Half Yearly valuations for June 2010 are due to be sent next week and for those clients interested, the accompanying report can be accessed now by Clicking Here

‘Hot Off The Wires’

June 2010 Budget Update

 

A summary of the first Coalition budget delivered by George Osborne is below:

Tax

From January 4 2011, the main rate of VAT will rise from 17.5% to 20%. Current zero-rated items like children’s clothes and magazines will remain exempt.

Corporation Tax will be cut next year to 27%, and by 1% annually for the next three years, until it reaches 24%. The small companies’ tax rate will be cut to 20%.

The government will help low-spending councils in England to freeze council tax for one year from April 2011.

Capital Gains Tax remains at 18% for low and middle-income savers but from midnight, higher rate taxpayers will pay 28%.

UK Economy

The economy is predicted to grow by 1.2 % this year, 2.3% next year, 2.8% in 2012, 2.9% in 2013 and 2.7% in both 2014 and in 2015.

The UK is set to miss the previous government’s “golden rule” - of borrowing only to invest over the economic cycle - in the current cycle by £485bn.

Consumer price inflation is expected to reach 2.7% by the end of 2010 before “returning to target in the medium term”. The inflation target remains at 2%, as measured by the Consumer Prices Index.

Unemployment is forecast to peak this year at 8.1% and then fall for each of the next four years, to reach 6.1% in 2015.

Borrowing

The structural current deficit “should be in balance” by 2015-16.

The balance of spending cuts vs tax rises would be 77% to 23%.

The measures are forecast to result in public sector net borrowing of £149bn this year, £116bn next year, £89bn in 2012-13 and £60bn in 2013-14. Mr Osborne said by 2014-15 borrowing would reach £37bn, falling to £20bn in 2015-16.

Spending

Mr Osborne said the state now accounted for “almost half” of all national income which was “completely unsustainable”.

He said current expenditure would rise from £637bn in 2010-11 to £711bn in 2015-16, blaming a “rapidly rising bill for debt interest”.

He said his Budget implied further £17bn cuts in departmental spending by 2014/15, unprotected departments face an average real cut of around 25% over four years.

He said compared with the plans set out by Labour, the government would cut additional current expenditure by £30bn a year by 2014-15.

There would be no further reductions in capital spending totals in this Budget but “careful choices” would be made about how it was spent. Projects with “a significant economic return to the country” would be prioritised - assessed in the autumn spending review.

Public Sector Pay

Public sector workers face a two-year pay freeze, although 1.7 million of those earning less than £21,000 will get a flat pay-rise worth £250 in both years.

Pensions

The government will accelerate the increase in state pension age to 66.

Benefits

Child benefit will be frozen for the next three years.

Tax credits will be reduced for families earning over £40,000 next year.

From 2011 - except for the state pension and pension credit - benefits, tax credits and public service pensions will rise in line with the Consumer Price Index, rather than the, generally higher, Retail Price Index, saving over £6 billion a year by the end of the Parliament.

Housing Benefit will be reformed so there is a maximum limit of £400 a week, to save £1.8bn a year by the end of the Parliament.

The government will introduce a medical assessment for Disability Living Allowance from 2013 for new and existing claimants.

Business

From April 2011, the threshold at which employers start to pay National Insurance will rise by £21 per week, above indexation.

Tax relief for the video games industry will be scrapped.

Cigarettes, Alcohol & Fuel

No changes

Banks

A bank levy is being introduced

Clients may find the attached useful - Please click HERE

2000 – 2009 has been a miserable decade for equity investors. Annual returns in Sterling on both the FTSE100 and the MSCI World indices were below 1% in nominal terms and negative after taking account of UK inflation averaging 2.5%. Returns from UK smaller companies a little over 5% per annum but even these were no better than the returns from gilts. A normal expectation would be that equities should earn an annual “equity risk premium” of about 4% over the return on “risk free” government bonds and more from smaller companies.

Research by Legg Mason shows that this is only the second time in history when Wall Street’s returns have turned negative over 10 years (the other was in the late 1930s) but there have been 13 periods since 1871 in which they turned negative in real terms. On average, this created a tremendous buying opportunity with subsequent 10 year real returns above 10% per annum. Investors who were slow off the mark or jumped the gun by being a year late or early were only mildly penalised; they saw returns of 12.3% and 10.1% per annum compared with 13% for those who caught the market at its low point.

 It will pay to remember that Wall Street’s history shows four previous extended periods of consolidation lasting over 10 years; each was followed by an extended period of strong performance.

