This month, I am not going to provide my ‘normal’ market review due to the extraordinary events happening in Ukraine. Firstly, and most importantly, my thoughts are with all those suffering in the current conflict.

From an investment perspective, it seemed that we were just starting to see the end of a two-year pandemic, the last thing that was needed was another global crisis. When events like this happen, as was seen with the outbreak of the pandemic, the markets react negatively. Markets simply do not like surprises and, although some may say this wasn’t a surprise, few had expected a full-scale invasion by Russia.

History shows that this type of event only has a short-term effect on markets with short-term volatility swiftly reverting to longer-term performance we all want to see on our investments. However, even before the invasion of Ukraine, markets had been very choppy at the beginning of the year, as I mentioned in my last market review. Some of this volatility was due to the tensions between Ukraine & Russia but a large part was due to inflationary pressures seen around the world.

It had been hoped that these inflationary pressures would ease as the year passed. However, if war is a prolonged state of affairs it seems inevitable that we will see energy inflation keep prices high for the foreseeable future. Already, oil price has increased dramatically. Russia is the second-largest oil producer in the world behind Saudi Arabia and there is considerable global reliance on this commodity as well as their gas. There are discussions ongoing in the West to ban the import of Russian oil and this will almost inevitably affect fuel prices. Shell have been heavily criticised for its decision to buy oil from Russia to keep their reserves up.

As we are already well aware, the cost of gas had been rising dramatically and this will be set to continue. It is being predicted the annual average UK household energy bills could now reach £3,000.

Before the war outbreak, the markets had priced in a Bank of England interest rate rise to 2% by the end of the year. Likewise in the US, it was widely expected that the Federal Reserve would start to increase their rates throughout 2022. All the indicators are that rates will rise, and long term I do not see this position changing. However, it may well be that the central banks delay rises in the short term to see how the war effects the global economy. They will be reticent to raise interest rates only to cut them again if conditions haven’t improved.

Clearly, the volatility in markets will be causing anxiety to investors. As you know, our mantra is always to look for long-term growth over short-term movements in and out of markets. With this in mind, we still believe the best antidote to short-term volatility is by deploying diversified portfolios and having a resolute focus on long-term outcomes.

Last year was a great one for equity markets, as they continued the rebound from 2020 and the effects of the pandemic. I would sincerely hope that, once markets settle down, we will see a return to long-term growth on our clients' investment portfolios.

As always, and especially at this time, if you have any queries or concerns on your investment portfolio, please do not hesitate to contact us.

Richard Brazier Director E RichardBrazier@hanoverfm.co.uk

Who should you contact for more information?

Director Richard Brazier

Financial Adviser Amanda Beacon

Senior Consultant Graham Smithson

I wanted to give my brief, initial thoughts on the Russian invasion of Ukraine, and particularly how this could affect your investment portfolio.

An existing conflict

It is worth noting that tension in the region has been simmering for years even though we, in the West, have remained often unaware. Sadly, that state of ignorance has been shattered with the huge increase in Russian military manoeuvres at the beginning of this year. Of course, this escalated dramatically yesterday, when Russian troops invaded Ukraine. Tragically, the human cost of this incursion is already being seen through various news outlets.

The initial market reaction

As we saw yesterday, the initial market reaction to the invasion was dramatic, with the major indices in the Far East and Europe falling significantly. The FTSE100 closed down nearly 4% on Thursday evening; however, history shows us that geopolitical crises do not tend to have a long-term effect on investment markets.

Markets do not react well to sudden surprises because they cannot price in unforeseen events. This was last seen with the initial outbreak of the pandemic in the Spring of 2020. Although the markets were already jittery over Putin’s remarks and stance on Ukraine, I don’t believe they thought an invasion was on the immediate horizon.

We had already seen a relatively volatile last few weeks on the global markets, and this is no doubt set to continue. Interestingly, after opening down, the US markets actually closed yesterday in positive territory. As I write this on Friday morning, the FTSE100 is up over one percent.

