China – 8000 miles

China – 8,000 miles

I’m sat in the shadow of Beinn Resipol, a remote and moody monument in mountain form, close to Moidart in the Highlands of Scotland. Shanghai is around 8,000 miles away. Still, I can hear the sound of investor panic.

The following extracts from Bloomberg’s daily Economic Brief sum up what’s happening over there…

‘In the second quarter, China’s markets and economy were in a virtuous circle upward. In the third quarter, they are in a vicious spiral down. The Shanghai Composite Index fell 8.5 percent to 3,209.9 at the close on Monday. The index is now down 37 percent from its mid-June high and below the 3,500 mark that many investors expected the government to defend.’

Furthermore…

‘All of the forces that accelerated market momentum on the way up are now working in reverse on the way down. The balance of outstanding margin loans has fallen to 1.4 trillion yuan, down from a peak of close to 2.3 trillion yuan in mid-June. The number of new trading accounts has slumped as the “greater fools” to whom speculators had hoped to offload stocks have wised up.’

I don’t doubt that some investors expected the Chinese government to defend stock prices but, for the life of me, I can’t figure out how the government could possibly succeed in so doing; I know of neither mechanism nor precedent. Of course, the government will do something. It will engage more easing – most likely in the form of reduced reserve requirements for banks – and that might go some way to settling investors. But it won’t sustain asset prices for long. And besides, the Chinese government has far larger fish to fry.

China’s economy is slowing. That’s not necessarily a bad thing. In fact, it’s something of a necessity if policymakers are to be successful in re-balancing the Dragon economy toward a more sustainable model – away from debt-fuelled investment on the one hand, toward higher household spending driven by rising incomes on the other. The alternative is worse – economies with over-sized investment tend to slow too, ultimately, but in a much more dramatic fashion. And that would be a disaster for the one party, in a one-party system, whose legitimacy is founded on lifting living-standards. So, the period of transition that China faces is a very difficult one indeed. Success, if it is successful, will be hard won.

In the meantime, China’s slowdown comes at a bad time for the global economy. Brazil and Russia are in decline, so too is Japan and the euro-zone is struggling to escape the doldrums. It seems a great many investors were counting on China – which, according to the Wall St Journal, ‘accounts for 15% of global output but has contributed up to half of global growth in recent years’ – to maintain some momentum.

That was always a dangerous assumption.

Steve Williams

 

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

China – 8000 miles2023-12-01T12:20:00+00:00

The China Syndrome

The China Syndrome

The recent severe volatility in China’s share markets has raised questions among many investors about the causes of the fall and about the wider implications for the global economy and markets generally.

The Shanghai Composite index, the mainland stock market barometer and one dominated overwhelmingly by retail investors, more than doubled in the year from mid-2014, only to lose more than 30% of its value in a month.

The volatility was much less in Hong Kong, where foreign investors tend to get their exposure to China. The Hang Seng index fell about 17% from April’s seven-year high, though it had a more modest run-up in the prior year of about 25%.

Nevertheless, the speed and scale of the fall on the Chinese mainland markets unsettled global markets, fuelling selling in equities, industrial commodities, and allied currencies like the Australian dollar and buoying perceived safe havens such as US Treasuries and the Japanese yen.

The decline in Chinese stocks triggered repeated interventions by China’s government, which has been seeking to transition the economy from a long-lasting export-led boom toward more sustainable growth based on domestic demand.

Investors naturally are concerned about what the volatility in the Chinese market means for their own investments and what it might signify for the global economy, particularly given the rapid growth of China in the past 20 years.

SHARE MARKET VS ECONOMY

Measured in terms of purchasing power parity (which takes into account the relative cost of local goods), the Chinese economy is now the biggest in the world, ranking ahead of the USA, India, Japan, Germany and Russia.1

Yet, China’s share market is still relatively small in global terms. It makes up just 2.6% of the MSCI All Country World Index, which takes into account the proportion of a company’s shares that are available to be traded by the public.

The Chinese market is also not a large part of the local economy. According to Bloomberg, it is capitalised at less than 60% of the country’s GDP. By comparison, the US equity market represents more than 100% of the US economy.

China is classified by some index providers as an emerging market. These are markets that fall short of the definition of developed markets on a number of measures such as economic development, size, liquidity and property rights.

China’s stock market is still relatively young. The two major national exchanges, in Shanghai and the other in the southern city of Shenzhen, were established only in 1990 and have grown rapidly since then as China has industrialised.

With foreign participation in mainland Chinese markets still heavily restricted, many foreign investors have sought exposure to China through Hong Kong or through China shares listed on the New York Stock Exchange.

