Market Update July 2017
The first half of the year has been generally positive in financial markets despite a host of reasons for uncertainty around the globe. However the tone has had a clear negative shift in recent weeks which could signal a summer of volatility ahead. The deterioration in tone was particularly notable in bond markets as investors accept that the long period of monetary policy around the world is finally ending. The generally benign backdrop over the first half of the year allowed the funds on our Recommended List to rise by more than 5% (in euro terms) on average over the six months.
The major factors weighing on markets currently include the expectation that the world’s central banks are looking likely to raise interest rates over the medium term, the uncertainty around the delivery of Trump’s agenda in the US and the outlook for the Chinese economy. More locally, Brexit continues to dominate. We continue to hold the view that a period of volatility is in prospect – the risk of a substantial correction in equity markets, while still less than 50% in our view, has not abated.
Having had a strong first quarter, equities fared much less well in the second quarter. China was the standout market over the period and is ahead more than 20% year to date. The ongoing improvements evident across European economies were reflected in healthy performances in the region’s equity markets. Europe grew by almost 10% over the first half of the year. Japan, in contrast to other markets, had a much stronger second quarter as investors became more convinced about the structural changes being implemented, particularly affecting Japanese corporate culture. Currencies were also more volatile in the second quarter. Euro based investors suffered from both a fall in Sterling and a weakening dollar. Performance data for the major markets is shown below:
. Q2 2017 H1 2017
US +2.7%* +9.0%*
UK +0.4%* +4.7%*
Europe +2.9%* +9.9%*
Japan +5.1%* +4.8%*
Ireland +3.2%* -4.8%*
China +7.6%* +20.1%*
* Source: Financial Express Analytics
As markets continue to rise, we cannot discount the risk of a market correction. However, there seems little doubt that the economic backdrop is generally on an upward tack so that any correction could bounce back relatively quickly and could well represent a good buying opportunity. So while we are advocating caution in relation to increases in equity exposures, we are not advising clients to reduce unless their exposures to equities are excessive. We prefer equity funds with a focus on income as they are likely to be less volatile should markets get bumpy. Longer term, we are also very positive on emerging markets and believe most investors should discuss having at least some small exposure to those regions with their advisor. Our longer term view on equities generally remains very positive.
All investors are aware of the poor to no return from cash deposits, a situation which is unlikely to change for quite a long time to come. We recently launched the Cash Alternative Strategy, which incorporates a range of very low volatility funds which offer a return significantly better than cash without involving a high degree of risk. We are strongly of the view that cash rich clients should be looking to switch at least part of their cash holdings into such a strategy.
As mentioned, bond markets moved sharply into negative territory which could be the start of a downward trend which could continue for some time. Overall we are sticking to the view we have held for some time now that the mainstream bond market offers little value for investors currently. We do however continue to see some value in particular niches such as Emerging Market bonds and some of the specialist credit markets.
Our view on this asset class is undimmed and we remain fans of property on a 3-5 year view. We see it as a core asset in most portfolios. Income can be a great compensation in volatile times and property is still one of the best sources of reliable income available. Investors need to be cautious about geared investments, as the next couple of years could see banks coming under balance sheet pressure and look to force asset disposals in some cases. The domestic market still looks to offer good value but the same underlying value arguments apply to many international property markets also. Problems around liquidity and diversification must always be taken into account when investing in property but need not be a serious concern for longer term investors. In addition there is now a wide range of stock market listed real estate investment trusts offering exposure to diversified real estate assets combined with good liquidity.
Against the trend signalled by forecasters at the start of the year, the dollar has been the weakest of the major currencies over recent months. It is expected to settle at these levels although Trump related developments are more likely to lead to further weakness should they come about. Until Brexit matters become clearer Sterling is also likely to be a volatile currency.
Gold and Oil
Gold has risen by 8%* in dollar terms since the start of the year and continued market uncertainty may provide further support for gold over the coming months. Dollar weakness has, and may continue to eat up most of these gains for euro based investors. We would reiterate our view that a small exposure to gold in your portfolio is worth considering. Oil markets continue to be hugely unpredictable as evidenced by the recent sharp fall in the price. A barrel of oil is trading at $48 currently compared with $57 at the start of the year. We see no prospect of a sustained recovery in this commodity.
* Source: Financial Express Analytics
Inflation is unlikely to be a factor in markets during the current year but could well emerge as a significant topic in 2018.
As always, you should only consider the investment views contained in this market update article in the context of your own attitude to risk and how such choices might impact your Asset Allocation model. Should you wish to discuss your investment portfolio, please contact your Harvest Financial Services Client Manager.
|Warning: Past performance is not a reliable guide to future performance.
|This material is not intended to provide advice and is provided for general information purposes only.
