Was Lockdown a Catastrophic Policy Error?

The following article, which is an interview with Barry Norris of Argonaut Investments, is a controversial but very interesting read.

Personally, I don’t think we will truly know the answer to this question for some years to come but is easy to imagine how governments around the globe the world might have felt pressured into taking extreme action through fear of recriminations and enormous political damage if they were not seen to do enough.  

Interview with Barry Norris of Argonaut

The UK Government's decision to implement a lockdown was one of the "biggest policy errors since 1914", according to Argonaut's Barry Norris, who believes "thoughtful debate" on the Government's response to the pandemic has been "shut down" and that "following expert opinion blindly" is "normally the road to ruin".

The manager, who runs the FP Argonaut Absolute Return, European Alpha and European Income Opportunities funds, believes the UK Government has been "talking to the wrong experts" in terms of how best to deal with the pandemic, and believes a Sweden-style approach would have been more beneficial for the country from both an economic and societal perspective.

As such, he has taken out shorts on "essentially all vaccine developers", although he is still cautious on retail and leisure stocks given the potential long-term impact lockdown will have on their revenues and business models. 

"The economic data as a result of this crisis makes 2008 seem like a small blip, so for a fund manager not to have a view on lockdown and the policy response to Covid would mean we are not doing our jobs," he reasoned.

"Somebody asked me the other day whether I was just an armchair epidemiologist. The answer to that is I am an armchair everything, because I have never worked in any of the industries I have invested in but that doesn't stop me from gathering what most people would regard as an informed opinion on those industries.

"Also, having been a fund manager and listened to lots of industry analysts, I can tell you that following expert opinion blindly is normally the road to ruin."

In Norris's personal view, it became "bizarre" how many people "seemed to enjoy lockdown" and therefore "willed" Sweden - whose prime minister Stefan Löfven decided not to impose a lockdown - to fail.

According to statistics from the European Centre for Disease Prevention and Control dated 18 August 2020, Sweden has had 85,045 recorded cases, 5,787 deaths and 4,033 new cases of Covid-19 in the last 14 days overall relative to a population of 10.2 million.

In the UK, there have been 319,197 recorded cases, 41,369 deaths and 13,574 new reported cases over the past fortnight, relative to a population of 66.7 million.

This means that 0.057% (to the nearest three decimal points) of Sweden's population has died from coronavirus, while 0.062% of the UK's population has died as a result of Covid-19.

However, it should be noted that each country has varying measures in terms of how many tests have been administered and how their death rates have been accumulated and calculated.

Population density (the UK has 275 people per square kilometre and Sweden has 25.4 people per square kilometre) and demographics (the UK population's average age is 40.5 and Sweden's average age is 41.2) must also be taken into account, alongside numerous other variables including socioeconomic data and the underlying health of both populations before the crisis.

Norris believes that a large percentage of Sweden's deaths occurred in care homes after people who became infected with Covid-19 were moved there, and subsequently passed the disease onto people with weaker-than-average immune systems.

"If you look at the number of deaths in Sweden aside from care homes the number is pretty similar to a normal flu season," he argued.

"Sweden has probably reached a kind of herd immunity already, so therefore society in Sweden can return to normal.

"Economic growth in Sweden contracted by 8% in Q2 which is obviously still a disaster, but that is predominantly because the rest of the world shut down their economies.

"The American economy contracted by 33% and the UK economy 25% because of lockdown policy."

He added: "There is a trade-off between the economic devastation and the public health benefit, but I don't believe there was any public health benefit.”

"In fact, one of the problems of lockdown was that health services became almost a Covid-only service."

Norris believes the UK Government initially sought to follow Sweden's lead, but Prime Minister Boris Johnson "bottled it" for fear of facing tough allegations from mainstream media.

"Boris was told, if he didn't lock down, journalists will ask him on national television to accept responsibility and apologise to the families of those who have died as a result of Covid-19, because the rhetoric would have been that is was his fault for not locking down," the manager continued.

"Now, they cannot admit that they have made a mistake because it is about saving face. The entire world has been hoodwinked by the initial diagnosis of what Covid-19 was and its severity, and that is why I think it is a fraud.

"I have thought long and hard about whether to use the word 'fraud', but in our lifetime, it has been the most significant negative event for the global economy since WWI, and the biggest policy error since 1914 when the Austrian Archduke was assassinated in Sarajevo."

Despite believing lockdown was an unnecessary measure, Norris believes its impact will be felt across economies over the long term, and in some instances, permanently.

"If you accept my version of the truth, it might be tempting to buy every single airline and cruise ship operator because lockdown has happened once and it won't ever happen again," he said.

"However, that doesn't mean that even if the population's consensus on Covid changes overnight, the government will suddenly throw its hands up and admit to making a mess of this.

"They could even end up doubling down on their policy error. They have potentially become prisoners of their own propaganda.

"You have seen this through random quarantines and the bizarre introduction of face masks. There will probably be future policy error as well."

As such, the manager has shorts on severely-impacted stocks such as Cineworld, as well as holdings in the high-street retail and travel & leisure.

"Industries such as shopping malls are not going to survive lockdown, period," he said.

"With travel stocks, they will spend a whole year without revenues so these will need to be recapitalised, thereby diluting the shareholders through new capital."

"I also think there has been a permanent cultural shift in terms of working from home, which means office properties will continue to struggle.

"It also means we are very bullish on UK housebuilders though, given people will be spending more time in their homes."

