Newsletter – January 2017

Well, we can’t say that last year was uneventful! It certainly kept us, and I’m sure you also, on our toes!

There have been numerous events worldwide over the past year that have affected the markets, but the two that stand out are the EU referendum and the US presidential election. The results of both were equally shocking – not just the results themselves but also the lack of large-scale immediate effects. Both events left us feeling that a new apocalyptic world had dawned and yet little seemed to have changed, either in the world or more specifically in the markets. Yes, ripples were felt and there were rumblings underground, but nothing like the extreme falls and losses that we were dreading.

So how did the events of 2016 affect us? Sterling has certainly felt the effects and is currently down more than 15% against the dollar. This is bad news for consumer products and we can expect to see sharp price increases over the coming years. It also means that interest rates will fall, so your money in the bank will be worth even less (if that is possible!).

The stock markets have been more volatile, as was to be expected. However, the British economy has continued to grow and this has bolstered performance and lessened the effect of some of the more harsh blows. The fall in sterling also means that share companies are benefiting from the currency exchange, boosting their profits and share prices, counteracting any negative market movements – particularly for those based mostly in mining and oil production. In fact, on the last day of Trading in 2016 these companies reached a record high, so let’s hope the growth we have seen in January 2017 continues.

2017 is sure to be just as interesting as 2016, as we begin negotiations to leave the EU. But amongst the uncertainly there will always be scope for market growth, which our Market Led portfolio’s will gain the advantage of.

Well it’s been nearly 10 years since the financial crisis of 2007/2008 resulted in the collapse of the global financial system. And it’s only now that some of the companies involved in selling the products that caused such widespread chaos are being held accountable. 

Germany’s Deutsche Bank has agreed to pay $7.2 billion dollars to the US Department of Justice, relating to an investigation into mortgage-backed securities within deals made during 2005–2007. Several banks including Deutsche Bank were, and continue to be, scrutinised for providing mortgages to those who could never afford them, repackaging the loans as ‘safe’ investments and selling their risk on to others.

The original fine due to be imposed on Deutsche Bank was in the region of $14 billion, so you could say that they got off lightly, having to pay just $7.2 billion. And, considering that they only have to pay $3.1 billion of that in actual cash, the other portion being made up in ‘consumer relief’ over a number of years, I think they were very lucky indeed. Deutsche Bank are said to be relieved at the outcome, acknowledging that it could have been worse. Perhaps the lenient sentence should have been tougher, to hit the bank much harder and encourage more of a sense of remorse than we are seeing? But they are banks at the end of the day; my expectations may be a little high!

Deutsche Bank is not alone – far from it! Credit Suisse has agreed to pay $5.28 billion in a separate, but not dissimilar, dispute with the US authorities; of this amount only $2.5 billion will be payable in cash. The USA now has Barclays in its sights for alleged mortgage securities fraud and will be bringing a lawsuit against the bank shortly, also in relation to the financial crisis of 2007/2008.

There are still more! Citigroup had their $12 billion fine reduced to $7 billion. Back in 2013 JP Morgan Chase was fined $13 billion, and the Bank of America paid $16.7 billion in the same year. Goldman Sachs also agreed a settlement of $5.1 billion in January 2016. I am sure more settlements were made in the past and there are no doubt others to be made in the future. Whilst we hope that this action will go a long way to preventing such a crisis reoccurring in the future, I would rather not bet my life savings on it and I would suggest you don’t either!

Speaking of cracking down, the UK seems to have followed suit and has announced tougher fines as part of a crackdown on tax evasion. The move was actually announced back in 2015, but it is now in force as of 1 January 2017. 

Fines have been increased to 100% of the tax evasion amount or £3000, whichever is higher. If you were going to try to evade tax, you would think it would be for a much higher sum than £3000! In addition to the fines, the perpetrators will be publicly named and shamed – something the press ensures happens in many instances anyway.

This new tough regime is aimed at tackling evasion and aggressive avoidance, something that we completely agree is wrong in all cases. If the move does reduce the amount of unpaid tax it will obviously have a positive effect on the economy and will make for a much fairer tax environment for those that pay up and on time.

There have been many plans to crack down on such activity in the past, most of which seemed half-hearted and a little lacklustre. The term ‘evade’ obviously means that those doing the evading will not leave a trail of breadcrumbs for the authorities to easily find their candy house full of bank notes. But we have seen in previous reports, documentaries and announcements that too many people are being caught red-handed but the prosecution and follow-through has just not been there.

Good luck to those in charge of this new venture, it will certainly be interesting to see if it has a noticeable effect. We will most certainly be watching.