In the long-term

I believe the issue of inflationary pressures on the markets will be exacerbated by the invasion of Ukraine. These pressures were already causing volatility in the markets, with central banks looking to, or already increasing, interest rates to curb rising inflation. After the events of yesterday, we have seen the cost of oil increase and the price of gas is only set to go higher. It is very likely now that the higher cost of living is set to continue for some time to come.

Our view, as always, is that your investment is a long-term one, and this does not change with shocking events such as this week. As we saw with the pandemic, short-term losses have historically always been seen on investment markets, but in the long-term you can see positive returns on your investment portfolios.

If you would like to discuss any aspect of your investment portfolio or financial planning, please do not hesitate to contact us.

Richard BrazierDirector E RichardBrazier@hanoverfm.co.uk

Who should you contact for more information?

Director Richard Brazier

Financial Adviser Amanda Beacon

Senior Consultant Graham Smithson

For anyone wishing for a quiet start to 2022 in the financial markets, they would have been sorely disappointed. 

Amongst other things, the markets have been hit by uncertainties surrounding a possible Russian invasion of Ukraine, and the ongoing inflationary pressures that are seen here and around the world. 

In the UK

Despite global equities struggling throughout the month, the UK was one of the strongest performers as the traditional sectors (energy, financials and industrials) rallied. During January, the FTSE 100 Index increased by 1.1%. 

The UK’s consumer price inflation shows no sign of falling away. In fact, in December the index rose from 5.1% to 5.4%. As I am sure you are aware, these inflationary pressures are fuelled by higher prices for energy and food. There seems to be no rest in sight, with energy bills set to increase further and talk of the index breaching the 7% mark in the spring. 

The International Monetary Fund (IMF) downgraded its forecast from 5% to 4.7% for UK economic growth in 2022. This was in large part due to the impact that they believe supply constraints and the inflationary pressures will have on households in the UK. Despite this, the UK’s forecast remains the highest amongst the G7 economies. During November, the UK economy grew by 0.9%, which actually meant it rose above pre-Covid levels for the first time. Of course, during December we saw the emergence of the Omicron variant and the Government’s Plan B measures, all of which I am sure will have an impact on December’s figures.

Globally

The IMF announced that global economic growth is expected to fall to 4.4% in 2022, from 5.9% in 2021. Much the same as the UK, they cite the disruption in supply chains, inflationary pressures caused by higher energy prices and ever-increasing wage demands. In regards to the US economy, they cut their forecast for 2022 from 5.2% to 4%. For China, the reduction in their forecast went down to 4.8% from the previous figure of 5.6%. 

As we have seen in the UK already, the Federal Reserve (Fed) in the US has strongly hinted at a tightening of monetary policy in the near future. This could see the Fed increase their key interest rate in the coming months.

The US saw their consumer prices index hit an annualised rate of 7% in December, which was the fastest growth seen since June 1982. The increase was largely fuelled by higher costs for food, housing and cars. During January, the Dow Jones Industrial Average Index saw a fall of 3.3%.

Closer to home, the eurozone ended 2021 with a 5.2% rise in their economy as a whole. However, it is not so different in Europe, where the growth rate was struggling towards the end of the year. Similar issues with increasing inflationary pressures, the impact of Omicron and supply chain issues all come to the fore. 

The rate of inflation in the eurozone increased to 5% during December, for the same reasons as with the UK, in large part due to the impact of energy costs. 

The European Central Bank (ECB) still sees the inflationary pressures as temporary and expects them to ease during the course of 2022. While, the German Dax Index fell by 2.6% during January. 

As we see the volatility in the investment markets, we fall back on our mantra for investment clients - to provide long-term growth in portfolios that match their appetite for investment risk. This means, that the short-term losses that may be being seen should be outweighed by the longer-term gains of the recommended portfolios. 

As always, if you would like to discuss any aspect of your financial affairs, please do contact us and we will be happy to help. 

Richard Brazier Director E RichardBrazier@hanoverfm.co.uk

Who should you contact for more information?

