Data shows younger generations have a larger exposure to US funds.
Younger investors tend to have more exposure to US funds as they look to benefit from the dominant technology companies and growth stocks in this region, data from Hargreaves Lansdown has revealed.
For instance, there were three funds in the IA North America sector among the top 10 picks of those aged 18-29: Baillie Gifford American, Legal & General US Index and UBS S&P 500 Index.
Investors aged 30-54 showed less interest in a specific exposure to the US market than their younger peers, removing UBS S&P 500 Index from their list.
Older age brackets deemed one US fund – Legal & General US Index – to be a sufficient exposure to the IA North America sector, while investors aged 81 or more do not have any US exposure among their favourite funds.
Source: Hargreaves Lansdown
Income funds’ popularity increases with the age of the investors, as they approach or already are in retirement. People aged 55-64 and 65-80 had two income funds in their top 10 list, while the oldest cohort had six. Artemis Income and BNY Mellon Global Income were the two income funds most commonly held across the different age groups.
Global funds were not as popular either with older investors, with only two such funds in their top 10. All the other age brackets had four global funds in their list.
However, the only two funds that all age categories were holding are in the global sector: Fundsmith Equity and Lindsell Train Global Equity.
Fundsmith Equity has been one of the best performers in the IA Global sector over 10 years, returning 296.3%. It is above the sector average of 131.9%.
It has been among the sector’s top quartile for every period, except on a three-year basis where the fund falls into the second quartile, returning 52.3%, just below the sector average of 53.3%.
Total return of fund vs benchmark and sector over one year
Source: FE Analytics
Terry Smith’s fund, which is one of the largest in the Investment Association universe, had a difficult 2022, underperforming both the sector and the MSCI World index but has had a strong start this year being top quartile over 12 months.
The manager invests with a low-turnover approach, choosing companies with strong balance sheets that can grow at a reasonable rate and have structural benefits such as barriers to entry or a rapidly rising sector. This approach is known as quality growth.
Last year he told investors that this had led to being overweight technology, but that the fund was not turning into a specialist portfolio.
The other global fund to appear in all age brackets is Lindsell Train Global Equity, managed by Nick Train. It is another example of a fund that outperformed the IA Global sector over 10 years, although with a smaller margin than Fundsmith Equity. It returned 224.7% over that period.
It also was one of the worst fund in the IA global sector over three years, returning 32.5%, while the sector average was 53.3%.
Total return of fund vs benchmark and sector in 2023
Source: FE Analytics
The fund is invested with the same school of thought as the Fundsmith portfolio, but holdings differ. Indeed, Lindsell Train Global Equity’s largest holdings are Diageo, FICO, Heineken Holding, London Stock Exchange Group and Mondelez.
Earlier this year Train lamented the performance of some of his stocks, but the portfolio has bounced back in recent months as its underweight to banks and financials has held it in good stead during the current environment.
While not a favourite among all of the age ranges, honourable mention also goes to Stewart Investors Asia Pacific Leaders Sustainability, which was in the top 10 for those in the 30-54, 55-64 and 65-80 age brackets.
The fund aims to achieve capital growth by investing in large and mid-sized companies in the Asia Pacific region (excluding Japan) that are positioned to benefit from, and contribute, to sustainable development.
It has returned 112.54% over 10 years, which is almost twice the performance of its benchmark. It also outperformed the MSCI Asia Pacific ex Japan index over five years and three years, but has underperformed it over one year and six months.
Total return of fund vs benchmark over 10yrs
Source: FE Analytics
Individual shares in common
The same patterns between the different age groups apply for shares, with young people having a bias for technology companies.
Amazon, Apple, Microsoft Corporation and Tesla are among the 10 most popular stocks of those aged 18-54.
In comparison, older investors see the potential in pharmaceuticals, with AstraZeneca and GlaxoSmithKline among their top holdings.
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Source: Hargreaves Lansdown
Emma Wall, head of investment analysis and research at Hargreaves Lansdown, said: “Older and younger investors have some striking differences when it comes to their portfolios, but an awful lot of it is driven by them tailoring their investments to their stage in life. When it comes to their overall approach, they have more that unites than divides them.
“However, different generations of investors are seeing opportunity in different places. Younger people are more likely to have technology companies in the mix, taking advantage of the way tech is transforming economies around the world. Meanwhile, older investors see the potential in pharmaceuticals as the population ages.”
Investors aged 55 or more also had a home-bias, with their 10 top holding all being UK companies, while four of younger investors’ picks came from overseas.
The precious metal hit an all-time sterling high of £1,645 per ounce on Monday.
Investors have flocked to the safe haven of gold in the midst of the Sillicon Valley Bank (SVB) crisis, with the precious metal hitting an all-time sterling high of £1,645 per ounce on Monday.
Global stocks have plummeted since the problems at SVB were brought to light and there was a run on the bank, which lent money to technology start-ups and venture capital firms.
The bank’s collapse has not been a one-off, however, with fellow mid-sized US bank Signature Bank also failing, while UBS bought European financial giant Credit Suisse as part of a government-brokered deal after the firm's shares tanked.
Adrian Ash, director of research at BullionVault, said the current market environment is similar, although not identical, to the 2008 financial crisis, when the “sudden loss of confidence in mainstream finance” caused investors to rethink their savings and understand that “bank deposits are debt, not property”.
The firm said there was a record £4.5m of gold bought over the weekend at a time when gold exchange-traded funds (ETFs) were closed. The previous record was in March 2020.
“From talking to new gold investors, including larger buyers, they are less concerned less about price right now than by certainty of title. Wholesale bullion stands out as the most tradable of physical assets. It's the deep liquidity in gold, added to the security of outright ownership, which is driving this jump in new demand.”
Total return of gold spot price in 2023
Source: FE Analytics
Nitesh Shah, head of commodities and macroeconomic research at WisdomTree, said that despite “decisive moves” by the Federal Reserve (among others) there has been a clear “flight to safety”, with demand for government bonds rising.
Yields on 10-year US Treasuries were down from 4% on 9 March to 3.4% by 17 March. Over this time, gold was up 8.7%.
He highlighted that this is not a sign of broad-based liquidity issues, as gold is often sold in this environment as people aim to free up cash for other needs.
This is the “key short-term risk” for gold, with a broader market meltdown causing investors to sell their precious metal holdings to raise liquidity for other obligations.
“The current crisis appears different in that there are no visible signs of panic gold selling and that could be indicative that the stress in certain parts of the banking sector are idiosyncratic,” he said.
“Nevertheless, investors have been reminded that unexpected events occur with greater frequency than they hoped and have sought to rebuild defensive positions that will help to hedge against further turbulence.”
The precious metal is often used as a hedge and could be so again this year if markets interpret monetary policy as incorrect. Both tightening to aggressively or loosening too early could be viewed by markets as a mistake, he noted.
In Europe, a 50 basis point rise in March was “bold”, but coupled with dovish commentary means markets are expecting fewer rate rises in the future.
Meanwhile, in the US, “if the Fed doesn’t soften its hawkish stance, it risks transforming a bank liquidity issue into a recession”, said Shah.
“If the Fed does act either by terminating quantitative tightening or prematurely ending the hike cycle, the central bank’s monetary largess will linger for longer. Either way, gold is likely to benefit. Gold tends to do well in recessions and is seen as the antithesis to central bank created fiat currencies. We therefore expect gold to hold onto the past week’s gains in this time of turbulence.”
Ken Wotton shares three of his favourite small-cap income stocks to rival the dividend giants.
Income-paying assets are an attractive investment in a high inflationary environment, but some of the most popular dividend stocks could make for volatile holdings, according to Ken Wotton, manager of the LF Gresham House UK Multi Cap Income fund.
He said that many income investors in the UK will have a significant allocation to high-yielding large-caps, but these companies offer little dividend growth and could be at risk of reducing payments.
Analysts at Octopus Investments estimate that 10 companies in the FTSE 100 will account for more than half (55%) of all dividend payments from the index, leaving a lot of responsibility on a small number of businesses.
However, the top 10 dividend payers in the FTSE 250 and FTSE Small Cap are forecast to have a more even spread, accounting for 21% and 26% of their respective indices.
Dividend concentration by index in 2023
Source: Octopus Investments
Wotton prefers to avoid large-cap companies, instead holding 78.1% of his fund’s assets in small- and mid-cap companies, which he says offer higher dividend growth and more reliable payments.
Here, the FE fundinfo Alpha manager shares three of his favourite small-cap income stocks that investors may not have heard of.
Smart Metering Systems
Energy infrastructure and technology company, Smart Metering Systems, is a top 10 holding in the LF Gresham House UK Multi Cap Income fund, accounting for 3.1% of all assets.
Wotton said that the smart meter provider’s steady revenue streams are one its most attractive qualities, with the company’s contractual nature ensuring a source of income even in times of volatility.
“It is important to assess both visibility and predictability of future income streams by unpicking a company’s revenue line,” he said. “Recurring or repeat revenue is ideal, as opposed to transactional business, which can be less predictable.
“Smart Metering Systems exemplifies the type of contracted, long-term visible income streams we look for.”
The company announced a 25% rise in revenue throughout 2022 in its most recent annual report, increasing to £136m despite high inflation and monetary tightening creating a hostile environment for many businesses.
Indeed, the government’s commitment to reaching net-zero emissions is likely to support Smart Metering Systems’ revenues over the long term, according to Wotton.
He said: “Backed by the government’s 2024 target for installing smart meters in every British home and the country’s net-zero aim, we are comfortable the smart meter business can continue to grow over the next five years.”
Its market cap is estimated to be worth around £1.1bn and shares in the company are currently offering a dividend yield of 3.73%.
Share price of Smart Metering Systems over the past year
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Source: FE Analytics
XPS Pensions Group
Pensions consultancy business, XPS Pensions Group, is Wotton’s second largest holding, with 3.5% of the £409m fund held in its shares.
He said that the company “enjoys an attractive market position and competitive advantage” thanks to its independence, while many of its main rivals are owned by larger multinational groups.
Its advantageous market position may play a part in its investment case, but strong revenues also make XPS a noteworthy company, according to Wotton.
Like Smart Metering Systems, it receives a steady flow of income from ongoing contracts – XPS reported an 8% rise in revenue in 2022, reaching £139m throughout the year.
Wotton said: “It operates with a business model that does not require significant capital – XPS boasts attractive profit margins and has the cash generation potential to support a high and sustainable dividend yield.”
The £315m company has a dividend yield of 4.93% and investors who held shares in XPS over the past year would have seen its value climb 23.5%.
Share price of XPS Pensions Group over the past year
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Source: FE Analytics
Although its share price is up considerably over the past year, Wotton said that XPS is attractively valued and on a larger discount than many of its peers.
Inspired
Investors looking to buy income-paying shares at a discounted price may also want to consider energy consultancy business, Inspired.
Shares in the company are down 36.6% over the past year, providing an opportunity to “exploit the increased dislocation between share prices and business fundamentals,” according to Wotton.
It may have undergone a derating over the past 12 months, but Wotton said that the opportunity for strong performance in future make it attractively valued.
Share price of Inspired over the past year
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Source: FE Analytics
“It has an attractive financial profile – its model features high margins, low capital intensity and growing revenue and profits,” he added. “It is also cash generative with an attractive and growing dividend per share.”
Inspired currently offers shareholders a dividend yield of 2.6% and big moves in the sector could have a sizeable impact on the share price in future.
There is a lot of consolidation happening among its peers, so Inspired could benefit from growing the business through acquisitions or being acquired itself by private equity, according to Wotton.
Critics have accused the group of using meaningless comparisons to undermine the case for passive funds.
Columbia Threadneedle has claimed its latest PassiveWatch study shows that active funds have beaten passives in every market over the past 20 years.
However, critics have accused it of misleading investors through the selective use of data.
In a release issued by Columbia Threadneedle to publicise its ninth annual PassiveWatch study, it said that “performance of active funds beat passive in every market in the UK over a 20-year period”.
It based this on research comparing the performance of the best fund in seven popular sectors within the Lipper Global universe against the average fund (both active and passive), the index, the average passive return and the best passive return.
It removed Global Emerging Markets as there were no passive funds in this sector 20 years ago.
“The most striking observation is the scale of the outperformance of the best-performing fund,” said the report.
“In the UK sector, the best-performing active fund outperformed the average passive fund by a large multiple of 2.5x. In fact, in the weakest market observed, Asian equities, the best active still beat the average fund by 1.6x.
“In summary, in every market it would have been worthwhile identifying the best active fund in the market, rather than passive.”
However, Alan Miller (pictured), chief investment officer and founding partner at SCM Direct, claimed that presenting such research in this way may have violated FCA rules about communications being ‘clear, fair and not misleading’.
“Obviously, it is not meaningful to compare the top fund with the average fund as you could never have known in advance which fund was going to be top,” he said.
“It's a bit like saying you're better off buying a lottery ticket than putting your money in the bank because had you won the lottery each year, you'd have done much better. Or even like saying, ‘it’s worthwhile picking the right share in each sector’.”
The data presented by Columbia Threadneedle prominently highlights the performance of the best fund in the sector but doesn’t show that of the worst.
While the group claimed the data shows that “active funds beat passive in every market in the UK over a 20-year period”, it actually shows that the average fund underperformed the average passive vehicle in all but one sector – Equity Europe ex UK. Here the average fund made 409%, compared with 406% from the average passive. However, the index used for the purposes of the study made 494%.
Even in the Equity UK sector, where Columbia Threadneedle highlighted the largest outperformance of the best fund, the study showed the average fund made 262% over the 20-year period, compared with 299% from the average passive. The index made 336%.
“To draw conclusions from such an amateurish and wholly biased analysis is astonishing,” Miller added. “I thought we'd gone past this nonsense about 10 or 15 years ago.”
Robin Powell of the Evidence-Based Investor agreed with Miller, saying: “Fund management companies like Columbia Threadneedle come up with these misleading studies from time to time. Once they are investigated by people who understand this subject, they usually have basic flaws.
“If you’re looking for an objective assessment on the value (or otherwise) of active management, never ask a company whose business model is built on selling actively managed funds.”
However, Columbia Threadneedle’s PassiveWatch study finished by saying that the group does use passive funds – for example, they make up between 16 and 23% of the CT Multi-Manager Lifestyle portfolios.
“We do believe that passives can have an important role to play as part of an overall portfolio (primarily as a means of reducing overall cost and adding diversification),” it said.
“[But] we also recognise that they are destined to underperform the index they are designed to track – a function of fees levied over time and tracking error.”
When questioned about its PassiveWatch study and the way its findings were presented, a spokesperson from Columbia Threadneedle said: “Following feedback, we are reviewing this latest report before being shared with our clients.”