As a consequence, domestic investors account for about 90% of the activity on the Chinese mainland market. And even then, the participation is relatively narrow. According to a China household finance survey, only 37 million or 8.8% of Chinese families held shares as of June 2015.2 As a comparison, just over half of all Americans own stocks, according to Gallup. In Australia, the proportion is 36%.

While the Chinese stock market is about 30% off its June highs, it nevertheless is still about 80% higher than it was a year ago. As such, much of the pain of the recent falls will have been felt by people who have entered the market in the past year.

A final point of perspective is that while the Chinese economy has been slowing, it nevertheless is still expanding at around 7% per annum, which is more than twice the rate of most developed economies.

The IMF in April projected growth would slow to 6.8% this year and to 6.3% in 2016. Still, it expects structural reforms and lower oil and commodity prices to expand consumer-oriented activities, partly buffering the slowdown.3

While such forecasts are subject to change, markets have priced in the risk of a further slowdown to what was previously expected, as seen in the renewed fall in the prices of commodities like copper and iron ore, which recently hit six-year lows.

DRIVERS OF THE BOOM

The Chinese share market boom of the past year cannot be attributed to a single factor, but certainly two major influences have been the Chinese government’s promotion of share ownership and investors’ increased use of leverage.

The government has been seeking to achieve more sustainable, balanced and stable economic growth after nearly four decades of China notching up heady annual growth rates averaging 10% on the back of an official investment boom.

But the transition to a shareholding economy has created its own strains. The outstanding balance of margin loans on the Shanghai and Shenzhen markets had grown to 4.4% of market capitalisation by early July, according to Bloomberg.4

Under a margin loan, investors borrow to invest in shares or other securities. While this can potentially increase their return, it also exposes them to the potential of bigger losses in the event of a market downturn.

When prices fall below a level set by the lender as part of the original agreement, the investor is called to deposit more money or to sell stock to repay the loan. These margin call liquidations can amplify falling markets.

Chinese regulators, mindful of the potential fallout from the stock market drop, have instituted a number of measures to curb the losses and cushion the impact on the real economy.

These have included a reduction in official interest rates, a suspension of initial public offerings and enlisting brokerages to buy stocks backed by cash from the central bank. In the latest move, regulators banned holders of more than 5% of a company’s stock from selling for six months.

The government also has begun an investigation into short selling, which involves selling borrowed stock to take advantage of falling prices. In the meantime, about half of the companies listed on the two major mainland exchanges were granted applications for their shares to be suspended.

While such interventionist measures may seem alien to people in developed market economies, they need to be seen in the context of China’s status as an emerging market where governments typically play a more active role in the economy.

Whether the intervention works in the long term remains to be seen. But the important point is that this is a relatively immature market dominated by domestic investors and prone to official intervention.

SUMMARY

The re-emergence of China as a major force in the global economy has been one of the most significant drivers of markets in the past decade and a half.

China’s rapid industrialisation as the population urbanised drove strong demand for commodities and other materials. Investment and property boomed as credit expanded and as people took advantage of gradual liberalisation.

Now, China is entering a new phase of modernisation. The government and regulators are seeking to rebalance growth and bring to maturity the country’s still relatively undeveloped capital markets.

Nevertheless, China remains an emerging market with all the additional risks that this status entails. Navigating these markets can be complex. There can be particular challenges around regulation and restrictions on foreign investment.

We have seen those risks appearing in recent weeks as about a third of the sharp rise in the Chinese mainland market over the previous year was unwound in a matter of weeks, prompting intense government intervention.

Markets globally are weighing the wider implications, if any, of this correction. We have seen concurrent weakness in other equity markets and falls in commodity prices and related currencies.

Yet it is important to understand that the stock market is not the economy. China’s market is only about 2.6% of global market cap and its volatile mainland exchanges are for the most part out of bounds for foreign investors anyway.

For individual investors, the best course in this climate, as always, is to maintain diversification and discipline and to remember that markets accommodate new information instantaneously.

1. Source: IMF World Economic Outlook, April 2015

2. ‘China Households Raise Housing Investment in Q2’, Reuters, July 9, 2015

3. ‘World Economic Outlook’, International Monetary Fund, April, 2015

4. ‘China’s Stock Plunge Leaves Market More Leveraged than Ever’, Bloomberg, July 6, 2015

Jim Parker

Vice President, Dimensional

 

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

The China Syndrome2023-12-01T12:20:01+00:00

Where does the time go?

Where does all the time go?

It’s the holiday season. All being well in a couple of days I will be poolside, reflecting on the year so far and what I still need to do, (being a couple of things that readily come to mind) and no doubt I will wonder, yet again “where does all the time go?”

Holidays are a little like landmarks in time. My daughters often use holidays as a reminder for helping us recall when other things happened, for example, a recent question about our aging cat (who went to move in with the neighbours when the dog arrived) was answered by recalling where we were and what else was going on when we picked him up… all referenced by our family holiday of that year.