Five steps to turn your income into real wealth
A high salary can help an individual appear wealthy, however, building real wealth requires commitment, sacrifice, lots of patience and a long term mind-set. Have you got what it takes?
One of the challenges we regularly face in Harvest is with clients of relatively modest investment asset bases but with significant incomes. We typically see this with younger clients who are building excellent careers with significant salaries, but have not as yet turned this income into investable assets (wealth). So how do you turn your income into real wealth?
Don’t let your lifestyle creep up with increases in income
First of all we’re not against you treating and rewarding yourself when you get a big salary increase – we fully believe in celebrating success! But what we see quite often is that salary increases (and sometimes very significant ones) don’t result in you being any better off than before. And the reason for this is that the salary increase turns out to be the gift that keeps on giving – an extra holiday, more weekends away, more nights out, a new and bigger car, etc. And before you know it, you’re no better off at the end of the month or year than you were before the salary increase.
Have a household budget and stick to it!
This is the place to start. Some people scoff at the idea of a household budget, but it is nigh on impossible to keep a lid on household spending without one. Build into the budget the lifestyle choices you make – holidays, weekends away, nights out, new car, etc. Once you decide you’re happy with your chosen lifestyle and can afford it, then salary increases should be extra money to put to another purpose, such as building your investment asset base. Commit to saving your income increases to building your real wealth, rather than improving your lifestyle.
Pay yourself first
This above all is the single most important step. Many commit in their heads to investing each month. When their income hits their bank account, they then pay their bills and fund their lifestyle, with the intention of saving “whatever is left over’. Which usually turns out to be nothing or very little – certainly less than they had anticipated.
Instead of this approach and based on your budget, you should know how much is needed each month for bills and your lifestyle. You should then be able to determine how much you should be saving each month. The key action is to pay yourself first – have this investment amount coming out of your bank account pretty much immediately after your income lands. This will help you prevent your income being frittered away and will turn your income into real wealth.
Saving regularly is very effective
One of the big challenges facing investors with a lump sum of money to invest is how to time their entry into the market. There is always the fear that they will commit their money, and that the market will quickly experience a dip – and a sudden and early dip is hard to make up.
Imagine you invest €100,000 and the market immediately falls by 20%. You now have only €80,000. To get back to your original €100,000, you now need a 25% increase in your investment.
Instead if you invest regularly, using a concept known as “euro cost averaging”, you can protect yourself against large swings in the market. By saving a monthly amount into an investment portfolio, you can smooth out the highs and lows in asset prices. Because when the price of assets (think of company shares) you buy goes up, the value of your portfolio rises. When asset prices go down, yes your money invested will go down in value, but your next monthly saving will buy more assets as the price is lower. Also buying stocks at a lower price means you get a higher return when the market swings back up. So regular savings are a very effective form of investing – turning your surplus income into real wealth.
Utilise tax breaks
Another important element of turning income into real wealth is the capture of as many tax saving opportunities as possible. Tax planning is a very important and very significant part of wealth management. Quite a number of tax reliefs available such as the small gift exemption and pension contributions have a time limit on them – if you don’t avail of them during the tax year or by a tax return date, the opportunity is lost. So it makes sense to maximise the wealth building power of any surplus income by availing of all tax reducing opportunities before they expire.
Wealth management advice
Converting surplus income into real wealth is a critical part of a robust wealth management strategy. Building wealth first of all gives you a buffer and helps you avoid needing to make rash (and often untimely) decisions should you hit unforeseen situations such as illness or redundancy down the road. Real wealth also simply gives you more choices. Yes there might be a small price to pay in terms of your lifestyle today, but it will be worth it down the road.
How do I find out more?
To find out more, please contact us on 01 237 5500 or email email@example.com and one of our advisors will be in touch.
|The material is not intended to provide advice and is provided for general information purposes only.
|The information contained herein is based on Harvest Financial Services Limited’s understanding of current Revenue practice as at June 2017 and may change in the future. Please note that the tax treatment depends on an individual’s circumstances and may be subject to change in the future. You should take such independent tax advice as you deem appropriate.
Congratulations to all the winners of the Irish Accountancy Awards 2017. We were delighted to sponsor the Awards again this year and thank everyone involved making it such a fantastic night. This year’s finalists are an outstanding group of practices, companies and individuals and showcase excellence, innovation and best practice within the accountancy sector in Ireland.