So the FTSE ended the year on a high and some would say, ‘why didn’t we just invest in the FTSE?’ But, as always, what is reported is never the whole truth. 

The FTSE ended the year at 7142.83, recovering from its slump to the highs we saw at the end of 2015. But is this good?

Well, considering it was just below the 7000 mark back in the years 1999/2000, then you could say it hasn’t made anything in almost 18 years! Like any other investment, it has its ups and downs, and so you could get lucky and invest at a low point and sell at a high point. But this is a dangerous strategy and highly unlikely to be achievable.

So, if you had invested in the FTSE from 1999 until today, other than the dividends you received (approx. 2%) you would have made next to nothing. And that is why we don’t just invest in the FTSE, because if it was that easy everyone would be doing it.

As you know following a sound, well thought through and robust investment philosophy based around Market Return portfolio’s on a global asset allocation basis is a strategy which is academically and evidence proven and which you have adopted through our advice. Please click here to see a copy of the Polestar Investment Philosophy.

House prices continued to grow steadily throughout 2016 despite the market volatility, averaging 4.5% nationally over the last 12 months.

However, this period of steady increase is set to slow, according to the Nationwide Building Society, who expect the average growth in 2017 to be at a more modest level of 2%. It is reported that these reductions in growth are already evident across London and, for the first time since 2008, average house price increase in London was lower than the UK average at 3.7%.

Prospects for house prices in 2017 are largely unknown and will depend on what happens across the economy, which is currently full of uncertainty. However, the Bank of England believes that a small increase is more likely than a decline, with the housing shortage supporting house prices across the country. On this occasion I think it’s a case of waiting to see what 2017 will bring and how this will affect property specifically.

Not to be confused with the Help to Buy Equity Loan Scheme, the Guarantee Scheme was introduced as a flagship programme in 2013 to help first-time buyers get onto the property ladder. Under the scheme, buyers were able to purchase their new home with just 5% deposit, as the government made a promise to the lending bank to cover any payments missed by the buyers.  

The scheme met with both praise and criticism throughout its time in force but reportedly helped more than 100,000 people buy homes. It was also a relatively inexpensive scheme for the government with, incredibly, only two buyers defaulting on their agreement and costing a total of £17,411 over the three years it has been in place. This near non-existent amount of non-payment is attributed to low interest rates and consequently more affordable mortgage levels; however, as rates begin to rise the default rate is likely to increase too. As the scheme guarantees payments for seven years from the date the mortgage is taken out, the government could be paying banks up until 2023. They have prepared for this and £12 million has been set aside for such events, but here’s hoping they don’t have to use the whole lot!

As banks now offer 95% mortgages even without the government guarantee, the scheme was deemed to have become obsolete. However, the Help to Buy Equity Loan Scheme, in which buyers put down a 5% deposit and the government contributes a further 25%, is still available using the same terms and will be until 2020.

Action Fraud has received several reports from victims who have been sent convincing looking emails claiming to be from Amazon.

The spoofed emails from “service@amazon.co.uk” claim recipients have made an order online and mimic an automatic customer email notification.

In one example below, the scam email claims recipients have ordered an expensive vintage chandelier. Other reported examples include; Bose stereos, iPhone’s, cameras and luxury watches.

The emails cleverly state that if recipients haven’t authorised the transaction they can click on the help centre link to receive a full refund.

The link leads to an authentic-looking website, which asks victims to confirm their name, address, and bank card information.

One victim lost £750

One victim reported entering his Nationwide banking details and later found out £750 had been stolen from his account.

After the victim notified Nationwide they cancelled the card and refunded the money in full.

Amazon says that suspicious e-mails will often contain:

• Links to websites that look like Amazon.co.uk, but aren’t Amazon.co.uk.
• Attachments or prompts to install software on your computer.
• Typos or grammatical errors.
• Forged (or spoofed) e-mail addresses to make it look like the e-mail is coming from Amazon.co.uk
• Amazon will never ask for personal information to be supplied by e-mail.

If you have been affected by this, or any other scam, report it to Action Fraud by calling
0300 123 2040, or by using the online reporting tool at www.actionfraud.police.uk

It’s that time again, so don’t forget the deadline for both Self-Assessment Tax Returns and Trust Tax Returns for the 2015/2016 tax year is 31st January 2017. 

If you hold investments with Transact you can access the reports required for your Self-Assessment Tax Returns online at Transact. If you have difficulty accessing them, please contact the office and one of the team will be able to help you. We also provide guidance on completing your Trust Tax Returns; if you contact the office we can provide you with a step by step guide.

Please be aware that the deadline for paper returns has passed and so outstanding Tax Returns will need to be completed online using the relevant software.