Director Richard Brazier

Financial Adviser Amanda Beacon

Senior Consultant Graham Smithson

The 60% income tax trap*

It is widely believed that the highest income tax rate is currently 45%, paid only on an income in excess of £150,000. While this is true, some people may actually have an effective tax rate of 60& on part of their income.

Case study: salary increase over £100,000

Caroline has had a successful career as a shipping lawyer and has reached a salary of £100,000.  She was delighted to learn that she was being promoted to a salaried partner with a 10% increase in her pay. However, the issue is that for every £2 she earns over £100,000, she will lose £1 of her personal allowance (so once her salary reaches £125,000, she will have no personal allowance). The following table illustrates the impact this has on her net pay:

The table shows that although Caroline’s pay has increased by £10,000, her tax has increased by £6,000, which is an effective tax rate on this top element of her pay of 60%.  This is triggered by the 40% tax on the lost personal allowance.

As Caroline is now earning more than £100,000, HMRC will also require her to complete a tax return.

As a solution, Caroline can make an additional pension contribution. If her employer’s pension scheme is a group personal pension and Caroline pays a net pension contribution in the tax year of £8,000, then with the addition of basic rate tax relief, this will increase to a payment into her pension of £10,000. Her “adjusted net income” will reduce to £100,000, so she will get back her personal allowance, and her basic rate band will grow by the amount of the contribution. Therefore, we now has the following tax rates:

Caroline pays £4,000 less in tax, but also receives the £2,000 top-up to the pension contribution, so the overall effect is an additional payment into her pension of £10,000 and a saving in tax of £6,000  (a 60% tax relief).

If her employer’s pension scheme is a trust-based scheme, then the payment of pension contributions are generally deducted before the calculation of tax. Therefore, paying a £10,000 contribution in the tax year effectively puts her tax position back to how it  was before the pay rise.

Alternatively, Caroline may be able to use salary exchange to give up the pay rise, in return for the employer making the additional contributions into the pension scheme. The additional benefit of this approach is the additional saving of National Insurance contributions, which on a sacrifice of £10,000 would be an additional saving of £200.

Case study:  discretionary bonus payment

Patrick is a Managing Associate earning £95,000. He has had a very busy year working on some major clients of the firm, giving great client service and advice; so the firm decides to reward Patrick for his exceptional performance by paying a discretionary bonus of £15,000.

As a result, Patrick will now earn £110,000 in the tax year, and therefore faces the same issue as Caroline.

The table shows that although the firm has paid Patrick a bonus of £15,000, he will pay an additional £8,000 in tax (an effective tax rate of 53.3%).

Again, a possible solution for this is for Patrick to make an additional pension contribution. This is achievable through a bonus sacrifice, and as the bonus is discretionary, this would simply need to be agreed at the time the bonus is being discussed.  If Patrick sacrificed £10,000 of his bonus, his pay would reduce to £100,000 and his tax will be as follows:

Consequently, Patrick has additional net income of £3,000, but in addition, an extra contribution in his pension account of £10,000 and a saving of £200 in National Insurance costs. Overall, a total value of £13,200 and effective tax rate of 12%.

These case studies illustrate how tax-efficient pension contributions could help you achieve more at this pay point in situations where the loss of personal allowance increases the effective tax rate.

For more information, don't hesitate to get in touch with a member of our team.

Robert J Young  BSc FIA E Robert.Young@hanover-group.com

*These examples are fictional, but the content is based on various, real client experiences.

Firstly, Happy New Year to you all. I hope that you managed to have an enjoyable and restful festive period.

The FTSE 100 index increased

To start this market review with some good news, over the course of December the FTSE 100 index increased by 4.6%, which saw it reach its highest level seen since February 2020. Looking at 2021 as a whole, the index finished the year 14.3% higher. To put this in perspective, this was the best performance over a calendar year since 2016. Of course, this is good news for those investments that we look after with a stocks and shares element. 

Having said this, at the start of December the news of the Omicron variant saw the markets wobble, with concern over how this may affect investments. At this time, there were fears over how contagious this variant was, and the governments across the UK brought in fresh restrictions. This caused a degree of concern on how this would affect the already struggling hospitality and leisure sectors.

