I can’t believe that it’s the end of June already, where has the time gone? I’m going to start with a thank you for all of the responses to the first edition of the 3M’s, I’m pleased that you feel it’s interesting and worthwhile.
The funniest comment was ‘it’s like the weekly edition but on steriods’ and the cheekiest was ‘it’s good as I now only have to hear from you once a month’!!
Anyway I can’t write this edition without mentioning the football, the latest generate of supporters who, in Scotland, had been starved of major tournament participation now know what it’s like to follow the national side. In our house Josh was convinced that not only that we’d qualify but that we could win the whole thing! He is currently still lying down in a darkened room! Still the boys in blue did well and we can now cheer on the other home nations.
I’m still as busy as we head into the second half of the year and like all of you, I’m sure, looking forward to the unlocking of restrictions and possibly some holidays.
Carol and I had another short break, this time to Crieff Hydro, very enjoyable although when I booked it I hadn’t realised it was the Scotland v England game that night so after an enjoyable dinner it was in front of the telly, Happy Anniversary!
From a business perspective as mentioned last time I’m keen to share details of the processes we follow and internal work we undertake.
On the investment side we work very closely with our partners as you’d expect and this month Collidar, our DFM partner for our Gresham Model Portfolio’s, have undertaken a rebalance of the portfolios. This is something that happens regularly so nothing unusual but thought I’d share. Last June we reduced our UK equity asset allocation in the portfolios due to the outlook and now after 12 months this rebalance will see us begin to rotate back towards the UK and Europe equities as we alter this view, it’s just one example of the active management being undertaken.
This relatively simplistic change takes months of analysis and monitoring of economics data so there is lots going on.
The volatility of recent months continue with, as I wrote last month, inflation fears being a key concern. The Bank of England has raised its expectations for inflation but reiterated its view that the coronavirus crisis-linked spike in price rises of recent months does not represent a looming crisis for the economy.
Minutes of the latest meeting of the Bank’s monetary policy committee (MPC), which left interest rates unchanged at their Covid 19 pandemic low of 0.1%, showed expectations for GDP growth in the current second quarter had been revised higher by 1.5%.
But they also revealed that policymakers now expect the headline measure of inflation to exceed 3% “for a temporary period”. This marks the Bank’s first official reaction to data released earlier this month that showed the consumer prices index (CPI) smashing through the Bank’s 2% target in May – months earlier than the MPC had forecast.
The surge in the annual rate of CPI has been led by the reopening of the economy since March with clothing, fuel and hospitality prices driving increases. It does represent a distortion because the same month last year marked the start of the hibernation for activity as the first UK lockdown was imposed.
It left economists and financial markets eagerly eyeing the Bank’s update for evidence of a shift in the MPC’s main view that the inflation spike is “transitory” – a consequence of the shift in demand compared to a year ago. The minutes read: “Since May, developments in global GDP growth have been somewhat stronger than anticipated, particularly in advanced economies.
While the Bank made no policy changes to combat inflation, such as raising rates or cutting its £895bn bond-buying plan, the Bank’s outgoing chief economist voted again to trim the bond-buying – also known as quantitative easing – by £50bn at his final MPC meeting.
Andy Haldane had warned in an opinion piece in the New Statesman earlier this month that inflation pressure had provided “the most dangerous moment for monetary policy” in almost 30 years.
The Bank’s statement continued: “The Committee’s central expectation is that the economy will experience a temporary period of strong GDP growth and above-target CPI inflation, after which growth and inflation will fall back.”
After the announcement, the pound fell to session lows around $1.3906 and hovered around the $1.3920 mark, whilst UK 10-year yields dropped to 0.75% from 0.78%.”
Elsewhere, the French CAC rose 1.2% on the day, and the DAX was almost 0.9% higher in Germany.
Stocks were buoyed by a rise in German exports to the US and China in May. According to the latest figures from the German statistics office, shipments to the US rose almost 41% year-on-year to €9.1bn (£7.8bn, $10.9bn), while exports to China, Germany’s second-biggest market outside the EU, rose 17.7% to €8.4bn.
German business confidence also improved, and was better than expected, jumping to 101.8 in June from 99.2 in May.
Confidence among French businesses reached its highest level since mid-2007, driven by the service industries.
Across the pond, the S&P 500 gained 0.6% at the time of the European close, and the tech-heavy Nasdaq rose 0.9%, boosted by shares of Tesla and other technology firms. The Dow Jones climbed 0.7%.
It came after initial claims for jobless benefits in the US fell to 411,000 last week, from 418,000 the previous week, as the labour market recovery from the COVID-19 pandemic gains traction. This was against expectations of a drop to 380,000.
“Imprecise seasonal factors around Memorial Day holiday weekend likely contributed to the uptick in initial claims, so the rise should prove temporary,” economists at Bank of America Securities in New York wrote in a note.