Today, investors must operate in a very different environment with profound implications for how fixed income and, in particular, credit portfolios are managed.
In recent years, fixed income investors struggled against low rates and a low-yield environment, but this backdrop has given way to a completely new landscape. Back in 2020, if you were an investor in government bonds, there was a fairly good chance you’d be receiving a negative yield – essentially paying to buy government debt, while even in better-yielding sectors total returns were challenged.
Last year, central banks implemented an enormous shift in monetary policy to control inflation, and we expect this trend to continue. Looking forward, investors can expect this new regime of higher inflation, increased volatility and more restrictive monetary policy will remain intact. Fast forward to 2023, and bonds benefit from higher rates and, in the case of credit, attractive spread levels.
This new environment creates real opportunities for long-term fixed income investors, particularly in the credit space — provided they can navigate it successfully.
The new macroeconomic regime we are entering will come with a new set of characteristics, all of which will affect how investors look at bonds. Higher and more volatile inflation and interest rates will shape the market backdrop.
Additionally, investors should expect restrictive monetary policy, increased dispersion, especially within credit, and further periods of positive correlation between bonds and equities to impact investments.
How should fixed income investors approach this regime shift?
The rulebook hasn’t been torn up, but in this environment, the rules for successful fixed income investing have been somewhat rewritten. Investors need to re-evaluate their approach to asset allocations and should consider the following fixed income themes:
Investing under the new regime
With all of these elements in mind, the next 12 months are going to be interesting for bond markets. The continued removal of accommodative policy by central banks will accentuate those idiosyncratic risks at a time when companies are increasingly exhibiting late-cycle behaviour.
Although we do not expect a deep recession, we do not believe that central banks have conquered inflation. This means that there will probably be a longer but shallower recession to come and that bond yields may remain elevated, perhaps for longer than the market assumes.
As a result, credit returns may be healthy as corporates deleverage their balance sheets in a slow, but not catastrophic, economic environment. If rate surprises wrongfoot the market, then investors can expect further volatility – bringing with it opportunities for active managers to outperform.
Paul Skinner is fixed income investment director and Matt Knight is head of UK & Ireland distribution at Wellington Management. The views expressed above should not be taken as investment advice.
The fund manager says we may have had the final rate hike of the cycle already.
The UK central bank is unlikely to raise rates at its next Monetary Policy Committee meeting, according to Aegon Asset Management fixed income manager James Lynch, despite broad consensus of another 25 basis point increase. 
Last month, the Bank of England raised interest rates to 4%, the 10th increase since it started the hiking cycle in December 2021, while as recently as mid February experts were calling for more rises to stem inflation, which remained stubbornly high at 10.1%.
Although the market appears to have priced in another hike this week, the economic factors that influence such decisions are precarious and could result in a shock result, said Lynch.
He said the decision was “always going to be a contentious one” but that “hawkish” forward guidance from the previous MPC meeting should give investors an idea of what to expect when it meets on Thursday.
“The data, specifically on private sector wages and services inflation (we get one more print on 22 March), has overall missed to the downside – this softening in data could have been enough to halt the rate rises,” he said.
This is a contrast to previous expectations, when slightly better economic growth forecasts meant the Bank of England was likely to follow its counterparts in the US and eurozone by raising rates.
After the last meeting, the market had been pricing in another 90bps of additional hikes this year, said Lynch, but this has changed in the wake of the Silicon Valley Bank (SVB) crisis. While the issue has seemingly been contained, some argue it was partly a victim of raising rates.
“One argument that has been taking place in central bank circles is over the sensitivity of the economies to higher rates and the ‘long and variable lags’ – for the past week at least, the pendulum has swung in favour of those who have a more cautious approach to monetary policy,” said Lynch.
“For this reason, we think the Bank will not raise interest rates this week. Risk management would suggest to wait and see on how the economy adjusts to the new level of interest rates, and they always have the data to fall back on as the main rationale. We may well have seen the last increase in interest rates in this cycle.”
Brad Tank, chief investment officer of fixed income at Neuberger Berman, agreed with Lynch, arguing that the current banking issues are a direct result of central bank policy, not something separate.
“The collapse of SVB was a sharp reminder that we can’t raise rates and drain liquidity this fast, and invert the yield curve this profoundly, and expect to come away unscathed,” he said.
As such, he argued that both the Federal Reserve and European Central Bank may pause rates.
“It’s worth remembering that it’s not a policy objective for any central bank to hit some previously signalled rate target, but to tighten financial conditions sufficiently to slow growth, job creation and, ultimately, inflation. Last week was a major step function in that tightening, which will contribute greatly to achieving those objectives,” he said.
Indeed, he noted that in the US markets are pricing in Fed fund rates to fall once again in 2023 as the central bank is further down the road in terms of its rate rises and has the flexibility to pause.
“We don’t think this hiking cycle is definitely over – policymakers will want to see confirmation in the inflation data over the coming months – but after this week, we do think they’ll be on indefinite pause,” he said.
March’s edition looks at how to check whether your investment portfolio is roadworthy.
With ISA season upon us, many of you will be thinking about how to use up your tax-free allowance. However, it is worth giving your portfolio the once-over before you make any more investments to ensure it is still well placed to help achieve your original aims. This month’s cover feature in Trustnet Magazine sees Hannah Smith walk through how to do this.
The enormous sums of money that fund management groups throw at advertising during ISA season means many people make their first investment around this time of year. In the magazine’s other featured articles this month, Sam Shaw reveals why this shouldn’t be in individual shares, while Anthony Luzio finds out that even setting someone up with a practice portfolio comes with its own risks.
This month’s sector focus falls on IA Sterling Strategic Bond, as Adam Lewis writes that it could probably be split into four further sub-sectors, so little do many of its funds have in common with one another.
In the magazine’s regular columns, John Blowers wonders why his prediction that the platform industry would be disrupted by fund management groups was so wide of the mark, Mark Chadwick of the SVS Dowgate Wealth UK Small Cap Growth fund names three stocks that offer exposure to the burgeoning big data market, and RBC Brewin Dolphin’s David Cadwallader reveals why Schroder European Recovery could be a surprise beneficiary of China’s reopening.
As always, Trustnet Magazine is free – you do not even have to enter any details. Simply click here to start reading, then click the arrow pointing down on the left-hand side of the screen if you want to download the PDF.
With markets across the globe sinking thanks to trouble in the banking sector, Trustnet finds out which funds have posted the biggest losses and which have been able to rise.
Commodities, smaller companies and UK equity funds are among those that have joined financials funds in losing the most money in the past two weeks as markets sold off in the Silicon Valley Bank (SVB) crisis, FE fundinfo data shows. 
Global stocks have sunk in recent days after a series of problems at SVB – which focused on lending money to technology start-ups and venture capital firms – caused a run on the bank. The group ultimately collapsed, representing the biggest failure of a US bank since the financial crisis in 2008.
Signature Bank, another mid-sized US bank that focused on the tech sector, also collapsed while other US regional banks have come under pressure. Meanwhile, UBS has agreed to buy Credit Suisse – Switzerland's second biggest lender – after regulators pushed for a takeover to avoid a collapse in a bank that is seen as ‘too big to fail’.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: “It is not yet known exactly where more pain will emerge in the banking sector, but investors fear the problems are not yet over. Shares in Standard Chartered and HSBC listed in Hong Kong fell by 7% after immediate relief at the Credit Suisse deal evaporated. Smaller lenders will be in focus again, particularly in the US, after First Republic Bank shares tanked by more than 30% despite the $30bn lifeline given to it by large US banks.”
As the chart below makes clear, investors have flocked towards bonds over the past two weeks as volatility returns to stock markets.
Performance of fund sectors between 6 Mar and 17 Mar 2023
Source: FinXL
The only Investment Association peer groups with a positive average return over this period have been fixed income or money market sectors, led by government bond sectors such as IA UK Index Linked Gilts (up 6.5%), IA UK Gilts (up 4.6%) and IA EUR Government Bond (up 2.2%).
Fixed income is a classic safe haven in times of market stress and the higher yields brought about by 2022’s bond sell-off mean they currently look attractive compared with recent history. Investors also seem to be betting on the chance that central banks will ease the pace of interest rate hikes, or even cut rates, in response to the banking sector’s struggles.
However, a note from the BlackRock Investment Institute said: “Markets have slashed their expectations of interest rate paths, expecting central banks to come to the economy’s rescue by cutting rates as they used to do in episodes of financial stress. We think that’s misguided and expect major central banks to keep hiking rates in their meetings in coming days to try to rein in persistent inflation.”
It should be little surprise to see the IA Financials and Financial Innovation sector at the bottom of the chart, with a 9.6% average loss, given that the banking sector is at the epicentre of the current sell-off.
More risk-on sectors such as IA Commodity/Natural Resources, IA North American Smaller Companies and IA China/Greater China have also suffered, while the banks-heavy nature of the UK market is reflected in large falls in the IA UK All Companies and IA UK Equity Income sectors – both down around 6.5% in the past two weeks.
Source: FinXL
The list of individual funds making the biggest losses over the sell-off is topped by Lyxor EURO STOXX Banks (DR) UCITS ETF, which is down 18.6%. It tracks the performance of eurozone banks, meaning its biggest holdings are BNP Paribas, Banco Santander and ING Group.
Other financials funds with heavy losses include Denker Global Financial, Aptus Global Financials and Xtrackers MSCI USA Financials UCITS ETF. There are only 15 funds in the IA Financials and Financial Innovation sector and all have made a loss in the past two weeks, although T. Rowe Price Future of Finance Equity has held up the best with a 4.3% fall.
Commodities funds are also well-represented among the worst-hit funds (iShares Oil & Gas Exploration & Production UCITS ETF, Guinness Global Energy) as investors start to worry about the onset of a recession, as this would imply a drop in demand – and therefore prices – for many key raw materials.
Thematic funds such as HANetf Electric Vehicle Charging Infrastructure UCITS ETF and HAN Medical Cannabis and Wellness UCITS ETF reflect the risk-off stance of investors in the current climate, while the presence of TM CRUX UK Special Situations in the list show how the UK has been one of the weakest countries in recent days.
Source: FinXL
However, some funds have been able to make positive returns in the turmoil, especially those that invest in long-dated bonds such as Vanguard UK Long Duration Gilt Index, SPDR Bloomberg 15+ Year Gilt UCITS ETF and abrdn Sterling Long Dated Government Bond.
As long-dated bonds are more sensitive to changes in interest rates, this may indicate that investors are betting on central banks cutting interest rates sooner than expected in order to stave off a recession. Some market analysts think banks may well pause on rates hikes in the near future before resuming tightening later to quash inflation.
Fixed income funds dominate the list of those with the best returns over recent weeks although a few IA Targeted Absolute Return funds such as TM Neuberger Berman Absolute Alpha and JPM Global Macro Opportunities can be found among the top 100.
The £2.8bn portfolio is a popular option for those seeking exposure to global equities, but what else can investors use to complement it?
It was a difficult year for the IA Global sector in 2022, with funds in the group falling 20.7% on average. However, Alliance Trust proved more resilient than its peers, dropping by a shallower 5.8% throughout the course of the year.
The £2.8bn portfolio also outperformed over the long term, climbing 172.5% over the past decade and beating its peers in the IT Global sector by 56.4 percentage points.
It is a popular option for those seeking exposure to global equities, but investors may be wondering what else they can hold alongside it. Here, Trustnet asks fund experts what would complement Alliance Trust.
Total return of fund vs benchmark and sector over the past decade
Source: FE Analytics
When blending funds, investors should first consider how any new additions would sit alongside their existing holdings, but Fidelity Global Dividend would make a good pairing in most portfolios, according to Chris Rush, invetsmsent manager at IBOSS.
The £3.4bn fund’s income focus means that its asset exposue differs substantially from that of Alliance Trust, which could add some diversification to investors’ portfolios.
Rush said: “Though it also invests primarily in developed markets, the focus on dividend-paying companies and downside protection means that manager, Dan Roberts, has constructed a portfolio with very different stocks.”
Top holdings include companies such as Unilever, RELX and Deutsche Börse (which account for 12.4% of all assets), and the fund has an overall yield of 2.9%.
Its pursuit of income has also led to a greater allocation to the UK and Europe than Alliance Trust’s US-dominated portfolio.
Fidelity Global Dividend’s 28.7% exposure to the US is significantly below Alliance Trust’s 52% allocation to the region.
Returns were up 156.5% over the past decade, bringing it 46 percentage points ahead of its peers in the IA Global Equity Income sector.
Total return of fund vs sector over the past decade
Source: FE Analytics
It may offer some regional and sectoral diversification, but Fidelity Global Dividend and Alliance Trust mostly provide exposure to developed markets.
Investors who want to mix things up with an allocation to emerging markets and Asia might want to consider the Blackrock Emerging Market fund, according to Rush.
It was up 53.8% over the past decade, beating its peers in IA Global Emerging Markets sector by 17.4 percentage points.
Rush added: “We believe these areas present significant opportunity to investors to boost longer-term returns and diversify their holdings - should they have the risk tolerance for investing.”
Total return of fund vs benchmark and sector over the past decade
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Source: FE Analytics
Alternatively, Gavin Haynes, investment consultant at Fairview Investing, said that the F&C Investment Trust would make a good pairing alongside Alliance Trust.
It is situated in the same sector as Alliance Trust and beat it over the long term, climbing 202.9% over the past decade.
Haynes noted that the trust had gone down the multi-manager route much like Alliance Trust, sharing management between Paul Niven and a set of external managers.
Total return of trust vs benchmark and sector
Source: FE Analytics
He added: “The flexible approach employed by Niven has been demonstrated to good effect over the past year where he has skewed the portfolio towards value and income producing stocks has resulted in strong performance.”
Returns dropped 0.9% in 2022, making it the best performing trust in the sector that year with Alliance Trust coming in second place.
Crucially, the trust’s 12.5% exposure to private equity is the key differentiator between the two, giving F&C an added edge, according to Haynes.
The Royal London Global Equity Select fund would also make a good pairing alongside Alliance Trust, according to Nick Wood, head of fund research at Quilter Cheviot.
He said that Alliance Trust ensures style neutrality by spreading responsibility between nine managers, so anything held alongside it should be a core fund.
“Any fund held alongside the trust should be also be core in nature, unless the investor wants to take an intentional style bet on either higher growth companies or cheaper value investments,” Wood added.
FE fundinfo Alpha manager James Clarke has run the fund since it launched in 2021 alongside Peter Rutter and Will Kenney.
Since then, returns are up 8% while its peers in the IA Global sector have sunk 10.6%, marking it as one of the few funds that has “navigated such different environments successfully”.