The inflation and the consumer price index continued to rise in the UK

Inflation has continued to increase in the UK and the annualised rate of consumer price inflation rose to 5.1% in December, driven largely by continuing high costs for transport and energy. The Bank of England’s (BoE) Monetary Policy Committee somewhat surprisingly increased the base rate to 0.25% from its historical low of 0.10%, a move that was expected in November. The surprising element was not the increase, but the timing, as earlier in the month, the BoE had warned of the impact that the Omicron variant could have on the UK economy. It is widely expected to continue tightening its policy measures over 2022.

In the US...

Much like the UK, all the major global equity markets saw increases during 2021. The Dow Jones Industrial Average Index in the US closed December 5.4% higher, and saw an annual increase of 18.7% over the year.

Again, as was seen in the UK, inflation continued to surge in the US, led by energy and food prices rising. Their consumer price inflation rose to 6.8% during November, a rate not seen in the US since 1982. There is now expectation that the Federal Reserve will look to increase interest rates during 2022, with some policymakers forecasting anything up to four rises.

In the Eurozone...

The Eurozone was no different, as high energy prices affected the annualised consumer price inflation that rose to 4.9% in November. However, the European Central Bank continues to see the current inflationary pressures as a temporary issue, caused by the global pandemic. In Germany, the Dax Index went up by 5.2% during December, and closed 2021 15.8% higher.

We hope that 2022 sees an end to the restrictions when it is safe to do so, and we finally return to a sense of normality. As always, if you have any questions in regards to your current investment portfolio or any other financial planning matter, please do get in touch with us.

Richard Brazier Director E RichardBrazier@hanoverfm.co.uk

Who should you contact for more information?

Director Richard Brazier

Financial Adviser Amanda Beacon

Senior Consultant Graham Smithson

This case study demonstrates how clients can use SSASs to save for their retirement in a flexible, tax-efficient manner, to compliment and assist their business operations.

Setting up the scheme

Keith and Mick own a successful manufacturing business. They operate out of a commercial building that they lease from an unconnected third party. Their landlord approaches them and offers first refusal on the purchase of the building.

Keith and Mick have various options opened to them to purchase the property:

• They could purchase the property themselves, with their personal funds;
• They could purchase the property through their company; or
• They could use a pension fund to purchase the property.

The pension fund route is their preferred option due to tax savings. Keith and Mick consider setting up either (a) two SIPPs (Self-Invested Personal Pension) to purchase the property together or (b) an SSAS to purchase the property. They decide to set up an SSAS (Small Self-Administered Scheme) for the following reasons:

• The complexity of owning the property over two SIPPs, with two associated borrowings, was pushing up the costs of operating the SIPPs;
• They are keen on the option a SSAS has to make loans to the sponsoring employer of the scheme; and
• They know they will act as trustees of the SSAS and will therefore retain more control over their retirement benefits when compared to the SIPP route.

Consequently, they set up an SSAS, with the help of an Independent Trustee to assist them with compliance with the relevant HMRC rules.

Purchasing property

Keith and Mick transfer their existing pension arrangements into the new SSAS. They also make sizeable employer contributions to the scheme, which qualify for tax relief within the company.  They are still short of the purchase price, so the trustees arrange bank borrowings to assist with the purchase.

The property is purchased and the trustees are now acting as the landlord, with the sponsoring employer the tenant. An arms-length commercial lease is put in place to define the terms on which the property is let to the company. However, the company are now paying rental income to their pension fund instead of to the unconnected third party.

Using SSAS - early years

The trustees use the rental income to service the borrowings, and  any surplus is retained in the scheme and invested in a portfolio of quoted investments, managed by a discretionary fund manager.

After a few years, the borrowings have been repaid. Accordingly, all the rental income paid to the scheme is boosting the investment portfolio. The rental income and capital growth soon generate a sizeable investment portfolio, sitting alongside the property as the two main assets of the scheme.