Claims have dropped from a record 6.149 million in early April 2020. However, they remain above the 200,000-250,000 range that is viewed as consistent with a healthy jobs market.
On Wednesday, the tech-focused Nasdaq and the Russell 2000 hit another record high, despite a fairly lacklustre session.
Michael Hewson of CMC Markets said: “Last year the central bank stopped all bank buybacks and dividends to ensure the US banking system had enough to cope with the economic fallout from the various lockdowns and restrictions placed on the US economy.
“At the start of this year that rule was altered so that banks that passed the various stress test scenarios could resume this process on a limited basis.”
Shares were mixed in Asia on Thursday after a listless day of trading on Wall Street as the recent bout of nerves over Federal Reserve policy fades.
In Japan, the Nikkei was flat while the Hang Seng rose 0.3% and the Shanghai Composite edged slightly lower.
The concept of ‘retirement’ changed a good few years ago with the idea that we stop working at 65 and then spend our time playing golf and walking hand in hand on beaches now anachronistic and probably ageist.
The nature of work has also been evolving, especially for the UK population, over the last 50 years. However, since lockdown began, many of those ongoing developments have been fast-tracked for immediate use. Particularly the way people work or move from one mode of work to another.
The pandemic has forced us all to reconsider our plans. Many of us have now become used to working at home, releasing us from exhausting commutes and early mornings. At the same time pension pots might have fallen in value and although they will have recovered we are now in uncertain times when you consider the recovery.
Will my future pension returns and income be affected by the coronavirus pandemic?
Almost certainly. All pension schemes rely on investments of one form or another to produce the returns required to pay income. While the pricing mechanism of investments is a product of many factors (investor sentiment, sector specific factors, and the relative valuation of one investment to another), longer-term growth depends on the continued profitability of companies and the return of those profits to shareholders.
Because of the pandemic, we are currently in a challenging economic period. The global economy has taken over 10 years to recover from the shock of the last financial crisis. Now it has been presented with another that will take a considerable time to work through. Generally, we should plan for lower returns, which means we need to take a much more cautious approach to our finances and planning.
Will I need to keep earning money for longer?
As mentioned above, the value of your pension pot might have fallen and then recovered but going forward it may be harder to get returns, so you may need to build up more savings before retiring. We are also living longer and staying healthier for longer. So working for longer may now be a necessity if we are to enjoy a comfortable, healthy retirement.
More flexible working conditions could enable you to work fewer hours, giving you time to do other things; perhaps other work – less well paid but more enjoyable. You could take sabbaticals to travel; do charitable work or creative projects. Still continuing to earn, and share your knowledge and experience.
How much longer will I need to work?
The facts about longevity are incontrovertible.
I was born in 1970. My average life expectancy at birth was approximately 67, while I was expected to retire at 65. To put that in context, I would have had to fund just two years of retirement had things remained the same throughout my life.
Females born in the same year had a life expectancy at birth of 75 and were allowed a lower pension age of 60 – this is gradually being equalised.
I am now in my 50th year. The Office for National statistics has a calculator which lets you know how long you are going to live. Here’s my chart:
As you can see, I am now expected to live until I am 84. In the space of the 50 years or so that I have been alive my life expectancy has increased by 25%. An extra 17 years on this planet.
This highlights one important change facing all of us.
Will the government continue to raise the official retirement ages?
Over the last few years government policy has changed, and my official retirement date has been increased to 67. This is likely to be a continuing trend and makes perfect sense.
The state pension was introduced in 1925, and since then the pensionable age has stayed much the same, only recently starting to rise. However, the number of people entitled to claim has increased, and longer life spans mean the time over which they claim has increased significantly.
The UK government pays for the state pension out of tax receipts. Thanks to the massive deficit accrued by the government during lockdown, there will be no spare tax income to support state pensions. So a younger generation, proportionally even smaller than now, will have to support a lot more people in retirement.
What return do I need to achieve for a reasonable retirement income?
Many people believe they need a return of 5% for their retirement income. However, if we are now entering a period of lower returns but also lower inflation, this level of income may not be needed – or achievable.
To give you some guidance, currently a man retiring at 65 in good health would get an average rate of about 4.6% as a level annuity and 3.8% for one that rises in line with inflation.
So how does financial planning help?
We are experiencing uniquely challenging times, and those challenges are likely to continue.
If you are drawing a retirement income now, or thinking about retirement, you should be considering all the possible scenarios for the future – given the potential for a long recession – and planning and structuring your wealth accordingly.
Proper planning is a vital way to mitigate some of the pandemic’s effects. Identifying problems early, changing what needs to be changed or simply having the peace of mind that you are still on track, despite all that is going on around us, will prove invaluable.