True lifelong financial planning for the serious business of life.
True lifelong financial planning
for the serious business of life.
True lifelong financial planning for the serious business of life.
True lifelong financial planning
for the serious business of life.
Category: Financial Planning
Early December saw the UK energy price cap raised for households, coming into effect in January. Consumers may not feel it, but we are lucky. Industry has no such protection and faces the highest cost for electricity among our peer group. Looking at the latest government statistics, the UK is a clear outlier with only Slovakia approaching our levels. Relative to a median price derived by the International Energy Agency, UK industrial electricity prices are 54% higher than the average.
The data shows that UK electricity consumption has fallen sharply over the last 25 years. Is this the UK leading the way in efficiency or just a sign of outsourcing to cheaper areas? Unfortunately, it appears to be more about the latter. Many commentators think there needs to be a serious discussion about the cost of energy for businesses as the differential with our peers is not compatible with economic success.
Climate change is happening, and the UK is taking the lead, but we have failed to recognise all the consequences and to fully consider the economic disadvantages we face in the generations long transition to lower carbon. This needs to be subject to more vigorous national debate both within and outside Parliament.
As if to highlight our vulnerability, early November saw the renewable contribution to UK electricity output fall below 5%, as days were cloudy and windless. The likely US pivot back towards fossil fuels under President Trump and the ongoing exploitation of cheap fossil fuels in Asia will only increase the competitive pressures. Mandating UK pension schemes to invest more in domestic companies is not going to work if better returns can be achieved elsewhere. Perhaps the cost advantage of energy explains the success of US stock markets and the diminishing role of the London Stock Exchange, rather than the listing rules? Microsoft’s deal with the Three Mile Island nuclear plant is the latest illustration that energy costs matter.
Energy costs were also behind the recent jump in UK inflation, with the headline rate rising from 2.3% to 2.6%. Disappointingly, services CPI ticked up to 5.0%. Transport inflation was strong, driven by air fares and second-hand cars but overall upward contributions were widespread. Of the 12 main categories, eight saw upward movement. This is not what the Bank of England (BoE) was hoping for – especially as the recent messaging was that rates would need to come down faster if the labour market continues to soften.
Globally, PMIs have generally been weak, consistent with sluggish activity. The UK and euro area both fell back below 50, while in Japan there was a small rise to 49.8. In the euro area, there is a clear divide between Germany and France on the one hand (weak) and the rest. In the UK, business confidence took a knock and there were indications that the rise in National Insurance will impact employment prospects and that price rises would be attempted to offset the margin squeeze arising from higher labour costs. The US provided a more upbeat message with the composite index rising to 55.3. According to this reading, the manufacturing outlook remains sluggish but service activity more than offset, rising from 55 to 57.
Political uncertainty is always present, but there seems to be a ratcheting up at this moment in time. In the US, we await the implication of President Trump part two. Often the sequel is a letdown, but this one looks likely to match the original in terms of impact.
In Europe we see turmoil in France, instability in Germany, political polarisation in the Netherlands and corruption probes in Spain. Elsewhere, Serbia, Georgia, Romania and Moldova are struggling to decide whether they want to move towards the euro zone or fall back into the orbit of Russia. The Middle East continues to see fighting, with the latest developments in Syria an indication that the status quo, attributable to the military influence of Russia and Iran, is under pressure.
Geopolitical risks are often overstated by markets – longer term economic factors tend to dominate in the end but we are seeing a fragmentation of a world system that has served financial assets well over the post-war period.
At a macro level, the challenge to US dominance by China and the instability arising from Russia’s influence in countries previously within the USSR are shifting old assumptions about the inevitable progress of liberal democracy. Demographic trends play a part. In Europe there are fewer babies than required to stabilise populations. This is putting a strain on budgets but is also encouraging migration to fill the employment voids. Cultural change is also happening, both because of migration and a shift in generational attitudes. In Europe, societies appear to be more fractious; politically, the centre is under greater pressure than at any time in the last 70 years.
In the UK, the Reform Party is now more popular than the Labour Party as the realities of government start to bite. The Chancellor, speaking to the CBI recently, sent out a message that business taxes would not rise further. This lasted for a few days until the Prime Minister clarified that it would depend on circumstances. This was a sensible caveat on two levels. First, no one knows what is around the corner. Second, the economic outlook is not encouraging. The plan to turbocharge the economy through the building of 1.5 million houses over five years is ambitious but will be very hard to deliver, business sentiment is heading in the wrong direction, and debt is rising. In addition, the transition to net zero will impose upfront costs on both consumers and businesses and take a further toll on public finances. From a competitive viewpoint, it is imperative that the green energy revolution is both speedy and effective. Ed Miliband, Secretary of State for Energy Security and Net Zero, perhaps holds the fate of the government in his hands.
There is a sense of flux – both at a geopolitical level and within countries. What is clear is that the retreat of the US from dominant political leadership, the rise of new economic powers, the impact of demographic and migration trends, and the climate challenge create a daunting set of issues for economies, societies, and markets to navigate.
There are 5.3 million family businesses in the UK. They employ over 14 million people and contribute over £630 billion to the country’s GDP. UK family firms pay more than £200 billion in tax every year. They are the engine room of the UK economy.
Every town and city in the country is full of small businesses; they’re the very fabric of British community life. They employ local people and pay Corporation Tax, National Insurance contributions, business rates, VAT, and the owners pay Capital Gains Tax if they ever sell.
But now families, having paid all their taxes over the years, are faced with also having to pay Inheritance Tax (IHT) on the death of the owner and the next generation taking over. They’ll be expected to find hundreds of thousands, maybe millions to meet the tax bill.
