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…
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:
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:
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:
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.
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.
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:
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.
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.
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
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.
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.”
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?’
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.
We maintain our belief in the ‘American Dream’ as described by James Truslow Adams, that “life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement,” regardless of social class or circumstances of birth. We not only acknowledge but embrace that we have work to do as a society, and hope that this year will serve as an inflection point as we advance toward a stronger and more united world.
Over three hundred and fifty years ago, back in 1665, Isaac Newton socially distanced himself from the horrors of the then rampant bubonic plague and – away from his burgeoning academic career at Trinity College in Cambridge – enjoyed a ‘year of wonders’ at his childhood home. During this period he formulated a theory of universal gravitation, explored optics and discovered differential and integral calculus.