Stuart Yeomans

The last week has seen some of the largest declines in asset markets since 2008. The drops have mainly been kicked off, by concerns over the Chinese economy and the US Federal Reserve’s move to potentially raise interest rates in September.

European markets are down by 18% and nearing bear market territory. The US market has also been effected and is entering a correction phase with drops of 10%.

Emerging markets have been hit the hardest and this is especially apparent in markets linked to China. We have had virtually no exposure to emerging markets in our portfolios, for the last two years, so overall we have outperformed the markets.

In addition to drops in the equity markets, commodities have also been hit hard. Oil prices have dropped as low as $38 a barrel overnight.

While markets have dropped substantially over the past few days, it is our view that there has been a severe overreaction. China is experiencing difficulties; however, it seems highly likely that China experienced a recession at the start of this year. This was largely caused by a reduction in lending to local governments, due to internal accounting changes in china. These issues have now been resolved and property prices in China have begun to increase. The US economy continues to grow and Europe is now moving out of recession.

In addition to the fall in the price of oil and the devaluation of the Chinese currency, there will now be even less reason for the Federal Reserve to begin raising rates in September. With this in mind we expect to see equity markets rally over the next few weeks, with main markets returning to previous highs by Christmas.

The oil market may take longer to correct and we see a 50/50 chance of further drops to as low as $35 a barrel. However, with oil prices this low we see a fantastic opportunity in the longer term.

It is our intent to maintain equity positions until the middle of September, before reducing holdings and making further purchases into oil. If you have any intention of making any additional investments, the next few weeks will likely present a significant opportunity to take advantage of.

I hope you have enjoyed reading this post.

Stuart Yeomans

CEO

Farringdon Group

Kuala Lumpur : Malaysia

Gold has slumped to its lowest price in more than 5 years; losing around 4%. It has gone as low as $US 1,088 an ounce, since March 2010. As a precious metal, it serves as a commodity used in many areas, such as electronics, computers and dentistry. However, it mainly acts as a store of value and is regularly used as an insurance policy against political upheavals. Unlike any other assets, gold brings no income and can be costly to store. Thus, the investors that favour it, are not so happy.

Stronger US Dollar and Higher interest rates

Gold has been falling out of favour, since the US dollar began to strengthen again. Historically gold usually trades in the opposite direction of the dollar. One of the major issues with a stronger US dollar, is that it makes dollar-dominated commodities more expensive for buyers who do not hold USD. This tends to reduce the demand and, consecutively pushes the prices lower.

Another of the main factors we must consider for the drop in the value of gold, is the revival of the American economy, which could soon begin to raise their rate of interest. Any rate hike, usually increases the opportunity cost of holding zero-yielding assets.

Massive selling in China and the Greek debt crisis

Another reason behind the fall in gold, could be from the world’s biggest consumer. China now owns 1658 tonnes of gold bullion, which is less than what was predicted by certain analysts.

By the end of June this year, China had increased its holding by 57% and became the 5^th largest holder of the precious metal. According to reports, 33 tonnes were sold in the Shanghai spot market on Monday, as investors sought to shift focus to other avenues.

Another reason behind this reduction in the price of an ounce, could be because of the Greek debt crisis. In order for the debt to be repaid, the risk premium that is attached to gold is weakened.

If the price of gold falls, countries that have invested in a lot of gold will be affected tremendously. Countries like Kazakhstan, Russia and Turkey boosted their gold holdings in early March this year, only to know later that the price had slumped. According to the BBC, Australian mining companies’ share prices had dropped around 10- 13% on Monday.

Watch this space, very interesting times for Gold ahead.

I hope you have enjoyed reading this post.

Stuart Yeomans

CEO

Farringdon Group

Kuala Lumpur : Malaysia

With the ever changing negotiations between the Greek government and its creditor’s, one of the key questions to ask is; what is the likely impact on the rest of Europe and the world, if Greece leaves the Euro and defaults on its debts?

The Greek economy is very small in relation to the Eurozone. It only makes up about 1% of the total GDP of the currency area. As such, the knock on effects to the Eurozone of the Greek economy sinking even further, are likely to be very limited.

The vast majority of Greek government bonds are now owned by international government owned organizations, like the ECB and the IMF. With that in mind, a Greek default is unlikely to trigger a selloff in international banks and bond markets, as we saw in 2008 following the Lehman Crisis. Also unlike the 1998 Russian default, the Greek default has been well anticipated.

While the cost of insuring Greek government debt has rocketed, the cost to insure the other PIGS economies Portugal, Ireland and Spain has not changed much. So we are unlikely to see a crisis spread to other European nations.