That said, Norris holds long exposure to "one or two" airlines which, while they may not do well "over the next few months", have the propensity to be "long-term winners".

Elsewhere, he is short "all vaccine manufacturers" as he said the companies involved have "never brought a drug to market before", and that when a vaccine is approved for widespread use, it will work less efficiently than many people expect it to.

"The mortality rate from patients hospitalised from Covid has fallen significantly and the way they are treating patients in hospitals is through cheap drugs, such as anti-inflammatories or blood thinners - these drugs don't cost a lot of money," the manager argued.

"You have to wonder about the lobbying element among pharmaceutical companies, which obviously do not want solutions for Covid-19 to be cheap, generic drugs, because that will mean a struggle in terms of profit margins.

"I sound like a big conspiracy theorist but I don't categorise myself as that - this policy move and the inability of the government to admit what has happened - it really is that extreme."

I did say it was controversial and as to whether Norris is right, only time will tell.

I hope you have found this communication of interest but if you have any questions, please do not hesitate to contact me at any time.

With best regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

The Impact of Government Borrowing on Investments

I am increasingly being asked about how the governments enormous stimulus packages in response to the coronavirus pandemic can be paid for and what impact this might have on client investments. The following article (it’s a little long but well worth the read) by David Thorpe, special projects editor of Financial Adviser and FTAdviser, goes someway to answering these questions. The article is aimed at Financial Advisers but it is reasonably accessible.

“The response of governments across the world to the pandemic-induced collapse in economic activity has been to inject hundreds of billions of pounds of borrowed money into the system in an effort to plug the gaping holes wrought upon the economy by the virus.

Gilles Moec, group chief economist at AXA says a particular feature of this policy response is the extent to which policy makers and commentators around the world accepted the need for governments to borrow money and spend it at this time. Mr Moec adds that, while there are a range of potential consequences for advisers and their clients from the bigger debt pile, it would be wrong to focus in the short-term on repaying the debt.

He said that one of the negatives that typically arises from higher levels of government borrowing is much higher inflation in the short term. This can happen either because too much cash is pumped into the economy, so demand rises faster than supply, or because the extra currency entering the system leads to a fall in the value of the currency, making imports more expensive. The reduction in economic demand has been so severe that inflation will remain low for an extended Period.

Were either of these scenarios to play out in the UK, the resultant inflation would be magnified by the additional costs businesses face as a result of the pandemic, for example, from spending money on extra cleaning of premises, or buying masks. But Mr Moec does not believe inflation is something that advisers will need to worry about in the near term, as he believes the reduction in economic demand has been so severe that inflation will remain low

Government debt never really needs to be paid back; instead it needs to be refinanced, that is, as the bonds mature and investors get their capital back, the capital is repaid with newly issued bonds.

The ten-year bonds of the UK government currently have an interest rate of 0.1 per cent. So, while it is not the case that the UK government will in ten years have to find all of the money to repay bondholders then, the uncertainty comes from what interest rate the government will have to pay on the debt in ten years, if it is much higher than the current rate, that will create future funding problems. But, Mr Moec does not believe inflation is something that advisers will need to worry about in the near term, as he believes the reduction in economic demand has been so severe that inflation will remain low for an extended period.

He draws a parallel with the world in the years immediately following the second world war, when governments rapidly increased spending, but inflation did not rise to unhealthy levels in those years, as the extra spending was replacing demand lost in the war, rather than creating an excess of demand.

Mr Moec says this shows: “There is no need for austerity to be used this time to get the deficit down.”

Neil Williams, senior economic adviser at Hermes, says the debt level will not be a problem for the wider economy as long as central banks are happy to let inflation rise.

The only remit of the Bank of England in terms of economic management is to achieve inflation at or near 2 per cent annually; if this was happening, the central bank may stop buying government bonds, and make it harder for governments to refinance.

He says he does not expect central banks to act in this way, as inflation was considerably below target prior to Covid; he anticipates policymakers will tolerate it being above target for an extended period.

Stephen Bell, managing director of Global Macro at BMO Asset Management, says that he does not believe inflation will be a problem in the near term, because the unemployment rate may be relatively high for a prolonged period of time. This is deflationary in an economy as it means individuals have less money to spend.

Bill Dinning, chief investment officer at Waverton, is less sanguine. He says: “There will have to be a reckoning, from all of this borrowing, it may be that inflation is higher and clients have to deal with that, or it may be something else.”

The nature of the recession

While the definition of a recession as two consecutive quarters of negative growth is universal, there are a multitude of different types of recessions.

The downturn caused by Covid-19 is what economists call an exogenous shock, that is, caused by an event outside of the financial system.

Such recessions tend to be very sudden, very deep, and over very quickly. They end relatively quickly because if the shock is from outside the system, as the shock subsides, the system is intact and activity can return to previous levels.

This is the thinking behind those who believe the UK economy will recover in a V shape. But Fahad Kamal, strategist at BNY Mellon, says this is not a typical exogenous shock-induced recession, because the impact of the pandemic may have changed long-term societal trends. He says those factors, such as remote working, will lead to “permanent“ changes in the structure of the economy.

Exogenous shocks do not typically leave permanent changes, but Mr Kamal says the combination of the Covid crisis and the changes to society are creating “lost growth” which will not be recovered by the economy.

The multiplier effect

The rationale for government’s increasing spending in a downturn was first created by the UK economist John Maynard Keynes, who described a “multiplier effect”. This is the idea that, if the government stimulus is spent properly, it can generate more activity and wealth in the economy than the cost of the original debt.

