Over the last 3 months, we have seen the strong performance of equities continue from the start of the calendar year. The first quarter of 2019 was a great period for investors, with all major indices posting significant gains.
The US market, rebounding off December lows, experienced their best start to a year since 1987. Market volatility came down sharply as robust US jobs data, the possibility of a trade truce between the world´s two largest economies and the Fed´s signal of a slower path of rate rises, contributed to the bounce back in global stocks.
The reason behind the December lows and the subsequent recovery in Q1 of 2019, not just in the US, but also in many global markets worldwide, was down to valuations. Based on expected earnings over the coming year, in the last quarter of 2018, stock valuations dropped down to the lowest level we have seen since 2013. As such, stocks become for want of a better word, “cheap”.
There was also a tailwind from interest rates. As rates drop, stocks are seen as being worth more. Further to this, the bad news that initially drove down stock values (trade wars, the US government shutdown, fear of the Fed and Brexit), all pulled back during the quarter. Combine these ingredients and we had a recipe for a bounce back that has taken us back close to all-time highs.
Brexit continued to drive volatility in UK equity and currency markets. The British Parliament did not mange to agree on the kind of Brexit it wants when “indicative” votes were held, with MP´s offered 8 different options on how the UK should break up with the European Union. This was after MPs twice rejected the Prime Minister´s deal and her announcement that she would resign if Parliament backed her deal.
The PM has now kicked the can down the road until October, so a constant level of uncertainty will remain in the UK and European markets for the foreseeable future. Whether the UK will leave the European Union after all is yet to be seen, as some of the more sceptical MP´s feel that Theresa May and the Government have allowed themselves just enough time to hold another Referendum by pushing the deadline to October.
Despite the Brexit uncertainty, Sterling has actually been the best performing major developed market currency in 2019 so far, as the vote to reject a “no deal Brexit”, and subsequent Extension of Article 50, were perceived to reduce the risk of a hard Brexit.
Looking ahead, there is a common sentiment amongst the investment managers that they see no reason why market growth cannot continue, albeit at a slower rate that we have seen since the start of the year. Stocks are now seen as fairly priced, compared to “cheap” as in December, and there are no interest rate changes expected in the immediate future. There is also a hope that a breakthrough may happen with both Brexit and the US- China trade deal.
With this said, the investment managers we have spoken to are aware of a few ongoing matters which could have a negative effect in the market, with arguably the biggest area of concern being the US government and their spending. In March, the US government ran out of money again as the debt ceiling came back into force. This is a pending issue which the managers are keen to keep an eye on.
Succession/ Inheritance Planning
With Brexit occupying the news headlines every night, we have noticed that many people have decided to “hold fire” with financial planning exercises. However, the Brexit saga unfortunately doesn´t look like reaching a finale any time soon, something which could leave clients in a disadvantageous position, should they decide to wait it out.
One of the key areas that often gets over looked in financial planning is the importance of succession planning, whether this be from a UK inheritance tax point of view, or a Spanish Succession tax point of view.
This, without doubt, is a very complex area in financial planning and it is no wonder that the majority of clients do not fully understand the differences between the two countries taxes and/or what can be done to reduce any liability.
As many of you may well know, Inheritance tax in the UK is charged on the deceased´s estate before any of their assets are distributed to their nominated beneficiaries. It is also a pretty straight forward operation with the standard rate of 40% being charged on any assets above the deceased´s Nil Rate Band. This can however be decreased to 36% if at least 10% of the estate is left to a charity, or for the national benefit.
In comparison, there is no “estate” in Spain, so the beneficiaries are asked to pay the tax liability before they are able to inherit the assets in question. Spain also have four categories of beneficiaries which begin with blood related individuals in the first category, to completely unconnected individuals in the fourth category. Each category has a different percentage of tax to pay.
From the UK´s perspective, the important factor when a death occurs is where the deceased individual was domiciled. It is very hard to lose a domicile status even if you have lived abroad for a number of years, so the majority of British nationals will still remain domiciled in the UK. A UK domiciled individual would be required to pay IHT on worldwide assets, including the UK.
This is where problems could arise as Spain are not concerned with the domicile of a person, for them it is to do with where the individual was resident. Under Spanish law, if you are resident in Spain at the time of death, you should pay Spanish Succession Tax on worldwide assets.
Careful planning needs to be taken when recommending solutions to reduce succession tax liabilities. There are plenty of solutions and products available, but a full analysis of a client´s financial situation must be undertaken before a suitable recommendation can be made.
At Logic, we are proud to have built up some very good relationships with a number of professional connections, including lawyers and accountants. Many of these cases are so complex, it requires a well trusted lawyer to be part of the financial planning process. We also have members of the team who are fluent in Spanish which we find invaluable when consulting with lawyers.
Spain´s ruling socialists won the most votes but fell short of a majority in Sunday´s snap general election. This contest was marked by the breakthrough of the far-right Vox party and a disastrous performance by the Country´s traditional conservative party.
Pedro Sanchez´s Socialist Workers ‘party (PSOE) won 123 seats, the conservative People´s party (PP) 66, the centre-right Citizens party 57, the anti-austerity Unidas Podemos and its allies 42, and Vox 24.
Although Vox performed slightly below expectations, their breakthrough was historic as they became the first far-right group to win more than a single seat in congress since Spain returned to democracy after the death of General Franco in 1975.
Voter turnout was 75.79% - nine percentage points higher than the 2016 election. This was also Spain´s third general election in less than 4 years and was called after Sanchez failed to gain support in Congress for his 2019 Budget plan.
PSOE will now need to seek the support of other parties to reach the 176 seats necessary to form a government in Spain´s 350 seat congress of deputies.
Over the last week we have seen the pound weaken due to thin liquidity in the markets after the bank holiday. In this same time period, the US Dollar has strengthened due to strong data and economic outlook in the US.
Looking at the exchange rate between GBP- EURO, aside from Brexit, the main factor in play right now is the Spanish elections which I have mentioned in the section above. Although the general election vote has now concluded, there is no majority, so PSOE (the party with most votes) will continue to seek support from other parties during the coming weeks. This will inevitably bring some uncertainty to the market which will affect exchange rates in the short term.
Central banks in the UK & US will also be a key focus this week as both the Fed and Bank of England (BoE) will have their interest rate decisions. Although neither is expected to make any changes, all eyes will be on the Fed to see if they mention anything about a possible future hike, following the strong information released on their outlook.
Current exchange rates are GBP/Euro – 1/1.16, GBP/ USD – 1/1.29, Euro/ USD – 1/1.12 (April 29th 2019).