 Poring over past data as a guide to the future has become a popular pastime and it needs to be remembered that the average of past experience is not a good predictor of the future. The circumstances are different each time and the range of historic outcomes is wide. Nevertheless, fundamental factors support the positive outlook that history indicates: the valuation of markets is reasonable and there is good visibility of strong earnings growth.

It might seem that emerging markets offer the best opportunities; after all, they did not suffer from the problems of over-extended credit, bloated government and inflated expectations which have bedevilled developed economies. Ostensibly, this has already been reflected in a far from miserable decade for emerging markets: the MSCI emerging markets index, excluding income, doubled in the last decade; the Shanghai Composite gained 191%; India’s Sensex 30 rose 226%; Brazil’s Bovespa index rose 314%; and the Russian market 724%.  However, the 1990s had been a very disappointing decade with the bright hopes encouraged by the fall of the Berlin Wall swamped by false starts, legacy problems and a multitude of mistakes. The collapse in emerging markets in the late 1990s left them very cheaply valued and the subsequent strong performance partly reflects performance off a low base.

The disparity between emerging and developed market performance is unlikely to be as stark in the current decade as in the last one but superior economic growth, increasing economic and social stability, high corporate returns of increasing quality and reasonable valuation suggest that returns will still be better for emerging than for developed markets. Smaller companies should also average annual returns a couple of percent above larger companies, in line with the long term trend.

The disparity between emerging and developed market performance is unlikely to be as stark in the current decade as in the last one.

The outlook for government bonds, even assuming fiscal deficits are brought under control, is much less positive. Gilts have returned an annual 5.5% for the last 10 years and the Citibank world government bond index in Sterling 6.6%. The equity risk premium has therefore been -3.9% and -6.4% respectively and it will take a lot of equity performance to return to the long-term trend of +4%. While equities average double digit returns, investors in government bonds are unlikely to do better than collect the yield over the next decade and maybe much less. Investors in quality corporate bonds should do better because yields are higher but the prospects for capital gains are slim.

Developed equity markets are still some 25% below their all time highs. They can rise 10% per annum (equating to a return in the low teens with dividends) for three years before they reach their all time high. By then, markets will have been broadly flat for 13 years and there will be a considerable psychological barrier to break through. It will then pay to remember that Wall Street’s history shows four previous extended periods of consolidation lasting over 10 years; each was followed by an extended period of strong performance.

On an annual basis, performance is likely to be volatile. In the last 36 years, the All Share index has moved by less than 5% (up or down) only five times. It has moved more than 15% 21 times and by more than 20% 14 times. The favourite prediction of most strategists, of single digit returns, is actually very unusual on both sides of the Atlantic. Investors will need to remember that a decade of strong returns will contain some exceptional years but also some negative ones. Patience and nerve will be required at times, but it should be nothing compared to the last decade. This contained, according to the London Business School, two of the worst four bear markets in global equities since 1900, including the worst. It should be much longer than a decade before there is another of similar magnitude.

Peter Waller - Investment Director

(Source: Max King Investment Strategist)

4 March 2010

This year has shown why economics is known as the dismal science; with output falling, unemployment rising and a stack of problems for the future building up, times have never been so good for the doom-mongerers. 2009 has also proved to be a good year for investors; global equities are up some 30% year to date and over 60% from the low point, thereby recovering nearly half the fall since 2007. Corporate bonds, both investment grade and high yield, have performed well and, despite the dire warnings, returns from government bonds have been positive. Stock markets climb the wall of worry, and there are plenty of those at present. So much so that there is a danger that an excessive focus on the risks will lead investors to ignore the positives and so miss out on the potential returns which are there to be made over 2010 and beyond. These positives include the following.

1 On a prospective p/e ratio of below 14 times 2010 earnings, well below fair value of around 16, global equities remain very good value.

2 Earnings forecasts continue to be upgraded with over 60% of estimate changes positive. Analysts have responded cautiously to third quarter earnings which were well ahead

of expectations, so significant upgrades of the next few quarters’ earnings are almost inevitable. Initial estimates already pencil in mid teens earnings growth for 2011.

3 Corporate profitability has withstood a severe economic downturn well, largely as a result of strong productivity growth. Not only have costs been cut but there are significant pay-offs coming through from past investment, particularly technology related. The US productivity growth in this recession has been by far the best for 50 years. There is a danger that an excessive focus on the risks will lead investors to ignore the positives.

4 Economic growth in 2010 and subsequent years in developed economies is likely to be modest, but that should make the expansion phase long and durable. If it is based on investment rather than credit expansion or government spending, the result should be a more stable global economy and, possibly, an increase in the trend rate of growth.

