Applewood Independent are deeply saddened by the passing of Her Majesty Queen Elizabeth II.

Throughout seven decades of devotion to our country she was a leader, an inspiration, and a true role model.

We send our deepest condolences to The Royal Family at this incredibly sad time.

We’re definitely riding the financial roller coaster this year, and the same word keeps being repeated over and over again: recession, recession, recession. 

While there has been volatility, and some losses and gains, I’m still not sure the UK is that close to recession in the market sense. 

From a value perspective, America is far closer to those calls of recession, in my opinion, than the UK. If you look at price/earning (or P/E) ratios, FTSE 100 P/E ratio of circa 14x the US market before and its recent fall, sort of 36x. 

(For reference: the P/E ratio is a statistic that helps to measure the value of stocks. The larger the number, the more expensive and valued something is; the smaller the number, the more cheap and undervalued. A par value for P/E ratios is 14x.)

For the UK, the last technical recession wasn’t in the Covid-19 lockdown (though you might have felt it should have been); it was during the 2008 credit crunch. Back then, the UK stock market was at an incredibly expensive 38x P/E ratio – then it took a real hit, going down to  earnings. So, whilst the UK has suffered some losses recently, from an investment point of view our portfolios have been insulated from further losses.

Stock market and equities

Recently, we’ve been backing UK domestic equities more and more, particularly FTSE 100 large caps. This means that any losses in the portfolio year have been less than they would have been by two times, if not two and a half times, than if our portfolios were more akin to 2015/2016, when we had a lot more overseas money.

As of 28 June 2022, the FTSE was only 2.3% down from where it started in January. However, in the American market, the Dow Jones was actually down 14%. So there’s been a big difference between the overseas funds that we keep an eye on and the FTSE 100 funds that are making up the majority of our portfolios at the moment. The UK stock market is currently the best value and the best setup to actually bring returns. Even if that return is an investment that loses less, you’ve still adopted a good strategy. If you’ve bought the least-falling investment, that value is there. 

In comparison to the North American market, the UK stock market’s value has been very good and the funds that we invest in have followed suit. They still look well placed to make money – though it may be in a day’s time or in a week’s time, or even a year or two years down the line – and we feel there’s value out there to be holding stock. 

Therefore, we’re very happy with the strategy that we have put in place. It has shown itself to be the right strategy with regard to staving off considerable losses, and we feel it’s well placed for those longer-term gains.

Fixed interest holdings

There are only four places in which to put your money: cash, property, fixed interest holdings and equities. For equities, we’ve talked about how we’ve backed the UK, which has been the right choice and helped with the losses. Regarding our fixed interest holdings, we’ve slightly reduced our UK holdings over the last few years, which again has been the right decision. 

Capital values are hurt by interest rates going up, which is guaranteed to continue happening until inflation has been beaten away. What helps protect against this is that the fixed interest that we’re currently holding is still paying very good rates of interest. If the capital value falls 5% but it pays a 5% interest, you’ve lost nothing. This also offsets some of the risk of the equities.

Property funds

In other blogs, we’ve talked about the BMO UK property fund, which is the one property fund that we hold across all our portfolios now. 

Its current 12-month performance is plus 20%, which has really helped the equities that have struggled this year. While it is a traditionally unloved asset class, its performance being very low at 2–5% per annum on average, it shows its value when the market struggles. 

If a portfolio is falling, it helps because it doesn’t care and just does its own thing; and if everything is going up, then even better. 

So protection from the current market volatility has been helped with other investments in the portfolio, some of which have made good money this year. 

This volatility probably isn’t going to go anywhere for a little while. The market seems to lose 5% and make 5%, but not move too much, and our portfolios are doing the same.

So I think that we need to keep the strategy that we’ve got. It’s working, and we were right in the first place to back the UK equities.

If you’d welcome input, expertise and experience from Applewood Independent, please get in touch via alex@applewoodindependent.co.uk or david@applewoodindependent.co.uk.

The views expressed in this article are those of the author and do not constitute financial advice. Applewood Independent Ltd is authorised and regulated by the Financial Conduct Authority. For financial advice designed for you and your specific circumstances, please contact the author using the contact details provided in this article or, alternatively, contact the Applewood Independent Ltd office on 01270 626555.

The value of your investment can go down as well as up, and you may not get back the full amount invested.

Past performance is not a guide to future performance.

The laws on the Trust Registration Service have changed, which has led new legislation to come into effect because of the Covid-19 borrowings. 

The government wants to make sure that they’ve got a register of all the trusts in the UK, in order to be certain that those trusts are paying the right amount of taxes. Due to the extra £300 billion that we borrowed as a result of the pandemic, we’ve now got extra sums of money to pay back to the NHS, for example. 

However, before Covid-19 even happened, the UK government was already a trillion pounds in debt, and needed to repay £80 billion of that debt this year (which is far more than we spend on anything, other than hospitals). 

In this blog, I will explain how UK government debt works. 

Gilts and bonds

When the UK government needs to borrow money, they are issued “gilts” (we will look at which institution in the UK issues these gilts to the government shortly). A gilt is a fixed-term loan (or bond) at a fixed rate of interest, and a guarantee of the capital back at the end of it.