Total return of fund vs benchmark and sector since launch
Source: FE Analytics
FE fundinfo has named the 60 managers who have been shortlisted in the annual Alpha Manager Awards.
Last year’s Alpha Manager of the year GAM Asset Management’s Anthony Smouha will compete against Wellington’s John Boselli, Liontrust’s Julian Fosh and Anthony Cross and Schroder’s Robin Parbrook.
FE fundinfo’s annual Alpha Manager Awards pits 60 of the best active fund managers against each other across 12 categories to identify and celebrate the best of fund management.
The awards, which will be held in May, feature categories for Alpha Manager of the Year 2023, equity and bond assets across the globe, responsible investment, and rising stars, which is open for those Alpha Manager who have been rated for the first time this year.
Charles Younes, research manager at FE fundinfo, said: “Fund managers have had to deal with an unprecedented level of market unpredictability in recent years – from the Covid pandemic to the war in Ukraine and cost-of-living crisis – so it’s a testament to all those making the list for their dedication and skill shown to navigate their clients through these testing times.
“Each year the bar is raised that little bit higher and 2023 is no different. The list of nominations across all the awards is impressive and each manager is deserving of praise just for making it onto the shortlist and we wish all of them the best of luck at the forthcoming ceremony in May.”
The winners will be announced on Thursday 11 May at Banking Hall in London. For more information, please visit Alpha Manager Awards.
The full list of nominees across the categories are:
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These funds offer more than the best-paying savings account around.
Pushing their money to work harder is one of the main concerns of investors who seek to preserve their purchasing power over time. For almost two decades, funds and trusts have been the place to be, as these vehicles haven’t had to worry much about the competition of savings accounts, which have offered low returns in the era of low interest rates.
This has changed now to some extent, as high interest rates are allowing savers to generate risk-free returns. The best-paying one-year fixed-term savings account today is offered by SmartSave and yields 4.3%, according to data from Moneyfacts.
Using this value as a threshold, Trustnet has scanned the IA UK Equity Income sector to find out which funds currently beat that level of yield. Speaking to Trustnet last week, however, experts have suggested investors avoid chasing higher yields only and look at other parameters as well, as some portfolios aim at maximising income at the expense of capital growth, and ultimately, investors need both.
As such, we have then narrowed the list down even further by filtering out the portfolios that have failed to beat their average peer over one, three, five and 10 years. This has left us with the five top-yielding funds that consistently outperformed their sector, which are presented below.
The highest yielder to consistently outperformed its sector was the £719.2m Schroder Income Maximiser, which sets out as its objective to generate an income of 7%. It achieves that by maintaining the lowest exposure to the UK market among all the funds in the list (still, that amounts to 72.9%). Setting it apart from the other strategies are also its exposures to South Africa (3.2%) North America and the money market, which, at 9.5% and 3.3% respectively, are the highest within the list.
Performance of fund over the year to date against sector and index
Source: FE Analytics
Square Mile analysts are aware that what one gains by receiving income in the present, may result in losing out on capital growth in the future, but despite this, believe that “the underlying equity income strategy deployed by the fund's managers, Kevin Murphy and Andrew Evans, is a credible one that should outperform the FTSE All Share index over the long term”.
Investors should note, however, that the managers' contrarian approach does tend to be more volatile than other equity income strategies.
“The central tenet of their philosophy is that share prices move more than the changes in companies' fundamentals justify. When markets are low and falling, the managers are likely to be more aggressively positioned as they see such short-term volatility as an opportunity. This may be painful in the short term, but these times may mark the periods when the strategy has the greatest opportunities ahead of it,” they concluded.
Also on the list in third position was Schroder Income, which has traits in common with the Schroder fund above.
Performance of fund over the year to date against sector and index
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Source: FE Analytics
The FE Investment team praised the managers’ long-term, successful track record in value investing and their “thorough and ongoing” company analysis skills.
“This allows them to move into positions quickly when stocks sell off aggressively. They can sometimes be too early into positions, which can cause short-term underperformance, but their contrarian positions have tended to pay off well over the long term,” they said.
“This is also one of the few UK funds managed by Schroders’ Global Value team that does not have liquidity concerns due to the fund’s focus on large companies.”
Splitting the two Schroder funds was Man GLG Income, which yields 5.3% and is run by FE fundinfo Alpha Manager Henry Dixon. Its sector weightings look different to those of the other funds in the list, as it has the highest exposure to basic materials (18.8%), financials (38.3%) and utilities (7.2%). It also invests a significant 14% of the fund’s value in Europe excluding the UK.
Performance of fund over the year to date against sector and index
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Source: FE Analytics
According to FE Investments analysts, the metrics used to assess the valuation of a company, as well as the fund’s exposure to bonds as a means of generating income, are key differentiating factors for the fund, as they are not widely used by other investors.
“Dixon is committed to the strategy and has always managed money in a similar way. He is very disciplined in his approach, which has meant that, despite being often out of favour, he has generated strong capital appreciation, as well as delivering high levels of income,” they said.
Achieving a yield of 4.7%, the next fund is FTF Martin Currie UK Equity Income, which has a higher weighting to consumer products (32.6%) when compared to the other strategies and is also the cheapest, with an ongoing charge figure (OCF) of only 0.52%. It is run by FE fundinfo Alpha Manager Ben Russon and was the best performer over five years within the list, with a total return of 34.9%.
Performance of fund over the year to date against sector and index
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Source: FE Analytics
Finally, with a yield of 4.6%, Rathbone Income focuses on “supported long-term dividend growth”, as the factsheet reports. Managers Carl Stick and Alan Dobbie look for businesses “that offer good value and make strong and consistent profits with high-quality earnings”.
Experts at FundCalibre awarded this mandate their Elite rating and described it as a “solid core equity income fund run by an extremely experienced and long-standing manager.”
Performance of fund over the year to date against sector and index
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Source: FE Analytics
“It has one of the best track records in the sector for raising dividends annually over a period of more than 20 years. Stick's process is well defined without being overly constrictive, and the heavy emphasis on risk management is particularly pleasing,” they said.
Its high exposure to the healthcare and industrials sectors, at 7.9% and 16.2% respectively, set it apart from the rest of the group, together with its slight tilt to smaller companies.
Tech companies will be “the key driver of most economies over the long-term,” but recent volatility has left them attractively cheap.
Technology will be a leading theme over the next decade but bonds are a good short-term play, according to Simon Nichols, manager of the BNY Mellon Multi-Asset Balanced fund.
The £2.4bn portfolio has an 11.3% allocation to technology compared to 8.4% average in the IA Mixed Investment 40-85% Shares sector.
This allocation has been helpful over the long term, with the fund up 88.2% over the past decade, while it has also made strong returns placing it in the top quartile of the XX sector over the past three, five and 10 years.
Here, Nichols tells Trustnet how deratings could provide a good entry point to technology and why US bonds becoming a bigger part of his portfolio.
Total return of fund vs sector over the past decade
Source: FE Analytics
What is your investment approach?
We invest predominantly in equities, with around about 70% to 80% of the fund in stocks. We also have allocations to government bonds and cash and we can invest anywhere, so it’s a very flexible portfolio.
Because we can invest anywhere, we like to gain the broadest range of views possible and we get that from our expertise across the firm. We take all that on board and create a portfolio of equities and bonds that meet the objectives of the portfolio to deliver long-term capital and income.
How does that approach differ from your peers?
We're directly invested – we're not looking to be a fund-of-funds – and we’re relatively concentrated with equities in the mid-50s which is complemented by exposure to bonds and cash.
That concentration really does come through in terms of the performance because we’re largely driven by the alpha that we're getting from that equity selection and backing our best ideas, not investing in hundreds of stocks.
Has your bias towards equites been damaging to performance over the past year?
Bond markets produced lower returns than equity markets looking back over the past year. The gilt market was down more than 20% last year and, whilst equities did suffer into that derating, many others produced higher returns than bonds.
What equity sectors do you see outperforming in the future?
We’re really long term, so the themes that excite us would be those areas of the market that have the potential for disruptive change.
Most of those stocks you will find in the technology and healthcare sectors and those are the areas that we are most overweight in.
Those are areas we would highlight, maybe not on a six-month view but certainly over the long-term.
Have you taken advantage of deratings to allocate to those sectors?
I think technology is going to be the key driver of most economies over the long term. Once they’re past this cyclical hump, I think these are great companies to invest in.
I think it's definitely a case of getting through this tough period. There was a time where they had supernormal returns in the Covid period but I see no reason why the returns shouldn't be fantastic in the future.
We haven't yet majorly reinvested our high cash balances back into equities but there's obviously a lot of volatility in markets that we are looking to use to invest in names that have got great long-term prospects.
Why haven’t you increased exposure to that sector yet?
Technology is already our largest overweight so there hasn't been a major move back into that area yet. We reduced exposure there a little bit in 2022 but we’ve started to build it back up this year by adding some new names like Nvidia, which is a semiconductor designer.
We've actually been increasing our allocations to bond markets because the yields available have become much more attractive. They weren’t yielding anything but the change in real yield has moved significantly.
Share price of Nvidia over the past year
Source: Google Finance
What bonds have you been buying?
We've increased both to the US and UK bond markets because they’re well-developed markets with high ratings.
We use our bond allocations very much as stabilisers, so we don't have any money in corporate and high yield bonds – we're taking risk in equities, not within the bond element of the portfolio.
UK bonds make up most of your fixed income exposure – why do you prefer them?
The yields are relatively similar in the US and UK at the moment. You can now get a little bit of a higher yield in the in the US than the UK.
The US market had a real yield of minus 1% last year, but that’s gone up to 1.5% at the start of this month, so that's been a key change for returns from bonds.
From a currency point of view, we are a sterling dominated fund so we keep an eye on currency exposures. Cleary, having some overseas exposure with the weak sterling was beneficial last year.
Are US bonds now looking more attractive than in the UK?
You get a slightly higher yield in the US, but there’s not a lot in it at the moment. Developed market bonds tend to move together because central banks tend to act together.
Inflation expectations in the UK are a little bit higher than they are in the US, but then you have the issues with Brexit so there’s not a lot in it.
Which of your holdings performed best over the past year?
BAE Systems was a really strong performer for us over the last year given the geopolitical issues we saw in Ukraine. It contributed around 50-60 basis points to the overall relative performance of the fund.
What was your worst performer?
The most negative contributors to performance will be some of our bigger technology holdings such as Accenture and Sony. Microsoft didn't keep up with the broader market last year, so that would be up there as well.
Microsoft detracted about 30 basis points from performance, with Accenture and Sony at around 25 basis points each.
There was some weakness in earnings last year from some currency issues because of the strong dollar and particularly from the cyclical hump in the fourth quarter. Over the longer term, we anticipate that these stocks can perform well.
Total return of Microsoft, Sony and Accenture over the past year
Source: Google Finance
What are your interests outside of fund management?
I like to run, so I’ve entered into the Leeds half marathon in a couple of months’ time. Training for that is what I do on evenings and weekends.
Trustnet editor Jonathan Jones looks at retirement savings in a week when the chancellor made it more enticing to save.
Investing for retirement has been the hot topic of the week after the chancellor’s Budget on Wednesday. Jeremy Hunt scrapped the Lifetime Allowance, increased the amount that can be added to a pension each year from £40,000 to £60,000, and changed the amount of money that savers can put into their pension after already making a withdrawal, from £4,000 per year to £10,000.
With such a spotlight on pensions, it is worth knowing how to make the most of them.
A defined contribution (DC) scheme is the default option for most employees, so this is what I will focus on here. Under this arrangement, workers put money from their salary into their pension, with their employer usually matching this figure up to a certain amount.
Most of these are then put into a default scheme, which is typically invested based on a range of factors including how long you have until retirement and risk profile. However these schemes can tend to err on the cautious side, which may not suit all, especially younger investors who have a long time to invest and watch their savings grow.
Even people nearing retirement may wish to have higher allocations to equities, which over the long run have proved to beat fixed income.
There is nothing wrong with taking a lower risk level as we get older, and circumstances may even require it, but savers should first look to diversify their equity risk across a greater selection of different asset classes first.
There are several reasons for this. First is the assumption that bonds are somehow ‘safe’ – a hypothesis that has been severely tested over the past year.
As Paul Derrien, investment director at Canaccord Genuity Wealth Management, said: “The lower end of the risk scale experienced the greatest falls in 2022, and if you were drawing down from your pension at this time, it could have had a much more negative impact than you were expecting.”
Another is that, even in or near retirement, many people working today will still live for decades more, meaning that some form of growth should also be considered – not just fixed income.
This can be especially problematic for anyone with a personal pension, where people often hold cash or low-risk government bonds, according to Claire Trott, divisional director of retirement and holistic planning at St James’s Place. She said such positioning “should be avoided for long periods of time as the funds invested will lose value because of inflation”.
Derrien said that if investors are confident, managing their own retirement savings is an attractive option and one that most pension providers offer. This can be through a self-invested personal pension (SIPP) or by managing the allocations yourself in a DC scheme.
“If you have the ability and inclination, then you may be better off allocating yourself, as you can mix the duration to suit your view of markets, mix between government bonds and corporate bonds, and look to increase and decrease your overall weighting to bonds to suit the market outlook,” he said.
However, it is always best to seek financial advice on not only the investments, but also the level of contributions being paid, before making any concrete decisions, as these may not be enough to support retirement goals
Trott added: “If you are not seeking advice, then the funds available will generally provide some guide with regards to the risk they pose. If you can determine how you feel about risk, this is a good place to start determining what is suitable for you.”
The trust has featured in many buy lists recently – here are other vehicles to consider adding next to it.
RIT Capital Partners is one of the largest most popular trusts in the IT Flexible Investment sector that analysts have been recommending since the beginning of the year.
In January, it featured in Numis’ list of equity trusts worth buying at their discounts (currently at 21%) and at the end of February, Winterflood researchers said that “there are several interesting dynamics at play in the underlying portfolio”, mostly due to the range of asset class exposures in areas that "remain attractive to long-term investors”.
“Furthermore, the managers justifiably point out that the fund has yet to produce a negative return over any 3-year period since its launch in 1988,” they said.
But not everyone is a fan of the investment company with close to £3bn of assets under management.
One notable critic was the Telegraph’s Questor column, which gave it a ‘sell’ note at the beginning of the year due to its tilt to venture capital. Additionally, the trust has had a difficult run since 2022, underperforming its IT Flexible Investment sector by 12.5 percentage points and falling short of closing the gap with its peers over the year to date, as the chart below illustrates. This, for some, adds reasons to think that the large discount might be justified.
Below, three experts discuss RIT Capital and explore other investment opportunities that might do well when combined with it.