5 The collapse of communism 20 years ago sparked political, social and economic change throughout what was then known as the third world. The consequence is strong economic growth and sharply rising living standards in what are now known as the emerging economies. This process has much further to go. Concern about the relatively few failures and dysfunctional states should not detract from the success of the many.

6 The fiscal challenge facing the developed economies in financing and reducing huge budget deficits is severe, but the experience of Canada and Sweden shows that it is not insoluble, and the economic and social cost may be surprisingly easy to bear. Moreover, public opinion is behind such retrenchment.

7 Bond investors do not require immediate and drastic action; if presented with a coherent plan over several years, they are likely to be willing to finance continuing deficits at modest interest rates. Spreads between corporate bonds and government bonds remain generous, particularly since the default rate appears to have peaked.

8 Interest rates are likely to rise in 2010 but this is already reflected in market interest rates. Well over 3% can be earned on 3 month notice deposits in the UK and nearly all

new fixed mortgages are charging an APR of above 4% already. A rise in interest rates will be an indicator of a return to normality, and therefore positive. There are significant further returns to be made in 2010 and, potentially, for several years thereafter.

9 The scale of quantitative easing in the developed economies has been huge but it has only counteracted the contraction in bank lending, and so threatens little inflation for now. Productivity growth and high output gaps promise continued low inflation while the withdrawal of liquidity in due course will be feasible if governments gain the confidence of bond investors in their fiscal policies. Runaway inflation as a result of printing money is far from inevitable.

10 Oil supplies are finite but reserve estimates for natural gas have been rising strongly. High energy prices have encouraged greater efficiency and the nuclear industry around the world is undergoing a renaissance, reducing the pressure on fossil fuels. High base metal prices are leading to investment in mine expansion and encouraging more efficient usage. As genetically modified crops spread around the world, crop yields will continue to rise while the faddish diversion of grain to produce bio-fuels is on the wane. In short, higher commodity prices are restraining consumption, increasing output and encouraging increased productivity. Cost push inflation and mass starvation are not in prospect.

11 Investors are focused on the uncertainties and reluctant to take risks. Flows into equities from both retail and professional investors are low and the slightest wobble in markets sends investors running for cover. Investors are more worried about the downside than excited by the upside and euphoria about the gains this year is notably absent. Poor sentiment is a classic indicator that the gains will continue.

We at Admiral believe there are significant further returns to be made in 2010 and, potentially, for several years thereafter.

Peter Waller - Investment Director

And on behalf of all the staff, may I wish all our clients a Very Merry Christmas and a Prosperous 2010.  Good health to everyone and thank you for helping us to reach a very important milestone in the company’s history.

Peter Waller - Director

The Technical View: With a very modest RSI just above neutral 50 at 55, and poised to break a line of resistance from the middle of last month at 5,330 the FTSE 100 seems to be right on track for a year end rally. This is of course helped along by Abu Dhabi handing out $10bn to Dubai, a small price to pay for indices like the FTSE 100 to hit new highs for the year, something which should be forthcoming relatively easily once an end of day close above the November resistance line projection is delivered.

The good news (such as it is) is that the UK index managed to close above the lows of the session on Tuesday, at 5250 or so, although the overall impression remains that prices have gone fairly quiet ahead of this week’s Fed meeting – not that any change in monetary policy is expected, although the accompanying statement will probably be more closely scrutinised than ever for evidence of even the subtlest change of emphasis. The key levels for FTSE traders remain at 5190 and 5395 or so.

Peter Waller - Investment Director

FTSE 100: 5258  Resistance Near 5300

We have enjoyed significant rises in the markets since the bottoms seen in March (The FTSE100 fell to 3460).  The point has now been reached where investors are asking if current levels will break down.

Here are the views of one respected Technical Analyst I follow :-

For the FTSE 100 this morning is probably as much about consolidation again, after the flotation with intraday highs of the year yesterday. The hourly chart shows a rising trend channel in place since early last week with the floor of the channel running through 5220. The implication is that unless we see an end of day close below the November uptrend line there is little reason to imagine that will not be further upside for this market. Helping the bulls to remain confident is the way that we have finally got our golden cross between the black 200 period moving average and the blue 50 period moving average.

This is a buy signal in a classic technical sense, and it would be very disappointing/surprising if the signal failed.

It looks like more upside to come.

Peter Waller - Investment Director

Readable article from one of our chosen providers of Fixed Interest - M&G.  Please click HERE to read

Interesting times - Please click HERE for Technical Analysis of the Major Markets