Chancellor George Osborne is offered plenty of advice ahead of Wednesday’s Budget

In this week’s bulletin:

  • Markets maintain their momentum although news from Cyprus sets an unnerving precedent
  • Central banks’ actions continue to come under scrutiny
  • Chancellor George Osborne is offered plenty of advice ahead of Wednesday’s Budget
  • 18 days left to make the most of available tax reliefs and allowances


‘Beware the Ides of March’

  • Markets maintain their momentum although news from Cyprus sets an unnerving precedent

The warning seems to have been ignored by equity markets as they continued their upward momentum last week. By Thursday, the narrow Dow Jones Industrial Average hit another all-time high, recording 10 straight days of gains for the first time since 1996. The broader S&P 500 Index was just two points from its record high before a small sell-off on Friday.

In the UK, the FTSE 100 ended the week marginally up at 6,489 after earlier in the week hitting highs not seen since the start of the financial crisis in late 2007. Markets across the globe continued to hit multi-year highs, with Japan particularly strong: it bucked Friday’s sell-off by jumping 1.45% to 12,560. This was after the government upgraded its view on the economy, and the expansionary-leaning Haruhiko Kuroda was confirmed as the governor of the Japanese central bank (more later on central bankers).

Global stock markets are up an impressive 28.9% since their June 2012 low, at the height of the eurozone crisis. One of the consequences of this growing confidence was the fall of the VIX (the so-called ‘fear index’) to a six-year low – reflecting a move away from the risk on/risk off macro bets which tend to drive all stocks up or down in tandem and a return to emphasis on individual company fundamentals – hopefully good news for active stock-picking investment managers.

But, of course, the nature of markets is that there is always a surprise around the corner and so it proved over the weekend with news that the government of Cyprus is seeking to introduce a levy on all bank deposits to fund a rescue package for the nation’s economy. The reaction, far out of keeping with the importance of Cyprus to the global economy, reflects the concern that this sets a precedent which could be repeated in other troubled countries, leading to a run on the banking system. Whilst down c.1%, equity markets have been fairly restrained in early trading.

On the economic front, data from the US unexpectedly showed jobless claims falling, another small indication of improving economic conditions in the world’s largest economy. However, in stark contrast, figures by Eurostat showed that employment in the eurozone fell by 0.3% in the final quarter of 2012 – with the pain being felt most strongly in the southern countries of Spain, Portugal and Greece. Even German Chancellor Angela Merkel, the architect of austerity, argued at a meeting of eurozone leaders for the need of more growth-orientated policies as the recession in the trading bloc continues to deepen.


‘Don’t fight the Fed’

  • Central banks’ actions continue to come under scrutiny

This has long been a maxim in financial markets and, reflecting on markets since June of last year, it should be extended to central bankers globally. The chart below outlines the concerted efforts by authorities in recent months and the impact these measures have had on the equity markets.


And in an unusual bout of public optimism, the outgoing governor of the Bank of England, Mervyn King, declared that the recovery is now “in sight” and that momentum would continue to build during 2013. He did warn about the need to continue to take steps to improve the credit supply and this is a point taken up by John Wood at J O Hambro Capital Management.

“UK share prices are climbing but the UK economy remains anaemic. Part of the problem for the stagnant domestic economy is the failure of the credit transmission mechanism. Monetary policy may be ultra-loose but this isn’t being reflected in increased lending by the UK banking sector. The failure thus far of the government’s Funding for Lending Scheme (FLS) underlines the impaired nature of the credit function. Latest quarterly figures revealed that bank lending to businesses and homeowners fell by £2.4 billion in the final quarter of 2012. This was despite participants in the FLS drawing down £9.5 billion of available funds. Meaningful economic growth will remain hard to come by until banks are once again prepared to lend to businesses.”

The governor also appeared to retreat from his previous attempts to talk down the pound, saying that, after its recent falls, the UK currency was now probably ‘properly valued’. This firmer stance on sterling was also driven home by the Bank’s chief economist, Spencer Dale, who warned against a move to focus on growth rather than inflation. At a conference of Far Eastern businessmen, Mr Dale opined that the best a central bank could offer to support “a prosperous and vibrant economy was to deliver enduring price stability”. The insidious long-term effect of inflation on standards of living and real investment returns is something we have long cautioned investors about.


Whereto growth?

  • Chancellor George Osborne is offered plenty of advice ahead of Wednesday’s Budget

So with central banks appearing to step back from policies designed to stimulate growth, it is left to the Chancellor in his Budget later this week. Unsurprisingly, Mr Osborne has not been short of advisers, welcome or not. Writing in the Sunday Times, David Smith outlines the challenges the Chancellor faces with weak economic growth threatening a ‘triple dip’ and borrowing still running ahead of his forecasts made as recently as December. Recognising the tough task, Smith advocates a combination of incentives to encourage firms to invest in new capacity, homeowners to invest in “job-generating home improvements” and, perhaps more controversially, a commitment to infrastructure spending via a third runway at Heathrow.

In the Financial Times, leading accountants highlighted other potential measures including a reduction in CGT to increase incentives for individuals to invest and the continued tightening of anti-avoidance rules to increase the tax take. No doubt all will be revealed on Wednesday and, as always, we will provide clients with a detailed analysis of whatever measures are introduced on Thursday.


Year-end tax planning

  • 18 days left to make the most of available tax reliefs and allowances

As ever, the speculation on the Budget coincides with the rapidly approaching end of the tax year; and the newspapers are full of stories highlighting the benefit of using the various tax reliefs and allowances available, in particular the ISA allowance, set at £11,280 for this year and £11,520 for next. Yet with the vast majority of savings accounts paying less than the rate of inflation, it remains surprising that 80% of all ISAs are cash-based (source: HMRC, September 2012), where the allowance is limited to £5,640, rather than the stocks and shares alternative where the prospects of CGT-free gains and no further tax payable on dividends really benefit investors over time. Anyone looking to make use of their allowance needs to act quickly, with only 18 days until tax year-end.

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