Performance of fund against sector in 2022 and over the year to date
Source: FE Analytics
Ewan Lovett-Turner, head of the investment companies research team at Numis, said this remains an “attractive time to buy RIT Capital, as it offers exposure to an attractive range of assets that is difficult to replicate, sourced through the managers’ network with specialist asset managers”.
Should investors want to couple it with a trust that is doing something different, he suggested a more growth-focused vehicle such as Tom Slater’s Scottish Mortgage. The trust plummeted in 2022 but was able to recover a lot of what it had lost in the new year, as the graph below shows. It currently trades on a 16% discount.
Performance of fund against sector in 2022 and over the year to date
Source: FE Analytics
For someone looking for mandates that are highly defensive or focused on capital protection, Lovett-Turner highlighted Capital Gearing or Personal Asset as other alternatives.
The former, a £1.2bn trust with a five-crown rating from FE fundinfo, returned 4% over two years against a 1% loss from its average peer. Currently, it has 40% weighting to UK corporate fixed interest and 29% globally, while 30.5% is in equities and 1.8% in cash.
The latter, managed by Sebastian Lyon at Troy Asset Management, has even less in equities (23%). Instead, he has 35% in US Treasury inflation-protected securities, 24% in short-dated bonds, 11% in gold and 7% in cash.
This strategy was also picked by Jason Hollands, managing director at Bestinvest.
“While RIT Capital looks to temper volatility through holdings in hedge funds, absolute return strategies and private companies, the Personal Assets trust is less exotic in nature, focusing on listed equities, inflation-linked bonds, gold and short-term bonds,” he said.
“The approach is more conservative than RIT Capital and the portfolio is currently very defensively positioned reflecting the view of the team that the environment remains risky. This strategy won’t shoot the lights out in a bull market, but it does have a track record of downside protection.”
Hollands also remarked that most of RIT Capital Partners’ high exposure to unquoted companies (through both commitments to private equity funds and direct holdings) is in “relatively mature businesses” rather than early-stage venture capital.
This wasn’t enough to convince Andy Merricks, fund manager at 8AM global, who said he’s “not a fan of private equity” and preferred to look elsewhere entirely. For those that wanted to look at a trust that had fallen to a big discount and was now attractively valued – one of the reasons an investor may look at RIT Capital – his pick was the Biotech Growth trust.
Performance of fund over 2yr against sector and index
Source: FE Analytics
“Given the longer-term potential for biotech development and the apparent injection in urgency to deliver solutions to a whole range of diseases and ailments in recent months, this is an attractive entry point in a sector that is not going away in terms of need any time soon. And I like investing in what the world needs,” he said.
Its discount is just under 10% and, having soared after the pandemic, “it’s given back all those gains to be sitting slightly down on its pre-pandemic price, which makes little sense to me”.
UK companies are “the most attractive in the world,” but their share price could double if they listed abroad.
Many UK companies would be better off leaving the UK and listing abroad, according to Alec Cutler, manager of the Orbis Global Balanced fund.
The FE fundinfo Alpha manager said that the UK is filled with strong companies that are unappreciated by domestic investors.
He added: “If they listed anywhere else in the world their stocks would double. If it takes long enough and we own 30% of a company like Headlam, that's what we're going to tell them to do.
“It would be terrible for the UK though, so something has to change. Someone needs to blow a whistle and say, ‘let's actually look at our own companies again’.”
Headlam is a UK flooring company that Cutler added to the £128m portfolio during the volatility of Brexit that has since paid off all its debt and generated a 10% free cashflow yield.
“That in the US would not be a $250m company,” Cutler said. “That would be a $750m company, but it's fallen through everyone's fingers because if the Brits don't care, then it's only trolls under the bridge like me who’ll care.”
One of the main reasons that companies in the region have become so undervalued is because they have lost the support of UK investors.
Last year, UK investors removed £8.9bn from IA UK All Companies funds alone, with the sector not experiencing a month of positive net inflows since July 2021.
Cutler said: “Domestic UK names are the most attractive in the world because Brits have decided they don’t like them anymore and have decided they want to buy stocks and bonds from other places around the world.”
This was echoed by Alex Savvides, manager of the JOHCM UK Dynamic fund, who told Trustnet last week that declining interest from UK investors in their home market has driven equity prices well below their actual value.
Instead, the rising popularity of passive investing has driven investors’ exposure out of the UK and into other markets around the globe, predominantly the US, according to Cutler.
While UK equity funds suffered billions in outflows last year, Investment Association data shows that UK investors poured £11bn into index-tracking funds over the course of 2022.
Most of the leading global indices are heavily skewered towards the US, such as MSCI World, which has a 67.7% exposure to US equities. UK equities, on the other hand, only account for 4.4% of the same index.
Cutler said: “Twenty years ago, pension plans in the UK would have at least 50% in domestic equities but now it’s around 4% which is crazy. I haven’t seen a country that’s lower than that.
“It’s just weird that everyone is selling the British companies that they know well to buy banks in Silicon Valley and US tech companies that promise them the moon.”
Unless UK investors decide to start allocating to their home market again, Cutler said that he can only see the UK’s presence in the global market dwindling further.
He added: “Around four years ago, UK stocks started hitting our screens as being very attractive, and they've only gotten more attractive over time.
“Good companies just keep falling and falling and falling to the point where bottom feeders like us get attracted because investors have all decided that they suck.”
The Orbis Global Balanced fund was second-best performer in the IA Mixed Investment 40-85% Shares sector over the past decade, beating its peers with a total return of 132.4%.
Total return of fund vs sector over the past 10 years
Source: FE Analytics
It currently has an 11% weighting to the UK, which Cutler began adding to when the UK became attractively cheap around four years ago, but one could argue that declining sentiment began earlier than that. The IA UK All Companies sector was the worst selling group among UK investors every year between 2014 to 2018.
EPIC Next Generation Bond manager Fred Coldham argues that fixed income is showing strong potential in the current environment but believes investors should move quickly.
Fixed income funds remained popular at the start of 2023, attracting inflows of £1.6bn in January , despite painful loses in 2022. While some remain cautious that bonds can provide positive returns, we believe underweighting fixed income right now is folly.
Our models show that we are at the point where inflation has started trending lower as households get squeezed, and the US Federal Reserve could find itself in a position where it has overtightened. Quantitative tightening affects financial instability: this policy acts with a lag and the outlook to us does not look as rosy as current data suggests.
Interest rates are markedly higher than they have been at any point since 2007 and this has generated concern in financial markets, but it is important to recognise that interest rates have historically been higher than the level maintained over the last 15 years. Interest rates were manageable in prior periods, and will be manageable going forwards.
Opportunity signals
In the meantime, volatility creates opportunity, and we will be looking to take advantage of this. We are already seeing encouraging market signals of spread widening as the UST curve has once again repriced.
However, there are still two key indicators that could affect this view: the Fed’s dual mandates of inflation and employment.
Employment data remains robust and inflation is off its peak, but still lofty. The Fed has managed the easy part of reducing inflation from the 9.1% highs to ~6.4%, but the tough job of bringing entrenched inflation down to the central bank’s 2% long term target will be extremely challenging. Hence the Fed is signalling higher rates for longer.
Moreover, China’s reopening could underpin inflationary pressures amid increasing demand for commodities and pent-up domestic demand, signalling possible higher terminal rates in the US, at the expense of growth.
Attractive yields
The era of negative yields has almost come to an end, and today’s yields look very compelling.
At this stage of the macro-economic cycle, we are broadly defensively placed in short-end US Treasuries and undervalued bonds, and continually look for signals to rotate our US Treasury holdings and small cash positions into credit.
We have reached a point where credit spreads have begun to tighten, having widened sufficiently. Those who captured the uptick following the Global Financial Crisis and during the Dubai crisis, when spreads had blown out, were rewarded in moving from defensive AAA/AA rated portfolios towards A/BBB weighted average ratings.
Although we can invest in sub-investment grade bonds through our Next Generation strategies, we have broadly favoured high-grade, quasi-sovereign bonds issued by ‘Wealthy Nations’ as we are not constrained by indices. This means we are not exposed to the most indebted nations.
Central banks, which had injected trillions into the financial system since the global financial crisis and during the pandemic, have foregone their assumed role as buyers of last resort against financial market volatility. The end of the so-called ‘Fed put’ has been underscored by swift rate rises and the withdrawal of liquidity. For the bond market this has prompted aggressive repricing; credit is therefore now offering a wider risk premium.
We take a value-led approach, seeking to identify “mispriced” bonds within the investable universe. Once the bond has been put under the microscope during our credit research process, we decide whether or not the expected risk-adjusted return and credit notch cushion is sufficient for the bond to be included within our various strategies and segregated mandates.
The bond market has great potential to offer excess returns, especially as many investors remain underweight, which we believe will be costly to investors. There are strong opportunities for fixed income gains on a valuation and yield basis. The risk is that once everything has lined up the market will have already exploded into life.
Fred Coldham is manager of the EPIC Next Generation Bond fund. The views expressed above should not be taken as investment advice.
The government did not backtrack on its reduction of dividend and capital gain allowances during the Budget.
Savers will still have to look elsewhere to avoid some of the government’s stealth rises, according to experts, even after helpful pension changes made in the Budget yesterday.
While the amount that can be put in a pension has been upped from £40,000 to £60,000 and the lifetime allowance has been scrapped, not all will want to tie up their cash for retirement.
ISA allowances were kept stagnant yesterday, while the government forged ahead with plans to reduce tax allowances.
The government halved the capital gain allowance from £12,300 to £6,000 and the dividend allowance from £2,000 to £1,000 from April 2023 during the Autumn Statement in November 2022.
The capital gain and dividend allowances will fall further to respectively £3,000 and £500 in April 2024.
As such, venture capital trusts (VCTs) and enterprise investment schemes (EIS) remain alternatives for high earners, experts have said.
Jason Hollands, managing director of Bestinvest, said that the tax outlook remains bleak despite the abolishing of the lifetime allowance.
In addition to topping up pensions to benefit from income tax relief or migrate investments into ISAs, he suggested that some investors could be interested in higher risk schemes.
He said: “For some, more esoteric tax efficient but higher risk schemes, such as venture capital trusts and enterprise investment schemes, which the government has encouragingly reaffirmed its commitment to, may be worth considering.”
Pensions will remain important and could look even more attractive after the minimum tapered annual allowance rose to £10,000.
As a result, Max Ormiston, assistant fund manager of the Unicorn AIM VCT said that saving into a pension will remain restrictive for many high earners.
He added: “We expect demand for tax-efficient investment products, such as VCTs, to remain robust as an alternative to pension pots for wealthy individuals.”
VCTs investors can invest up to £200,000 each year, claim up to 30% upfront income tax relief on the amount they have invested and benefit from tax-free capital gains and tax-free dividends on their investment.
In comparison, investors can pour up to £1,000,000 per year into an EIS or £2,000,000 if investing in knowledge-intensive companies. It also provides a 30% relief on the amount invested on income tax once investors have held their investment for three years.
In an effort to boost growth, Hunt also announced the creation of 12 new investment zones across the UK in today’s budget.
Matt Currie, head of growth capital at Seneca Partners, said that the Budget set out the government’s ambition to accelerate the economy and unlock the potential of the SME sector.
He added: “Whilst there is little in the immediate detail relating to direct measures to achieve this at individual business level beyond reinvestment tax incentives, the chancellor pledged to make this the focus of his attention in readiness for the Autumn Statement.
“Many of the businesses in the tax advantaged arena are not yet at the stage of reinvesting profits and their funding largely derives from VCTs, EIS and SEIS. The recognition of this at UK government level bodes well for the tax advantaged sector going forward and the critical part it will have in helping these businesses to develop and flourish.”
The government extended the sunset clause for VCT, EIS and the Seed Enterprise Investment Scheme beyond 2025 last autumn.
Personal finance experts share the traps investors often fall into with their ISA.
ISAs are one of the few ways investors can squirrel away their cash without leaving it open to raids from the taxman, making them a must-have for the majority of investors.
With the deadline to use up this year’s £20,000 allowance fast approaching on 5 April, investors will be looking for ways to make the most of their ISA budget, but there are easy mistakes that all too many of us make at this time, according to the experts.
Here, Trustnet asks personal finance professionals for the most common errors people make with their ISA in the final months before the end of the financial year and how to avoid them.
Don’t buy this year’s winners
Investors often fall into the trap of looking at which funds have performed best over the past year and buying those, according to Rob Burgeman, senior investment manager at Brewin Dolphin.
He said: “A seasoned professional can often tell when an ISA was taken out by which holdings are held. Last year’s ISA vintage will be full of technology and high-growth funds and this year’s vintage will, doubtless, be full of value funds.”
Short-term outperformance can be attractive on face value, but it can be followed by periods of more stabilised returns – funds that benefited from a rally over the past year might not be as popular moving forward.
Alice Haine, personal finance analyst at Bestinvest, agreed, stating that chasing short-term winners is no substitute for careful portfolio construction.
She said: “Investors often take an ad hoc approach to selecting funds each year, buying whatever funds or trusts are currently doing well or being heavily tipped as free-standing decisions, rather than considering how these will fit as part of a wider, well-constructed portfolio.”
Pay attention to your existing portfolio
Haine added that investors first need to look at which funds they already hold in their ISA and consider how any new additions might fit in with them.
Buying a new fund without considering your pre-existing portfolio could leave your ISA heavily reliant on a few investments, adding a significant deal of risk.
Haine said: “Failing to review a portfolio can see it skewed towards an out-of-favour investment style, that needs drastic refreshment.”
When looking at what they already hold in their ISA, investors need to think about which funds still deserve a place in the portfolio, according to Laura Suter, head of personal finance at AJ Bell.
She said: “Once a year you want to take stock of how your investments have performed and make sure that you’re happy with how the portfolio looks.”
If a fund has done well over the past year, investors might want to consider selling out of it and buying one that has performed poorly which could benefit from a rebound in future.
Suter said: “While it can feel counterintuitive to sell the stocks or funds that have risen and buy more of the ones that have fallen, that’s the theory you should be sticking to.”
It can be tempting to keep adding keep adding growth funds to your ISA, but this is only fruitful if you keep looking back and rebalancing your portfolio, Burgeman added.
He said: “A more balanced approach is often the best way – a portfolio, diversified by asset type and style bias, can produce less volatile returns that can weather the inevitable market storms better.”
Don’t worry about timing
Investors may be hesitant to invest their money in markets given the current volatility but waiting for the perfect moment would be a mistake, according to Myron Jobson, senior personal finance analyst at interactive investor.
He said: “Amid volatile markets, some people delay contributions until the waters settle – but ultimately no one short of a functioning crystal ball can say for sure when this might happen.”
