WeeklyWatch – Tech disputes add to trading bloc tensions

Monday 15th April 2019

Stock Take

Technology tension

Last week, there were several indications of international discord between the world’s three major trading blocs. The US confirmed it was considering $11 billion in tariffs on Airbus, following the WTO’s finding that state subsidies to the plane manufacturer had adversely impacted the US. The EU-China summit had a similarly chilly tone, as Brussels, Paris and Berlin grow more nervous about China’s lopsided trade relations with Europe.

That said, in many cases the deepest tensions were over technology, not trade. Despite Information Technology stocks often driving the market recovery this year, several of them continue to be in the line of fire. Last week, the US government criticised Microsoft for working with a military university in China on Artificial Intelligence that could be used for surveillance and censorship. China increasingly dominates the field via an invasive and growing infrastructure of facial recognition technology, which it uses to monitor its domestic population to an almost unthinkable extent.

Yet criticism does not just focus on tech giants’ relations with China – it also concerns their behaviour in the US and Europe. Last week, Bloomberg reported that Alexa, Amazon’s virtual assistant, not only records some users’ conversations, but also feeds back recordings to thousands of Amazon staff employed specifically to listen in and study the content. Amazon admitted that this was the case, but added that the recordings were used to improve their voice recognition technology.

The UK, meanwhile, announced plans to enforce the removal of harmful content from the internet by those platforms on which it appears. If enforced to nth degree, this would be a major challenge for the likes of Google and Facebook, but the details of implementation are still to be confirmed. The tech giants’ impact on the high street, on the other hand, is clearly visible. Last week, Debenham’s fell into administration, the victim of the rapid rise of online retailers – and their low-cost business model.

Black holes, Brexit and other mysteries

Last Wednesday, the first-ever image of a black hole was published – a real feather in the cap, not just for science, but for mathematics, too. Ninth-century Iranian scholar Muhammad ibn Musa Al-Khwarizmi introduced the decimal system to the West and coined the term ‘algebra’ – ‘algorithm’ was named directly after him. It was an algorithm that facilitated the ground-breaking image, 1,169 years after his death. At about 6.5 billion times the mass of the sun and 55 million light years from Earth, this image of the black hole might just help crack open one of the biggest mysteries in the Universe.

One mystery that appears ‘uncrackable’ at the moment is Brexit, a scenario that has also proven that politics is far from immune to such black-hole-phenomena by whisking all other major legislation into oblivion. On Thursday, the Prime Minister won agreement to extend that legislative void by a further six months. Within less than a day, sterling and the FTSE 100 had largely shrugged off the news – and expectations of the next interest rate rise had been pushed back to the back half of 2020, dealing a blow to cash savers. Brexit is perhaps losing its capacity to shock, especially now that a no-deal outcome has been largely ruled out.

Reassurance in the US and China

Markets had a mixed few days last week, ending marginally up in the US and Europe, and down in Japan and China. In broad historical terms, though, what was most notable was that we are just now in relatively quiet financial times. VIX, a measure of volatility on the S&P 500, ended the week close to 12, against a long-term average of 20. Enjoy it while it lasts.

Investors in the US were particularly reassured by a positive set of first quarter earnings from JPMorgan Chase and Wells Fargo, two major US banks, and financial stocks rose in anticipation of good earnings across the sector more broadly – although earnings more broadly were more muted, and forecasts for the next quarter look unimpressive.

Growth and jobs numbers in the US continued to reassure, while a third month of credit growth in China suggested Beijing’s stimulus policy may have borne fruit. Car sales – a key measure of Chinese consumer demand – fell 5.2% year-on-year in March, but this was taken as a relative positive on markets, give it was less than half the rate of decline seen in February. Investors also appreciated the assurances of Mario Draghi, Chair of the ECB, that the central bank was ready to offer further support as needed – the euro dropped slightly in response.

Wealth Check

This week witnessed a blow for savers, as NS&I, the government-backed savings provider, announced a host of changes to its accounts. Half a million savers trying to protect their cash from inflation will see their returns plummet when NS&I changes the way it calculates interest.

Currently, the interest rate on index-linked savings certificates is based on inflation measured by the retail prices index (RPI), currently 2.5%. But from 1 May, savers who renew their certificate will see their returns switch to the lower consumer prices index (CPI), which is now 1.9%. There is £19.9 billion deposited in these certificates, according to the NS&I 2017-18 Annual Report.

In a further move by NS&I, changes to Guaranteed Growth and Guaranteed Income Bonds will affect nearly 700,000 savers with £17 billion deposited, according to the NS&I 2017-18 Annual Report. From May, new savers will no longer be able to cash in their bonds before the end of the term. The change will also affect when tax is paid on the interest. This could mean higher tax bills when the bonds mature, as savers will no longer be able use their annual Personal Savings Allowance against each yearly interest payment.

With few cash alternatives offering returns that match or beat inflation, the government-backed schemes are still a valid consideration for cautious savers. But with interest rate rises now a more distant prospect given the Brexit delay, cash savers continue to be offered little respite.

Tax planning should be a constant, all year round. However, if it has fallen by the wayside a bit recently, the start of a new tax year is the perfect time to kick-start your 2019 planning, and making the most of the allowances and exemptions available. The 2019/20 tax year has brought several changes – read about them in full here.

In The Picture

Despite the best intentions of successive Chancellors’, the UK tax system is filled with quirks. The good news is that these allow us to benefit from the various planning opportunities on offer – if you are well-advised, of course!

A good starting point is the range of tax allowances available, which if exploited correctly, could theatrically provide you with £32,500 tax-free income in 2019/2020. If this sounds appealing, contact your Wellesley adviser for more information.

The starting rate for savings is only available where non-savings income (e.g. earned income, pensions, rental income) does not exceed the Personal Allowance.

The Personal Savings Allowance is £1,000 for a basic rate tax payer. Higher rate tax payers have a savings allowance of £500, while additional rate tax payers have no savings allowance. Those with income over £100,000 lose Personal Allowance at a rate of £1 for every £2 over £100,000. The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

The Last Word

“It is said that fact is sometimes stranger than fiction, and nowhere is this more true than in the case of black holes. Black holes are stranger than anything dreamt up by science fiction writers, but they are firmly matters of science fact.”

Stephen Hawking

The information contained is correct as at the date of the article.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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