It was an eventful start to February for global stock markets – and here with some pointers for the first quarter and to remind us of why a long-term view is important, is Kasim Zafar, Portfolio Manager at EQ Investors.
Equity markets had a very strong start to the year, continuing their trend from 2017 and supported by robust economic and earnings growth. For the first time since September 2011, all geographic regions are achieving sustained positive earnings growth – and we see this global ‘synchronicity’ as generally being a good thing.
However, with the S&P 500 (as an example) up 7% year to date in mid-January, the magnitude of this momentum was difficult to justify. Subsequently, we have seen some violent moves in markets. In our view this was a long overdue market correction and see volatility as a healthy sign investors are taking account of the risks inherent in markets.
So our current outlook and base case remain unchanged: global growth has improved markedly and inflation expectations in Europe and the US are increasing. This has led to more hawkish rhetoric from central banks – including plans to increase interest rates and rein back on quantitative easing – but in the grand scheme of things they remain relatively accommodative.
Recently, we have marginally increased our developed equity exposure, and remain excited by developments in Japan & Europe where we are overweight our long term benchmarks. Political stability is set to continue in Japan following the re-election of Prime Minister Shinzo Abe. This likely means business as usual and a continuation of structural reforms feeding through into strong corporate earnings and wage growth.
And European growth prospects are now among the most exciting globally, after years lagging other developed markets. Europe is likely to benefit in a similar vein to Asia from ongoing synchronised global growth and its economic recovery is much less mature than that in the UK or the US – with low inflation suggesting that, in spite of strong growth, the economy is some way from overheating.
We still hold a slightly negative view on long duration bonds as inflation may rise in the short term – negatively impacting values. With tight credit spreads we see little value in either investment grade or high yield bonds as an asset class either. So in fixed income we continue to invest in flexible strategies that can take advantage of specific opportunities as they arise.
One impact of globalisation is that corporate revenues and earnings are increasingly spread across the globe. This has a big impact on geographic equity allocation, which has been the basis for traditional asset allocation. In short, it is far less relevant than it once was. As an example, around 80% of revenues generated by FTSE 100 companies (i.e. listed in the UK) come from overseas.
Because of this, and drawing the success of this approach with our Positive Impact Portfolios, the research team are increasingly finding interesting investment ideas from funds that invest in global themes rather than specific geographies.
Healthcare, artificial intelligence and the millennial generation are three examples and you can expect more of this ‘thematic thinking’ in our outlook going forward.
Various expert Partners at Crowe Clark Whitehill, a leading audit, tax and advisory firm, share their expectations below ahead of the UK Chancellor Phillip Hammond's Spring Statement tomorrow.
Dinesh Jangra, Partner, Head of Global Mobility Solutions, calls for measures to help the UK retain and attract talent and investment: “Let there be no doubt, UK PLC will benefit immensely from the world’s best talent being here. The question is what role can the UK tax system play in encouraging this?
Regardless of what is announced in the Spring Statement, Brexit looming in the background and this is causing concerns around the UK’s attractiveness for talent and investment. With that in mind, I would like to see the UK tax system in the area of mobility (expatriate tax breaks) being reviewed to enhance UK attractiveness. The tax effectiveness of non-domicile status has been eroded over time and while we have overseas workday relief and temporary workplace relief, I question if they are enough to continue to attract the best talent to the UK. Often, employers take on the UK income taxes due in respect of employees under tax equalisation arrangements so more UK tax breaks can reduce overall employer tax costs.”
Stacy Eden, Head of Property and Construction, calls for a stamp duty cut and a freeing up of Green Belt land to reinvigorate housebuilding: “An SDLT reduction would free-up liquidity in the market, which will ultimately increase housing transactions and sales, which are currently at extremely low levels. We may even find that it raises more money. There is a broader concern that our tax system is not favourable to property investors and developers, which is not surprising given we have one of the highest property taxes amongst OECD countries.”
“I’m looking out for the Chancellor’s approach to simplifying the planning process. He could reinvigorate UK housebuilding by freeing up more areas of Green Belt land. Investing in planning departments to try and get closer to housebuilding targets is of great importance. We are currently well short of targets and this is contributing to higher house prices in certain areas.”