Indeed, investing your money now will be more rewarding over the long-term than holding off for a sunnier day, even if it means your ISA going through a bumpier road in the short term.
Jobson added: “Regularly drip-feeding money into your investments can help take emotions out of investing while mitigating investment risk and smoothing out the inevitable bumps in the market, buying fewer shares when prices are high and more when prices are low.”
Likewise, Sarah Coles, head of personal finance at Hargreaves Lansdown, said that the fear of a negative return deters many people from investing in the first place.
However, putting money into your ISA incrementally through periods of volatility leads to better returns over the long-term than leaving it sat in a cash account.
Coles said: “People rule out a stocks and shares ISA because of a misunderstanding. Some think they can’t get a last-minute stocks and shares ISA because they don’t want to invest it all right now – but you can secure your allowance now and invest it gradually.”
Don’t leave it to the last minute
Although investors shouldn’t worry about timing the market, Jobson said that those looking to use this year’s allowance should do so sooner rather than later.
The deadline to use up this year’s allowance may be 5 April, but those looking to transfer investments from a general savings account into an ISA (known as bed and ISA) is 31 March.
This brings those investments under the tax benefits of an ISA, but not many people know that they have less time to do it, according to Jobson.
He said: “With allowances for capital gains and dividend taxes set to fall significantly come the new tax year, investors with substantial assets held outside of the ISA and SIPP tax wrapper might want to pay attention to the bed and ISA deadline.”
Haine also reminded investors that bed and ISA transactions take much longer, but added that even buying new funds for your ISA can be held up by delays.
Fund platforms experience more traffic than normal near the deadline, so those leaving it to the last minute could miss the boat to technical difficulties.
Haine said: “Ultimately, the biggest mistake of all is not utilising your £20,000 ISA allowance by the deadline at the end of the tax year.
“This is a ‘use it or lose it’ allowance that you cannot backdate, so take action before the 2022-23 tax year ends at midnight on 5 April and it is too late.”
Make the most of your allowance
If investors have any of their allowance left over this year, they should try and use up the rest of it now, according to Suter.
From next month, the threshold investors can earn dividends without paying tax is being halved from £2,000 to £1,000. Not long after in April, the total amount people can earn tax-free will be dropping from £12,300 to £6,000, so those who haven’t protected their assets in an ISA yet may regret it come 5 April.
Suter said: “The biggest ISA mistake is not taking advantage of your allowances this tax year and losing them – especially given the imminent slashing of the dividend and capital gains tax allowances.”
Eight investment trusts have raised their dividends for 50 years or more, but which one would make the best addition to a portfolio?
Investors can pick between eight investment trusts with a track record of raising annual dividend for at least half a century, but owning all of these ‘dividend heroes’ may not be the best investment strategy as half invest in the IT Global sector while two are in IT UK Equity Income.
Investors can find worthy investment trusts beyond the dividend heroes but having more than 50 years of dividend growth is a commendable feat that shows longevity – something that many investors covet. Below, fund pickers choose which of these eight investment trusts they would buy.
The Bankers Investment Trust
In the IT Global equity sector, Shavar Halberstadt, equity research analyst at Winterflood, picked the Bankers Investment Trust. He said this is because this trust is large, liquid, well diversified and investing across geographies.
While its dividend performance has been strong, returns have been mixed. It has been in the bottom half of the IT Global sector over 10 years, returning 141.5%. However, this is above the sector average 116.8%.
Last year the trust was middle of the pack, but the portfolio could be in for a rebound, according to Halberstadt.
He said: “Factors that negatively impacted 2022 performance have (partially) reversed post year-end (dollar strength, oil revenue, China weakness).
“Moderate gearing is utilised, and average borrowing costs are set to fall through the repayment of a high-yield debenture. The fund also runs an active share buyback program, repurchasing 1.5% of share capital over 2022.”
Bankers invests on a worldwide basis with the aim of achieving capital growth in excess of the FTSE World Index and dividend growth above the UK Consumer Price Index inflation.
The City of London Investment Trust
Turning to the UK, the £2bn City of London is the largest of the two ‘dividend hero’ trusts in the IT UK equity Income sector.
Pascal Dowling, partner at Kepler Trust Intelligence said: “The trust’s high and growing dividend has led to it often trading on a premium, allowing the board to issue shares and the trust to grow.
“This has led to a virtuous circle forming in which fees fall as the trust grows, and it is already the cheapest trust in the IT UK Equity Income sector.”
The City of London trust aims to deliver long-term growth in income and capital through investment in equities listed on the London Stock Exchange such as British American Tobacco, Shell and Diageo.
It was launched in July 1964 and Job Curtis has managed it since July 1991. Like Bankers, the trust’s performance has been spotty. It was one of the worst portfolios in 2019 and 2021 when markets rallied, but came into its own last year, up 9.4% when the average peer lost 4.3%. Over 10 years it has beaten the average peer, up 84.5% versus 76.2% for its rivals.
Dowling added: “Job Curtis’s long experience in the markets has helped him deliver positive stock selection in eight of the past 10 years. Meanwhile the judicious use of gearing has also contributed to returns.
“We continue to take the view that its unique package of characteristics makes the trust an attractive proposition for long-term investors seeking income and capital growth.”
The Global Smaller Companies Trust
Darius McDermott, managing director of Chelsea Financial Services, was keen on the City of London Investment Trust, but also highlighted the Global Smaller Companies Trust as another worth buying.
He said: “Small-caps are always in the eye of the storm, and while the UK is particularly attractive for this part of the market, they are also extremely attractive on a global scale.
“But with recession looking increasingly likely, it is important to remember this part of the market has not only been hit hard already, but history shows us small and mid-caps often lead markets out of recession as well. I would add that the dividend yield is lower at 1.2%.”
Managed by Peter Ewins since 2005, the trust has been a boom or bust proposition. Recent performance has been stellar, with the trust making the smallest loss in the IT Global Smaller Companies sector (15.6%), having made a 20.9% in 2021 – the second among its five peers.
However, it was the worst performer in 2018, 2019 and 2020 and its 10-year returns are the worst among its four peers with a long enough track record at 105.7%.
F&C Investment Trust Plc
Not all agreed with McDermott, however, and Doug Brodie, chief executive of Chancery Lane, said he would sell the global small-cap trust above in favour of the world’s oldest investment trust: F&C.
He was high on the trust due to its history and track-record in delivering dividends, adding that “everyone should have it in their SIPP (self-invested personal pension).
Brodie said: “The average age of our clients is 62, so all the work that we do is income based, which means we only operate with companies that have a very strong cash flow, because there's no chance of them running out of money.”
F&C Investment Trust fits the bill. It started in 1868 under the name “Foreign & Colonial Investment Trust” and was the first collective investment scheme in history.
Since Paul Niven started managing F&C in June 2014, the trust has always been able to beat the IT global equity sector.
It aims to deliver long-term growth in capital and income through international investments in public equity as well as securities and private equity and returns have been strong.
Indeed, the trust has been in the top quartile of the IT Global sector over one, three, five and 10 years, with it topping the peer group over three years.
Experts react to the abolition of the lifetime allowance and hikes in the annual allowance.
The highlight of today’s Budget was the abolition of the pensions lifetime allowance, as few were expecting chancellor Jeremy Hunt to make this announcement.
The end of the LTA means that people contributing into their pension pot will not face a tax-free limit of £1,073,100.27 on their retirement savings anymore.
It was widely welcomed by industry experts, although one or two remained cautious. Below, Trustnet highlights some of their views.
A rabbit out of the hat
Clare Moffat, pensions expert at Royal London, said the decision to scrap the LTA altogether was the ‘rabbit out of the hat’ moment that no one expected.
“While abolition was not expected, the government has acknowledged that too many workers in well-paid jobs are opting for early retirement or reduced duties rather than face paying punitive taxes on their retirement savings. This was particularly relevant to senior NHS doctors, a group vital to clearing hospital waiting lists,” she said.
“Allowing these people to save more money into their pension without a tax charge can only incentivise them to remain in work longer – a boon for both the Treasury and employers attempting to retain talent in a tight labour market.”
The government is on your side
Today’s reforms are the most significant retirement policy intervention since Pension Freedoms in 2015, according to AJ Bell head of retirement policy Tom Selby.
“The lifetime allowance has long acted as a drag anchor on strong investment performance and a deterrent to retirement saving, while also creating horrendous complexity in the system,” he said.
“Significant hikes in the annual allowance, and in particular the money purchase annual allowance, are also welcome and should help reduce disincentives for over 55s to return to the workforce.
“Taken together, these pension tax cutting measures amount to a colossal boost to savers and retirees and send a clear message to hard-working savers that the government is now firmly on your side.”
The changes reflect the modern day
Simon Harrington, head of public affairs at PIMFA, said the steps taken by the chancellor today gives consumers the right incentives to save for the future, and ensure that some are not forced to make a decision between saving and investing and remaining in the workplace.
“It is right that, having been frozen for so long, these allowances are reformed to reflect the modern day and we would encourage the government to keep the annual allowance under review on a regular basis,” he said.
“Going forward, it is vital that any future policy should not negatively impact on the ability of people to save and invest and we would encourage the government to look at other areas – particularly those that disincentivise individual share ownership – in future.”
Retirees should feel more confident about their money lasting the distance
The chancellor has given retirees a game-changing boost to how much they can save into their pension with the latest moves, said Verona Kenny, managing director at 7IM.
“All of this should help retirees feel more confident about their pension pots lasting the distance and allow them to enjoy a more comfortable retirement. Indeed, our recent research of more than 500 retirees, revealed that nearly one in three (31%) retirees are concerned about running out of money at retirement,” she said.
“The significantly more generous allowances announced today present another great opportunity for advisers to engage with clients to help them solve the retirement puzzle.”
It is very helpful for NHS staff
Paul Gordon, head of medical specialist wealth planning at atomos called the abolition of the lifetime allowance an “amazing response” to some of the issues NHS doctors and employees are facing.
“At first glance this looks very helpful for those senior NHS managerial staff looking towards their retirement planning and should, when combined with the recent NHS consultation, allow greater flexibility and options to continue increasing their retirement pots. It will become even more important to help staff understand their retirement provisions and peripheral benefits,” said Gordon.
“The Tapered Annual Allowance will remain, although the ability for negative growth in the legacy scheme to offset growth in the 2015 Section will reduce many annual tax liabilities. It will be imperative to ensure records are correct, particularly as the level of complexity continues to increase with NHS pensions.”
A welcome idea from the chancellor
Toyosi Lewis, retirement investment specialist at FE Investments, said that the removal of various limits on pension tax will incentivise those who are still in work to build up bigger pensions.
“The lifting and removal of various limits on pension tax relief in today’s Budget announced by the chancellor is a welcome idea. Whilst it appears to be aimed at those thinking about an early retirement to reconsider their plans, it also incentivises those who are still in work to build up bigger pensions.
“As defined contribution (DC) pensions become the mainstay of people’s retirement wealth over time and with the investment risk sitting with them, the importance of the above cannot be overemphasised.”
There’s a sting hidden in the documents
Not all were overwhelmingly positive on the news. While the pension tax cuts represent the biggest U-turn on pension tax policy in a decade, according to Quilter head of retirement policy Jon Greer, he warned there was a sting hidden in the documents.
“This is not a cheap policy decision with the government forecasting that it will cost them around £2.7bn to scrap the lifetime allowance over the next five years. This therefore represents a golden opportunity for high earners to plough money into their pensions,” he said.
“However, hidden in the documents is a sting that people will now only be able to take 25% tax free cash from their pension subject to a maximum of £268,275 so even if someone has a pension pot far bigger than the previous LTA this will be the most they can take out. However, those who have existing rights to higher TFC amounts will retain them.”
It won’t affect people’s decision to retire
Meanwhile, SG Kleinwort Hambros head of wealth planning Andrew Dixon noted that the changes will not make a huge difference to people outside of the medical profession on when they will retire.
“Outside of the medical profession it is unlikely to be a motivating factor or a key driver in the decision of when to retire. From a financial planner’s perspective, the more you can save in a tax-efficient manner the sooner you can generally retire. Most clients choose not to prolong their working life when they have achieved financial freedom.
“Given all we know about the cost of tax relief, it also feels out of line with previous chancellors to both increase the annual allowance and remove the lifetime allowance. Not a year goes by without an article referencing the cost and subsequent prospect of wholesale changes to how pension tax relief is applied.“Flexibility may be what the market most desires from the new BoJ governor, says Nikko Asset Management chief strategist Naoki Kamiyama.
The first leadership change at the Bank of Japan (BoJ) in a decade has involved a few twists and turns. Current BoJ deputy governor Masayoshi Amamiya was initially seen as the top candidate to succeed incumbent chief Haruhiko Kuroda. Amamiya, however, reportedly declined the government’s offer, and the post of governor will instead go to Kazuo Ueda, an economist with experience as a BoJ policy board member from 1998 to 2005. 
Ueda will become the first academic in the post-war era to head the BoJ. He assumes the reins of the central bank amid a seeming transition; the BoJ had firmly committed to monetary easing under governor Kuroda’s 10-year tenure but amid rising inflation investors now expect the central bank to begin reversing its policy.
What the market perhaps seeks the most from the new governor is flexibility, with a general sentiment that the BoJ does not have to doggedly stick to the policies it implemented under Kuroda. At the same time, it does not have to introduce drastic changes right away. Given the BoJ’s situation, Ueda seems to fit the bill as governor: an academic who can hopefully assess the situation flexibly and communicate the BoJ’s decisions and intent logically. He is not the only academic with ties to the BoJ, but he has the advantage of being very familiar with central bank policy concepts such as the ‘time axis effect’ (which he himself championed while on the BoJ policy board), where inflation expectations are seeded among the public as a mechanism to cope with deflation.
Ueda’s academic background means he has access to a strong international network of other academics involved in central bank policy. Although he may not be a high-profile figure outside of academia, such a network is expected to help Ueda coordinate policy with other central banks. While he may have the ability to communicate and coordinate with other central bankers, it remains to be seen how he will project his message to the media and the market.
One key difference between Kuroda and Ueda’s tenure may turn out to be the government’s stance towards the BoJ. Kuroda became governor in 2013 under drastically different circumstances. The late prime minister Shinzo Abe’s ‘Abenomics’ economic policies were being implemented at the time and the BoJ was basically expected to be on the same page as the government.
In contrast, current premier Fumio Kishida’s administration appears less focused on projecting its will on the central bank. As a result, Ueda may be less burdened by political considerations than his predecessor. This may place greater responsibility on the new governor, but it could also enable the BoJ to pursue policy more logically and independently.