Making employer-related investments

Keith and Mick’s business is doing well, but they have cashflow issues and need to borrow money to keep the business moving forward. They discuss their options with their Independent Trustee and  decide to borrow funds from their SSAS instead.

A loan is granted over five years, with the employer paying back interest and capital to the pension fund throughout the term of the loan. Keith and Mick feel this is a much better source of funding for the company, as they are paying interest to their pension fund rather than to a bank.

Drawing benefits

As Keith and Mick get older, they bring their children into the family business to help with the day-to-day operation of the company. Their children also join the SSAS, so can benefit from the greater returns they achieve from pooling their modest pension savings with those of their parents.

Keith and Mick are drawing less income from the company, so both decide to draw benefits from the SSAS. Although Keith and Mick are members of the same scheme, this does not mean they have to draw the same retirement benefits. Keith requires a large lump sum, so draws the maximum tax-free lump sum andcommences drawing a pension, whilst Mick decides to phase his benefits and spread his tax-free lump sum payments over a number of tax years.

While Keith and Mick are drawing benefits, their employer is still funding their pensions by paying their rental income into the scheme. Keith and Mick can choose to draw modest pensions, roughly equal the rental income, or draw greater amounts and use some of the capital held in the investment portfolio as well as rental income. The speed at which they draw benefits is entirely up to them under the flexi-access drawdown rules.

Passing benefits onto other family members

Sadly, Mick passes away. The trustees of the scheme can use the remainder of Mick’s fund to pay death benefits. These benefits are split equally between his wife and his four children, who are each allocated a pot within the scheme, equal to 20% of Mick’s remaining funds. Benefits are paid at the discretion of the trustees.  The SSAS now sits outside of Mick’s estate and is free of IHT when these benefits pass to his wife and children.

As Mick passed away before age 75, the trustees are therefore able to offer these benefits to the beneficiaries tax-free.  All five beneficiaries are able to make independent decisions as to what they do with their own pot.  One decides to draw everything out tax-free in one go, another decides to draw a tax-free pension from the scheme each month, while the other three decide they do not need any income at present, so they decide to wait to draw any benefits until they’re required

Passing property to the next-generation 

Keith and Mick’s children have been running the business successfully for some time now and have outgrown the building owned by the pension fund. They find a larger site for relocation and they decide to liquidate the investment portfolio within the pension fund and obtain bank borrowings to acquire this new commercial property within the pension fund.

They consider letting out the old building to an unconnected third party. However, in the end they decide to sell the original property. As the trustees have held onto the property for so many years, the value is far greater than the original purchase price.

However, the trustees do not pay Capital Gains Tax and therefore the wholesale price is paid into the pension fund. The trustees decide to use these funds to pay off the borrowings required to purchase the second property and invest the residual funds in the investment portfolio.

For more details on SASS pension, please don't hesitate to contact a member of our team.

*These case studies are fictional, but the content is based on various, real client experiences.

The term “inter vivos” can be roughly translated as “between the living”. One way to reduce your potential Inheritance Tax (IHT) liability is to make gifts during your lifetime to another person, hence a transfer between the living.

Everyone has a personal inheritance tax allowance, which is currently £325,000 or possibly higher depending on your circumstances. Any amounts above this are subject to inheritance tax at the rate of 40%. One way to reduce this potential liability is to make a gift during your lifetime. The main issue with this is that the gift will only be exempt from inheritance tax if you survive at least seven years after granting the gift. For this reason, such gifts are known as potentially exempt transfers. The liability to inheritance tax gradually reduces over the seven years as follows:

One solution to this issue is to purchase an insurance policy that will meet the liability for IHT. This would be due from the beneficiary for the IHT that would become due. A gift inter vivos policy is designed to meet the gradually reducing liability and pay out the appropriate sum on death within the first seven years. However, the main issue is that only a few insurers offer these policies.

Fortunately, there is another solution, which is offered more widely by insurers. With a multi-policy solution, the same result can be achieved using a suite of five term insurance policies each for a fifth of the total liability. The five policies run alongside each other with terms of three, four, five, six and seven years respectively. After three years, the first policy falls away, thus reducing the total cover by 20%.