Rob Marchant, VAT Partner, calls for VAT reform to stimulate the residential build-to-rent market: “It may be an ambitious ask, but I would like VAT changes to encourage the residential build-to-rent market. If rental income were treated as zero-rated rather than VAT exempt, it would allow landlords to reclaim VAT on running, management and repair costs.”
Matteo Timpani, Partner, Corporate Finance, calls for Entrepreneurs Relief to be expanded: “I would like to see the government retain and even expand the reach of Entrepreneurs’ Relief (ER) and other tax reliefs, aimed at rewarding enterprise for UK entrepreneurs.
Recent soundings around restrictions to Enterprise Investment Scheme (EIS) relief and other reliefs designed to foster growth in the UK economy can cause uncertainty among a community of risk accepting entrepreneurs, the success of which, in the mid-market, drives our economy.
The government should be careful not to underestimate how much of an incentive ER is for business owners to drive growth and ultimately create wealth and jobs for the UK economy as a whole.”
Johnathan Dudley, Partner, Head of Manufacturing, calls for clarity around pensions for SMEs: “With Brexit on the horizon and the possibility of yet another general election, what businesses really need is a period of stability and for politicians to provide some certainty.
Provided this ‘certainty’ is forthcoming, I would expect to see further changes to pensions provisions, aid for businesses to strengthen their international trade capabilities and the tightening of provisions to IR35 and tax evasion rules around employment and self-employment.
Many SMEs have invested time and effort into dealing with pension auto-enrolment duties and a relief for these businesses around payroll provision would be welcomed and well deserved.”
Caroline Harwood, Partner, Head of Share Plans and Reward, calls for clarity about remuneration in light of the Rangers EBT case: “During 2017 we saw the introduction of yet more measures to tackle remuneration structures designed to avoid tax, including a charge on all outstanding ‘disguised remuneration loans’ made to employees by Employee Benefit Trusts (EBT) or other third parties, as well as the new ‘close company gateway’.
The Supreme Court decision to favour HMRC in the ‘big tax case’ against Rangers FC brought the ‘redirection principle’ into the foreground, in ruling that payments via EBTs qualified as taxable income. Initially, the interaction between this new case law, the disguised remuneration rules and arranging such salary sacrifice into a pension scheme, was unclear.
HMRC have made statements as to how they expect these rules to interact in certain cases in the future, but formal clarification in the Spring Statement would be welcomed.”
By Sylvain Thieullent, CEO of Horizon Software
It feels like the financial services are in a constant state of rapid evolution as regulators, leaders, active participants and vendors strive to move the industry forward. For the FinTech sector, this could be a golden age, with every challenge creating an opportunity. If the current trajectory continues, it’s a golden age that could last for some time, says Sylvain Thieullent, CEO of Horizon Software.
The financial services thrive on change. Change drives innovation, and in turn, innovation finds faster, more efficient ways of doing things. Over the last decade, FinTech has become an independent sector in its own right, increasing the pace of innovation across the entire industry.
Competition, regulatory requirements and the calibre of the teams involved are three key elements in the industry’s constant state of flux. An array of secondary factors are also adding to the mix, combining to deliver an impressive level of innovation.
Three primary elements
At every level, the industry is driven by competition. Leadership teams recognise that if they don’t keep bringing prices down, their competitors will quickly find ways to undercut them. While loyalty and relationships will always be very important for the market, price is a major consideration. This creates a constant appetite for quicker, more efficient ways of doing things.
The second element is regulatory expectations. Just as technology is changing what we can do, it is also making it easier to regulate. Trades are being tracked with a level of granularity that would have been inconceivable a decade ago, and because regulations are coming from multiple jurisdictions, institutions are expected to report on different things in different ways (as well as the same things in different ways). Making sure that the regulators are satisfied is a major catalyst for change and innovation.
The third element is the calibre of the people involved in the financial services. The downsizing of the banking industry over the last ten years has meant that a number of highly-skilled and very experienced people have found themselves free to pursue some fascinating ideas. In some cases, they’ve joined FinTech ventures and turned their attention to some of the deeper structural issues in the sector that are perhaps too specialised for major institutions. This is leading to a string of innovative solutions to challenges.
