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Ramblings of a Wealth Manager – 13th January 2021

Bitcoin – Fools Gold?

On Monday 4th January 2021 in Hong Kong, a bitcoin trader was ambushed by robbers who stole cash and bitcoin before pushing him out of their car.

They stole 15 BTC equating to approximately $520,000 at the time…

Having recently hit a record high price of $41,000 per bitcoin (BTC), there seems to be more and more hype surrounding the cryptocurrency. However, given the volatility of this asset, who knows where the price will be at the end of the week.

What is Bitcoin?

Launched in 2009, bitcoin is the world’s largest cryptocurrency by market cap and unlike pounds, dollars or euros, bitcoin is created, distributed, traded, and stored with the use of a decentralised ledger system, known as a blockchain.

As the earliest cryptocurrency and by far the most popular and successful, bitcoin has inspired a host of other digital tokens such as Ethereum and Ripple.

Why is Bitcoin back in fashion?

Corporate interest from banks such as JPMorgan, arguably one of the biggest banking names in the world, projects a price target of $146,000, which would match the total private sector investment in gold via exchange-traded funds, or bars and coins. JPMorgan did state that this price target is a long-term target and unsustainable for this year – but given the recent rally, who knows?

PayPal Holdings have also allowed cryptocurrencies on its platform, which is another reason for the recent rally. If bigger corporations are taking it seriously, then the appetite in retail investors grow, which in turn creates a speculative bubble. It is rumoured that Apple is considering it for Apple Pay.

Is Gold a fair comparison?

As a scarce resource, gold has traditionally been a hedge against inflation. Miners can’t flood markets with gold, whereas a government can debase their currencies by starting up their printing machines. Part of bitcoin’s appeal lies in the fact that it isn’t controlled by governments or their monetary policies, and that its supply is limited even more strictly than gold’s. ‘Halvenings’ (a bitcoin halving event is when the reward for mining bitcoin transactions is cut in half) help slow down the mining of new coins and production will cease entirely at 21 million coins (at the end of 2020, the tally was more than 18.5 million). With the vast spending by governments and central banks in response to the pandemic raising fears of inflation after economies recover, more attention than ever is being paid to bitcoin as “digital gold,” even as inflation remains muted.

Regulation

Perhaps the scariest thought behind all this is there is no regulation in bitcoin. This makes it a nightmare for central banks and regulators, let alone traders in Hong Kong. However, as bitcoin becomes a more common asset class, we would expect there to be increased regulation – how exactly, is a completely different story as who exactly is responsible for the regulation?!

Mt.Gox’s (a bitcoin exchange) case serves as a vivid example of why bitcoin traders should be cautious. A popular exchange collapsed and almost $460 million of users’ bitcoins went missing.

Final words

We find clients are frequently asking us about bitcoin and other cryptocurrencies and our answer is more or less the same every time – at the moment we wouldn’t invest our own money, let alone our client’s money, into something we don’t fully understand, which isn’t regulated. Watch this space as I don’t think this will be the last ramble about bitcoin, however, for the time being, the term ‘Fugazi’ comes to mind…

Ramblings of a Wealth Manager – 7th January 2021

Riding the crest of the blue wave

 

Yesterday evening we got the results of the Georgia runoff elections. The Democrats won both of the seats which means the Senate will have a 50-50 partisan split with incoming vice-president Kamala Harris having the tiebreaking vote. We would expect her to vote Democrat!

What does this mean?

It means that Joe Biden and the Democrats have a much better chance of getting through legislation and making changes to both corporate America and Main Street. Some popular Democrat policies include higher tax rates to fund more government spending, climate-friendly initiatives and increased regulation of the technology titans and pharmaceutical sectors.

What was the market reaction?

A big rally across global equity markets. The UK market hit its highest level since March. The biggest winners were those sectors which have been largely out of favour such as banks, oil and gas and mining. In general, any sectors that will benefit from increased inflation and higher interest rates led the market higher. This is the so-called ‘reflation trade’. These are also areas where investor positioning is generally underweight so as we have experienced before rotations often have a large magnitude and are swift. Previously these rotations have not had much-staying power.

Is the Senate result a gamechanger?

The margins are still very thin in terms of majorities in both House and the Senate so whilst the Democrats will have more scope to shape policy and get its chosen nominees confirmed, the usual checks and balances should mean now is not the time to completely rip up the playbook and start over!

The curtain falls on a tumultuous year

The curtain is slowly coming down on 2020. Not before time! After what has been a tumultuous period for most, and a tragedy for many, the time to turn the page and move on is slowly arriving. Centre stage, the principal actors are going through their closing lines. Following the US elections, the leading actor refuses to go quietly into the night. Legal actions lie strewn about like discarded party poppers…

Ramblings of a Wealth Manager – 9 December 2020

Capital Gains Tax reforms

The capital gains tax (CGT) system could be made simpler and fairer by reducing the annual exempt amount and raising rates to match income tax, according to a recent report from the Office of Tax Simplification (OTS).