Ultimately, it will be up to the Japanese economy, not Ueda, to determine the course of BoJ policy. More important than Ueda’s academic views is whether the current apparent rise in salaries continues. If so, the BoJ can take a more flexible policy approach, such as making further adjustments to its yield curve control scheme.
Focus on tax revenue and inflation as Japan’s spending keeps increasing
It is no secret that Japan is heavily indebted, and the government’s recent spending plans have again brought the country’s state of finances into focus. Notable is the defence budget, which Japan plans to increase to about 2% of GDP by fiscal 2027 from the current 1%; the government is also planning to take “unprecedented” steps via fiscal outlays to reverse the country’s steadily declining birth rate.
With the budget for fiscal 2023 set to hit a record high, attention has turned to how Japan can finance its spending needs - especially because the government does not appear set to reign in the spending it increased during the coronavirus pandemic.
The market currently appears focused on two risks. The first is the risk of Japan’s fiscal credibility being eroded by the state of its finances. The second is that of GDP growth losing momentum should the government reverse course and begin spending less.
Regarding the first risk, Japan is yet to experience a serious deterioration in its credibility due to an expansion of short-term fiscal expenditure. This is thanks to its strong ability to raise tax revenue. For example, in a move that few other governments would be able to pull off, Japan hiked the consumption tax rate during the Abenomics era despite significant opposition. Japan also excels in its ability to collect taxes, which it can rely on to maintain its sovereign standing should an extreme credit event occur.
Regarding the second risk, stimulating GDP growth is less about how much the government spends, but what they choose to spend on. There will be an acute need to spend in a way that generates future increases in tax revenue, as mandatory outlays, such as social security costs, will only increase. Moreover, even if increased defence spending may not have as much of a multiplier effect on the economy relative to other expenditures.
The Kishida administration, at least publicly, says it is committed to spending wisely. It may be easy to view such a commitment with cynicism, but one cannot assume the administration won’t follow through with its goals, either. Inflation, if maintained, is expected to both reduce government debt and increase tax revenues in real terms. Japan’s fiscal expansion will continue. But as we noted earlier, it may boil down to how the money is spent, not how it is financed.
Market: Japan stocks edge up in February on central bank policy expectations
The Japanese equity market ended February slightly higher with the TOPIX (w/dividends) up 0.95% on-month and the Nikkei 225 (w/dividends) rising 0.49%. During the month, stocks were somewhat weighed down by growing views that the US Federal Reserve would prolong its interest rate hikes after US inflation indicators exceeded market expectations. However, this was subsequently offset by positives such as expectations for Japanese exporters’ earnings to improve on the back of the yen’s depreciation against the US dollar stemming from strong macroeconomic data out of the US.
Japanese equities were also supported by rising sentiment that the BoJ would maintain its current monetary easing policy for the time being based on the new central bank governor nominee's comments during his confirmation hearing at the lower house of parliament.
Of the 33 Tokyo Stock Exchange sectors, 21 sectors rose with Marine Transportation, Iron & Steel, and Rubber Products among the most significant gainers. In contrast, 12 sectors declined, including Air Transportation, Precision Instruments, and Other Products.
By Naoki Kamiyama is chief strategist at Nikko Asset Management. The views expressed above should not be taken as investment advice.
Trustnet rounds up the key policies from chancellor Jeremy Hunt’s first Budget.
Chancellor Jeremy Hunt conducted his first Budget since taking the job last year with a range of measures that will influence people’s finances.
From abolishing the lifetime pension allowance to capping energy price and news that the UK is to avoid recession this year, below Trustnet rounds up all you need to know from the announcements made today.
Pensions
There was good news for savers with an eye on retirement as those concerned about the lifetime allowance (currently £1,073,100.27) were cheered by the abolishing of the limit that people can save before being taxed.
Hunt also upped the pensions annual allowance from £40,000 per year to £60,000 and the money purchase annual allowance for people who have already taken some of their pension out but want to add more was increased from £4,000 to £10,000.
The tapered annual allowance, which affects very high earners, will also rise by the same amount, while the ‘adjusted income’ threshold used to determine when the taper kicks in will increase by £20,000, from £240,000 to £260,000.
The maximum tax-free cash someone can take will be frozen at the current level of £268,275 as part of the reforms.
The economy and inflation
The Office for Budget Responsibility (OBR) suggested the UK will not enter a technical recession in 2023. It forecasts the economy will contract in the first quarter of 2023 by 0.4% and not grow in the second quarter, before growth returns for the remainder of the year.
GDP will fall by 0.2% on an annual basis over 2023 but has been revised up by 1.2 percentage points compared to the OBR’s November forecast, before growing by 1.8% in 2024 and 2.5% in 2025.
Meanwhile, the OBR said inflation is set to drop from 10.7% at the end of 2022 to 2.9% by the end of 2023. It means that, if correct, inflation peaked in October 2022 at 11.1%.
The OBR then expects inflation to fall to 0.9% in 2024 and to remain near 0% until mid-2026, before returning to the Bank of England’s 2% target by 2027-28.
Energy price guarantee
Energy prices have been a major cause of concern for many, with the energy price guarantee due to end in April. However, the chancellor announced today it will remain at £2,500 for the next three months, putting a cap on unit prices ahead of an expected fall in wholesale prices from July, when the original rise to £3,000 will take place.
Those on pre-payment meters, who typically pay more than those on direct debits, will have their charges brought in line with comparable direct debit charges.
Childcare
The chancellor announced new measures for parents, with more than £4.1bn of spending by 2027-28 to fund 30 free hours per week for working parents with children aged 9 months up to 3 years in England.
It will be based on the eligibility existing for three-to-four year-old who currently get 30 hours offered and is to be staggered, with parents of two-year olds eligible from April 2024 and parents of nine-month-olds eligible from September 2024.
ISAs
The annual allowances for ISAs remains £20,000 for cash and stocks & shares ISAs, and £9,000 for a junior ISA.
Duties
Hunt froze the duties on alcohol duty until August 2023, when they will rise in line with the retail prices index. Fuel duty was also frozen, with the 5p cut in rates extended for 12 months and no RPI increase this tax year.
The chancellor has just delivered his first Budget. Here’s what he said.
Madam Deputy Speaker, in the face of enormous challenges I report today on a British economy which is proving the doubters wrong.
In the autumn we took difficult decisions to deliver stability and sound money.
Since mid-October, 10-year gilt rates have fallen, debt servicing costs are down, mortgage rates are lower and inflation has peaked.
The International Monetary Fund says our approach means the UK economy is on the right track.
But we remain vigilant, and will not hesitate to take whatever steps are necessary for economic stability.
Today the Office for Budget Responsibility forecast that because of changing international factors and the measures I take, the UK will not now enter a technical recession this year.
They forecast we will meet the prime minister’s priorities to halve inflation, reduce debt and get the economy growing.
We are following the plan and the plan is working.
But that’s not all we’ve done.
In the face of a cost-of-living crisis we have demonstrated our values by protecting struggling families with a £2,500 Energy Price Guarantee, one-off support and the uprating of benefits with inflation.
Taken together, these measures are worth £94bn over this year and next – one of the largest support packages in Europe.
That averages over £3,300 of cost-of-living help for every household in the country.
Today, we deliver the next part of our plan.
A budget for growth.
Not just the growth that comes when you emerge from a downturn.
But long-term, sustainable, healthy growth that pays for our NHS and schools, finds jobs for young people, and provides a safety net for older people all whilst making our country one of the most prosperous in the world.
Prosperity with a purpose.
That’s why growth is one of the prime minister’s five priorities for our country.
I deliver that today …
…by removing obstacles that stop businesses investing;
…by tackling labour shortages that stop them recruiting;
…by breaking down barriers that stop people working;
…and by harnessing British ingenuity to make us a science and technology superpower.
Meeting the prime minister’s priorities
I start with the forecasts produced by Richard Hughes and his team at the independent Office for Budget Responsibility whom I thank for their diligent work.
They have looked in detail at the prime minister’s economic priorities.
Halving inflation
The first of those is to halve inflation.
Inflation destroys the value of hard-earned pay, deters investment and foments industrial strife.
This government remains steadfast in its support for the independent monetary policy committee at the Bank of England as it takes action to return inflation to the 2% target.
Despite continuing global instability, the OBR report today that inflation in the UK will fall from 10.7% in the final quarter of last year to 2.9% by the end of 2023.
That is more than halving inflation.
High inflation is the root cause of the strikes we have seen in recent months.
We will continue to work hard to settle these disputes but only in a way that does not fuel inflation.
Part of the fall in inflation predicted by the OBR happens because of additional measures I take today.
Firstly, I recognise that even though wholesale energy prices have been falling, there is still enormous pressure on family finances.
Some people remain in real distress and we should always stand ready to help where we can.
So after listening to representations from Martin Lewis and other experts, I today confirm that the Energy Price Guarantee will remain at £2,500 for the next three months.
This means the £2,500 cap for the typical household will remain in place when energy prices remain high, ahead of an expected fall in prices from July.
This measure will save the average family a further £160 on top of the energy support measures already announced.
The second measure concerns over four million households on prepayment meters.
They are often the poorest households, but they currently pay more than comparable customers on direct debit. Ofgem has already agreed with suppliers a temporary suspension to forced installations of prepayment meters.
But today I go further, and confirm we will bring their charges in line with comparable direct debit charges. The energy premium paid by our poorest households is coming to an end.
Next I have listened to representations from the hon members for East Devon, North Cornwall, Colne Valley and Central Suffolk and North Ipswich about the risk to community facilities, especially swimming pools, caused by high costs. When times are tough, such facilities matter even more.
So today I am providing a £63m fund to keep our public leisure centres and pools afloat.
I have also heard from my RHF the charities minister and his Secretary of State about the brilliant work third sector organisations are doing to help people struggling in tough times.
They can often reach people in need that central or local government cannot, so I will give his department £100m to support thousands of local charities and community organisations do their fantastic work.
I also note the personal courage of one of my predecessors, my RHF from Bromsgrove, in talking about the tragedy of suicide and the importance of preventing it.
We already invest a lot in this area, but I will assign an extra £10m over the next two years to help the voluntary sector play an even bigger role in stopping more families experiencing such intolerable heartache.
My penultimate cost of living measure concerns one of our other most treasured community institutions, the great British pub.
In December, I extended the alcohol duty freeze until 1 August, after which duties will go up in line with inflation in the usual way.
But today, I will do something that was not possible when we were in the EU and significantly increase the generosity of draught relief, so that from 1 August the duty on draught products in pubs will be up to 11p lower than the duty in supermarkets, a differential we will maintain as part of a new Brexit pubs guarantee.
Madam Deputy Speaker, British ale may be warm, but the duty on a pint is frozen.
And even better, thanks to the Windsor Framework negotiated by my RHF the prime minister, that change will now also apply to every pub in Northern Ireland.
Finally, I have heard the representations from the Honourable Member from Stoke on Trent North, my Rt Hon Friend for Witham and my Rt Hon Friend from South Thanet and the Sun newspaper about the impact on motorists of the planned 11p rise in fuel duty.
Because inflation remains high, I have decided now is not the right time to uprate fuel duty with inflation or increase the duty.
So here’s what I am going to do: for a further 12 months I’m going to maintain the 5p cut … and I’m going to freeze fuel duty too.
That saves the average driver £100 next year and around £200 since the 5p cut was introduced.
Our Energy Price Guarantee, fuel duty and duty on a pint – all frozen in today’s budget.
Something that doesn’t just help families, it helps the economy too because their combined impact reduces CPI inflation by nearly ¾% this year, lowering inflation when it is particularly high.
Reducing debt
I now turn to the prime minister’s second priority, which is to reduce debt.
Here too our plan is on track.
Underlying debt is forecast to be 92.4% of GDP next year, 93.7% in 2024-25; 94.6% in 2025-26, and 94.8% in 2026-27, before falling to 94.6% in 2027-28.
We are meeting the debt priority.
And with a buffer of £6.5bn, it means we are meeting our fiscal rule to have debt falling as a percentage of GDP by the fifth year of the forecast.
As a proportion of GDP our debt remains lower than the USA, Canada, France, Italy and Japan.
And because of the decisions I take today, and the improved outlook for the public finances, underlying debt in five years’ time is now forecast to be nearly three percentage points lower than it was in the Autumn.
That means more money for our public services and a lower burden on future generations – deeply-held values which we put into practice today.
At the Autumn Statement I also announced that public sector net borrowing must be below 3% of GDP over the same period.
The OBR confirm today that we are meeting that rule with a buffer of £39.2 bn.
In fact our deficit falls in every single year of the forecast, with borrowing falling from 5.1% of GDP in 2023-24, to 3.2% in 2024-25, 2.8% in 2025-26, 2.2% in 2026-27 and 1.7% in 2027-28.
Even better in the final two years of the forecast our current budget is in surplus, meaning we only borrow for investment and not for day-to-day spending.
Day to day departmental spending will grow at 1% a year on average in real terms after 2024-25 until the end of the forecast period, and capital plans are maintained at the same level set at Autumn Statement.
We will uprate tobacco duty, and we will freeze the gross gaming duty yield bands. We are also maintaining the starting rate for savings and the ISA subscription limits, and we will bring forward a range of measures to tackle promoters of tax avoidance schemes.
But Madam Deputy Speaker, taken together today’s measures lead to a slightly lower overall tax burden for the rest of the parliament compared to the OBR’s Autumn forecast.
We are reducing borrowing and improving our public finances.
By doing so we make sure we are on track to…
… halve inflation
… get debt falling
…and grow our economy, which I turn to next.
Growth
Growth is the prime minister’s third priority and the focus of today’s budget.
13 years ago, we inherited an economy that had crashed.
But since 2010 we’ve grown more than major countries like France, Italy or Japan and about the same as Europe’s largest economy Germany.
We’ve halved unemployment…
… cut inequality
…and reduced the number of workless households by one million.
For the first time ever, because of the rises in tax thresholds made by successive chancellors, people in our country can earn £1,000 a month without paying a penny of tax or national insurance.
Those tax reductions have helped lift 2 million people out of absolute poverty, after housing costs, including 400,000 pensioners and 500,000 children.
That averages 80 pensioners and 100 children lifted out of poverty for every single day we’ve been in office.
Today we face the future with extraordinary potential.
The World Bank said that out of all big European countries, we are the best place to do business.
Global chief executives say that apart from America and China, we are the best country to invest in.
We became the second country in the world to have a stock of foreign direct investment worth $2trn.
And London has just pipped New York and 53 other global cities to be the best place in the world for female entrepreneurs.
Declinists are wrong about our country for another reason, which is our newfound strength in the innovation industries that will shape this century.