Mario Draghi can potentially print EUR 4 trillion from the European Central Bank and this is like pointing a big bazooka at Europe; hence we are even less likely to see a spike in other European government bond rates.

The biggest losers in any potential Greek default would be the other countries that have lent them the money. However Germany is by far the biggest contributor to Greece and has estimated that a Greek default will only cost them around EUR 1 billion per year from 2020 onwards. The assessment in Berlin may well point to the fact that the never ending uncertainty of Greece staying in the Euro is costing even more.

This may be the reason that Berlin and others seem completely unwilling to compromise with the current Greek government.

While a Greek default will no doubt reduce European investment markets and weaken the Euro itself; it will most likely be a short term drop, leading to a much larger pick up after a few months. Markets hate uncertainty and if Greece is finally out of the Euro, a great deal of uncertainty will be removed.

I hope you have enjoyed reading this post.

Stuart Yeomans

CEO

Farringdon Group

Kuala Lumpur : Malaysia

Most people including myself got the General Election wrong and the predicted hung parliament turned out to be an all Blue Conservative government.

So what will this mean for pension and IHT planning?

One big change that will not materialise, is the plan to scrap the non-domiciled tax which was proposed by the Labour Party and I can’t see the Conservatives adopting this moving forward, so any planning for this area of non-domiciles is now null and void.

One of the most interesting results was across the Scottish and English border and all but three seats ended up going to the Scottish National Party. This in hindsight should have been expected; however, such a large swing was certainly the main result that got most people talking.

It will be interesting to see how those last three seats fair in the next general election? This result has reinvigorated Scottish nationalism and should in fact mean a revisit to a Scottish referendum; which many, including myself, see as being successful this time around.

In addition to this, a number of longstanding MP’s have now lost their seats and parliament will be brimming with fresh new and happy faces. This can only be seen as a positive, by the fact that MP’s holding seats for decades, can become too comfortable and a fresh view can be what is needed to improve the government.

Now that the election is over I feel that we can see a more aggressive movements to hit higher rate tax earners with assets inside the UK. But before we get onto this, let’s begin with some positives.

Cameron’s did pledge to increase the IHT threshold, but not by its usual figures seen below; it will be by allowing families to pass on their family homes, worth up to GBP1 million tax free! This slightly unusual increase is long overdue and below shows how the nil rate band has changed since the turn of the century.

As you can see, the rates have not changed since 2009 and to allow a GMP1 million home to pass freely is a very attractive tax incentive indeed. So although the higher rate tax earners may be getting hit with more taxes, they will certainly be looking to take benefit from the above.

More positive news is the fact that the Conservatives have pledged to raise the 40% income tax threshold to GBP50,000 and to keep National Insurance contributions the same, along with the VAT rate. It is sometimes difficult to ascertain who to vote for, with regards to taxes, but the Conservatives really have promised a positive stance.

Now onto a negative for pensions…..

The Conservative Party had proposed restricting tax relief on pension contributions for those earning in excess of £150,000 a year.

Previously you could utilise your allowance from the previous three tax years and it will be interesting to see whether this will now be curbed moving forward. This is one area the wealthy get hit, however with the new IHT plan, I feel that they will accept this without too much pain.

So in my opinion, what’s next…..

A referendum on staying within the EU is promised for 2017 and I personally don’t know which way this will go. There are positives and negatives on both sides of the fence and Nigel Farage has played a positive role in getting the Conservatives to address the immigration issue, which is what I feel most Brit’s have a grievance with. UKIP got the third highest votes, even though they only obtained one seat and these votes were mainly gained by the immigration issue that Britain has been deemed to have.

Angela Merkel has made it very clear that we can’t opt out of the freedom of movement act, but maybe the UK can opt out and take up a more Norwegian stance on this matter!

Norway are part of the economic area, but not part of the EU and in my opinion is the perfect model for Britain.

This will not happen for a couple of years, but could give rise to volatility and uncertainty in the GBP and its markets. This being said, many companies on the FTSE are global and should not be greatly affected by either result.

Facts and figures…..

There could be changes to the way the voting system is done in the future, again this is because of Nigel Farage’s UKIP, which had 3.86m votes for its one seat in Parliament, as opposed to SNP who had an average of 26,000 and the conservatives with 34,000. Labour had 40,000 and the Lib Dem’s 299,000.

An interesting fact is that 24.2% of the seats would be held by a different party if a proportional voting system were implemented. Even more worrying is that 63% of the total votes were for losing seats, hence a change in the system maybe warranted.

I hope that you have enjoyed reading this post.

Stuart Yeomans

CEO

Farringdon Group

Kuala Lumpur : Malaysia