This is a tax on an unrealised gain on an illiquid and hard to value asset. To make matters worse, if the company does have cash, other shareholders may have to pay themselves a dividend, be taxed on that first, and then pay IHT out of what remains – double or even triple tax.
Ultimately, the company may have to be sold completely in order to meet IHT obligations. The Treasury admits they only expect to raise £230 million the year the tax is introduced. That is only a rounding error in terms of government spending and doesn’t justify the uncertainty and complexity it brings for millions of family businesses.
You can argue whether or not this is fair, but it’s certainly not conducive to creating a culture of entrepreneurship, growth, and ambition – something which is sorely needed right now.
“The only way to win is to not be afraid of losing.” Ratan Naval Tata, 1937-2024. Indian industrialist and philanthropist and Chairman of the Tata Group from 1991-2012.
Nobody wants yesterday’s papers. Within 24 hours, they are no use for anything other than wrapping fish and chips. But surely tomorrow’s papers would be very useful if you are playing the stock market? Apparently not, according to a recent study. In the short run, knowledge of the next day’s news is not guaranteed to make money when playing the stock market.
This seems strange. In Back to the Future 2, Biff Tannen gets rich when he’s gifted a sports almanac from the future that allows him to bet correctly on every sports event. But day by day and minute by minute, stock markets attempt to discount future events and knowledge of tomorrow’s headlines isn’t that helpful.
These are the main conclusions from some fascinating research by Victor Haghani and James White of Elm Partners in London. They built a game in which stock market traders were shown the front page of The Wall Street Journal (with market prices blacked out) and asked how much they would wager on the direction of the S&P 500 index and the 30-year Treasury the day before.
Starting with a notional $1 million, a group of 118 experienced traders placed bets on 15 different days taken by Elm Partners at random from the last 15 years. Bearing in mind the traders were armed with foreknowledge of the next day’s events; the results were almost comical.
The players guessed the direction of stocks and shares correctly only 51% of the time on roughly 2,000 trades they made. They guessed the direction of bonds correctly 56% of the time but bet less of their capital on bonds than on stocks.
Even with foreknowledge, experienced investors guessed right only a little more than half of the time. The average return they made was only 3.2%, while half lost money and 1 in 6 went bust.
If you knew the direction of stock prices in advance, rather than the news to which they were reacting, then returns are infinite. That’s why people try trading in the first place. In the real world, to make money you need to acknowledge your limitations and stake less when you are less certain. Even prior knowledge of Donald Trump’s Presidential election victory in November would not have been guaranteed to make money, as although equities and crypto currencies rose strongly the next day, bond prices fell heavily. One hedge fund manager did however get the calls correct and made a billion dollars by betting heavily on a Trump victory.
One of the indisputable truths about investing is that the past is certain, but the future is all probabilities. Hindsight is a wonderful thing, as the saying goes! It seems obvious now that there would be no recession in the US in 2023 due to high levels of government spending and the strong wealth effects from property and share prices within large parts of the consumer economy. Yet at the end of 2022, a recession was viewed as inevitable. At the end of 2023, similar concerns over economic growth were also well founded, but incorrect.
Why do forecasters have such pessimism when reality teaches them otherwise. Part of the answer lies in human behaviour. It can be hard to be optimistic. This is partly due to human nature, which tends to weigh bad news more heavily than good. It is also due to the media-driven world in which we live and understanding that bad news sells. Take readily available pessimism, mix in a splash of human behavioural biases and at times it seems like society is going backwards, not forwards.
This is observable in equity markets. Most have reached all-time highs this year, with some such as the US increasing by more than 20%, yet many investors still worry about recessions, valuations, and geopolitics much the same was as they did a year ago.
One of my favourite sayings is that if you want to be a successful journalist, be a pessimist but if you want to be a successful investor, be an optimist. This is not to say that investments can only go up – they clearly do not in some years – but it is to say that generally, over the long-term societies improve, economies grow, innovation thrives, and optimism wins.
Each year has its own story, and 2024 was no different. 2021 was a year of ebullience; 2022 a year for surviving; 2023 a year of shaking off recession fears; and 2024 a year for artificial intelligence and innovation. For investors, each year is an opportunity to increase our skills through experience and knowledge building. Here are a few lessons:
What will be the lessons of 2025? Some will be new, but some will be old. Patient optimism with an eye on innovation and an open mind to everything is a good set of characteristics for any investor. 2025 will undoubtedly have unforeseen challenges but we believe, strongly, that it is a good time to be a long-term investor with more opportunities today than ever before.
Don’t try to second guess markets, don’t be influenced by short-term noise and negativity, embrace volatility as an opportunity and invest for the long term.
And so, as we start a new year, our greatest belief and hope are in people, in their desire for peace and prosperity, in their innovation, ingenuity and spirit, and their resilience. With these thoughts, we send you our best wishes for the year ahead and we thank you for your continued support in these difficult and challenging times.
We hope you enjoy reading our regular updates. We are always eager to improve and welcome any suggestions as to any topics you would like us to cover in future editions of The Clarion.
Keith W Thompson
Clarion Group Chairman
Creating better lives now and in the future for our clients, their families and those who are important to them.
Any investment performance figures referred to relate to past performance which is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments, and the income arising from them, can go down as well as up and is not guaranteed, which means that you may not get back what you invested. Unless indicated otherwise, performance figures are stated in British Pounds. Where performance figures are stated in other currencies, changes in exchange rates may also cause an investment to fluctuate in value.
The content of this article does not constitute financial advice, and you may wish to seek professional advice based on your individual circumstances before making any financial decisions.
If you’d like more information about this article, or any other aspect of our true lifelong financial planning, we’d be happy to hear from you. Please call +44 (0)1625 466 360 or email [email protected].
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