Over the last 13 years we have become the world’s third trillion-dollar tech economy after the US and China.
We have built the largest life sciences sector in Europe, producing a Covid vaccine that saved six million lives and a treatment that saved a million more.
Our film and TV industry has become Europe’s largest, with our creative industries growing at twice the rate of the economy.
Our advanced manufacturing industries produce around half the world’s large civil aircraft wings.
And thanks to a clean energy miracle we have become a world leader in offshore wind.
Other parties talk about a green energy revolution, so I gently remind them that nearly 90% of our solar power was installed in the last 13 years - showing it’s this government who fix the roof while the sun is shining.
Let’s turn now to what the OBR say about our growth prospects.
In November, they expected that the UK economy would enter recession in 2022 and contract by 1.4% in 2023.
That left many families feeling concerned about the future.
But today, the OBR forecast we will not enter a recession at all this year with a contraction of just 0.2%.
And after this year the UK economy will grow in every single year of the forecast period: by 1.8% in 2024; 2.5% in 2025; 2.1% in 2026; and 1.9% in 2027.
They also expect the unemployment rate to rise by less than one percentage point to 4.4%, with 170,000 fewer people out of work compared to their Autumn forecast.
Defence
Madam Deputy Speaker, that return to growth has direct consequences for our role on the global stage.
I am proud we are giving the brave people of Ukraine more military support than anyone else in Europe.
On Monday we were able to go further with my RHF the prime minister announcing a £5bn package of funding for the Ministry of Defence, an additional £2bn next year and £3bn the year after.
Today, following representations from our persuasive defence secretary, I confirm that we will add a total of £11bn to our defence budget over the next five years and it will be nearly 2.25% of GDP by 2025.
We were the first large European country to commit to 2% of GDP for defence and will raise that to 2.5% as soon as fiscal and economic circumstances allow.
Following representations from my RHF the minister for veterans affairs, I am today also increasing support for our brave ex-servicemen and women.
We will provide a package worth over £30m to increase the capacity of the Office for Veterans’ Affairs, support veterans with injuries returning from their service and increase the availability of veteran housing.
But to be Europe’s biggest defender of democracy, we must build Europe’s most dynamic economy.
That means tackling our longstanding productivity issues including two in particular which I address today: lower business investment and higher economic inactivity than other similar countries.
Too often companies struggle to recruit and even when they do, output per employee is lower.
So today I set out the four pillars of our industrial strategy to address these issues.
Colleagues will know from my Bloomberg speech, they all start with the letter ‘E’: Enterprise, Employment, Education and Everywhere.
I start with ‘Everywhere’, our measures to level up growth across the UK.
Everywhere
This government was elected on a mandate to level up.
We have already allocated nearly £4bn in over 200 projects across the country through the first two rounds of the Levelling Up Fund. A third round will follow.
Since we started focusing on levelling up, 70% of the growth in salaried jobs has come from outside London and the South-East.
Today we take further steps.
Investment Zones
Canary Wharf and the Liverpool Docks were two outstanding regeneration projects.
I pay tribute to Lord Heseltine for making them happen because they transformed the lives of thousands of people. They showed what’s possible when entrepreneurs, government and local communities come together.
So today I announce that we will deliver 12 new Investment Zones, 12 potential Canary Wharfs.
In England we have identified the following areas as having the potential to host one: West Midlands, Greater Manchester, the North-East, South Yorkshire, West Yorkshire, East Midlands, Teesside and, once again, Liverpool. There will also be at least one in each of Scotland, Wales and Northern Ireland.
To be chosen, each area must identify a location where they can offer a bold and imaginative partnership between local government and a university or research institute in a way that catalyses new innovation clusters.
If the application is successful, they will have access to £80m of support for a range of interventions including skills, infrastructure, tax reliefs and business rates retention.
Local investment
Working together with our formidable Levelling Up Secretary, I also want to give some further support to levelling up areas under the ‘E’ of everywhere.
First, I will invest over £200m in high quality local regeneration projects across England including the regeneration of Tipton town centre and the Marsden New Mills Redevelopment Scheme.
I am also announcing a further £161m for regeneration projects in Mayoral Combined Authorities and the Greater London Authority.
And I will make over £400m available for new Levelling Up Partnerships in areas that include Redcar and Cleveland, Blackburn, Oldham, Rochdale, Mansfield, South Tyneside, and Bassetlaw.
Having listened to the case for better local transport infrastructure from many hon members, I can announce a second round of the City Region Sustainable Transport Settlements, allocating £8.8bn over the next five-year funding period.
And following a wet and then cold winter, I also received particularly strong representations from my hon friends from North Devon, South-West Devon and Newton Abbot as well as councillor Peter Martin from my own constituency about the curse of potholes.
The Spending Review allocated £500m every year to the Potholes Fund but today I have decided to increase that fund by a further £200m next year to help local communities tackle this problem.
For Scotland, Wales and Northern Ireland this Budget delivers not only a new Investment Zone but an additional £320m for the Scottish Government, £180m for the Welsh Government and £130m for the Northern Ireland Executive as a result of Barnett consequentials.
On top of which in Scotland, I can announce up to £8.6m of targeted funding for the Edinburgh Festivals as well as £1.5m funding to repair the Cloddach Bridge.
I will provide £20m of funding for the Welsh Government to restore the Holyhead Breakwater and, in Northern Ireland, I am allocating up to £3m to extend the Tackling Paramilitarism Programme and up to £40m to extend further and higher education participation.
Local leadership
But Madam Deputy Speaker, for levelling up to truly succeed we need to unleash the civic entrepreneurship that is only possible when elected local leaders are able to fund and deliver solutions to their own challenges.
That means giving them responsibility for local economic growth and the benefit from the upside when it happens.
So the government will consult on transferring responsibilities for local economic development currently delivered by Local Enterprise Partnerships to support local economic development to local authorities from April 2024.
I will also boost Mayors’ financial autonomy by agreeing multi-year single settlements for the West Midlands and the Greater Combined Manchester Authority at the next spending review, something I intend to roll out for all Mayoral areas over time.
I have also agreed a new long-term commitment so that they can retain 100% of their business rates, something I also hope to expand to other areas over time.
Investment zones, regeneration projects, levelling up partnerships, local transport infrastructure and business rates retention…more control for local communities over their economic destiny so we will level up wealth generation and opportunity everywhere.
Enterprise
Today’s budget is about the prime minister’s promise to grow the economy.
We’ve talked about making that growth happen everywhere, so I now move on to my second ‘e’. Enterprise.
We need to be Europe’s most dynamic enterprise economy.
And under this government that is exactly what’s been happening.
Since 2010 we have one million more businesses in the UK, a bigger increase than in Germany, France or Italy.
But I want another million and another million after that.
So today I bring forward enterprise measures in these threeareas: to lower business taxes, reduce energy costs and support our growth industries.
Business taxes
Let’s start with business taxation.
We know the importance of a competitive tax regime. We already have lower levels of business taxation than France, Germany, Italy or Japan.
But I want us to have the most pro-business pro-enterprise tax regime anywhere.
Even after the corporation tax rise this April, we will have the lowest headline rate in the G7.
Only 10% of companies will pay the full 25% rate.
But even at 19% our corporation tax regime did not incentivise investment as effectively as countries with higher headline rates.
The result is less capital investment and lower productivity than countries like France and Germany.
We have already taken measures to address this.
For larger businesses we have had the super deduction, introduced by my RHF the prime minister, which ends this month.
For smaller businesses we have increased the Annual Investment Allowance to £1m, meaning 99% of all businesses can deduct the full value of all their investment from that year’s taxable profits.
If the super deduction was allowed to end without a replacement, we would have fallen down the international league tables for tax competitiveness and damaged growth.
I could not allow that to happen.
So today, I can announce that we will introduce a new policy of “full expensing” for the next three years, with an intention to make it permanent as soon as we can responsibly do so.
That means that every single pound a company invests in IT equipment, plant or machinery can be deducted in full and immediately from taxable profits.
It is a corporation tax cut worth an average of £9bn a year for every year it is in place.
And its impact on our economy will be huge. The OBR says it will increase business investment by 3% for every year it is in place.
This decision makes us the only major European country with full expensing…
…and gives us the joint most generous capital allowance regime of any advanced economy.
Madam Deputy Speaker, I also want to make our taxes more competitive in our life science and creative industry sectors.
In the Autumn, I said I would return with a more robust R&D tax credit scheme for smaller research-intensive companies.
So today, I am introducing an enhanced credit which means that if a qualifying small or medium-sized business spends 40% or more of their total expenditure on R & D, they will be able to claim a credit worth £27 for every £100 they spend.
That means an eligible cancer drug company spending £2m on research and development will receive over £500,000 to help them develop breakthrough treatments.
It is a £1.8bn package of support helping 20,000 cutting edge companies who day by day are turning Britain into a science superpower.
This government’s audio-visual tax reliefs have helped make our film and TV industry the biggest in Europe. Only last month, Pinewood announced an expansion which will bring another 8,000 jobs to the UK.
To give even more momentum to this critical sector I will introduce an expenditure credit with a rate of 34% for film, high end television and video games and 39% for the animation and children’s TV sectors. I will maintain the qualifying threshold for high-end television at £1 million.
And because our theatres, orchestras and museums do such a brilliant job at attracting tourists to London and the UK, I will also extend for another two years their current 45% and 50% reliefs.
Energy
Madam Deputy Speaker, an enterprise economy needs low taxes. But it also needs cheap and reliable energy.
We have already announced billions of support to help businesses reduce their energy bills through the Energy Bills Relief Scheme and the Energy Bills Discount Scheme.
We have appointed Dame Alison Rose, chief executive of NatWest, to co-Chair our national energy efficiency taskforce and help deliver our national ambition to reduce energy use by 15%.
To support her efforts, I will extend the Climate Change Agreement scheme for two years to allow eligible businesses £600m of tax relief on energy efficiency measures.
But the long-term solution is not subsidy but security.
That means investing in domestic sources of energy that fall outside Putin or any autocrat’s control.
We are world leaders in renewable energy so today I want to develop another plank of our green economy, carbon capture, usage & storage.
I am allocating up to £20bn of support for the early development of CCUS, starting with projects from our East Coast to Merseyside to North Wales – paving the way for CCUS everywhere across the UK as we approach 2050.
This will support up to 50,000 jobs, attract private sector investment and help capture 20-30 million tonnes of CO2 per year by 2030.
We have increased the proportion of electricity generated from renewables from under 10% to nearly 40%.
But because the wind doesn’t always blow and the sun doesn’t always shine, we will need another critical source of cheap and reliable energy.
And that is nuclear.
There have been no more powerful advocates for this than the hon members for Ynys Mon, Copeland, Hartlepool and Workington.
They rightly say that increasing nuclear capacity is vital to meet our net zero obligations.
So to encourage the private sector investment into our nuclear programme, I today confirm that subject to consultation nuclear power will be classed as ‘environmentally sustainable’ in our green taxonomy, giving it access to the same investment incentives as renewable energy.
Alongside that will come more public investment.
In the Autumn Statement, I announced the first state-financed investment in nuclear for a generation, a £700m investment in Sizewell C.
Today I can announce two further commitments to deliver our nuclear ambitions.
Firstly, following representations from our energetic Energy Security Secretary I am announcing the launch of Great British Nuclear which will bring down costs and provide opportunities across the nuclear supply chain to help provide up to one quarter of our electricity by 2050.
And secondly, I am launching the first competition for small modular reactors. It will be completed by the end of this year and if demonstrated as viable we will co-fund this exciting new technology.
Boosting innovation
Finally under the ‘E’ of Enterprise I come to our innovation economy, a central area of national competitive advantage for the United Kingdom.
Over the weekend, I worked night and day with the prime minister and the Governor of the Bank of England to protect the deposits of thousands of our most cutting-edge companies.
We successfully secured the sale of the UK arm of Silicon Valley Bank to HSBC, so the future of those companies is now safe in the hands of one of Europe’s biggest and most creditworthy banks.
But those events show that we need to build a larger, more diverse financing system, where the benefits of investment in high growth firms are available to more investors.
So I will return in the Autumn Statement with a plan to deliver that. It will include measures to unlock productive investment from defined contribution pension funds and other sources, make the London Stock Exchange a more attractive place to list, and complete our response to the challenges created by the US Inflation Reduction Act.
However when it comes to our innovation industries, there are two areas I want to make progress on today.
Nigel Lawson made the City of London one of the world’s top financial centres by competitive deregulation.
With our Brexit autonomy, we can do the same for our high growth sectors.
So today I want to reform the regulations around medicines and medical technologies.
We are lucky with the MHRA to have one of the most respected drugs regulators in the world, indeed the very first to licence a Covid vaccine.
From 2024, they will move to a different model which will allow rapid, often near automatic sign-off for medicines and technologies already approved by trusted regulators in other parts of the world such as the United States, Europe or Japan.
At the same time from next year they will set up a swift new approval process for the most cutting-edge medicines and devices to ensure the UK becomes a global centre for their development.
And with an extra £10m of funding over the next two years they will put in place the quickest, simplest, regulatory approval in the world for companies seeking rapid market access.
We are proud of our life sciences sector which received more inward investment than any in Europe last year.
Today’s change will make the UK an even more exciting place to invest – as well as speeding up access for NHS patients to the very newest drugs.
Today together with our talented science, innovation and technology secretary, I also take measures to strengthen our position in artificial intelligence, where the UK hosts one third of all European companies.
I am accepting all nine of the digital technology recommendations made by Sir Patrick Vallance in the review I asked him to do in the Autumn Statement.
That means I can report to the House that we will:
…launch an AI sandbox to trial new, faster approaches to help innovators get cutting edge products to market;
…work at pace with the Intellectual Property Office to provide clarity on IP rules so Generative AI companies can access the material they need;
……and ask Sir Patrick’s successor, Dame Professor Angela McLean, to report before the summer on options around the Growth Duty for regulators.
Because AI needs computing horsepower, I today commit around £900m of funding to implement the recommendations in the independent Future of Compute Review for an Exascale supercomputer.
The power that AI’s complex algorithms need can also be provided by quantum computing.
So today we publish a quantum strategy which will set our vision to be a world leading quantum enabled economy by 2033 with a research and innovation programme totalling £2.5bn.
I also want to encourage the best AI research to happen in the UK so will award a prize of £1m every year, for the next 10 years, to the person or team that does the most ground-breaking British AI research.
The world’s first stored-programme computer was built at the University of Manchester in 1948, and was known as the ‘Manchester baby’.
75 years on, the baby has grown up, so I will call this new national AI award ‘the Manchester Prize’ in its honour.
