Market update – March 2014

FamilySome major surprises in the Budget last week with Chancellor of the Exchequer George Osborne announcing an overhaul of the current regulations around pension income (we have already covered this in a separate article) and an increase in the ISA allowance.

The changes to ISAs have three main strands – a significant extension to the annual allowance, a simplification of the overall structure and the introduction of new allowable asset classes within ISAs.

Prior to the 2014 Budget, there had been rumours the Chancellor would seek to impose a lifetime cap on ISAs, as has been done with pensions. As it was, he went in the opposite direction, hiking the annual allowance to £15,000 from its current level of £11,520 (£11,880 from 6th April). The limits for Junior ISAs were also increased – from £3,720 to £4,000.

Arguably the Chancellor’s most important change, however, was to make the structure of ISAs simpler. He has created a ‘New ISA’, which gets rid of the separate allowances for cash ISAs and stocks and shares ISAs, and allows transfers from stocks and shares ISAs to cash ISAs. Transfers had previously only been allowed in the other direction.

The creation of this single allowance means conservative, cash-based savers may shelter more within an ISA even if this may not currently be an attractive option for many. However, the move also allows more flexibility for all types of ISA investors, enabling them to change their asset allocation more easily over time.

The Chancellor’s final move was to broaden the range of allowable investments within an ISA to include peer-to-peer lending schemes, which aim to match individual lenders with borrowers who may be unable to find financing elsewhere. The extension to the rules comes hot on the heels of the recent decision to allow AIM (Alternative Investment Market) investments to be included within ISAs.

There is now a broad range of potential ISA investments, including standard open-ended funds and investment trusts, exchange-traded funds, individual shares, AIM stocks and commercial property funds. The ISA now has real clout as a savings option, enabling investors to build a portfolio that suits their needs and remains sheltered from tax.

The Chancellor also announced that the UK economy is predicted to grow more strongly than previously forecast and to expand this year to a level greater than its pre-crisis peak. The UK’s budget deficit during 2014 is likely to be lower than envisaged at 6.6% and is now expected to achieve a surplus by 2018/19.

Meanwhile, the UK inflation rate (CPI) fell to a four-year low of 1.7% in February, the second successive month it has been below the Bank of England target of 2% and underlining its message that there is no rush to raise interest rates. The rate of unemployment has continued to decline, moving closer to the 7% originally stated as a possible trigger for a rate increase, but the Bank had expanded its forward guidance criteria to include a wider range of indicators such as wages and productivity.

After a relatively bleak January, most major equity indices picked up over February, boosted by ongoing signs of economic recovery. The FTSE100 rose 4.6% during February. Nevertheless, share prices experienced some wobbles during the month, undermined by mounting concerns over the deteriorating political situation in Ukraine, and investors remain vulnerable to disappointment.

Despite disappointing US manufacturing and employment data in early February, the Dow Jones Industrial Average index reached new heights during the month, and rose by 4% overall. Weaker-than-expected consumer expenditure led fourth-quarter US economic growth to be revised down from 3.2% to 2.4%. Sentiment was however boosted by encouraging consumer confidence data, and confidence in the manufacturing sector also showed signs of picking up.

Elsewhere, Europe’s economic recovery is “gaining ground”, according to the European Commission, and the eurozone’s economy expanded at a quarterly rate of 0.3% during the last three months of 2013. Activity in the eurozone’s private sector reached its highest level since the middle of 2011 during January. The rate of inflation in the euro area remained broadly stable at 0.8%% during January and European Central Bank president Mario Draghi sought to reassure investors deflation does not pose a threat to the eurozone’s economy.

Eyes are turning once again to Japan as the country’s government readies itself to implement the rise in sales tax at the start of April. The impact of the hike has been much debated and is part of the reason the Japanese stockmarket has struggled to make progress in 2014.

After an impressive rise in 2013, Japan has been the worst-performing sector in 2014, with the average fund down 9.6%, while the Nikkei is back to its level of May of last year. Many believe the imminent sales tax rise from 5% to 8% will choke off Japan’s consumer recovery and negate any positive impact from the small growth in wages.

Tony Roberts, Japanese equities fund manager at Invesco Perpetual, for example, says the group is predicting a sharp contraction in GDP growth in the second quarter and continued volatility in the equity markets. However, Roberts also suggests the impact of the sales tax rise is likely to be smaller than many expect and GDP growth should pick up again in the second half of the year. Should this not happen, he adds, the Japanese government will act to ease monetary policy further. Furthermore, he believes, any dent to Japan’s economy is already factored in to stockmarket prices.

Equally, many Japan fund managers agree the focus has been too much on the activity of the government and not enough on Japanese companies themselves. They argue the country’s businesses have been forced to become uniquely efficient given the weak economic environment. They also point to a number of changes in the approach of the giant Government Pension Investment fund – such as targeting higher return-on-equity companies – that support changes in the way companies conduct themselves and the stockmarket in general.

Meanwhile, another set of data showed the world’s third biggest economy is moving away from deflation, a period of falling prices which plagued Japan for nearly two decades. Core consumer prices rose in January by 1.3% from one year ago – the eighth straight months of gains.

And closer to home, the most up-to-date figures for the Northern Ireland economy showed growth of 1.6% in the third quarter of 2013. Growth is measured using the recently introduced Northern Ireland Composite Economic Index (NICEI), which is roughly equivalent to GDP. Despite the strong growth in the period, the Northern Ireland economy is still almost 10% behind its peak in 2007.

We are always available to discuss any queries or concerns, so just call or drop us an e-mail.

The value of your investment can go down as well as up and you may not get back as much as you originally invested.

This entry was posted in Financial News. Bookmark the permalink.