Some economic activities have a larger, and faster acting, multiplier than others. For example, a pound spent by the government on a construction project tends to move quickly through the economy as such a project employs many people in different trades and requires the purchase of raw materials.

If the multiplier in an economy works, then the pace and rate of GDP growth should increase rapidly.

Using borrowed money to increase the salaries of already relatively highly paid people may not have the same effect, as the extra salary may not be spent quickly.

But Hugh Gimber, chief market strategist at JP Morgan Asset Management says that despite the vast sums pumped into the economy, investors should not expect the multiplier to be high in the UK.

Mr Gimber says: “While a lot of money has been pumped into the economy, it has not delivered the traditional benefits of a stimulus. This is because while the money went in, we were told to not go out, we couldn’t spend it, so it didn’t multiply. I also think there are factors in the UK such as the ageing population that were already present and not really conducive to growth.

Mr Dinning says the borrowing and spending now may actually reduce the multiplier of future government spending. He says: “The cash that has been spent now is to sort out an emergency. It is absolutely the right thing to do, but it also is likely to mean that there is less ability to borrow in future, so there would be less cash for spending on long-term projects in areas such as infrastructure that contribute positively to economic growth.

"So it may be the borrowing now, lowers the longer-term growth rate in a way that is almost permanent.”

Mr Williams says other policy decisions taken over the past decade probably mean any multiplier effect will be much slower. He said the policy of quantitative easing, whereby the Bank of England buys government debt and other bonds helps to keep borrowing costs low, but also reduces the multiplier achieved on that debt. This is because the bond buying programme causes asset prices to rise.

So, for example, in the decade after the global financial crisis, house prices in the UK rose much more quickly than did incomes. This meant people seeking to get onto the housing ladder had to save more of their income and for longer to do this, and that reduces the amount they can spend in the economy.

With central banks continuing to buy bonds as part of the Covid response, Mr Williams says the rise in asset prices is likely to continue, meaning those that have to save to buy assets will need to save more.

In this way, “even if the policy succeeds in getting money into people’s pockets, which is not something that happened after the global financial crisis, higher asset prices will have an impact on spending levels and growth.”

Portfolio impact

Gero Jung, chief economist at Mirabaud says it is a central tenet of investment theory that if interest rates are low, then equities will rise in value.

This is because many equities are priced relative to the return available on cash on bonds. Low bond yields and low interest rates therefore make equities relatively more attractive. He says it is unlikely that interest rates will rise for many years into the future, and this will be supportive of equities.

Mr Gimber says the yield on government bonds is now so low that they are an unattractive income investment. He says: “The rationale historically for owning government bonds in a portfolio is that they are a diversifier and they pay an income. "But now they don’t pay an income and the diversification effects may not be as strong as in the past. I think real assets are more interesting, as they offer income and can offer inflation protection.”

Mr Moec says in the short-term the profits achieved by companies will be lower, as they deal with the higher costs of restrictions, but will not be able to pass the costs onto consumers due to the pressure on wages and higher unemployment. For this reason, he believes that investors will just have to accept lower equity returns for the foreseeable future.

Mr Bell agrees that returns to equity investors will be lower in the years ahead, but he believes the returns will be more attractive than those available from other asset classes.”

I hope you have found this information of interest but if you have any questions, please do not hesitate to contact me at any time.

With best regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Virtual Client Meetings

Little by little the UK appears to be returning to normal but with some very obvious differences, masks on when travelling and shopping, the need to book an appointment to have a beer at the pub and waiters wearing Darth Vader PPE to bring food to your table in restaurants. With infections falling in the UK but rising elsewhere in the world, it does beg the question, how long will these changes be around for? Will we, like a number of Asian countries, find ourselves wearing masks for years to come for example and will everyone ever actually return to head offices in London?

We at Clearwater are also trying to adopt a ‘business as usual’ approach and that now extends to offering meetings at our offices in Holmer Green, at the client’s own risk of course. We have cleaning materials, including anti-bacterial sprays and we are confident that we can observe an appropriate degree of social distancing whilst you are here.

If you are not yet comfortable to visit us in person, which I would quite understand, we are very happy to offer you a ‘Virtual Meeting’ using Zoom or Microsoft Teams. Our new high-speed internet makes Virtual meetings a very good substitute for the real thing. We have conducted a number of these meetings now and we have received some positive feedback from the clients who have been through the process. The only piece of technology you will need is a computer or iPad with a camera and audio capability (I guess you could do it on a phone but it would all be rather small), we can provide instructions on the software prior to the meeting, if you have not done this sort of thing before, it really is very straightforward.

The technology enables me to share my computer screen, so I can beam all of the charts I would normally go through on my touch screen onto your own PC or Laptop, this usually makes for a very productive session.

If you would like to book a meeting for either a face to face or virtual get together, please do get in touch and we will be happy to arrange something. If we don’t hear from you, Kim will restart her diary and invite you to Planning Meetings as they fall due, you will then be able to decide which type of meeting you prefer.

If you have any questions about this e-mail or indeed on any finance related matter, please do not hesitate to contact me.

With best regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Rishi Sunak’s Summer Statement

Yesterday, the Chancellor made his "Summer Statement". Below is a summary of the key points and the potential impact for you and your families.

I must confess some personal disappointment that the temporary VAT reduction does not apply to the wine with your restaurant meal but I suppose we should be thankful for small mercies!

