WeeklyWatch – Brexit Britain
03 February 2020
47 years later
After four years of twists and turns, predictions and prevarications, the Withdrawal Agreement was finally voted into law in the European Parliament last week. What began under Ted Heath in January 1973 ended 47 years later, at 11pm (midnight, Brussels time) on Friday 31st January. It was followed by hugs and promises of return from some UK MEPs, and flag-waving and whoops of jubilation from others. The session closed with a rendition of ‘Auld Lang Syne’. But will ‘auld’ acquaintance be forgotten?
We shall see. The world looks different today, with the US in retreat from the rules-based international order it has traditionally upheld and dominated, and China looking to create a more bipolar world. But the old conundrum expressed in 1962 by Dean Acheson, former Secretary of State to Harry Truman, remains as pertinent (and contentious) today as ever:
“Great Britain has lost an empire and has not yet found a role. The attempt to play a separate power role – that is, a role apart from Europe, a role based on a ‘special relationship’ with the United States, a role based on being head of a ‘commonwealth’ which has no political structure, or unity, or strength – this role is about played out. Great Britain, attempting to be a broker between the United States and Russia, has seemed to conduct policy as weak as its military power.”
Dominic Cummings, campaigner extraordinaire and now right-hand man to the PM, is certainly not short of ideas to push for some bold policy steps. In any event, trying to find meaningful short-term market responses to the end of 47 years of EU membership is a fool’s errand.
When it comes to the impact of Brexit, investors, like everyone else, will just have to wait and see. As the video (see ‘In the Picture’) explains, significant new trade deals generally take years to iron out. Friday’s exit was, in reality, only the end of the beginning. All the same, the Prime Minister did offer some initial clarity over the direction of travel this weekend, emphasising that his government would not be seeking regulatory alignment with the EU.
Wuhan to the world?
But investors both in the UK and around the world were more focused last week on the spread of the coronavirus from Wuhan to other parts of China and much further afield. At time of writing, the virus had claimed some 360 lives and infected more than 17,000 across 23 countries. The World Health Organisation last week declared a global emergency.
As for the Xi Jinping administration, it appears to be taking strong containment measures in what is the biggest threat yet to its popular legitimacy. Today, stocks in China plummeted by 8% as investors returned from a long holiday to a virtual stoppage of economic activities, which is cascading throughout the second-largest economy in the world, and one with considerable regional and global ties.
When considering the long-term implications, it is important to consider the SARS virus of 2003, which had a sharp – but ultimately short-lived – impact on both daily life and financial markets. On equity markets, airlines in particular suffered, as they do today, but broader indices also took a hit last week, among them the FTSE 100, EURO STOXX 50 and Shanghai Composite — the virus has cancelled all this year’s gains on the S&P 500. A market fall, however, does not necessarily add up to a major global economic event.
Chris Ralph, Chief Global Strategist at St. James’s Place, commented:
“It’s important that investors don’t overreact to media reports that analyse the impact on individual economies. At the time of writing, it would appear the major impact is on the Chinese economy, whereas the global impact is, as yet, small.”
Back in the corporate world, results season was fast upon us last week. Apple posted record earnings and sales – the software goliath’s share price has doubled in just a year as sentiment has switched. McDonald’s and Microsoft were among the other major US highlights. US consumer confidence remains close to multi-year highs, particularly among those over 55, although spending has generally lagged sentiment since the 2016 Presidential Election.
At the other end of the spectrum, however, Boeing’s woes continued to weigh on US markets, and are expected to weigh on US GDP too. Oil was another negative. Both Chevron and ExxonMobil reported unimpressive earnings, reflecting how oversupply has weighed on oil prices – global growth fears have provided a similar drag, taking oil majors share prices down too. Indeed, the S&P 500 Energy entered a technical bear market during January, and continues to be the ugly duckling among the major S&P 500 sectors.
Those worried about growth may yet reflect that central bankers last week appeared ready to lend a hand. Meetings of the Fed and Bank of England (BoE) rate-setting committees may not have ended in rate cuts, but the prospect was undoubtedly dangled before investors. Figures released on Thursday showed the US economy grew by an unspectacular 1.9% in the fourth quarter – further ammunition for the doves at the Fed.
With the Budget rapidly approaching on 11 March, we’ll soon find out whether the OTS’s proposals to overhaul Inheritance Tax will be implemented.
Often referred to as Britain’s ‘most hated tax’, or, as the OTS tactfully put it ‘often said to be unpopular’, Inheritance Tax is an extremely complicated issue – made even worse by the fact relatives have to deal with it at a time of bereavement. The review was commissioned by Chancellor Sajid Javid’s predecessor, Philip Hammond, “to ensure that the system is fit for purpose and makes the experience of those who interact with it as smooth as possible”. The OTS’s report, released early in July 2019, (unsurprisingly) found ‘many areas where Inheritance Tax is either poorly understood, counter-intuitive…or…simply unclear’, and therefore made 11 proposals designed to simplify the complex patchwork of charges and reliefs.
Back in October, Javid claimed that scrapping IHT was “on my mind”. If he were to proceed, it would certainly be a bold and very expensive decision. IHT raised £5.4 billion for the Treasury in 2018/19 – useful revenue given that the government is promising to spend many billions more on public services.
Adding fuel to the fire, a cross-party group of MPs published a report last week recommending even more radical reform than that put forward by the OTS, to “increase fairness, cut complexity and reduce avoidance”. The headline proposals were to scrap most reliefs and tax transfers of wealth both on death and in life at a flat rate of 10%. The rate would rise to a maximum of 20% for estates worth over £2 million. The report also recommended a new annual gifting allowance of £30,000 to replace the current seven-year rule, with individuals taxed immediately at 10% on transfers above that limit.
Short of it being scrapped, which seems unlikely, IHT looks set to remain a meaningful and unpopular tax. Without proper planning, it can compromise the desire of families to hand wealth down the generations.
Here’s a reminder of some IHT-saving strategies to think about as we approach the end of the tax year.
In the Picture
January may have begun well on markets, but news from China dampened spirits. Andy Shaw, Head of Division – Investment Communications at St. James’s Place, covers the month in markets, including the US-China trade agreement, Coronavirus and Brexit day.
The Last Word
“If you hear of an outbreak of plague in a land, do not enter it, but if the plague breaks out in a place while you are in it, do not leave that place.”
– Dr Arif Alvi, Pakistan’s President, tweeted a hadith (or saying) of Muhammad on Saturday to explain his government’s decision not to evacuate its citizens from China.
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