The only real difference is that for a gift inter vivos policy, the premiums remain the same throughout the term, but for the suite of policies, they start a little higher and reduce overtime as each policy comes to an end.

In the unfortunate event of death within the seven years, the policies then, in force, will pay out and the premiums will cease.

Generally, it would not be sensible for the proceeds of the policy to be paid to the estate of the donor, as this is likely to increase the IHT due on their estate. To avoid this, the policy or policies should be written in trust. Not only then will the proceeds not end up in the donor’s estate, they can also be paid out without the delay of probate, so that the proceeds are available to the beneficiaries quickly to meet the IHT tax liability that will be due.

When determining the tax liability, you must consider how this interacts with the nil rate band for IHT, particularly with multiple gifts. It should also be noted that the liability on the remainder of the estate may be higher until the seven years have passed and the full nil rate band becomes available again. There are several things to consider and calculations to undertake, but if these are done properly, this can be an effective way to help the donor reduce their IHT liability. At the same time, ensuring that the beneficiaries of the gift are not landed with a tax bill to pay if death does occur in the first seven years.

Robert J Young Bsc FIA

Individual Savings Account (ISAs) and pensions each have their unique set of rules, and for this reason, they are both very different in how they work. Is there a right or wrong way to fund your savings and investments, and is there an advantage to using one investment product over the other?

In this article, I wanted to look at two different tax-efficient investment products that can be used for long-term savings. Let’s take a look at an overview of each of the products to see how they compare:

Why consider an ISA?

• ISAs are the most flexible form of tax-efficient savings plan available.

• ISAs can be accessed at any time. However, stocks and shares ISAs should be looked upon as medium to long-term investments (over five years). 

Why consider a pension?

• If the investment is being made for retirement (currently over the age of 55), the pension provides the advantageous benefit of tax relief on your payments. Remember you don’t get tax relief for payments to ISAs.
• If you are employed and meet the eligibility criteria, your employer must enrol you into a pension scheme and pay contributions into the scheme. These contributions will boost your payments and are in effect, free money.

 So, which is best for you?

• ISAs offer the most flexible tax-efficient products for your savings or investment, as you can access them at any time, with no tax to pay. However, as we have mentioned, if you are using stocks and shares ISA these are usually held for the medium to long term.
• You should consider a pension for your savings or investment if you are planning to use these funds in later life and won’t need to access the funds before your 55th birthday.
• Of course, you can use a combination of both ISAs and pensions for your savings and investments. This will depend on how much money you have at your disposal for this purpose. Using both products will allow you to use all the advantages of each and the monies will be sheltered in a very tax-efficient manner.

With both stocks and shares ISAs and pensions, the value of investments can go down as well as up and you may get back less than has been paid in. The value of a cash ISA may not keep pace with inflation.

Should you wish to discuss either of these products or have any other investment queries, please do not hesitate to contact us.

*The minimum age to access your pension will increase to age 57 from April 2028.

One of our Private Wealth clients had made several gifts, and was about to make another significant one as the result of a property sale. Each gift created a potential inheritance tax liability with total potential liability in excess of £2 million.

There is a liability to inheritance tax for seven years after a gift is made, with liability gradually reducing after three years. We arranged an insurance cover to pay this liability in the event of the death of the donor in the first seven years.

As each gift was given at a different time, we created a model to determine how the total inheritance tax liability changed every month for all of the gifts going forward. Then, we sourced insurance policies to meet the potential for inheritance tax (IHT) as closely as possible.

As the cover was not placed at the time each gift was made, it was not practical to meet the precise profile of the IHT liability. We agreed with the client that there would be some months where the cover would be higher than strictly required. We placed a suite of term insurance policies and wrote the policies under trust, so that in the event of the death of the donor, the resulting payment would not form part of their estate.

We agreed to work on a fee basis enabling the policies to be placed on nil commission terms, resulting in reduced overall costs for the client.