The UK can issue what is called a “tenure index length bond”. It means you would get indexation, which is an adjusted price to combat things like inflation, plus 0.5% or 0.25% of interest. And that would be considered your interest rate for the next ten years. It comes in multiples of £100. So, in the event you put £10,000 into a gilt, you will get your interest returned to you over the following decade. 

However, a lot of the gilts aren’t index length, because indexation to inflation is currently at a high point. A lot of gilts are issued at slightly fixed rates. Taking this into account, you can get a 20-year gilt at a 3% rate of interest each year until you make the £10,000 back at the end of that period.

Who issues the gilt to the UK government?

The short answer is the Bank of England. 

Within the government, there’s a department attached to the Bank of England that issues gilts. That means that one of the few saving graces of the £300 billion we borrowed during the pandemic is the fact that, over the last two years, interest rates have been at their lowest since 1694. 

Basically, no interest rates were given out by the Bank of England; they used a base rate known as the interbank rate. 

Once the Bank of England says interest rates are going to be 1%, they will lend money to the big banks at the said 1%. Those big banks then set their interest rates based on what they need to borrow.

From this perspective, our banks make their income through giving people loans where they (the bank) make back a percentage over time. The loan can be for a mortgage or to invest in a small business, for example. Traditionally, that’s how banks have made their profits. 

When it comes to how the Bank of England lends, and the UK government receives their gilts, the process works in the same way. 

I hope this information was useful to you. If you’re curious to learn more, feel free to email me directly for any further information at david@applewoodindependent.co.uk. 

Are you aware of how new budgetary changes will impact your household income this year? Getting clear on your financials and business outgoings will support you to steer clear of debt and make better investment decisions.

While there have been no significant developments in this tax year in comparison to the previous 12 months, the small changes that have been implemented will affect everybody to some degree.

In this blog, we’re going to explore the financial changes that are likely to impact you the most in this tax year.

The four main issues are:

• Your personal allowance has been frozen

Whilst your tax-free personal allowance remains static at £12,570 if you receive a pay rise in line with inflation, all of the additional money is subject to tax (fiscal drag) (because your allowance hasn’t increased).

• You will pay more national insurance

National insurance rates have increased by 1.25% for the basic tax rate payer, which means you will pay more to the government (the funds have been earmarked to help fund the gap in social care costs, support the NHS and take care of the costs of the pandemic). If you’re in the higher UK tax bracket, you’ll now pay 3.25% instead of 2%, which over a year can add up to a sizeable amount, leaving you with less.

• Increased cost of living

Utility bills and fuel costs have increased, and the same groceries you bought at the start of the year are now likely to cost more.

• Increased mortgage payments

If you have a variable rate mortgage, you will already have experienced an increase this year, and you are likely to experience at least one more hike in 2022.

At least three out of these four changes are likely to affect most of the UK’s employees, but there are also challenging times ahead for business owners.

What’s new for business owners this fiscal year?

Small and medium-sized businesses are likely to be less prosperous this year because of fiscal drag, which means you’re working the same hours for less profit.

The national insurance rate for employers has increased to 15.05% from last year’s 13.8%.

In short, this means that small and medium-sized business owners are likely to find the next year more financially challenging. It’s wise to explore the changes and consider your best options, so here are two suggestions that may suit you:

• Pass the cost to the consumer

This may or may not support you given that your personal allowance is static and you pay more national insurance. Weigh up whether passing the cost to the consumer means you will need to sell less and potentially have to work less; or will you have to work harder to sell at a higher price?

• Nurture your investments

Make sure that your investments are well placed given the country’s changing financial landscape. It’s important that any investment portfolios are diverse and as viable as they were pre-April. 

What else do I need to know in 2022–2023?

You might also like to bear in mind the following:

• Pension

Fiscal drag will also impact your pension. You can put a maximum of £40k a year into your pension pot, but due to the rise in the cost of living, its buying power is reduced.

• Inheritance tax

This tax remains the same (£325k allowance), so even though your assets are rising in value, the percentage of tax you pay has not changed. The government has a set allowance that enables a married couple to each give away up to £175k, but there are terms and conditions, such as your house must be worth in excess of £350k, and to get the most out of it, you can only give the funds to direct descendants.

Whilst overall there are no substantial financial changes for 2022–2023, the smaller changes will give you less return for your efforts. The government is spending more than it is bringing in, which means we pay more tax to cover those costs.

However, if you take the time to enlist the help of an independent financial adviser, there may be legitimate allowances and tax reliefs available to you (depending on your personal circumstances).

If you’d welcome our input, expertise and experience, please get in touch by emailing me at alex@applewoodindependent.co.uk or David at david@applewoodindependent.co.uk.

The views expressed in this article are those of the author and do not constitute financial advice. Applewood Independent Ltd is authorised and regulated by the Financial Conduct Authority. For financial advice designed for you and your specific circumstances, please contact the author using the contact details provided in this article or, alternatively, contact the Applewood Independent Ltd office on 01270 626555.

The value of your investment can go down as well as up, and you may not get back the full amount invested.

Past performance is not a guide to future performance.