Business Alert

Key tax developments and an update for investors on the market movements during the last quarter and the outlook for 2009.

15.12.2008

Key tax developments and an update for investors on the market movements during the last quarter and the outlook for 2009.

Business Alert December 2008 - click on the links below

Investment update 2008

 

Time to change company car?

Business cars attract capital allowances when purchased. The current regime provides for a slower rate of allowance on cars costing more than £12,000 when new. This system will change for cars purchased on or after 1 April 2009, to provide a rate of 20 per cent on cars emitting no more than 160g/km of CO2 and 10 per cent for cars with higher emissions. However, the quid pro quo is that cars will no longer attract a large allowance when sold, and this will ultimately slow down tax relief on purchased cars considerably. In contrast, companies leasing cars after the date of change will benefit from increased tax allowances for lease payments, with a maximum of 15 per cent of the lease payments disallowed for tax on higher emission vehicles – considerably less than under the current rules for expensive cars. Companies wishing to beat the new rules will need to consider those cars due for replacement in the first half of 2009 and decide whether the old or the new rules are of more benefit to them.

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Paying tax by credit card

Last year, HM Revenue & Customs indicated that taxpayers would be permitted to pay their tax liabilities by credit card. However, in order for them to do so, legislation is necessary setting the charge for doing so, which the taxpayer will have to pay in addition to the amount of tax due. More Regulations have now been issued which set the charge for payment by credit card over the internet at 1.25 per cent of the payment made. These regulations came into force on 9 December. We can thus expect that the new process will be available in time for payments due by 31 January 2009.

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Investment Update December 2008

Scott-Moncrieff Wealth Management consultants provide you with a summary of the key developments and market movements in the UK and internationally. If you are affected by any of the changes and would like to discuss your investment options for the year ahead, please contact Paul Bennett, Wealth Management Associate Director.

For more information on how you can manage your investments more effectively visit our online wealth management portal: click here. Also available on wealthmangement-online is our new risk profiler tool which will help you to understand your attitude to risk. Click here to access our risk profiler.

Click on the links below for commentary on the key market movements:

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World Markets

Global equity and credit markets have remained under pressure recently as it has became clear that the US, Japan and parts of Europe, including the UK, are all in a recession. Emerging market performance has been mixed with the better performances in Asian markets; emerging Europe doing less well due to extended weakness in Russian markets. Oil and other commodity prices continued to tumble as weaker global demand forces prices lower.

Equity valuations have reached their most extreme levels for more than a generation, which gives some protection against the risk of a fall in corporate earnings. Volatility of markets continues to be extremely high. History suggests that stocks will under perform in a recession but such an outcome is considerably priced into markets already.

The shorter term outlook for investors is expected to be one of continued uncertainty and volatility until we see leading economic indicators start to improve. This may not be until 2010 which suggests a continued cautious investment stance is appropriate. However, there is a generally held view that credit markets e.g. corporate bonds may recover in the shorter term, helped by the substantial fall in interest rates and inflation globally.
 
The background to the current global financial crisis is the long term build up of debt and indebtedness in several of the major economies but especially in the US and the UK; this has been particularly pronounced in the household and financial sectors. Tight credit conditions are now pervasive across all the OECD economies and it is the lack of credit that is the major factor contributing to the synchronised down turn across the developed economies.

Central banks and governments have been responding to the crisis by cutting interest rates, supporting the banks by injecting new capital, e.g. RBS, and devising fiscal stimulus programs. As the balance sheets of financial institutions and households have become overstretched with borrowings investors should prepare for an environment that takes account of a long period of de-leveraging i.e. repayment of borrowings.

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UK

With the substantial fall in Bank Base Rate during the fourth quarter of this year, from 4.5% to the current rate of 2%, there is bound to be investor demand for attractive(alternative) income producing assets, not only corporate bonds but also higher yielding equities.

The dividend yield on investment grade corporate bonds is around 7-9% at the moment; in addition there is significant scope for capital appreciation going forward, particularly if interest rates fall further in the UK which at the moment they are expected to do.

The consumer prices index (CPI) reached a 16 year high of 5.2% year-on-year in September and has now started to fall. The retail price index also declined to 4.2% at the end of October (its largest fall since 2003).

According to Nationwide’s recent housing market survey there has been a year-on-year house price inflation fall of -13.9%.