Economic Backdrop

• In the first two months of the FY 2020/21, UK government borrowing has exceeded £100bn and according to most estimates is heading towards £300bn by the end of the FY 2020/21.

• The March 2020 budget was forecasting borrowing of £55bn for the FY 2020/21.

• Total Government Debt is now more than 100% of GDP. As the ONS commented public sector debt is "just under £2.0 trillion"!

• UK economy contracted by 2.2% in the first quarter of 2020

• Bank of England forecasts unemployment at 10%. OECD have commented that unemployment could spike at 15% IF we see a second wave of Covid-19 infections.

Job Retention Scheme

• The Coronavirus Job Retention Scheme (CJRS) will NOT be extended beyond October.

• However, the Chancellor will introduce a "Job Retention Bonus"

• This scheme will pay £1,000 for every furloughed employee who remains continuously employed from the closure of the CJRS until the end of January 2021

• Employees must earn on average more than the Lower Earnings Limit (£520 per month) in that period. The payments will be made to employers in February 2021.

• More details will be published at the end of July.

Kickstart Scheme

• A new scheme that covers England, Wales and Scotland but NOT Northern Ireland.

• The aim is to create "hundreds of thousands" of 6-month placements for individuals aged between 16-24 and deemed to be at risk of long-term unemployment.

• The Government will provide the necessary funding for each job up to the level of 100% of the "relevant minimum wage" for 25 hours per week plus the associated Employer NI costs and minimum pension automatic enrolment contributions.

• For a 21-24 year old whose minimum hourly rate is £8.20 per hour. This equates to a payment of circa £6,500.

Traineeships

• Employers will also receive a payment of £1,000 for each 16-24 year old to whom they offer and provide work experience.

• Government will also invest in better provision for traineeships

Temporary VAT cut for food, non-alcoholic drinks, accommodation and attractions

A 5% rate of VAT will apply to supplies of:

• Food and non-alcoholic drinks from UK restaurants, pubs, and

• Accommodation and admission to attractions operate from across the UK.

• The temporary rate will be in force from the 15th July 2020 until the 12th January 2021. Further details to be published by HMRC in due course.

Temporary Stamp Duty Land Tax Cut

• The nil rate band threshold for residential SDLT will increase from £125,000 to £500,000 with immediate effect until 31 March 2021.

• That offers a maximum saving of £15,000. For second homes, the 3% additional rate will continue to apply.

• The devolved administrations in Scotland and Wales set their own rates of tax on Land and Buildings Transaction Tax (LBTT) and Land Transaction Tax (LTT) respectively. When there have been SDLT rate changes previously, the administrations have tweaked their bands, although not necessarily in line with Westminster’s numbers. As at the 9th July, neither administration has announced any change but this may alter in the days ahead.

Green Homes Grant

• A £2 billion Green Homes Grant is to be introduced. This will provide at least £2 for every £1 spent up to £5,000 per household to homeowners and landlords making their properties more energy efficient.

• For those on the lowest incomes, the scheme will fully fund energy efficiency measures of up to £10,000 per household.

Full details of the Summer Statement can be found at:

https://www.gov.uk/government/publications/a-plan-for-jobs-documents

In terms of the future, we are expecting far more detailed tax and spending plans to be put before Parliament in the Autumn Budget and I will continue to keep you updated.

As always, if you have any questions about anything contained in this e-mail or indeed on any finance related matter, please do not hesitate to contact me.

With best regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Bank of England predicts ‘V’ shaped recovery!

Just as pubs restaurants and to my wife’s delight, hairdressers start to reopen, there is potentially even more good news!

The following is from Wednesday’s Times.

Britain is on track for a V-shaped recovery as the economy rebounds from the lockdown far faster than expected, the Bank of England’s chief economist has said.

“Andy Haldane said the country was already two months into the recovery and that the depth of the coronavirus recession was likely to be less than half as bad as the Bank had feared in May.

Real-time data on payments, traffic flow, energy use and business surveys suggested that “the recovery has come somewhat sooner, and has been materially faster, than in the [Bank’s] May scenario — indeed than any other mainstream macroeconomic forecaster”, Mr Haldane said.

“It is early days, but my reading of the evidence is so far, so V.”

Policymakers and economists have grown increasingly gloomy in the past few months. After initially predicting that the recession would be V-shaped, or short and sharp, they have lowered expectations, warning of a slow U-shaped recovery, a “W” caused by a second rise in cases or even an “L”, where the recession is prolonged.

In other developments:

• Britain’s Covid-19 death toll rose by 155 yesterday, taking the total to 43,730, with the weekly number of all deaths having fallen below normal for mid-June.
• Patients will be told to call ahead and book A&E appointments under a new system being tested by the NHS.
• Nightingale hospitals will be repurposed as cancer testing centres to cope with an increasing backlog.
• The National Gallery will reopen on July 8 with three one-way “art routes” to maintain social distancing.

Mr Haldane emphasised that the economy was still facing an unprecedented collapse and that a steep rise in unemployment posed a threat to a swift rebound, but he remained optimistic. “Both the UK and the global economies are already well into the recovery phase. The UK’s recovery is more than two months old,” he said on a Bank webinar.

Boris Johnson said yesterday that the economy was at a critical moment as the government’s furloughing scheme was wound down. “We’re waiting as if between the flash of lightning and the thunderclap with our hearts in our mouths for the full economic reverberations to appear,” he said.

The prime minister declined to estimate how many jobs could be lost but warned that the post-pandemic crisis would be worse than the 2008 financial crash. “I’m not going to pretend that this is going to be without real, real difficulty and real, real bumps,” he said.