I often say to clients during our review meetings that I still see the ongoing pandemic as being the main contributing factor to the performance of the investment markets at this moment in time. This was seen in November, when the new Covid-19 variant, Omicron, changed investors’ sentiment around the world. The discovery of the new variant of the Covid-19 virus in South Africa saw all the main global equity markets generally fall over November. The fear, from an economic point of view, is how this variant will affect the recoveries that we have seen so far this year.

In the UK, news of the Omicron variant caused concerns over both the UK’s and the global outlook for their respective economic recoveries. It will also be interesting to see if this news will have any impact on UK monetary policy and its future direction.

Consumer Price Index (CPI) is on the rise

During October, the CPI continued to increase on the back of rising prices for energy, fuel and the second-hand car market. The year-on-year CPI figure rose to 4.2% in October, compared to 3.1% in September. This has increased the likelihood of an interest rate rise in the very near future. As we have reported in previous reviews, the Bank of England (BoE) do not expect these inflationary pressures to subside any time soon. They have predicted that we could see a figure as high as 5% by April 2022.

Base rate remained the same in the UK

Somewhat surprisingly, the BoE did not increase the base rate in their November meeting, leaving it unchanged at 0.1%. Members of the Monetary Policy Committee (MPC) voted 7-2 in favour of no change. However, the BoE Governor, Andrew Bailey, made it very clear that it had been a narrow escape in the meeting as to whether they should have been raised. It is now widely expected that the base rate will rise in the very near future, with the next MPC meeting due in December. However, it will be interesting to see if the new Omicron variant will have any bearing on their decision making in the short term.  During November the FTSE 100 index fell by 2.5%.

In the US...

A similar tale can be seen in regards to inflationary pressures. Much like us, higher energy prices and food prices are driving up inflation. During October, the US consumer price inflation went to 6.2%. Unlike the BoE, the Federal Reserve System (Fed) seems to be looking to take a patient view in regards to inflation. They expect the inflationary pressures to continue into next year but are predicting that they will fall back during the second or third quarter of 2022. With this in mind, The Fed has indicated that they can take a watching brief in regards to any thoughts of tightening interest rates. In November, The Dow Jones Industrial Average Index was shaken by the Omicron variant news and fell by 3.7%.

In the Eurozone...

The same issues were in play as in the UK and US. Rising energy prices saw the Eurozone’s rate inflation hit a record high 4.9% during November. Much like The Fed, the European Central Bank does not intend to raise its rates at this time. Their fear is that any policy tightening could have an impact on the economic recovery in 2022. For this reason, they have so far indicated that an increase in 2022 is unlikely to be seen. Meanwhile, in Germany, Olaf Scholz is set to succeed Angela Merkel as Chancellor. This follows a coalition agreement between the SPD, the Greens and the FDP. Germany’s Dax Index fell by 3.8% during November.

In the Far East...

Japan’s economy saw an annualised fall of 3% in the third quarter. Supply chain issues undermined export activity, consumption and capital spending. Over the month of November, the Nikkei 225 Index went down by 3.7%.

Many investment targets are set as x% above inflation and this is because you need to achieve an investment return at least equal to inflation to maintain the purchasing power of your funds.

This is the issue with keeping funds in cash, which many regards as risk-free whereas generally, any interest earned is less than inflation, so funds are falling in value in real terms. As noted above in much of the western world and indeed elsewhere, the increased energy costs and food costs are fuelling rises in inflation. Investments will need to work harder.

For those still in the accumulation phase where the emphasis is mainly on capital growth, the aim will be to ensure that the investment managers have reacted to this and have holdings in sectors that do well in inflationary times.

For those who have moved into the decumulation phase and are seeking at least some income, then a refocus of your investments may be required to be able to continue to draw income without impacting too greatly on the capital value. If these issues are worrying you then we are available to review your portfolio and your wealth planning and reassure you or make adjustments as necessary

As always, I hope that you find this market review useful. If you have any concerns regarding your investment and the impact of the Omicron variant, please do not hesitate to get in contact with us.