, and our clients, a new challenge or two. We have addressed these in the same manner as all the others in the previous four decades by acting in the best interests of our clients, thinking of the long term, and dealing with reality. We are in a privileged position to have been trusted with safeguarding the futures of our clients and multiple generations of their families for 40 years – we look forward to many more in an ever-evolving world.

Please note any past performance mentioned is not a guide to future performance and may not be repeated. Any sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered advice, nor a recommendation to buy or sell.

Alan Cram – Investment Director
Ellis Bates Financial Advisers

The Ugly Truth About Investment Loyalty | Independent Financial Adviser

560 315 Eleonore Bylo

By Grant Ellis, Director Ellis Bates Group

I’ve been a Manchester City fan since 1970.  I chose to support them as all my friends were either Leeds United or Manchester United fans, and Manchester City were an attractive footballing alternative who were having a bit of success at the time, winning the league and the FA Cup in consecutive years.  However, just as I formed my allegiance to them their success dried up and apart from a couple of cup runs they remained relatively unsuccessful until 2011.  You know what it’s like though – once you’ve made your choice of team it’s incumbent upon you to stick with them through thick and thin.  After all that’s what supporting a football team is all about; you make your choice, and for better or worse you remain loyal to them whatever happens.

Just imagine though if I’d been prepared to switch my support between different teams over the years based on their performance, rather than simply sticking with Manchester City?  Had I for example, switched to a blend of Liverpool and Leeds Utd in the 70’s, Liverpool and Everton or Arsenal in the 80’s and Manchester Utd and Arsenal in the 90’s and noughties before reverting to Manchester City, I would have enjoyed way more success as a result.  Between them they were either first or second in the league every year throughout that period, winning numerous cups long the way too.

And it would have been quite possible to chose those clubs based on their results, coupled with a bit of football nouse.  Indeed, the pundits have only failed to predict all the top teams in a couple of the last 40 plus years, most recently when Leicester surprised everyone by winning the league in 2016.  In virtually all other seasons the top three or four teams have been easily identifiable by those with the experience and expertise to pick them out.

Now, being a football supporter is an entirely emotive decision, which is why we tend to stay loyal to one particular club.  So why do many of us behave like football fans when it comes to choosing Fund Managers to look after our investments?  That shouldn’t be an emotive decision at all, yet far too often we hold off moving our money when results are not going the way they should and there are better alternatives available.

Now, I do understand that everyone can go through a bit of a lean period, and sometimes it is better to give your incumbent the benefit of the doubt for a time.  Clearly that is not always the case, as the recent fall from grace of the one time darling of the investment world, Neil Woodford, is a timely reminder.

So when it comes to your money surely the key is to make evidence backed, emotion free informed decisions about switching, and on a regular basis?  Of course, not all of us have the time or the expertise to do this which is why many of us chose an Adviser to do it for us.

Choosing an Adviser wisely is clearly important, as they will of course charge for this service, but it is not all about the cost; it’s about value for money.  Look for an Adviser with a dedicated investment department, with full time, daily focus on the investment performance of their panel funds.  Get them to give you testimonials from satisfied customers along with the number and scoring of verified reviews they’ve had from clients, and ask them about their recent investment performance. They should also be prepared to back up their claims about investment success with hard facts which clearly demonstrate they are indeed followers of the latest winners and not blindly loyal, or just plain lazy.

And choosing winners works whether you’re a fan of active or passive funds, so this sort of support can work whatever your investment philosophy.  Check out the following link for more information https://www.ellisbates.com/individuals/investments/

Of course, being a Manchester City fan is now much more enjoyable than it was 30 years ago, but one thing I have learnt in the past 50 years is that I can’t and won’t take their recent success for granted and I know it won’t last for ever.  I am enjoying it whilst it does though!

Ellis Bates Financial Advisers are Independent Financial Advisers with offices across the United Kingdom.  They specialise in active investment management of over £1 billion of assets on behalf of clients, who have given them a 4.9/5.00 score with Trustist.  https://www.ellisbates.com/about/reviews/

For more information please visit their website www.ellisbates.com

The Big ‘Lies’ About Our Economic Prospects

560 315 Eleonore Bylo

By Grant Ellis, Director Ellis Bates Group

In the spring of 2007 I hosted a conference for a group of insurance professionals. One of the most popular speakers was my old friend the economist Roger Martin-Fagg. He was his usual entertaining self, but took everyone by surprise by suggesting that the world economy was on the brink of a meltdown the like of which we had never seen before, and it was going to happen soon – probably within 12 months. Yes, he predicted the financial crash of 2008 a year before it actually happened.