He refused to rule out breaking the Conservative manifesto pledge not to raise income tax, national insurance or VAT. Asked whether taxes could rise to pay the cost of coronavirus, he said: “You know where my instincts are, what I would like to do. They are, of course, to cut taxes wherever you possibly can, but the difficulty we have is that we have a generational challenge now.”

While declining to rule out raising some taxes, he hinted that others — such as corporation tax — could be cut. “I understand that on top of that bedrock on infrastructure you need dynamic private sector concerns. The fiscal environment as we leave the EU has got to be as competitive as it can possibly be,” he said.

Mr Haldane said that real-time data used by the Bank suggested that the cumulative loss in annual GDP as a result of the pandemic would be 8 per cent, rather than the 17 per cent modelled by the Bank in May. Britain’s decline in the three months to June now looked likely to be 20 per cent rather than the 27 per cent in the May scenario.

Mr Haldane’s prediction of a V-shaped rebound was supported by separate data compiled by Barclays. Fabrice Montagné, Barclays’ UK economist, said that the recovery had “entered a new phase” as social restrictions were eased.

Spending data showed “quite a jump in [in-store] retailing as restrictions to non-essential shops are lifted”. Sales of clothing and footwear in physical shops “staged a striking recovery” with sales down 34 per cent on last year in the week beginning June 15 compared with a 92 per cent shortfall the previous week. Traffic was also returning to normal, he said, in a sign that there may have been little “behavioural scarring”.

The analysis came on the day that Easyjet said nearly 2,000 jobs were to be lost as the airline moved to close its bases at Stansted, Southend and Newcastle airports. Airbus is equally set to cut 1,700 jobs.”

Let’s hope Mr Haldane is right!

I do hope you have an enjoyable weekend.

With best regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Planning Meetings in 2020

As you know, we have been prevented from offering our normal face-to-face Client Planning Meetings throughout the Lockdown period, owing to the Governments social distancing rules. Although restrictions are gradually being lifted, I anticipate that it will be some time before we will be able to welcome you back into our offices and remain within Government guidelines.

However, I don’t want you to feel that this means we are unable to offer you a productive and worthwhile Planning Meeting. We have now conducted several successful remote meetings using Zoom and Microsoft Teams and we are happy to arrange a date and time with you, if you think it would be useful to have a review at this time.

During the Lockdown period we have discovered that our internet service, whilst perfectly able to cope during normal times, does struggle with video calls but strangely, only in the afternoons! As a result, we are in the process of upgrading to a super speedy service which should be up and running later this month.

If you would like to book a slot for a video call (preferably in the morning), please do let us know.

In the meantime, Adam is able to produce any reports that you may require, so please do not hesitate to ask.   

As always, please do feel free to call me at any time to discuss anything that might be concerning you.

Stay virus free everyone and have an enjoyable weekend.

With best regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

A Quick Update

As we enter a new phase of the Lockdown, some restrictions are eased, schools return and businesses reopen, I thought this would be a good time for another quick Portfolio Performance Review.

The first Chart shows how a range of our Portfolios have performed since the severity of the pandemic became apparent and as such it includes the impact of the stock market crash from 20th February in all its gory detail.

As you can see, the markets started falling on 20th February and didn’t really stop until 23rd March.

There has of course, been something of a recovery since then and this has provided holders of cash with a wonderful opportunity to buy into our Portfolios at prices that we haven’t seen for a couple of years. Portfolio 60 was essentially 20% cheaper on 23rd March than it had been just a month earlier and as we know, when things are on sale it’s a good time to snap up some bargains!

The next Chart looks at the same Portfolios during the mini ‘recovery’ since 23rd March.

To put some numbers to this, if you had been lucky enough to invest say, £500k on 23rd March into Portfolio 60, you would have made a cool £68,950 whilst being cooped up at home or doing the garden – easy money! If you had invested in Portfolio 100 (you would have been very brave), you would be up a remarkable £121,050!

Investing, like most things, is incredibly easy with hindsight but who honestly would have had the courage to make such an investment in March, when things looked so grim? Those prices look like a bargain now but they certainly didn’t at the time.

I often hear people say that ‘they might dip their toe in the water again when markets settle down a little’ but of course it’s that ‘settling down’ that represents the growth you don’t want to miss.

Another way of looking at this is to consider an investor who held a Portfolio of £500k in EBIP 60 on 20th February. They would have been down about £100k by 23rd March but by keeping a level head and doing nothing, approx. £50k of this would now have been returned to them. Remember, you only make a permanent loss if you sell, otherwise it’s just temporary!

The first graph shows that there is still a long way to go before we get back to where we were in February but if you are sitting on any surplus cash at the moment, it’s still not too late to take advantage of these lower values.

I wouldn’t be doing my job of course, if I didn’t point out that, in the short-term, there is absolutely no guarantee that things won’t suddenly get much worse from here and values could even fall below where we were in March. The current position is reflecting the optimism that many businesses will soon be back to normal but what happens if there is a second spike in 3 weeks or so, for example?

Short-term investing is not for the feint-hearted but for long-term investors these dips can be genuinely great buying opportunities.

As always, please do feel free to call me at any time to discuss anything that might be concerning you.

Have an enjoyable rest of the week in what remains of the sunshine.

With best regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Some Thoughts

What follows are a few thoughts on how taxation policy might need to change in order to meet the extraordinary public spending commitments caused by the Coronavirus pandemic.

