The week also saw the start of the ECB’s quantitative easing (QE) programme

In this week’s bulletin:

  • Euphoric Europe?
  • US equities lose ground but the start of the ECB’s long-awaited quantitative easing programme supports further gains in European markets.
  • Oil prices retreat again, putting pressure on energy stocks.
  • New pension freedoms come into focus as the Chancellor prepares to deliver Wednesday’s Budget.
  • Maximising ISA allowances could see investors hit the magic million within three decades.
  • Strong balance sheets and profits bolster prospects for UK dividends.

 

Euphoric Europe?

US equities suffered a third consecutive week of losses as investors focused squarely on the Federal Reserve’s next move. Despite positive results from the second round of stress-tests on US banks and increased M&A activity within the healthcare sector, retail sales figures for February were weak and concerns over falling oil prices weighed on market sentiment. The S&P 500 index has fallen back 3% from the record closing high posted at the start of the month and is now under water compared to where it finished 2014.

The price of Brent crude fell to $54.67 a barrel, down 8.5% over the course of the week – although still notably higher than the six-year low of $45.19 in January. Energy stocks, in particular, felt the pressure as the week progressed. Eni, the Italian oil major, became the first of the world’s biggest energy companies to cut its dividend after the near-50% fall in oil prices.

The week also saw the start of the ECB’s quantitative easing (QE) programme. The first instalment of the €60-billion-a-month government debt and asset-purchase scheme seemed to have a positive impact and added further momentum to the recent rally in European equities. The pan-European FTSEurofirst 300 Index gained 0.5% over the week, its sixth consecutive weekly rise, closing at a new seven-year high and up more than 15% since the turn of the year.

Data from EPFR Global shows that investors have seen record cash flows into eurozone equity funds this year. Commentators point to the eventual commencement of the ECB’s monetary stimulus package, weakening of the euro (boosting European companies by making their exports more competitive) and signs of a burgeoning recovery for the region as the reasons for the surge in interest.

But it’s not just the multinationals where the opportunities exist, as Stuart Mitchell of S. W. Mitchell Capital observed: “For us, the most fascinating thing is to look at domestic Europe – the large construction companies, house builders and utilities companies; those companies which make 70, 80, even 90% of their sales within Europe. Current valuations are around 50% of those of their competitors in the US. Our view is that, as the investment community becomes more confident with what’s happening in Greece and the broader recovery in Europe, that gap will narrow very fast.”

Elsewhere, the Japanese benchmark Nikkei 225 joined in the positive mood, gaining 1.4% over the week to finish above 19,000 for the first time in 15 years.

 

Crystal balls

On home shores, the FTSE 100 closed down nearly 2.5% over the week – its biggest weekly decline so far in 2015 – as the strength of the dollar pressured the mining and oil sectors, and utilities endured another weak showing.

This week, however, all eyes turn to the House of Commons as Chancellor George Osborne delivers his third Budget speech. On the heels of the overhaul of the pension system in 2014 and reform of the stamp duty regime in last year’s Autumn Statement, opinion is divided on whether there will be further surprises when Mr Osborne takes centre-stage at lunchtime on Wednesday, although he has already confirmed plans to allow pensioners to cash in annuities from 2016.

Given that the general election is primed for just a couple of months’ time, there could be a twist in the tale with some commentators suggesting that the Chancellor has changes to Inheritance Tax firmly in his sights. Yet, for now, many are still working through the opportunities and implications of the changes to the pensions regulations due to take effect from 6 April.

As a timely warning of the possible unintended consequences of those changes, Martin Wheatley, head of the Financial Conduct Authority, referred to the “frankly, unchartered territory” of the “profound political reform of UK pensions” when addressing the National Association of Pension Funds conference in Edinburgh last week. The industry is clear that advice, rather than guidance, will become invaluable as the additional flexibility in the pension rules creates an ever more complex backdrop for those reaching or considering retirement.

 

Who wants to be an ISA millionaire?

According to calculations by Fidelity, assuming inflation-linked increases to subscription rates and long-term average stock market returns, it will take an ISA investor just under 28 years to hit the magic seven figures. With the end of the tax year rapidly approaching, this statistic may provide inspiration for those yet to make use of their annual allowance before the 5 April deadline.

The financial benefits of utilising your annual ISA allowance are well-known, yet few appreciate the scale of the cost borne by the Treasury for providing these tax reliefs to investors, which is estimated to be more than £2.5 billion per year. Although the allowance is £15,000, the average investment into a Stocks & Shares ISA was just £6,163 in the 2013/14 tax year.

With the average interest rate for Cash ISAs currently just 1.02%, investors planning to use this valuable allowance as part of a longer-term strategy should consider maximising the amount invested into real assets. Equities, fixed-interest securities and commercial property all offer the potential for capital growth alongside income generated from dividends, coupon payments and rental income, respectively.

 

Income outlook

Whilst Wednesday’s Budget may have significant but unknown ramifications for the result of the general election in May, one constant – for now at least – seems to be the continuation of ultra-low interest rates here in the UK. Earlier this month, the Bank of England’s Monetary Policy Committee confirmed that base rates would remain at 0.5% – a situation that is now into its seventh year.

Faced with near-zero returns on cash, income-seeking investors have increasingly turned to other sources, with commercial property, fixed interest and equities all offering alternatives. Richard Peirson of AXA Framlington is optimistic on the outlook for dividend income growth. “I think the outlook for dividends in 2015, certainly for the UK and most of the major markets, is actually quite good. Companies are financially in great shape; their balance sheets are strong and profits are at very high levels. If you look at the UK, dividends should grow this year by between 5 and 8%.”

In the UK, the top 15 companies are responsible for around 57% of the total dividend income, with a concentration towards oil, mining and banking stocks. Despite the recent falls in the oil price, Peirson remains confident in the ability of some of those companies to maintain dividend levels. “The dividends are sustainable providing the oil price doesn’t lurch down again. We’ve met with the top management of some of these companies in recent weeks and their balance sheets are so strong that even if earnings don’t cover dividends, they are still likely to be paid this year.” Peirson also noted there are positives elsewhere, with a familiar name returning to the fold. “Lloyds will return to the dividends list with a decent payment this year, so there are areas where we should see some growth.”

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