So this week I will be reflecting on the a small milestone. It will be 16 years since I formally received permission from the regulator to open the doors at Solomons. Sixteen years. It seems that I have endured rather longer than the regulator, which is in its third revision or Doctor Who like regeneration in the same period.

Taking Stock

I hope that this doesn’t sound twee, but I really enjoy helping my clients. I love real stories and helping clients plot new ones – or rather the life that they want in the future. Of course I don’t make it happen – they (you) do that. However I have the opportunity to prompt thought, vision and help clarify it, occasionally acting as a type of permission-giver due to being able to demonstrate what would happen if…

That’s what I love about financial planning. Like most people, I find financial products rather dull and invariably remain sceptical and suspicious of the wider workings of the financial services industry, which resulted in the formation of the company and the business model of transparent charges and a “level playing-field” approach.

It is with some degree of surprise that I read my trade press suggesting a further 22% of advisers will close within the next year because more changes to commission are coming or feared. The change being that it will be turned off…. yet this is what we did 16 years ago.

Woodstock …. or out in the Wilderness

At the weekend I attended “Wilderness” a festival held in Oxfordshire. It was my first visit (its fifth year) and having been to quite a number of different festivals over the years, it was interesting to experience the evidently more affluent middle-class approach. I was struck by the irony of it being located near Woodstock  and connotations with the east-coast American hippy counter-culture festival started in 1969 of the same name. What was once counter-cultural has become both “fashionable” and highly commoditized over the last 46 years. Sadly I missed the V&A museum’s take on this observation, which is true of many, if not all festivals, not simply Wilderness, who have by far the best on-site food (I admit to indulging in a superb banquet fit for a King at the Hix on-site restaurant and the odd glass of champagne at the Lauren-Perrier orangery) all of which you won’t find at your typical summer festival. Nobody dared mention the phrase champagne socialism too loudly.

Anyway, one of the talks/seminars I attended was called “State of the Nation” hosted by Jolyon Rubinstein which raised questions about business, stock markets and economics. Despite festival attire, many of those attending are probably the sort of people (of all ages) that seek out financial advice, yet few seemed to really appreciate how much financial services eeks out of their wealth in charges…. something that I hope is evidently clear to our clients  and why I set out 16 years ago to be transparent and use low-cost investing techniques. I guess it is good that finally others are waking up to better understanding of economics, wealth and planning. As many festival revellers seemed to come from the London area, perhaps rethinking or dare I say even re-imagining financial planning resides within striking distance of Wimbledon…. and we’ve been walking the talk – living it for some time.

What Wilderness has done is to break into the imagination of those more right of centre, higher earners, who are also desperately aware of the unfairness of the “system” and have found some comfort in various, albeit expensive forms of alternative…. a sure sign for hope.

Do share this with your friends..

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

Where does the time go?2023-12-01T12:20:02+00:00

Office Envy? 24 of the best offices

Office envy? 24 of the best offices

I came across this and thought that those of you that work in an office might be interested. It was put together by an insurance company (Unum) who specialise in protection and staff benefits.  I loathe dull offices and have always wondered why, given that so many people have to spend so many hours in them, so few are designed with any sense of creativity.

 

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

Office Envy? 24 of the best offices2023-12-01T12:20:02+00:00

Anything to declare?

Anything to declare?

Having made your way through airport lounges, delays, immigration and luggage collection, the last airport encounter will be customs. Greeted by green signs asking if you have anything to declare. I tend to find myself wishing to say something funny, but am well aware that airports are not places for humour.

Customs generally operates on the basis of trust –  trusting you to tell the truth, failure to be truthful may be discovered, resulting in considerable discomfort, embarassment and possible shame, for those of us that still feel such things.

Declaration forms

Most people don’t like forms, fewer still like insurance forms. Some appear to take the view that full disclosure is optional, it isn’t. At best this is memory failure, more likely selective memory, at worst simple deception.

Full Disclosure

Admittedly insurance forms are tedious, but it is better to complete them fully – too fully, so that you disclose all of the information required. This is particularly important in relation to tax and health, as well as the more obvious identity and residency. I have not had the misfortune of any client misleading an insurer (or anyone else) however it is important to remind everyone that misleading information invariably comes back to haunt.

Lessons from Glasgow

I’m thinking of the very sad tale of the lorry driver in Glasgow, who had a blackout whilst at the wheel of a refuse lorry during a busy morning of Christmas shopping. It would appear that similar blackouts occurred before, yet were not disclosed in subsequent encounters with those charged with assessing the health and fitness of the workforce. Many may have taken a similar approach, thinking that the incidents were “in the past” and “no longer relevant”. Sadly this was a hugely costly misjudgment.

