Investment Blogs

Please find below, a market update received from Blackfinch Group this morning – 11/04/2022

UK gross domestic product (GDP) rose just 0.1% in February, 0.2% less than economists expected. The UK economy is now around 1.5% larger than just before the UK’s first lockdowns two years ago, according to the Office for National Statistics.

The three storms, Dudley, Eunice and Franklin, which hit the UK in mid-February weighed on the construction sector, leading to a 0.1% drop in output.

UK house prices continued to surge in March, lifting the average house price to a new record high of more than £282,000. Since the first pandemic lockdown began two years ago, the average UK house price has jumped 18%, or £43,577. 

UK households and businesses were hit by the biggest monthly jump in motor fuel prices in at least two decades. Average UK petrol and diesel pump prices increased by 11p and 22p per litre respectively in March, according to the RAC’s Fuel Watch.

The number of Americans filing for unemployment benefits fell to just 166,000, the lowest figure since 1968, according to the US Labor Department.

In the US, the total volume of mortgage applications fell another 6% last week, according to the Mortgage Bankers Association’s seasonally-adjusted index. This left mortgage applications 41% lower than one year ago.

In the Republic of Ireland, inflation as measured by the Consumer Price Index (CPI) jumped 6.7% in the year to March 2022, the highest annual inflation rate since November 2000.

German manufacturing orders fell by an unexpected 2.2% in February, in the run-up to Russia’s invasion of Ukraine. The decline, which was led by a drop in overseas orders, was much worse than economist forecasts of a 0.3% fall.

In Turkey, inflation soared to 61.1% in March, its highest reading since 2002 as rising energy and commodity costs intensified Turkey’s cost-of-living crisis.

As the UK Foreign Office joined the US in announcing sanctions on Vladimir Putin’s two adult daughters, it said it expects Russia’s GDP this year to contract by between 8.5% and 15%. Around £275bn, or 60% of Russian foreign currency reserves, are currently frozen, which has hampered Moscow’s ability to support its economy. 

Russian consumer prices jumped 7.61% in March alone, the fastest monthly increase in inflation since 1999. Annual CPI inflation rose 16.69% in year-on-year terms in March, sharply up on February’s 9.15%.

The United Nations’ Food and Agriculture Organization (FAO) reported that world food prices reached record highs in March as the war in Ukraine drove up prices. The FAO’s food prices index rose nearly 13% in March, adding to global inflationary pressures.

Global trade fell 2.8% between February and March as Russia’s invasion of Ukraine hit imports and exports, according to the Kiel Institute of the World Economy.

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses

David Purcell

11th April 2022

Please find below an article on the increase in student loan repayments, received from AJ Bell, yesterday evening – 07/04/2022

Chancellor Rishi Sunak has announced a shake up of the student loan system, which will make it more expensive for people to go to university and mean graduates are paying off their loans for up to 40 years after they leave university.

Graduates and potentially their parents may be left wondering if there’s a case for taking action to pay off borrowings as early as possible in light of these changes.

The modified rules extend the period until your loan is wiped out from the current 30 years up to 40 years. It means someone who graduates when they are 21 could be paying off their loan until they are 61.

The next big change is that the threshold at which you start repaying your loan has reduced from the current £27,295 down to £25,000. However, one help for graduates is that the interest on the loan will be simplified to be just the current rate of RPI inflation, where currently it’s charged at RPI plus up to 3%, varying by your income.

REPAYMENTS GOING UP

However, the combined impact of these changes mean that many graduates will repay more than double what they currently do. For example, someone who graduates with £45,000 of debt on a starting salary of £30,000 a year will currently pay back £30,900 in total, assuming their salary increases by 3% a year. Under the new system they will repay £71,518 – so almost £27,000 more than they borrowed thanks to the impact of interest over the 40-year term of the loan.

Someone who starts on a lower graduate salary of £20,000 will pay back £7,207 under the new system, whereas previously they wouldn’t have repaid any of the loan as they would never have earned enough to get over the income repayment threshold.

However, the changes do benefit higher earners, who will pay off their loan faster and so incur less interest over the term of the loan, but also benefit from the lower, flat-rate interest under the new system. For example, someone on a starting salary of £50,000 (on the same debt and salary increase basis as above) would pay off almost £117,000 under the current system, but only £62,000 under the new system. Of course, few graduates will start on such a high salary.

SO IS IT BETTER TO PAY OFF THE LOAN STRAIGHT AWAY?

Parents who have a lump sum they could use to pay off the debt will now be wondering whether it’s better to pay off the loan as soon as their child graduates (or just not take out the loan in the first place and use that pot of money to pay for their child’s university education) or whether they leave their child to pay off the loan through their salary. However, it’s not an easy calculation and relies on some big assumptions about your child’s future earning potential.