As a result, financial centres around the world are buzzing with new ideas, some of which have the potential to coalesce into very interesting products and services over the next five years.
Changing emphasis
There are also a number of secondary factors in play.
The first of these is a move towards FinTech vendors as hubs of innovation. The rising importance of regulation and compliance has come at the same time as the downsizing of banks. A decade ago, banks could keep all the talent they needed and look in-house whenever they had a conundrum to solve. Now, all but the largest institutions need to look elsewhere.
Until recently one of the tried and tested routes for successful firms to grow was through leading institutions setting up a division, strategy or technology, nurturing it for a few years (while enjoying first-mover advantage) and then setting it free to operate independently, or selling the division for a decent return.
Coupled with the downsizing, this model is likely to become less common over the next few years as fewer financial institutions will have the depth of resource to support it. As a result, there will be more fledgling start-ups looking for support earlier in their development, which could encourage them to be nimbler and more innovative in responding to potentially more risk-averse clients.
Shifting politics
Another ingredient in FinTech’s cauldron of innovation is politics. Brexit could lead to major changes in the global financial markets, and even though London has long enjoyed an enviable position as the world’s centre for many aspects of financial services, the current level of uncertainty could see its primacy eroded. This could be another catalyst that helps some innovative initiatives move forward as businesses reassess their strategies.
Ultimately, irrespective of the choices of the British public and the subsequent political manoeuvring, uncertainty creates opportunity. London has a heritage of financial innovation that spans centuries, but other centres have been keen to challenge its preeminent position for almost as long.
At the same time as Britain enters a period of internal debate and financial institutions look at their positions to ensure that they are ready for a variety of outcomes, the French electorate, for example, has delivered a government with a modernising agenda. The interplay between London and Paris, those most traditional of frenemies, could be a source of innovation and new thinking over the next five years.
Other financial centres will also be clamouring for attention throughout this process. The growing importance and confidence of Australasia and Latin America, as well as the changing outlook in the US, could well create evolutionary pressure to innovate.
These changes are taking place as the importance of physical borders and location are coming to mean less. Financial services are exceptionally international, and regardless of the changes in individual countries, market participants will continue to focus on getting the quickest, most cost-effective solution that most closely matches their risk profile and meets the regulatory requirements of the countries where they are based and their clients are active.
Enhanced flexibility
But innovation means flexibility as institutions are less likely to fall into the trap of building a comprehensive in-house system that only a handful of people know how to keep working. This is not only a vast improvement from an operational perspective, it also means that regulation and compliance requests are far more easily met, and there is a far wider variety of environments in which to test models and strategies.
A further benefit of flexibility comes in the form of market participants and vendors understanding each other better, effectively reducing the risk that a system will be developed that doesn’t quite do what the traders want.
As ever, there’s risk. Some of the initiatives across the world are destined to wither and die because they are not built on sustainable business models. Businesses are going to need to evolve their strategies and possibly their focus to become sustainable. This is a route that many innovative industries follow as they grow to maturity, but institutions need to be aware of what they are exposed.
Incumbent bias
The barriers to entry as a nascent game-changer are very high, which poses yet another challenge. Incumbents have the advantage of existing relationships and proven track-records which will always weigh heavily in their favour.
Regulators are also rightly risk-averse, a stance which again favours market incumbents. With the current regulatory environment going through a process of rapid evolution, there are significant sanctions accompanying non-compliance which could make potential clients more reticent about embracing innovation.
That said, regulatory changes could help level the playing field from a data reporting perspective, again creating the conditions where innovation can thrive. The implementation process could be highly challenging for many organisations, but they could provide a shared foundation that supports innovation in the longer term.
Living in interesting times
The FinTech sector exists to help the financial services innovate and keep moving forward. Even though the last five years have been a golden age for FinTech, it is difficult to predict what the next five will bring.
The array of fascinating challenges ahead, the deep well of expertise, technology that keeps enhancing and regulators that keep changing what’s expected, all suggest that the outlook is positive.
Website: https://www.hsoftware.com/
