Breaking News! Your Portfolio
4 November 2021
To all Financial Friends
Interest Rates
Many wise people feel that interest rates should have been increased now. Why? Because inflation is taking hold. Increasing the cost of borrowing deters people from spend, spend, spend. Less to spend means that providers and products of services cannot increase their prices as customers cannot afford to buy. Result? Prices remain the same or even go down. This puts the brake on inflation, in theory.
The banks need interest rates to rise to provide healthy profit margins. We need 2% inflation to maintain a healthy economy. With inflation almost at 4% now, no wonder the Bank is hinting at higher interest rates next year.
Alan Overy, a friendly established mortgage advisor tells me that just yesterday, he had notification of lenders withdrawing current interest rate deals. Replacing them with higher rates of course.
Markets move ahead of the event, you will remember?
Inflation
The Bank of England warns that inflation could hit 5% next year. Perhaps the Bank has been reading Financial Friends commentaries here. Informed by our Global Economist friend, Peter Warburton we flagged up inflation at 5% by the turn of the year. We said this many months ago.
This led to some of our student friends buying into inflation linked gilt funds. As our Money Awareness Course teaches, these students moved two steps ahead of the market. Result? A gain of 12% over a recent 6-month period. Up 5.3% in just the last month to date.
The Budget
Higher taxes, inflation and higher interest rates, are not a desired combination. For you personally, and most of those around you, it means a real squeeze on our spendable income. Surely this slows down the economy – we have less to spend.
In 2023 corporation tax will rise reducing the net profits made by companies we invest in. Offsetting this is the forecast of much faster growth in the economy than expected. The impact of Covid, so far, has been less than expected.
Be relieved that your personal capital gains tax allowance has not been slashed. It remains, allowing you to draw capital gains of up to £12,300 in each tax year with no tax to pay. This, even if your investments are held outside an ISA.
Good also, that you can still draw up to £2,000 per year in dividends tax free in each tax year. This provided you have not taken this allowance from other holdings or as limited company as a director if that’s who you are. These allowances are fixed until the 2025/26 tax year. Better if they had risen in line with inflation of course but better than a decrease now.
Your personal basic income tax allowance will also remain fixed at £12,570 pa until 2025/26 instead of increasing in line with other factors across the years. The freezing of allowances will feel like a gradually increasing squeeze on your disposable income as time goes by.
The Turning Point
The global economy has been supported by quantitative easing (the equivalent of printing money) for years. Add to this strategy, the massive borrowing of money here in the UK and across the globe.
Then the holding down of interest rates, and we have an abnormal market. Rather like the global economy catching Covid and struggling to come out of intensive care.
What happens when these supportive, stimulating the economy actions, must cease? This is the turning point. Likely that you will need to listen in here, and with us, move funds to defensive and strategic holdings. We watch like hawks for all the signs that suggest it is time to make a move. Already our associate Stockbroker, Tom Murphy is moving some of his clients’ funds into strategic defensive holdings. His moves now, are somewhat reflected in our current model of holding a percentage of funds in diversified investments plus conviction holdings to seek a cutting edge.
A Touch of Gold?
Gold has been a mystery for some time. In recent months, gold has not performed as markets would have expected. The conditions for gold have been ideal for some time, yet the price of gold has dived. That is until quite recently. You will have seen in our last commentary that gold was put forward with a volatility warning.
Students who went for gold a month ago today, have seen a return in just the one month of 10.81%.
Against the uncertainty of current conditions could it be that gold and precious metals have further to go?
One of the most volatile investments available, yet a safe haven when things get really bad, gold has been a constant in many investors’ portfolios over the years. Maybe increasing the holding could be considered?
PLEASE NOTE: A financial or economic commentary like these, are written to explain, interpret or give an opinion on economic events and markets to help readers understand what’s happening and why it matters. Designed to help you make informed decisions of your own by making you aware of opportunities, risks and potential rewards in the market.