But first, I thought I would include a table showing the average duration of Bull and Bear markets and their respective "heights" and "depths". The table shows the highs and lows of UK Bull and Bear markets from the 1920s to the present day and as such, it includes every stock market crash in the last 100 years and there have been lots.

Bull and Bear Markets.

Source: Money Observer May 2020/Timelineapp Tech

• Average Bull duration 7 years

• Average Bull "height" 507.1%

• Average Bear duration: 1 year and 8 months

• Average Bear "depth" -36.5%

That’s not a typo – the average Bull market height over the past 100 years has been 507.1%!!! This is why long-term investors shouldn’t worry too much about Bear markets, painful though they seem when you are in the middle of one, where the average depth is only -36.5%.

Taxation Policy

Source: Daily Telegraph

"The Telegraph can reveal that a Treasury document drawn up for Rishi Sunak, the Chancellor, sets out a proposed "policy package" of tax increases and spending reductions which may have to be announced within weeks in order to "enhance credibility and boost investor confidence" in the British economy."

Income Tax

Some Options?

"All bets are off with things like manifesto pledges and triple locks. The world has changed to such a degree" (Mike Hodges Saffrey Champness)

• According to HMRC a single percentage point rise in the basic rate of income tax from 20%-21% would raise £4.7bn in 2020-21.

• Increasing the higher rate of tax from 40%-41% would raise circa £1bn of tax reflecting the smaller number of taxpayers in this band of earnings.

• Increasing the additional rate of tax from 45%-46% would raise £105m

Possibility that the Chancellor could scale increases in tax rates, for example

• 1%:BRT

• 3% HRT

• 5% ART

Other Possibilities

• Reduce or remove the personal allowance

• Drop the level at which the personal allowance starts to be restricted to <£100,000

National Insurance Contributions (NICs)

NICs are complex and the government may take this opportunity to introduce some radical reform to "simplify" and also raise additional tax revenue.

Some options?

• Remove the Upper Earnings Limit

• Introduction of a flat rate

• Harmonise the lower earnings limit with the personal allowance which will help lower earners but as above remove the upper earnings limit

• Introduce National Insurance Contributions (NICs) for people who are working and over the state pension age.

• Increase NICs for self-employed clients and a quid pro quo for the Self-Employed Income Support scheme

• Self-Employed clients earning over £9,501 pay NICs at 9%. Employed individuals pay NICs at 12%

Inheritance Tax

Some Options?

• Remove the flat rate of IHT of 40% and align the tax rate(s) to rates of income tax

• Introduce a wholesale reform (See OTS report from July 2019) and introduce a form of Capital Transfer Tax which taxes assets whenever they are transferred (lifetime or on death).

• Reform Business Relief and Agricultural Property Relief

• Reform gifting (consider introducing a lifetime limit)

• Remove the Main Residence Nil Rate Band

• Retain the Nil Rate Band at current levels

• Reform exemptions such as the "Normal expenditure out of Income"

• Take another look at trust taxation

Also worth noting : HMRC’s suspension of its Inheritance Tax investigations during the coronavirus crisis gives taxpayers a unique opportunity to get their affairs in order, says Pinsent Masons, the multinational law firm. (Source: https://ifamagazine.com/article/hmrc-pause-on-inheritance-tax-investigations-gives-taxpayers-opportunity-to-get-affairs-in-order-says-lawyers/)

According to Pinsent Masons, HMRC launched 5,347 IHT investigations last year*, generating £259m in extra tax. 27,283 IHT investigations have been launched in the last five years, with a total yield of £1.3bn.

Pinsent Masons warns the suspension of tax investigations is only temporary and HMRC is likely to be more aggressive once its compliance work resumes. HMRC will be looking for ways to increase its compliance revenues to cover rising coronavirus-driven public spending.

The law firm adds that HMRC dramatically increased the number of tax investigations it opened in the aftermath of the 2008 financial crisis as it tried to close the gap in the public finances.

Capital Gains Tax

• Remove or cap CGT relief on a client's "Principal Private Residence"….Cost to the exchequer £26.7bn ( according to the NAO)

• Increase rates of taxation ( currently 10%/20% and for property 28%)

• Align CGT rates of tax to Income Tax rates

• Clear disparity between tax rates on "wealth" and tax rates on "income"

• Freeze or reduce the Annual Exemption of £12,300 for individuals/£6,150 for trustees

Introduction of a Wealth Tax?

Some Options?

• A one-off payment or an ongoing levy on wealth

• According to the Future Economies Research Centre in Manchester a 2% one-off levy on ousehold net wealth calculated to be at circa £15tn would generate the £300bn needed to cover the cost of the Covid-19 crisis

• Levy would be on property values (net of mortgages), financial assets, businesses, savings and possibly pension assets

• May mean the introduction of temporary capital controls to stop individuals moving wealth overseas?

• May not be called a "wealth tax" but positioned as an NHS surcharge which would apply to all Income Tax and Capital Gains Tax (say at a rate of 1%-1.5%). Possibly also NICs. Maybe tapered so that clients with higher incomes/wealth pay a higher percentage?

• Perhaps this approach is an easier "sell" politically?

The above is largely speculation of course but it is an inescapable fact that the cost of this crisis will need to be met from somewhere and we are all likely to feel some pain, in one way or another.

As always, please do feel free to call me at any time to discuss anything that might be concerning you.

Stay safe everyone and have an enjoyable week.