Best Use of Technology in Accountancy & Finance
EasyDebit – FEXCO
Part- Qualified Accountant of the Year
Zoë McBride – Heritage Administration Services
Young Accountant of the Year
Richie Patton – OASIS Group
Tax Team of the Year
Kilbride Consulting Tax Partners
Advisory Team of the Year
Finance Team of the Year
Finance Director of the Year
Shane McGibney – Kerry Group
Employer of the Year
Accountant of the Year Practice/Industry
Alison Ritchie – Polar Ice
CSR Initiative of the Year
The Kenyan Child Foundation – John McCarrick & Associates
Excellence in Education & Training
The Accounting Experience – Maynooth University
Start-up Practice of the Year
TaxBright Accountants & Business Advisors
Small Practice of the Year
Medium Practice of the Year
Baker Tilly Hughes Blake
Large Practice of the Year
Practice of the Year
The CSO figures for April 2017 show the unemployment rate in Ireland is 6.2%. With a tightening labour market, employers are finding it increasingly more difficult to attract and retain the right employees. Reward structures over and above basic salary are becoming more of a significant factor in employee decisions to move jobs. Many companies are now realising that to attract and retain top quality employees they need to have a competitive edge and to provide employees with the resources to build a happy and financially secure life.
Look after their future.
By ensuring that your employees are included in a pension arrangement and that they understand the future value of that pension arrangement, your employees will not only save tax but they will know that you are interested in their longer term well being.
Protect their families.
Increasingly employers are including life assurance cover and disability benefits in their reward structures. The disability benefits protect the employee’s income if the employee can not work due to illness or disability and the life assurance cover protects the employee’s family in the event of their untimely death. Arrangements can be cost effective, employer premiums can be offset against corporation tax and there is no benefit in kind (BIK) for employees. In addition arrangements can offer a level of cover which does not require medical underwriting.
Provide peace of mind about their finances.
Employee wellness surveys indicate that employees are often more stressed about their financial situation than any other issue. Providing an on site financial planning clinic has been proven to help employees manage their personal finances. With this peace of mind comes an increased focus on their job. It is also one of the best ways to get employees to engage with their own pension planning to ensure that they have the financial resources to retire at the end of their employment contact.
Specialised benefits for key employees.
Pensions are often one of the largest and most complex investments an employee may hold. For higher earners who want to make larger contributions an Executive Pension Plan (EPP) or Small Self Administered Pension (SSAP) may provide a more tax efficient solution. They also offer greater investment options such as property, private equity and international equity funds. Our bespoke financial planning service is designed to support your key executives at every stage of their financial future and help them take control of their financial affairs.
Regularly review your reward structures.
For employers it is important to regularly review your reward structures. Insurance companies regularly change their cost structures and product offerings. By not keeping an eye on the market your company could end up paying too much. A regular review of your pension and risk benefits will ensure that you are getting the best value for money for both the firm and your employees.
Harvest’s range and depth of experience in this sector, along with our independence means we can offer you a more holistic approach to employee benefits solutions. Our Employee Benefit Solutions team provide strategic advice and brokerage services that can help you optimise your reward structures and maximise employee engagement.
Talk to us today about employee benefit solutions that can give you a competitive edge when attracting and retaining employees, and to provide employees with the resources to build a happy and financially secure life.
The Social Welfare and Pensions Bill 2017 was published yesterday. It contains a number of proposed amendments to the Pensions Act which directly impact on Defined Benefit (DB) schemes:
- When a DB scheme is in deficit, trustees will have to submit a funding proposal to the Pensions Authority within six months of the date of the actuarial funding certificate.
- Employers will be required to give twelve months’ notice to the Pensions Authority and trustees before ceasing contributions to a DB scheme.
- The Pensions Authority will have the power to determine a contribution schedule where an employer will not engage with the trustees on agreeing a funding proposal.
With an increasing legislative burden for DB schemes, we expect to hear more and more about the winding-up of these schemes. This can be harrowing news for those involved and very often, members worry about their years in retirement and the subsequent effect on their standard of living.
However, a question that must be posed is: is this a benefit in disguise? Members of DB schemes can be quietly pleased when they learn of the capital value of their pension benefits with six and often seven figure sums being quoted and the control of these funds can transfer in to their hands.
If you would like Independent Advice on the options available to you on your DB scheme contact us on 01 2375500 or email firstname.lastname@example.org
To view full details of the bill click here
The material is not intended to provide advice and is provided for general information purposes only.
The legislative information contained herein is based on Harvest Financial Services Limited’s understanding of current practice as at May 2017 and may change in the future.