Now in Spring 2007 the world economy was doing very nicely thank you. Following three consecutive years of good growth, averaging 3.8% it was expected to fall only slightly in 2007 to 3.6%. Meanwhile the UK was doing pretty well too. House prices had risen from an average of £150,633 in January 2005 to £184,330 in May 2007 – a rise of 22.4%, whilst wages grew by an average of over 5% per annum between 2004 and 2007. Inflation on the other hand was under control and only rose by an average of 3.25% in the same period. Furthermore, between 2003 and 2007 the FTSE All Share Index grew by 49%, so overall everyone was feeling pretty optimistic about the prospects for the future. No one, other than Roger was saying anything about a recession, never mind a full blown crash!

So, when Roger issued his dire warning, the overwhelming response was to laugh it off – in the same way that we would laugh at a soothsayer predicting the end of the world. Eccentric yes, and likely to happen eventually, just not anytime soon.

You can imagine that those of us who were there in 2007 are far less likely to write off Roger’s opinions now than we would have done previously.

I was therefore pleasantly surprised, and heartened to receive his latest Economic update, penned on 16 June. Once again he is at odds with the mainstream view, and indeed is critical of others talking world economic prospects down. He opens his piece by saying that the press is being irresponsible in the way it is reporting our economic outlook. His opening paragraph reads:

“Last weekend the Daily Telegraph had a banner headline: ‘Britain’s biggest ever collapse in GDP wipes out 18 years of growth’. This statement is completely wrong. I am concerned that individuals who are trying to make the right judgement call are being fed this nonsense. To be clear: 18 years ago our GDP was £1 trillion. It is now £2.2 trillion. The reduction in spending in April was 20% on the previous April. The monthly flow of spending averages £200bn. 20% of that is £40bn. The media, as we know, impact emotion and decision taking. That Telegraph article is therefore both economically illiterate and irresponsible.”

Wow! Hard hitting stuff. And the perpetuation of such comments is still evident a week later. In the Sunday Times on 21 June Sajid Javid is quoted as saying:

“We’ve seen a 25% fall in GDP in two months. To put that in some perspective, that is 18 years of growth wiped out in two months.”

And that’s from our erstwhile Chancellor of the Exchequer, who should be anything but economically illiterate!

In his update Roger goes on to suggest that, despite what the world and his wife are saying, we are not going to have a recession. Indeed, whilst he acknowledges that quarter 2 of 2020 will be significantly negative, he expects quarter 3 to be significantly positive, and predicts that the UK economy could grow by 8.5% in 2021, with the World economy back to 2.5% growth next year too.

His argument is that the fundamentals for a recession don’t exist in the same way as they did for previous recessions; rising prices and interest rates squeezing individuals and companies alike in 1979 and 1989, and banks stopping lending in 2008.  The common factor is a shortage of money available, and that’s not the case this time around. Households have seen a reduction in income, but a larger fall in what they’ve spent, and the UK Government is spending an extra £40bn a month pumping new money into the system, so no shortage here. Roger predicts a mini boom to take off in the next few months as a result of this excess cash in the system, with the only thing that could dampen it being the media reporting company closures, an increase in the R well above 1, and stories of mass redundancies.

I don’t propose to reproduce all Roger’s arguments here – you can read the whole article at https://www.ellisbates.com/news/june-2020-economic-update/ to get the complete picture, but I would say his reasoning and logic are very persuasive. And I for one would not bet against him. I also fully endorse his condemnation of sensationalist reporting in the media. They have to take more responsibility for the message they send out as, rightly or wrongly, people do listen to them. A more evenhanded and less melodramatic approach to reporting would benefit us all. After all, we all know the power of ‘fake news’ by now, don’t we?

Ellis Bates Financial Advisers are Independent Financial Advisers with offices across the United Kingdom. They manage over £1 billion of assets on behalf of clients, who have given them a 4.9/5.00 score with Trustist. https://www.ellisbates.com/about/reviews/

For more information please visit their website www.ellisbates.com

Sources:
World Economic Situation and Prospects 2007 (United Nations publication, Sales No. E.07.II.C.2), released in January 2007 accessed on 21 June 2020

Office of National Statistics UK House Price Index, accessed on 21 June 2020
Office of National Statistics Wages and Salaries average growth rate percentage, accessed on 21 June 2020
Office of National Statistics RPI All Items: Percentage change over 12 months, accessed on 21 June 2020
Swanlowpark.co.uk FTSE 100 and FTSE All-Share since 1985, accessed, on 21 June 2020