I imagine that the driver feels terrible about the accident and utterly devastated by the assertion that perhaps if he had recorded and presented information differently, his life and those lost and those families and friends effected by this terrible accident would now be rather different. In such situations, it is tempting to simply seek to blame someone, yet perhaps we could all benefit from being reminded that full disclosure is important, questions on forms are invariably posed for good reasons, (yes I know that many may not be) but honesty is there to protect us all.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

Anything to declare?2023-12-01T12:20:03+00:00

Pension Exit Charges

Pension Exit Charges

I wonder if I can be honest with you about pension exit charges? I freely admit that I probably spend too much time concerning myself with what others within my industry think. I spend a lot of time improving my knowledge and this involves reading both technical papers and opinion. Yet I find myself increasingly perplexed by the comments on industry media outlets.

THIS IS A LONG ITEM, BUT PLEASE STICK WITH ME…

Like it or not, the financial services industry regularly gets berated for being nothing short of self-serving. Often different or indeed competing elements of the spectrum that make up the financial services get lumped together, frankly this is our collective fault for not clearly defining or explaining the differences, invariably made harder by really rather poor regulatory clarity.

However I was utterly exasperated with my peers on yet another comment section within the “trade press”. This concerned the issue of exit penalties on pensions. At the time Mr Cameron, the Prime Minister was expected to outline his frustration with pension companies that apply high exit fees… for the sake of simplicity, let’s call them what they really are – transfer penalties.

Old World not New Model Advisers

The comments appeared in a publication that I respect by Citywire – New Model Adviser, the article written by a very thorough journalist, Will Robbins. The publication aims to high-light good or best practice and aims to help improve the advice sector and thus help achieve better results for the investing public. So one would hope that the readers and their comments are towards the front forward-thinking end of the adviser population.

The King is dead, long live the King

On the topic of exit penalties it seemed to me that commentators reverted to their historic stances as salesmen, not advisers, preferring to defend high penalties rather than lead a revolution to have them scrapped or at least capped.

Investors are being ripped off

Yes it is true that pensions set up were contracts and that contract law is therefore under the microscope…. but there are times to simply admit that enough is enough.  I have seen some horrendous penalties (the difference between the actual value and the transfer value of a pension)… some taking well above 30% of the fund. That is simply not good enough. OK there was a contract, but neither “adviser” nor investor could have anticipated these penalties which have become increasingly pertinent as investors and advisers seek better, more efficient and cost-effective solutions. Something that I regularly do to great effect for our clients.

Analogies have flaws but…

However suggestions that imposing a cap were largely greeted with derision. I was under the impression that it is the advisers job to represent the client, not the pension company and if engaged by them, to seek the most suitable solutions. I would like to think that it is in the collective interest to allow someone to move their money elsewhere with minimal fuss and cost so that it can grow better (hopefully) – and yes it cannot be guaranteed…. at least it cannot be guaranteed in a way that your life is not guaranteed by the protection that the airbags in your 2015 car should deploy if you have an accident, as opposed to your 1986 car that doesn’t have any of the current safety features. Yes you may be maimed or even die in the accident, but which do you think is likely to provide a better journey?

Aren’t we meant to put you, the client first?

In an industry steeped in scandal and mistrust this ought to be an opportunity for pension companies and advisers to put clients interests first. I find this even more frustrating as in reality it is all to do with commission and the lie that advice is free. Old style policies are those that typically paid high levels of commission, which the pension company advanced to the adviser as payment for arranging the pension with them. Of course it didn’t help that some pension companies offered more commission for using them as opposed to others, thus bringing into question the independence of the advice and adviser. If you went to a Tied Agent or Bank, you didn’t even get any option to compare costs…. which was the job of the IFA at the time.

Thinking that is so last century…

This has been going on for years, yet alternative approaches have also been available for those willing to face some truths. In 1999, 16 years ago I formed Solomons, removing commission, charging 1% on any investment or pension product – no matter who… a level playing field. 16 years ago! The regulator eventually caught up and banned commission on investments from 2013 called RDR so since then all advisers have had to charge fees properly.

Vive la revolution

Why does this vex me so? well as someone still in their 40’s I expect and plan to remain advising clients for many years to come, so I’d like to see things improve. I would like to see the standard of advice improve and the number of scandals and complaints decrease… not least because invariably the way compensation works is that those left working within the sector pay the compensation levy, even if they had nothing to do with it. This summer I had yet another regulatory invoice for this levy, an increase of 64% on last year…there comes a point when I and many (thankfully) like me, simply cannot absorb all these costs without jeopardising our own sustainability.

If you are fed up with your pension or not even sure what its worth, please check out my free guide, which  will help you regain control of your pension planning. There ought to be a box below to download this, if not just email me.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

Pension Exit Charges2023-12-01T12:20:04+00:00
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