The first thing to note is that student loan debt is not the same as other debt – you don’t have to pay it if you have no income, or your income falls below the new £25,000 a year threshold. So, if you take time out, a career break or work part-time on a lower salary, you wouldn’t be liable to pay it. It also doesn’t count on your credit file as debt like that volume of credit card debt would, for example.

Regardless, many graduates won’t want their university debt following them around for 40 years if they can help it. And, as you repay your debt at a rate of 9% of any income over the £25,000 threshold it means that graduates have a 42.25% effective tax rate over this income level (20% basic rate tax, 13.25% National Insurance and 9% student loan repayments). That could significantly impact their ability to save money for a house deposit, for example, or to live the lifestyle they want.

However, whether it’s worth paying off the loan hinges on what your child is likely to earn. Someone with £45,000 of debt on a starting salary of £25,000 who sees a steady 3% a year increase in their salary will repay just over £36,000 in total over the 40 years. That’s obviously much less than the amount they initially borrowed and so means it wouldn’t be worth paying off the debt when they graduate. However, a small increase in their starting salary to £30,000 changes the figures entirely, as they would pay off just over £71,500, far more than the initial debt.

ACCOUNTING FOR PERSONAL CIRCUMSTANCES

These scenarios don’t account for any career breaks, due to having children, going back into education or travelling, where the graduate would make no repayments. And nor do they account for big increases in salary, due to promotions or switching jobs. And both these factors can dramatically impact the sums.

Let’s take that person starting on £30,000, with £45,000 of debt and a gradually rising salary. If they took a five-year career break early on in their career and then resumed work on their previous salary their repayments will reduce to just more than £40,000.

Now take that same individual starting on £30,000 with no career break but instead they get three pay rises of £5,000 each in years five, 10 and 15 of their career – now their repayments rocket to almost £104,000 – meaning that it would have made financial sense to pay off the loan when they graduated.

As these figures highlight, there’s no easy answer. Some of it will come down to the career your child picks and their likely future choices around career breaks, and some may come down to whether that’s the best use of the lump sum you have sitting around.

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses

David Purcell

8th April 2022

Please find below, a Daily Investment Bulletin from Brooks Macdonald, received this morning – 31/03/2022

What has happened

Global equities edged lower on Wednesday as the lack of a breakthrough in Ukraine-Russia peace talks pushed back on hopes of progress the day before. In Europe, a growing risk of Russia cutting off energy supplies coincided with stronger than expected inflation data. Provisional data for German March CPI was up 7.3% annually, vs 6.3% expected (harmonised 7.6% vs 6.7% expected), driven by energy prices (for household energy and motor fuels) up 39.5%. Underscoring the lack of uniformity across the inflation basket (a broader post-pandemic theme), data from the German statistical office showed a big split between goods inflation and services inflation, with goods prices up 12.3% annually, vs services inflation up 2.8%. Overnight, equity futures are up and oil is off on reports that the US Biden administration are considering a major release from their strategic oil reserves in an effort to lower fuel prices.

 Germany takes a step towards possible energy rationing

On Wednesday the German government took the first formal step towards rationing gas consumption, bracing for a potential halt in Russian gas supplies over a dispute in payment currencies. Previously EU members settled payments mainly in euros, but Russia is demanding payment in roubles. German economics minister Habeck activated the ‘early warning phase’ on Wednesday, meaning that a crisis team will monitor imports and storage. If supplies fall short, Germany’s network regulator has scope to ration gas, with industry first in line for cuts. In this scenario, energy priority would be given to hospitals and other critical parts of the economy, as well as households. Later on Wednesday evening, a call between German Chancellor Scholz and Russia President Putin hinted at a possible compromise according to a read-out of the call by German officials.

 Peace talks continue but no breakthrough yet

In a sign of the scale of the challenge in getting a peace deal delivered, both sets of negotiators gave very different accounts on where they were at on Wednesday. While Russia foreign minister Lavrov talked about ‘substantial progress’, Ukraine government spokesperson Nikolenko played down hopes, saying that ‘Lavrov demonstrates misunderstanding of the negotiation process’. In particular, both sides still look to be far apart around the subject of any territorial concessions. Meanwhile, despite Russian pledges on Tuesday to scale down military operations around Kyiv, Russian forces continued to bombard around the capital with shelling on Wednesday, leading to uncertainty as to whether Russia was withdrawing troops in certain areas or simply regrouping ahead of possible fresh assaults.

 What does Brooks Macdonald think

The war in Ukraine creates worrying energy-related headwinds for Europe at a time of post-pandemic recovery.  EU member states are all net importers of energy, with Russia previously the largest single supplier for imported gas, oil and coal. Germany is particularly exposed with gas making up around a quarter of Germany’s total energy consumption mix, with Russia in the past providing around half or more of Germany’s gas needs. Longer-term, tensions between Russia and the West might be permanently reset at a higher level, and a structural lack of EU security of energy supplies risks having a long-lasting impact on both corporate margins and household balance sheets in the region.

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses

David Purcell

31^st March 2022