Monthly Archives: August 2014

Points of View: The Bank of England Inflation Report

The Bank of England (BoE) released its latest inflation report and minutes from the August meeting of its Monetary Policy Committee (MPC) last week.  While the BoE remains optimistic about the overall recovery it also highlights some areas for concern. In particular, the forecast for 2014 annual wage growth for 2014 has been halved to 1.25% on the back of evidence that average weekly earnings have fallen 0.2% in the second quarter compared with the previous year.  This is the first decline in wages in five years and has led the market to push back its expectations for a rate rise to early 2015 from late 2014.  Despite this, the minutes from the MPC meeting show that the decision to keep rates at their current ultra-low level was not a unanimous one.  Two members, Martin Weale and Ian McCafferty, defied the MPC’s majority and voted for an immediate increase in rates; the first divergence in opinion in more than three years.

A positive note to come from the BoE inflation report was that GDP is back to pre-crisis levels in 2008.  However even this can be taken with a pinch of salt as GDP per capita is down 4 – 5% from 2008.  With the general election approaching in 2015, wage growth will no doubt be a high priority on the political agenda.  In the meantime, investors and mortgage holders will remain keenly interested on the expected trajectory of interest rates.


Stocks in focus: HSBC

The UK banks recently announced their interim results, which provide an update on the businesses for the first half of the year. This week I am looking at HSBC, a bank which has undergone considerable restructuring and refocusing over the last three years. Its reported profits are down 12% vs. the first half of 2013 but when adjusted for significant items the underlying profits have increased by 3%.

All banks have been operating in uncomfortable market conditions of low interest rates, reduced financial market volumes and waves of regulations. The bulk of HSBC’s targeted restructuring has been achieved and has resulted in decreased revenues as it has sought to de-risk its operations. This de-risking over an extended period has had a big impact on its profit margins but also has led to a significant reduction in loan impairment charges (from bad debt) which have come down from $3bn in the first half of 2013 to $1.8bn over the same period in 2014.

Douglas Flint, the HSBC Chairman, used the announcement to warn against banking reforms.  He suggested that over-regulation is leading to a zero-risk environment and an increase in costs required to comply with multiple regulatory requirements in multiple jurisdictions – a key challenge for an international bank such as HSBC.  Offsetting this, HSBC stands to benefit from any rate increases in the UK or US and has attractive exposure to faster growing developing markets.

Stocks in focus: Balfour Beatty

This week I am looking at Balfour Beatty, which has just rejected a revised £3bn merger proposal from its rival UK contractor, Carillion.  The main sticking point seems to have been Balfour’s ownership of Parsons Brinckerhoff, the US design consultancy that it is in the process of auctioning. Indeed, the initial talks over a deal broke down after Balfour accused its rival of reneging on its commitment to continue the sale of Parsons. Carillion’s latest approach has offered to keep the process alive, reimbursing bidders’ costs if the merger proceeded and took Parsons off the table. However, in rejecting the renewed offer, Balfour’s executive chairman Steve Marshall described the guarantee as “not a big sum of money” and suggested it would leave any interested party in the Parsons auction gambling on the merger falling apart. Carillion is due to make an announcement in response but has signalled that there is no certainty that a revised offer will be made.

As an independent entity it is certainly true that Balfour has been struggling, and this makes it vulnerable to opportunistic bids.  The 109-year-old building company has suffered a string of profit warnings and is searching for a new CEO since sacking Andrew McNaughton in May after little more than a year in charge. If a deal does proceed it would create a combined entity with an equity value of £3bn, revenues of £14bn and 80,000 employees. However, it remains to be seen whether relations between the two have soured too far for a deal to progress.

Points of View: Profit Warnings

Profit warnings from UK companies have hit a three-year high despite the continuing recovery in the wider economy.  According to Ernst & Young, the first half of 2014 saw 137 UK-listed companies issue statements that their profits will be lower than market expectations. This is an increase of 9% compared with the same period last year, and the highest level since 2011.

Over a fifth of these 137 profit warnings have been blamed on the recent strength of sterling, which has appreciated against other major currencies such as the US dollar and the Euro and thereby reduced overseas earnings when converted back into sterling.  This is an important fact for the UK market given its reliance on overseas earnings (it is estimated that around 75% of the sales generated by the companies listed in the FTSE All Share Index are generated outside the UK).  Another fifth have cited that increased competition – brought on by a low level of insolvencies – has put additional pressure on prices and squeezed margins.

However, whilst analysts have been busy revising down their estimates for company earnings, the International Monetary Fund has been upgrading its GDP growth estimates for the UK.  Its latest forecasts predict the UK economy will grow 3.2%, outstripping every other major advanced economy. This is clearly encouraging, although economists are still debating the sustainability of the recovery and whether this momentum will continue into 2015.

Pension Changes

In the March 2014 Budget we saw some of the biggest proposed changes to pension legislation in generations.

In the past, once you had reached pension age you would have been forced to buy an annuity (an income for life in exchange for your pension pot) or more recently you would also have had the option of using Pension Drawdown (keeping control over your pension pot and drawing an income directly from it, subject to Government maximum limits).  

From 2015 it is proposed that a third option will be available :– drawing as much out as you like!  It appears that the government is moving away from the nanny state and allowing pensioners to control their own retirement income.  Whilst this will be great news to many, extreme caution will be needed in managing this new option.  Many people may run the risk of running their pension pot out within their lifetime and impacting their standard of living.  They must also be aware that whilst they can still take 25% out as tax free cash, anything else will be taxable as income.  Take too much out in one go and you could easily find yourself moving into a higher tax bracket.  

Whilst we are still awaiting final approval of these new measures, it appears that the genie is out of the bottle and there is little chance of him going back in, even if we see a new government elected in 2015.  With the prospect of some immediate income tax receipts and VAT receipts (on Lamborghinis or otherwise), the current chancellor will be looking forward to these changes and any future chancellor is unlikely to reverse this position.  For now we must await further guidance.  It appears that other changes may be introduced at the same time, such as a rise in pension age (from the current minimum of 55), changes to taxation of pension death benefits and incentives not to delay taking state pension benefits are also on the cards.  Further information is expected in the Autumn Statement, but as always, you should seek financial advice to make sure you make the most of these pension changes.