Madam Deputy Speaker we want the UK to be the best place in Europe for companies to locate, invest and grow so today’s enterprise measures strengthen our technology and life science sectors, invest in energy security and for three years - but I hope permanently - cut corporation tax by £9 bn a year to give us the best investment incentives of any advanced economy.
Employment
An enterprise economy can only grow if it can hire the people it needs, which brings me to my third pillar after ‘Everywhere’ and ‘Enterprise’, the ‘E’ of Employment.
Brexit was a decision by the British people to change our economic model.
In that historic vote, our country decided to move from a model based on unlimited low skill migration to one based on high wages and high skills.
Today we show how we will deliver that with a major set of reforms. The OBR say it is the biggest positive supply side intervention they have ever recognised in their forecast.
We have around one million vacancies in the economy…
… but excluding students there are over seven million adults of working age who are not in work.
That is a potential pool of seven people for every vacancy. We believe work is a virtue.
We agree with the road haulage king Eddie Stobart who said: ‘the only place success comes before work is the dictionary.’
So today, I bring forward reforms to remove the barriers that stop people who want to from working. I start with over 2 million people who are inactive due to a disability or long-term sickness.
Long-term sick and disabled
Thanks to the reforms courageously introduced by the Rt Hon Member for Chingford and Woodford Green, the number of disabled people in work has risen by two million since 2013.
But even after that we could fill half the vacancies in the economy with people who say they would like to work despite being inactive due to sickness or disability.
With Zoom, Teams and new working models that make it easier to work from home this is more possible than ever before.
So for that reason, the ever-diligent Work and Pensions Secretary, today takes the next step in his ground-breaking work on tackling economic inactivity.
I thank him for that, and today we publish a White Paper on disability benefits reform.
It is the biggest change to our welfare system in a decade.
His plans will abolish the Work Capability Assessment in Great Britain and separate benefit entitlement from an individual’s ability to work. As a result, disabled benefit claimants will always be able to seek work without fear of losing financial support.
Today I am going further by announcing that in England and Wales, after listening to representations from the Centre for Social Justice and others, we will fund a new programme called Universal Support.
This is a new, voluntary employment scheme for disabled people where the government will spend up to £4,000 per person to help them find appropriate jobs and put in place the support they need. It will fund 50,000 places every single year.
We also want to help those who are forced to leave work because of a health condition such as back pain or a mental health issue.
We should give them support before they end up leaving their job, so I am also announcing a £400m plan to increase the availability of mental health and musculoskeletal resources and expand the Individual Placement and Support scheme.
And because occupational health provided by employers has a key role to play, I will also bring forward two new consultations on how to improve its availability and double the funding for the small company subsidy pilot.
Young people in care
There is another group that deserves particular attention, which is children in care. They too should be given all possible help to make a normal working life possible when they reach adulthood.
Often, they depend on foster families who do a brilliant job, so I am today nearly doubling the Qualifying Care Relief threshold to £18,140 which will give a tax cut to a qualifying carer worth an average of £450 a year.
I will also increase the funding we provide to the Staying Close programme by 50% to help more care leavers into employment.
And I will support young people with Special Educational Needs and Disabilities with a £3m pilot expansion of the Department for Education’s Supported Internship programme to help them transition from education into the workplace.
Madam Deputy Speaker, no civilised society can ignore the contribution that can be made by those with challenging family circumstances, a long-term illness or a disability.
So today we remove the barriers we can with reforms that strengthen our society as well as strengthening our economy.
Welfare recipients
The next set of employment reforms affects those on Universal Credit without a health condition who are looking for work or on low earnings.
There are more than 2 million jobseekers in this group, more than enough to fill every single vacancy in the economy.
Independence is always better than dependence, which is why we believe those who can work, should.
So sanctions will be applied more rigorously to those who fail to meet strict work-search requirements or choose not to take up a reasonable job offer.
And for those working low hours, we will increase the Administrative Earnings Threshold from the equivalent of 15 hours to 18 hours at national living wage for an individual claimant, meaning that anyone working below this level will receive more work coach support alongside a more intensive conditionality regime.
Older workers including doctors
The next group of workers I want to support are those aged over 50.
My younger officials have termed these people ‘older workers’, although as a 56-year-old myself I prefer the term ‘experienced’.
Fully 3.5 million of pre-retirement age over 50 are not part of the labour force, an increase of 320,000 since before the pandemic.
We now have the 23rd highest inactivity rate for over 55s in the OECD.
If we matched the rate of Sweden, we would add more than one million people to our national labour force.
Madam Deputy Speaker, I say this not to flatter you, but older people are the most skilled and experienced people we have.
No country can thrive if it turns its back on such a wealth of talent and ability.
But for too many, turning 50 is a moment of anxiety about the cliff edge of retirement rather than a moment of anticipation about another two decades of fulfilment.
I know this myself from personal experience. After I turned 50, I was relegated to the backbenches and planned for a quiet life. But instead I decided to set an example by embarking on a new career in finance.
So today I take three steps to make it easier for those who wish to work longer to do so.
First, we will increase the number of people who get the best possible financial, health and career guidance ahead of retirement by enhancing the DWP’s excellent “Mid-life MOT” Strategy.
They will also increase by fivefold the number of 50+ Universal Credit claimants who receive mid-life MOTs from 8,000 to 40,000 a year.
Second with my RHF the Education Secretary, we will introduce a new kind of apprenticeship targeted at the over 50s who want to return to work.
They will be called Returnerships, and operate alongside skills boot camps and sector-based work academies.
They will bring together our existing skills programmes to make them more appealing for older workers, focussing on flexibility and previous experience to reduce training length.
Finally, I have listened to the concerns of many senior NHS clinicians who say unpredictable pension tax charges are making them leave the NHS just when they are needed most.
The NHS is our biggest employer, and we will shortly publish the long-term workforce plan I promised in the Autumn Statement.
But ahead of that I do not want any doctor to retire early because of the way pension taxes work.
As chancellor I have realised the issue goes wider than doctors.
No one should be pushed out of the workforce for tax reasons.
So today I will increase the pensions annual tax-free allowance by 50% from £40,000 to £60,000.
Some have also asked me to increase the Lifetime Allowance from its £1 million limit.
But I have decided not to do that.
Instead I will go further and abolish the Lifetime Allowance altogether.
It’s a pension tax reform that will…
… stop over 80% of NHS doctors from receiving a tax charge.
… incentivise our most experienced and productive workers to stay in work for longer.
… and simplify our tax system, taking thousands of people out of the complexity of pension tax.
Madam Deputy Speaker, a comprehensive plan to remove the barriers to work facing those on benefits, those with health conditions and older workers. That is the ‘e’ of the employment pillar of today’s growth budget.
Education
Which brings me to the final pillar of our growth plan. After Employment, Enterprise and Everywhere I turn to the ‘E’ of Education.
Over more than a decade, this government has driven improvement in our education system.
We have risen by nearly 10 places in the international league tables for English and maths since 2015 alone.
In the Autumn Statement, I built on this progress with an extra £2.3bn annual investment to our schools.
We are reviewing our approach to skills with Sir Michael Barber.
We have set out our plans to transform lifelong learning with a new Lifelong Loan Entitlement…
…and My RHF the PM announced plans to make maths compulsory till 18.
But today I want to address an issue in our education system that is bad for children and damaging for the economy.
It’s an issue that starts even before a child enters the gates of a school.
Today I want to reform our childcare system.
We have the one of the most expensive systems in the world.
Almost half of non-working mothers said they would prefer to work if they could arrange suitable childcare.
For many women, a career break becomes a career end.
Our female participation rate is higher than average for OECD economies, but we trail top performers like Denmark and the Netherlands.
If we matched Dutch levels of participation, there would be more than one million additional women working.
So today I announce a series of reforms to start that journey.
Supply
I begin with the supply of childcare. We have seen a significant decline in childminders over recent years – down 9% in England in just one year.
But childminders are a vital way to deliver affordable and flexible care and we need more of them.
I have listened to representations from my hon friend from Stroud and decided to address this by piloting incentive payments of £600 for childminders who sign up to the profession, rising to £1,200 for those who join through an agency.
I have also heard many concerns about cost pressures facing the sector.
We know this is making it hard to hire staff and raising prices for parents, with around two thirds of childcare providers increasing fees last year alone.
So we will increase the funding paid to nurseries providing free childcare under the hours offer by £204m from this September rising to £288m next year.
This is an average of a 30% increase in the two-year-old rate this year, just as the sector has requested.
I will also offer providers more flexibility in how they operate in line with other parts of the UK. So alongside that additional funding, we will change minimum staff-to-child ratios from 1:4 to 1:5 for two-year-olds in England as happens in Scotland, although the new ratios will remain optional with no obligation on either childminders or parents to adopt them.
UC claimants
I want to help the 700,000 parents on universal credit who, until the reforms I announced today had limited requirements to look for work. Many remain out of work because they cannot afford the upfront payment necessary to access subsidised childcare.
So for any parents who are moving into work or wants to increase their hours, we will pay their childcare costs upfront.
And we will increase the maximum they can claim to £951 for one child and £1,630 for two children, an increase of almost 50%.
School age children
I turn now to parents of school age children, who often face barriers to working because of the limited availability of wraparound care.
One third of primary schools do not offer childcare at both ends of the school day, even though for many people a job requires availability throughout the working day.
To address this, we will fund schools and local authorities to increase supply of wraparound care so all school-age parents can drop their children off between 8am and 6pm.
Our ambition is that all schools will start to offer a wraparound offer, either on their own or in partnership with other schools, by September 2026.
Pre-school children
Madam Deputy Speaker, today’s childcare reforms will increase the availability of childcare, reduce costs and increase the number of parents able to use it.
Taken together with earlier reforms, they amount to the most significant improvements to childcare provision in a decade.
But if we really want to remove the barriers to work we need to go further for parents who have a child under 3.
For them childcare remains just too expensive.
In 2010 there was barely any free childcare for under 5s.
The government changed that with free childcare for 3- and 4-year-olds in England.
It was a landmark reform.
But not a complete one.
I don’t want any parent with a child under 5 to be prevented from working, if they want to, because it is damaging to our economy and unfair, mainly to women.
So today I announce that in eligible households where all adults are working at least 16 hours, we will introduce 30 hours of free childcare not just for 3-and-4 year-olds, but for every single child over the age of 9 months.
The 30 hours offer will now start from the moment maternity or paternity leave ends.
It’s a package worth on average £6,500 every year for a family with a two-year-old child using 35 hours of childcare every week…
… and reduces their childcare costs by nearly 60%.
Because it is such a large reform, we will introduce it in stages to ensure there is enough supply in the market.
Working parents of two-year-olds will be able to access 15 hours of free care from April 2024, helping around half a million parents.
From September 2024, that 15 hours will be extended to all children from 9 months up, meaning a total of nearly one million parents will be eligible.
And from September 2025 every single working parent of under 5s will have access to 30 hours free childcare per week.
Today we complete a landmark reform…
…we help the economy
…transform the lives of thousands of women
…and build a childcare system comparable to the best.
A major early years reform for our education system, the ‘E’ of education alongside the three other pillars of our growth plan, enterprise, employment and everywhere.
Madam Deputy Speaker in November we delivered stability.
Today it’s growth.
We tackle the two biggest barriers that stop businesses growing - investment incentives and labour supply.
The best investment incentives in Europe.
The biggest ever employment package.
For disabled people, more help.
For older people, barriers removed.
For families feeling the pinch…
…fuel duty frozen.
…beer duty cut.
…energy bills capped.
And for parents, 30 hours of free childcare for all under 5s.
Today we build for the future with…
…inflation down
…debt falling
…and growth up.
The declinists are wrong, and the optimists are right.
We stick to the plan because the plan is working.
And I commend this statement to the House.
Prices rose 6% year-on-year in February and 0.4% on a monthly basis, latest figures show.
Inflation in the US should decelerate but it will not be a smooth process, experts have warned, with the Federal Reserve facing a difficult prospect of balancing a fragile economy with rising prices.
The consumer price index for February rose 0.4% compared to a 0.5% rise last month and 6.0% on a year-on-year basis versus 6.4% in January.
Nathaniel Casey, investment strategist at Evelyn Partners said the inflation data provided a mixed picture with regards to goods prices, core services and shelter.
He added: “Goods prices have largely moderated despite an acceleration in household furnishings’ prices and although still elevated, shelter inflation is expected to decelerate over the coming year (based on recently signed rental leases).
“That said, core services excluding shelter which accounts for more than half of consumer expenditure remains stubbornly high, with Fed chair Powell acknowledging inflation in this sector needs to fall before we see price stability. “
Pictet Wealth Management expects the US personal consumption expenditures (PCE) inflation to end the year at 3.4%, down from 4.7% in January but above the 2% inflation target.
Frederik Ducrozet, head of macroeconomic research at the firm, said: “Rental disinflation (already evident in industry measures) should start passing through to readings for shelter inflation around the summer.
“Goods prices should continue to normalise, although supply-chain bottlenecks could also re-emerge if geopolitical risks escalate.”
The Federal Reserve is expected to hike rates by 25bp next week, from 4.75% to 5.0%, but stop afterwards. Jerome Powell opened the door to a 50bp rate increase in March and suggested the terminal rate for the Fed funds could be higher.
Yet, recent events, such as the collapses of Silicon Valley Bank and Signature Bank, have called into question the Fed’s ability and willingness to push rates higher to fight inflation while also guaranteeing stability.
Ducrozet said that Powell may repeat that monetary policy is working with a lag but will justify a pause in the light of recent events.
He said: “While letting inflation run might be bad, presiding over a credit crunch would be worse. Given that we have had the fastest monetary tightening cycle in history, we were expecting ‘something’ to break eventually.
“Policy normalisation was never going to be a smooth and linear process. The collapse of SVB is likely to be the catalyst that convinces central banks to proceed more cautiously going forward.”
The Fed’s focus should now turn to the timing of rate cuts, balance sheet policies and quantitative tightening (QT).
Ducrozet added: “The balance sheet runoff (QT) of the Fed’s holdings of US Treasuries and agency mortgage-backed securities should continue at the current pace for now. The Bank Term Funding Program (BTFP), aimed at providing additional funding to depository institutions, could temporarily expand the Fed’s balance sheet, but it is not large-scale asset purchases (or quantitative easing).
“If financial stresses accumulate materially, the Fed could stop QT early. However, unless the US enters a very deep recession, we don’t expect a resumption of QE [quantitative easing] anytime soon.”
Pictet Wealth Management does not expect rate cuts before 2024, but said the US will enter into a moderate recession in the second half of 2023. Inventory destocking, weak capital spending and a continued slump in residential investment should drive the contraction.
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