I’m going to run through the Budget very quickly this morning.
Truth is, as far as investing goes, it wasn’t the most important thing that happened yesterday.
So let’s see if we can get through it in a few paragraphs and then we’ll move onto the meaty stuff…
The Budget in a (fairly roomy) nutshell
Ignore the economic forecasts, they don’t matter. Sugar tax is a gimmick (if you genuinely want to legislate for people to eat less sugar, I would start by imposing maximum portion sizes. As it is, this is just a regressive tax).
The ongoing recategorisation of tax planning as tax avoidance was inevitable. We’ve firmly moved to a “if it feels a bit dodgy, it probably is” regime on tax planning. I don’t have a huge problem with that, but the difficulty arises when the government starts to get cocky and decides that once-perfectly legitimate tax avoidance measures are in fact on the hit list.
I’m all for obeying the spirit rather than the letter of the law, but the reason we have the letters is because people don’t always see eye to eye on the spirit. So let’s keep an eye on the small print.
But on capital gains tax – there was good news there for investors. If you (sensibly) hold most of your investments in a tax-efficient wrapper then this shouldn’t matter too much. But if you (like many of us) have the odd bits and pieces that aren’t organised as tax efficiently as they should be, then it’s nice that the CGT rate has been cut from 28% to 20% (higher rate), and 18% to 10% (lower rate).
The Lifetime Isa is probably the most interesting thing. It’s another major step towards scrapping the current pensions regime. What the chancellor is doing is presenting the under-40s with a much more attractive-sounding long-term savings option.
You get basic-rate tax relief on the way in (effectively), and you don’t get taxed at all on the way out, as long as you either a) hold it until you’re 60, or b) spend it on your first home.
The tax relief takes the sting out of the lack of the 25% tax-free sum you currently get with a pension. But in all honesty, that lump sum would probably never have survived long enough for the under-40s to take it anyway.
Of course, it adds up to yet another taxpayer subsidy for the damnable British property market. I suppose if you were being charitable, you could argue that Osborne is just gradually levelling the playing field by giving first-time buyers a version of the tax advantages once enjoyed by buy-to-let landlords. It still sticks in the gullet though.
Raising the Isa allowance to £20,000 is interesting too. The Isa has long since ceased to be a tax wrapper for your “fun” money. It used to be perfectly feasible for a “normal” person to use up their annual Isa allowance every year. If you can achieve that these days – well, it might not quite make you “rich”, but it certainly puts you into the category of “better off”.
It’s all clever on George Osborne’s part, but it’s also another complication to add to our already complex savings regime. If he can finish the job, it’ll be a simpler system in the end, but – good Lord! – the acrobatics in the meantime.
With the annual pensions allowance now down to just £40,000, I suspect that Osborne’s next steps might include harmonising the annual allowances. So come the Autumn Statement, you may well find the annual pension allowance dropping to £20,000. Or maybe they’ll both be moved to £30,000.
We’ll see. We’ll be dissecting the Budget in a lot more detail in next Friday’s issue of MoneyWeek magazine, with a particular focus on savings, investment, your pension, and this new Lifetime Isa allowance business.
The really important stuff that happened yesterday
OK, that took a bit longer to romp through that than I’d hoped, but as you know, I can’t resist chucking in my tuppence worth.
Anyway, as I said, if you’re an investor the most important stuff was happening on the other side of the Atlantic yesterday.
The US Federal Reserve had its big interest-rate setting meeting. I think it’s fair to say that no one quite knew what to expect. The markets had a woeful start to the year, but that is rapidly fading into distant memory now. I think the S&P 500 is down maybe 1% for 2016 now – and all the global markets that had tumbled into bear territory have made a decent comeback.
So prior to the meeting there were a few jitters that the Fed might just decide it was time to get back on track.
But so far – certainly within my adult lifetime – no one has gone bust under-estimating the dovishness of the Fed. And yesterday was no exception.
The Federal Reserve had forecast making four rate rises this year. The market had already decided that was unlikely. And yesterday, the Fed confirmed it, forecasting that there would now be just two.
The important thing is not the actual number of rate rises, which remains unknown. It’s the fact that the Fed – in full knowledge that US inflation is rising (it beat expectations quite sharply yesterday) – is happy to present a relaxed face to the markets.
This matters. Europe and Japan are fighting deflation – that’s why they’re being radical on rates. The US isn’t. But in a way, the Fed’s lack of action is far more effective than anything Europe or Japan have done.
You see, markets are currently terrified that it doesn’t matter what Europe or Japan do – deflation there is unbeatable.
But the US has inflation already. It’s just that the central bank doesn’t care. And I suspect that will continue. What’s likely to happen in the US – as we’ve discussed a few times – is that the Fed will be happy to let inflation run a lot “hotter” than it once would have.
At some point, that’ll start to rattle markets. But for now, it spells good times ahead. Commodity stocks surged, and the dollar slipped. To get all jargon-y on you, while this continues, the cyclicals (economy-dependent stocks that all took a hammering earlier this year) should be doing better than defensives.
Oh, and hang on to gold. In this week’s issue of MoneyWeek, Russell Napier, one of our favourite analysts, tells us that he reckons it’s at the start of a 20 to 30-year bull market. You can read more about it in the mag tomorrow.
Cyclicals with good fundamentals should do even better by the way. Gold miners fall squarely into that category.