With best regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Getting things in their proper perspective

Getting things in their proper perspective
The following is a superb article by Sarah Knapton of the Daily Telegraph. It provides an excellent analysis of the REAL risks posed by coronavirus, when compared with the risks we routinely face in everyday life. It provides some welcome perspective and cuts through the seemingly impenetrable doom and gloom. If part of the media's role is to provide balance (and to build morale during a crisis), maybe they should be following this example. It's a long read but well worth it!

Analysis: How the danger of coronavirus compares with the risks of everyday life

How much of a threat is low level of Covid-19 in community compared to danger of accidents, bad health or crime?

By Sarah Knapton, Science Editor Daily Telegraph

The Government has been urged to step back from its plan to reopen schools in June, with education unions claiming it poses too much of a risk to society. But just how risky is a low level of coronavirus in the community compared with the risks’ individuals take every day through activities such as driving, drinking or crossing a busy road? After all, the 25,000 serious injuries caused by road traffic accidents in Britain each year could be prevented by banning cars, but we do not take that step because people need to get around. Likewise, we could prevent the 17,000 flu deaths each year by observing social distancing and keeping a lockdown in place to prevent community transmission.

Speaking at the science and technology select committee on Wednesday, Osama Rahman, the chief scientific adviser at the Department for Education, said people had to accept that some risks were inevitable.

"There is always a risk of transmission," he told MPs. "Can we get the risk of transmission to zero? No. And what can you put in place that will help reduce risks as much as possible? "There will always be some risk. There is a risk going to school anyway – it's not a risk-free environment, so to what extent is that risk acceptable?"

So how does coronavirus compare to the dangers posed by everyday living? We look at the figures:

Age

Age is one of the biggest risk factors for general health and wellbeing, with the chance of dying rising substantially as people grow older.

Although there is an early spike in the deaths of babies due to congenital birth defects and problems in delivery, the chance of dying as a child is eye-squintingly small, with those aged nine and 10 the least likely of any age group to die.

As Cambridge University risk expert Sir David John Spiegelhalter put it in a recent blog: "Nobody in the history of humanity has been as safe as a contemporary primary school child."

Youngsters also seem largely immune to coronavirus, with most cases involving people over 60 or with underlying health conditions.

In April, Imperial College modelled the death rates for the virus, factoring in for the first time less serious cases which will never trouble the health service. While the overall death rate of those in hospital is hovering at around 1.3 per cent, or about one in 77, it falls dramatically to 0.66 per cent, or one in 152, when mild and asymptomatic cases are included.

The same lowering of risk holds true for all age ranges, and means that the chance of dying for children contracting coronavirus is miniscule, approximately 0.0069 per cent for 10 to 29 year olds – one in 14,492.

For the under-10s, there is even less risk – around 0.0016 per cent, or one in 62,500. Those in their 20s have a one in 1,666 chance of death, while for 30-somethings it is one in 1,190. For people in their 40s it is approximately one in 625, in their 50s one in 169 and in their 60s nearly one in 50. Over-70s have a roughly one in 23 risk of death.

The risk of dying from anything follows the same linear pattern as coronavirus as people age, with a slight rise in the late teens and early 20s largely caused by the follies of youth. But apart from that blip, the average risk of death doubles roughly every eight years.

Each age group has a different chance of dying each year, and Prof Spiegelhalter has calculated that coronavirus squeezes, on average, a year's worth of risk for someone who is hospitalised. So, for an 80-year-old Briton, the chance of death from anything annually is around 11 per cent, and coronavirus adds 9.3 per cent to that for hospitalised patients.

For those aged 10 to 19 the risk is far lower, accounting for just five months of annual risk, yet for those 60 to 69 it is two-and-a-half years of extra risk. If we include those who never needed hospital, the risk falls even further. So, while the annual risk of death for a 10 to 19-year-old is just 0.02 per cent, the risk of death from coronavirus is 0.0069 per cent – the equivalent of four months of annual risk.

Accidents

While there is a general risk from ageing, the public faces a host of other risks in daily life. The avoidable mortality rate in Britain, which includes accidents, unintentional injuries and some preventable diseases, is currently 228 people per 100,000, or 0.2 per cent. But the risk from coronavirus for the general population does not rise above that until people hit their 50s – so for anyone under that age the disease is less risky than the general underlying chance of death from preventable causes.

For road accidents, the fatality rate by population hovers around 2.8 deaths per 100,000 people. The Government is encouraging more people to cycle, but cyclists are 15 times more likely to be killed on Britain's roads than car drivers. Department for Transport figures show that, for every billion miles cycled, there are 1,139 serious injuries and 29 deaths. That compares with just 27 serious injuries and two deaths per billion miles for car drivers.

Walking is also encouraged under the new Government plans, yet pedestrians are at even greater risk than cyclists or drivers, with 34 killed each year for every billion miles walked and 461 seriously injured. However, with fewer cars on the roads the rate of cycling and pedestrian deaths is likely to drop.

Motorcycle riders are at the greatest risk, with 126 deaths and 2,038 serious injuries per billion miles travelled.

Some 147 people are killed at work each year, while 581,000 people suffer an injury.

Professor Alan Penn, the chief scientific adviser at the Ministry of Housing, Communities and Local Government, said risks would inevitably go up once lockdown was released. "There is a hierarchy of risks, and we decide which measures can be taken and give advice about how they need to consider the risk," he told MPs. "The risks will increase. One reason we are able to do opening up is because the total numbers infected are dropping, so the risk from that perspective is reducing."