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US

The problem of tight liquidity in the money markets since the summer has persisted, following the US sub-prime mortgage defaults leaving banks to be over cautious. Access to short term finance continues to be difficult.

November was a milestone in US history with the election of Barack Obama as the 44th President of the United States. He is expected to bring a change in policy emphasis, including areas such as energy and health care, but has the primary objective of limiting and ending the recession.

Investors are continuing to prefer “safe haven” assets with great demand for government bonds, the yield on the ten year Treasury note falling recently below the dividend yield on the S&P 500 index, for the first time in 50 years.

Corporate news has been largely negative of late and financial stocks were hit by the government abandoning plans to buy troubled assets from banks through its TARP (troubled assets relief program) arrangements. Citigroup has had to be bailed out by a US$20 billion injection and AIG received an improved US$150 billion government bail out package.

October’s monthly core CPI inflation figure turned negative for the first time since 1982 and the trade deficit narrowed to US$56.5 billion in September, as oil prices continued to fall steeply.

However, many feel that the US equity market may be the first to recover, hence there are some investment manager portfolio overweight positions in US large cap stocks.

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Continental Europe

The Euro zone is officially in recession as the economy contracted by 0.2 % in the third quarter, following the same level of contraction in the quarter before. At the end of November inflation fell sharply to 2.1%.

As in other economies, consumer confidence and retail sales figures continued to weaken; also unemployment in Europe has started to rise. This has put further pressure on the European Central Bank (ECB) to continue cutting interest rates, but it has been more measured in its reduction so far with the ECB base rate currently standing at 2.5 %.

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Japan (and other South East Asian markets and emerging markets)

Japanese equities have been mixed recently with the main indices (Nikkei 225 and Topic) declining less than the small cap indices.

The Bank of Japan recently decided to hold interest rates at 0.3%, following October’s 0.2% reduction; the bank remains cautious on prevailing economic conditions which they describe as “increasingly sluggish”. Third quarter gross domestic product data showed that the economy shrunk by an annualised rate of 0.4%, which left Japan officially in recession following the contraction in the second quarter.

Sentiment towards the Japanese economy was also undermined by news that the government’s planned stimulus measures will not be considered by parliament until January. Recent corporate news has been dominated by stories of widespread production cuts as export demand weakens. Economic data in Asia is unconvincing as inflation continues to ease but key indicators of economic health, including industrial production and export growth, show further signs of weakening.

Governments have recently announced further stimulus measures including fresh initiatives in both Korea and Taiwan and a RMB  4 trillion ($580 billion) package in China. Although this figure includes existing planned expenditure the scale of China’s spending plans provided a boost to equity markets in the region, particularly companies involved in infrastructure where much of the spending will be focussed.

In the recent past there has been further significant weakness in emerging equity markets on mounting fears about a deepening global recession. Further weakness in commodity prices and a reduction in the risk appetite of investors also undermine support for the market. However, a series of interest rate cuts and the introduction of government stimulus packages in various countries were welcomed.

Brazilian equities have performed the worst of all the emerging markets recently, mainly because of the further weakness in oil prices and the effect that this will have on earnings prospects. Inflationary pressures were also evident in other parts of South America, including Mexico and Chile which saw annual inflation rates rise to 5.8% and 9.9% recently.

As mentioned, emerging Europe suffered overall because of the weakness in Russian shares which was accentuated by increased concerns that the country’s export earnings will be hurt by the slide in oil prices. To counter this, the Russian government announced tax cuts and higher welfare payments to maintain economic growth.

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Fixed Interest (Bonds)

During the period that economic growth is expected to remain “sub-par”, with inflation remaining low because money and credit growth are restrained, there is a widely held view that the environment is ideal for fixed interest investments. This in our view should include both investment grade  and higher yielding corporate bonds, held within a well diversified portfolio of bonds. However, government bonds are seen as a “safe haven” at the moment by risk averse investors but may be “over bought”.

There is a generally held view that credit markets, e.g. corporate bonds, may recover before equity markets, possibly in the next 6 – 9 months.

The demand for income producing assets, particularly bonds, will remain high, at least partly because of the very significant fall in interest rates globally.

Bonds continue to be an important asset class for portfolio diversification as they tend to move in a different way to equities and are significantly more stable (low risk).

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For more information visit Scott-Moncrieff wealthmanagement-online or contact Paul Bennett, Associate Director, Wealth Management.

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