economic #aGENda 'Dec 22

Our regular roundup of last month's financial news

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Bonds are back

Investors are at that point in their long, messy break-up with bonds where they’re tottering on a bar stool, tucking in to their third martini of the evening and asking their dearest friend whether it would be crazy to give the relationship another try?

It has certainly not been a happy marriage this year. After four decades of stability, ballast in times of uncertainty and reliable returns (in nominal terms at least — no relationship is perfect), government bonds have done the dirty on fund managers in 2022.

Soaring, sticky inflation dealt a blow, eating away at the fixed interest payments that bonds generally provide and lining up a series of startlingly aggressive rises of benchmark interest rates. This is bad enough: since the 2008 crisis, fund managers had become conditioned to expect vanishingly low levels of inflation and supportive central banks.

Sure, investors have whinged about bonds in the past, particularly when benchmark interest rates sank so low that yields turned negative, meaning fund managers ended up buying them in the certain knowledge that they would lose money if they held them to maturity. But this year has been particularly cruel. Even super long-term government bonds have taken a hit.

This is unusual in itself, especially with a potential recession around the corner, and weakness in this pocket of the markets has chewed up and spat out investment products labelled as supremely safe. These things are supposed to be boring and reliable. They’re not supposed to lose your life savings. It’s not just long-dated government debt that is to blame.

The Bloomberg US Aggregate index comprising a range of dollar debt has dropped by about 13% so far this year — comfortably its worst year in decades. And the real insult is that bonds have failed in one of their most basic tasks in a portfolio: they have fallen at the same time as stocks.

Brief periods like this do happen, but not for this long. It has turned a bad year for investors into a terrible one. But after this historic rout, investors are slowly making their way back. Ten-year US Treasuries, to pick the global benchmark, yield 3.7%. That’s not nothing, and it’s way above the 1.6% we began 2022 with.

Could prices fall further?

Sure, if inflation revs up again. Still, yields are now decent, often without having to take any meaningful risk of default, and if the worst does happen (a recession, for example) the price will rocket, dulling the likely blow from sliding stocks. One of the reasons to hold bonds is for the buffer. That still stands.

Chancellor’s post-brexit city overhaul faces opposition

Jeremy Hunt has been accused of encouraging a “race to the bottom” after he unveiled ‘big bang’ plans to slash City red tape.

The sweeping package of more than 30 reforms, aimed at boosting Britain’s financial services sector and the UK’s flagging economy, is being billed by ministers as one of the big opportunities of Brexit. But with the City bruised by the UK’s exit from the EU, critics and political opponents said reducing regulatory oversight of banks was unlikely to make up for the damage.

Others added that loosening regulations could risk a repeat of previous banking failures. Speaking on Friday morning Prime Minister Rishi Sunak insisted the UK’s financial services industry would “always be a safe place where consumers will be protected.” He added: “We've always had and always will have an incredibly respected and robust system of regulation for the financial services sector. That's the right thing to do. “But it's also important to make sure that the industry is competitive.”

Frances Coppola, a banking analyst, told the BBC: “I think we have to be completely honest and say London is falling behind on competitiveness. And the reason is the form of Brexit that we had, which didn’t pay sufficient attention to the concerns of financial services companies. “I don’t think we should ignore that there’s quite been quite a lot of damage. We certainly shouldn’t be using regulatory reforms as a form of compensation for the damage that has done to the financial services industry.”

Last month analysis by Bloomberg revealed that Paris has overtaken London as Europe’s biggest stock market. The French stock market now has a combined value of $2.823 trillion, marginally above the UK stock market which is worth $2.821 trillion altogether, according to Bloomberg’s research.

Fiscal watchdog the Office for Budget Responsibility (OBR) has said Brexit caused a “significant adverse impact” to trade volumes and business relationships between UK and EU firms. And the Chancellor conceded last month that leaving the EU had created trade barriers which will take time to remove. The City reforms - dubbed the Edinburgh Reforms by the Treasury - were being outlined at a meeting between Mr Hunt, City minister Andrew Griffith and senior executives from banks including NatWest, TSB, Citi and Barclays in the Scottish capital this afternoon.

They include:

• Reforming the ring-fencing regime for banks to free companies with assets lower than £35billion from requirements to separate their retail banking services from their investment and international banking activities.

• Widening the role of City regulators the Financial Conduct Authority and the Prudential Regulation Authority to include targets for growth and competitiveness.

• Repealing a series of laws and rules left over from the UK’s membership of the EU to boost City freedoms.

More mortgage support for the vulnerable

The chancellor is expected to tell lenders they should do everything they can to support borrowers, including through interest-only payments that could temporarily reduce their monthly bills during the economic downturn.

Homeowners have been hit with higher mortgage payments as a result of the disastrous mini-budget in September, which spooked financial markets and pushed up borrowing costs. It increased payments for borrowers on variable rate mortgages as well as those that have had to remortgage at higher rates.

While borrowing rates have eased since then, average five-year fixed mortgage deals are still hovering at about 5%, putting further strain on households already facing soaring energy and food bills that have pushed inflation to a 41-year high of 11.1%.

Banking executives are expected to come armed with data outlining the health of their mortgage lending books, as Britain braces for the longest recession in a century. Most lenders are already contacting customers that might be at risk of falling behind on payments, but some say they have been cautious over the kind of help they might provide to vulnerable customers due to a lack of guidance from the regulator.

While the FCA instructed lenders to be flexible during the Covid crisis by providing payment holidays and interest-only arrangements, it has been less prescriptive on the kind of support that should be provided during the cost-of-living crisis.

HMRC gets tough on offshore companies

HM Revenue & Customs is preparing to write to more than 5,500 overseas companies that it suspects have failed to pay enough tax on the British properties that they own.

As part of the tax agency’s latest attempt to ensure taxpayers comply with the rules, the Revenue will send “nudge” letters to thousands of individuals who own UK property through offshore companies that “appear to have failed to notify” it of tax owed.

HMRC said it plans to write to more than 4,000 companies within the next year that it thinks owe either corporate income tax or annual tax on enveloped dwellings (Ated) on UK property. A further 1,500 companies will be targeted for unpaid capital gains tax on property sales between 2015 and 2019.

“These numbers sound like a lot, but they also sound realistic,” said Adam Craggs, partner at law firm RPC, adding that many non-UK domiciled individuals choose to own property via a company to preserve their anonymity on the UK’s land registries.

HM Land Registry data in November showed that around 93,000 property titles in England and Wales were owned by overseas companies. The tax advantages for wealthy non-doms of owning UK property through an offshore company have been tightened over the past decade.

Ated was introduced in 2013 as an annual tax charged on companies which own UK homes worth more than £500,000 and not let on a commercial basis. According to HMRC’s accounts, Ated raised about £100mn in tax over the 12 months to March 2022. The annual charge payable through Ated increases with the value of the property, from £3,800 for properties valued between £500,000 and £1mn, to £244,750 for properties worth more than £20mn, in the current tax year.