The main proposed changes that could affect your tax bill (if the government chooses to implement them) are:

Higher CGT rates:

  • OTS suggest CGT rate should be ‘more closely aligned’ with income tax rates.
  • Basic-rate taxpayers currently pay:
    • 10% on CGT assets, and 18% on property, and;
    • 20% on taxable income.
  • Higher-rate taxpayers currently pay:
      • 20% on CGT assets, and 28% on property, and;
      • 40% on taxable income.

If a higher flat-rate of CGT tax was introduced, it could mean basic-rate taxpayers will pay a lot more CGT than they currently do.

Reduced CGT tax-free allowance:

  • OTS suggest that people’s behaviour is distorted as they rush to use their annual CGT allowance, and should be changed.
  • OTS suggests the annual CGT allowance should be reduced to between £2,000 and £4,000 per individual (less than half the current allowance – £12,300).

If the CGT allowance is reduced then there are calls to exempt more personal items, so fewer assets fall into the scope of CGT.

Reduced CGT tax-free allowance:

  • OTS suggests removing CGT uplift on death, where an IHT exemption or relief has been given, and pay CGT based on the price paid by the person who has died.

The removal of the CGT uplift would have the desired effect of providing additional income for the government, but add complexity when it comes to administering estates, as executors and their professional advisers would need to hunt down historic records to confirm the base cost before calculating any subsequent tax charge.  

Summary

It remains to be seen which avenues the government will decide to pursue and we will closely monitor developments in this area; a second paper is due in early 2021. 

Ramblings of a Wealth Manager – 3 December 2020

Bye bye RPI

Last week Rishi Sunak delivered his eagerly anticipated spending review. We were not expecting good news and we did not get any. Amongst the headlines were that we will suffer our deepest recession since the Great Frost of 1709 and a public sector pay freeze for all non-health roles.

Hidden in amongst the detail was the confirmation that the widely used inflation reference index of RPI would be scrapped from 2030 and replaced by CPIH. This has been discussed previously and was potentially going to come in from 2025.

Definitions:

  • RPI – Retail price index – this index tracks the cost of a fixed basket of goods over time but no housing input.
  • CPIH – Consumer price index plus housing – this tracks a slightly different basket of goods but includes a housing element (living costs not house price movements). This measure is seen as more realistic to actual inflation nowadays.

Why does this matter?

Historically CPIH typically runs about 0.8% below RPI.

So what?

Well RPI is the reference rate used in calculating payments of approximately two thirds of final salary pension schemes, some annuity payments and the income and capital returns linked to the majority of older index linked gilts. It is estimated that the change in the measure could cost index inked gilt holders up to £96bn.

A lower rate means a lower payment for holders of the above securities. The government has stated that no compensation will be available to those impacted.

The relentless war on savers continues.

Ramblings of a Wealth Manager – 18th November 2020

You spin me, right round baby, right round

Another week and some more positive news on a potential COVID vaccine. Most importantly this is good news for the potential of a long term return to normal (fingers crossed for a Christmas with family too!). For equity markets what it means is that the sectors that investors had almost shunned completely due to COVID are now in demand. Banks, travel and leisure, oil & gas, consumer discretionary and other economically sensitive sectors (termed cyclicals) have rallied strongly whilst technology, consumer staples and healthcare (termed defensives) have lagged.

Over the medium term, the cyclical sectors have massively underperformed but by taking a few individual share price graphs you can see the theme that has emerged since the first vaccine announcement last week. A strong short term bounce but still well off medium-term highs.

The opposite is reflected in the share prices of defensive sector stocks. Short term underperformance but still near all time share price highs.

What happens next?

Defensives have outperformed cyclicals by such a huge margin that there is scope for the rotation to cyclicals to continue particularly if there is more good vaccine news. That being said the companies that have done well since COVID such the technology leaders still look well placed to deliver growth over the long term whilst sectors such as oil look structurally challenged.

Investor positioning was extreme and this can lead to some big rotations but we would not be looking to abandon our preferred companies in defensive sectors just to chase what could easily be a short term market rotation

Optimism can be contagious too

After a rough, tough performance month in the pan-European equity markets, the instinct is always to look away from the detailed data and conclude in a world of tightening pandemic restrictions and an imminent (and hotly contested) American presidential election, that uncertainty must induce investment caution.

TRADE, DISPUTES AND NOVEMBER’S ELECTION

This October marks 80 years since the opening of the Pennsylvania Turnpike, America’s first highway. Highways have been a critical driver of economic growth due to the connectivity, speed, and efficiency they provide. As Confucius so appropriately stated, “roads were made for journeys, not destinations.”

 

Feeling Lucky

The traditional early September think piece centres on the natural reset that a generalised return to work (and for the younger generation, school) brings after the typically languid summer holiday period. As 2020 is clearly a very different style of year, let us rip up the normal script and ask the simpler question of ‘does the world feel lucky?’

A different summer pause

Financial markets are always a three-dimensional jigsaw, with new pieces being added and deleted at whim every business day. But the signals from the last month have been especially difficult to discern. In contrast to the bounce back second quarter, July was a negative month for pan-European markets with the U.K. continuing to lag.

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