Crime

The chance of becoming a victim of crime in a single year is now 15 per cent, but that changes dramatically depending on age. While around one in five of those aged 16 to 24 can expect to experience a crime annually, that drops to just one in 20 for the over-75s. The type of crime also varies. The chance of being robbed is around 0.3 per cent in 100, while 0.9 per cent of people are a victim of violence without injury, 0.5 per cent a victim of assault with minor injury, and 0.4 per cent a victim of wounding.

Likewise, the average adult in England and Wales has a one in 100,000 chance of being murdered in a given year, while domestic abuse among the wider population is around 7.9 per cent of women and 4.2 per cent of men.

Over the last decade, the annual chance of being murdered in a terrorist attack on British soil was about one in 11.4 million per year.

Health

Around 600,000 people die in Britain every year, with the frail and elderly most at risk, just as they are from coronavirus. The most recent data from the Office for National Statistics (ONS) reveals that more than one in eight people will die of dementia and Alzhiemer's disease, which is now the leading cause of death.

In Britain each year, 280 people in 100,000 die of cancer, and there are an estimated 40,000 deaths per year linked to outdoor air pollution, with dirty air linked to lung cancer, stroke, heart disease, Alzheimer's and fatal asthma.

The risk from depression is also high, particularly for young people. The leading cause of death for 20 to 34-year-olds in the UK is suicide and injury or poisoning of undetermined intent for all years observed, accounting for 27.1 per cent of male deaths and 16.7 per cent of female deaths for this age group.

Bad habits

As well as health, accidents and age risks which cannot be avoided, many people raise their risk of ill health and early death through bad lifestyle habits.

As many as one-third of heavy smokers aged 35 will die before the age of 85 from diseases caused by their smoking. For a 55-year-old smoker, the chance of developing lung cancer in the next decade is 34 in 1,000, compared to just one in 1,000 for a non-smoker.

Likewise, consuming one to two drinks four or more times per week – an amount deemed healthy by current guidelines – increases the risk of premature death by 20 percent compared with drinking three times a week or fewer.

The male drug poisoning rate has significantly increased from 89.6 per million males in 2017 to 105.4 per million in 2018. Two-thirds, or 2,917, of drug-related deaths were related to drug misuse, accounting for 50.9 deaths per million people in 2018.

How much risk is too much?

The Government assessment of risk is based on the reproduction, or 'R' number, which calculates how many other people will be infected by one person with coronavirus. The rate is currently below one, which is why some lockdown measures have been lifted, but the Government will reimpose measures if it rises again.

However, some experts believe that Britain could still function with an 'R' rate of above one. Professor Jonathan Ball, of the University of Nottingham, said: "If the effective 'R' is above one, then that means numbers will increase – therefore you can get away with that until your capacity to deal with hospital ICU admissions is swamped."

Mark Woolhouse, a member of the Government's Scientific Advisory Group for Emergencies (Sage) and professor of infectious disease epidemiology at the University of Edinburgh, believes it should be scrapped altogether. "Insisting on 'R' below one is painting yourself into a corner – it restricts your options very substantially," he said. "We have a situation where it’s almost certainly below one in the community but above one in care homes, and that's the wrong way round. “We would rather it was less than one in care homes and maybe above one in the general population as a price worth paying."

As always, please do feel free to call me at any time to discuss anything that might be concerning you.

Stay safe everyone and have a lovely weekend.

With best regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Economists

I was reading David Smith’s piece in the Business Section of The Sunday Times yesterday, in which he speculates on how the economy might evolve as a result of the pandemic, it is a little long to reproduce here but I thought you might like the rather droll Economist ‘jokes’ with which he finished it.

“This had better be my last week for economist jokes, not because the well is running dry, far from it, but because other people, notably accountants, management consultants and actuaries, are feeling left out. I am prepared, however, to continue the series for them, if readers can provide enough material.

To get you in the mood, one that provides a neat handover: “What’s the definition of an economist? Someone who found accountancy too exciting.”

Anyway, back to my final flurry. Professor Iain Begg and others offered this. Three people are in a hot air balloon and get lost on a foggy day. They shout to a passer-by on the ground: “Where are we?” The passer-by shouts back: “In a balloon.” “Ah,” say the balloon travellers, “you must be an economist, because what you said was precisely correct but totally unhelpful.”

Giles Johnson of CIL offered Walter Heller’s observation that an economist is someone who observes something working in practice and wonders whether it will work in theory, and also a variation of the desert island joke. Two economists are stranded on a desert island and make millions over the next few years selling their hats to each other.

Max Good provided the most suggestions, such as Paul Samuelson (or was it Thomas Carlyle?) claimed to have trained a parrot to answer every question in economics by squawking just three words — demand and supply. Also, the Japanese car firm Nissan used to be known as Datsun. When a mishap befell a cargo plane bringing parts to Britain, it was said to be raining Datsun cogs. He also recounts the possibly apocryphal story of a lunch between Donald Stokes, chairman of British Leyland, and Tony Benn, industry secretary in the 1970s, that sealed the car giant’s nationalisation. At the end, Benn says: “Thank you for your company.”

That’s it, apart from Peter Spencer’s reminder of the economic statistician who is broken down by age and sex. I’ll be here all month.”

david.smith@sunday-times.co.uk

If you would like to read the whole thing here is the link  https://www.thetimes.co.uk/article/the-economy-will-be-different-but-will-it-be-better-88930llff).

As always, please do feel free to call me at any time to discuss anything that might be concerning you.

With best regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner