Aim for a higher yield

Mark Incledon, CEO quoted in The Times 16th January 2022

Over one fifth (22.5%) of companies on AIM now pay a dividend, with 195 companies from a total of 867 on the junior market regularly paying out cash to investors, says Bowmore Financial Planning.

The average yield of the 195 dividend-paying shares on AIM stands at 2.5%, with over 60 shares (or 7% of the market) on AIM generating a dividend yield of 3% or higher.

Well-known shares on AIM that pay a dividend include premium mixers maker Fevertree Drinks, biotech group Abcam and software house Ideagen.

Bowmore says the fact that almost 200 AIM shares now pay a dividend shows that AIM investment may be more suitable for older investors than previously thought. The rising number of income shares on AIM means investors can benefit from income as well as Inheritance Tax relief on their investment.

Bowmore says the tax relief known as Business Property Relief (BPR) means AIM shares can be an effective way for investors to pass on some of their wealth completely free from Inheritance Tax.

BPR allows people inheriting unlisted shares, as well as those listed on AIM, to claim 100% IHT relief on them provided they have been held for at least two years. The shares can even be held in a tax-free ISA wrapper and still benefit from BPR.

AIM shares are treated as unquoted for tax purposes so long as they are not ‘dual listed’. It is relatively common for AIM companies, especially in the oil & gas and mining sectors, to be listed both on AIM and another overseas exchange, such as Australia’s ASX or Canada’s TSX. This means they are no longer considered ‘unquoted’ by HMRC and wouldn’t qualify for BPR.

Mark Incledon, CEO of Bowmore Wealth Group, says: “The relative lack of dividends among AIM companies used to mean they weren’t a great choice for older investors who want income to play a bigger role in their portfolios. With so many AIM shares now coming with a good yield attached, that is no longer the case.”

“BPR means that AIM shares can be a great way for investors to shield their wealth from the taxman when passing it on to their children. It is a lot easier now for investors to find the right balance between shares that benefit from BPR but still offer the potential for a strong yield.”

“Using a BPR AIM strategy, investors have the potential to get a good income and pass it on inheritance tax free. There is also no upper limit – you can invest £10,000 or £10 million and still attract 100% IHT relief.”

Britons built up £1.7 TRILLION in savings but now families torn between holidays and bills

Mark Incledon, CEO quoted in Daily Express, 9th January 2022

“When people are concerned about taxes rising, they save more and spend less. I think we’ve seen that happen in the last couple of months.

“The loosening of travel restrictions over the summer meant less saving and more spending for a lot of households. That reversed sharply in the autumn as people worried about the cost of the National Insurance rise, as well as other tax increases that could be around the corner.”

Read more: https://bit.ly/3zFzDFY

URGE TO SPLURGE Savers built up £1.7 TRILLION in savings – and are ready to splash the cash on holidays and restaurants, experts say

Bowmore Financial Planning research quoted in The Sun, 9th January 2022

Bowmore’s study shows that the value of household savings has accelerated sharply during the pandemic. The value of savings has risen by £11.5bn per month since the start of 2020, compared to just £4.6bn per month in the prior two years. UK households have saved an average of £412 per month during the pandemic.

The growth in savings has recently sped up again after starting to level off in mid-2021. UK savings grew by £21.5bn in two months in September and October, after only growing by £18.1bn in the four months from April to August.

Read more: https://bit.ly/3zEztPj

Market Drivers in 2022

COVID-19

It has been almost two years since a global pandemic was declared. The world now has a much better understanding of COVID than we did in March 2020, but there is little doubt the virus will continue to evolve and impact our lives in 2022. Fundamentally, we know that the vaccines tend to prevent serious illness and that, whilst the virus is seemingly becoming more contagious, it is at the same time proving less deadly. Vaccine uptake and the emergence of new strains will drive short-term market sentiment and markets are likely to continue to react both positively and negatively to the interim noise created by COVID news.

Central Banks and Inflation

Central Bank actions will play an influential role in 2022, particularly in the Fixed Interest (Bond) market.  Over the past 12 months we have seen a gradual pull back of accommodative government policy and support. Both the US Federal Reserve and the Bank of England have reined in economic support as levels of inflation have skyrocketed. With the anticipated rate of tapering only increasing, further action in relation to decreasing government support cannot be ruled out. Bond markets are likely to be volatile as this unfolds in real time (we are only in the first week of the year and we have already seen this in US bond markets over the past few days).

Value vs Growth

Throughout 2021 markets swung between favouring value investing over growth, and vice versa.

  • Growth investing: buying companies looking to grow their revenue and market share, and therefore their overall value
  • Value investing: buying companies at prices lower than their intrinsic value with a view to realising that value in the future.

These swings will likely continue in 2022. However, the speed at which the rotations occur means timing these changes is a tricky business. In this environment we continue to favour companies with strong balance sheets, high margins, low labour intensity, low capital intensity, and growing earnings.

Volatility

Whether it is due to COVID, Central Bank actions, inflation or geopolitical risks, we predict that higher levels of market volatility will persist throughout 2022. The good news is that heightened volatility should lead to greater market inefficiencies. In turn this presents investment opportunities.  When volatility is high, a diversified asset allocation with a focus on the long-term soundness of investment fundamentals is vital to a successful investment strategy. In other words, ignoring short term noise.

We believe we are in a transitionary phase, where investors are still grappling with certain aspects of the economic recovery as we gradually return towards something more like a pre-COVID environment. In the short term this does mean that certain investment styles can fall in and out of favour quickly, but it is important to remember that longer term trends do not play out overnight.

Source: Refinitiv – Market returns as at 06/01/2022

Bowmore Bulletin: Your latest update from the Bowmore team

Tom Henshaw, Bowmore Financial Planning

Every month, we share some highlights of what’s been happening in and around the Bowmore Group. This month, we celebrate various appearances in the press, success in the exam room, five years with Bowmore Financial Planning, and the birth of a baby boy.

In the press

You may have spotted Bowmore in the press over recent weeks and months. If not, here’s a brief rundown of the coverage we’ve received in the last few weeks.

This is Money

This is Money covered research from Bowmore that revealed the number of company flotations in London more than trebled during 2021, another sign that the City and the UK are thriving.

113 companies joined the stock market in the year to October – compared with just 36 the year before.

Some big-name firms have gone public in the past 12 months too, including Darktrace, Deliveroo, Trustpilot, and Wise.

The market value of the companies listing also more than trebled – coming in at £51 billion, up from £16.5 billion, according to Bowmore Asset Management.

Visit This is Money for the full story, published 29 November 2021.

City A.M.

City A.M. also covered the story under the headline: “Powered by Darktrace and Wise: IPOs in UK jump 310% in a year with 113 companies listing in London”.

The Scotsman

Client director, Charles Incledon, was quoted in The Scotsman talking about how Covid and Brexit jitters had failed to derail the UK stock market.

He said: “For stock market investors it’s great to see that so many major businesses still see public markets as the best platform to realise their full growth potential.

“This is great news for private investors, as last year there was increasing speculation that private equity, reserved for institutional investors, was becoming the default for further investment, in turn denying retail investors the opportunities to invest in new growth companies.”

Read the full story at The Scotsman, published 29 November 2021.

Rising stars

This month, Tom Henshaw passed the J05 Pension Income Options Exam. This covers different strategies for retirement planning. Tom now has only one outstanding exam to sit before achieving “fellow” – the highest Chartered Insurance (CII) designation, which he hopes to do in February 2022.

Tom Henshaw, Bowmore Financial Planning

Here’s what Tom had to say.

First up, can you share a bit about the role you hold at Bowmore?

I’m a financial planner and I look after a wide range of clients across various life stages.

What exam have you just passed, and what does this mean for your career?

I have just passed J05 Pension Income Options, an exam that covers all areas of pension and retirement planning.

It was a particularly useful exam as, at Bowmore, we help lots of clients through the transition into retirement, and a massive part of that is working out the best way to provide income for those clients for the rest of their lives.

No two retirements look the same, so thinking holistically and having knowledge about all options available is really important.

How long have you been working towards this qualification?

I studied for around two months over the summer, sat the exam in October, and have had a nervous wait for the last two months.

How are you at exams, generally? 

I’m generally fairly good with exams and much prefer them to written assignments. However, this exam was a new format for me.

Other financial planning exams I’ve done have either been multiple-choice or long written case studies, whereas this exam was short written answers, which was quite different.

What was the hardest part of preparing for the exam? And the easiest?

The hardest part was juggling everything at once, studying, working full-time, and planning and then having a wedding in the autumn!

The easiest aspect was the indirect study and practice you get from working with real clients. It’s all well and good reading things in a textbook, but things come to life when you’re using the knowledge in the real world.

Can you tell me a bit about how you prepared/whether you have a revision technique or whether you’re simply a natural when learning new stuff?

I generally work my way through the course material once, trying to take in as much information as possible. I then go back over everything and create quizzes to test myself. I find this second stage especially helpful as it helps to spot gaps in my knowledge.

How was the exam? 

Difficult. Although I left the exam feeling quietly confident, I then got more and more nervous during the long wait for the results!

Are you now working towards another qualification, or are you taking a break before diving into your next challenge?

I’m working towards Fellowship, which is the highest qualification offered by the Chartered Insurance Institute. I only have one more exam until I have achieved this, and the plan is to sit this in February 2022.

Anniversaries

Last month, Jill Ellicott celebrated her fifth year with the Bowmore team.

What do you remember about your first day at Bowmore Financial Planning?

Everyone was really welcoming and keen to help. I seem to recall the first four days were spent in the Bristol Office and there was an awful lot of information to take in.

What do you love most about your job?

I really love being able to help clients understand their money better and what it can do for them. It can be really hard to visualise your financial future and our cashflow planning software helps with that.

Favourite memorable moment?

Following my success in 2016 as Money Planner of the year, being recommended for London Financial Planner of the Year 2021 in the Women in Financial Advice Awards was fantastic. I was really pleased to have been selected as a finalist in the top 11.

Oh, and the bag I got for Christmas in our Secret Santa a couple of years ago!

New arrivals

Congratulations to Owen Moore and his wife Becky on the birth of their son, George. A brother for big sister Ada, we wish the whole family well.

 

 

 

 

 

 

 

Season’s greetings

Thank you to all our clients. We love working with you and helping you to achieve your aims and goals.

As this is our last update of 2021, we extend our best wishes for the festive season and hope you have a healthy and prosperous new year.

7 new year resolutions for a financially healthy and prosperous 2022

lady at home on the sofa writing notes and smiling with a cup of tea looking relaxed and comfortable

The new year is a great time to break a cycle of bad habits and set some good ones. Many of us focus our intentions on trying to follow a healthier lifestyle and forget to think about our financial health.

To help you consider what some of your new year resolutions might include this year, here’s a list of resolutions to help you improve your financial health for a prosperous 2022 and beyond.

1. Pay off your debt

If debt is holding you back from saving as much as you’d like, prioritise debt repayment.

Expensive credit card debt can play havoc with your finances and having debt hanging over you can harm your financial wellbeing.

High levels of credit card debt may prevent you from securing a mortgage, or at least mean you’ll find it difficult to benefit from more generous lending rates.

2. Define your long-term financial goals

It’s easy to focus on the present and forget to think ahead for the future. So, take some time to set some long-term financial plans.

This can be a good way to motivate you to stay on track with your financial resolutions and make certain that your money is working for you.

Long-term financial goals could focus on saving for retirement, a healthy deposit for a new home or even a holiday of a lifetime. Maybe there’s a combination of things you want to plan to achieve.

Once you’ve defined your goals, you can make solid plans for how and when you’ll reach them.

3. Prepare for the unexpected

Risk is an unavoidable part of life, especially when it comes to finances. All kinds of unexpected life events can seriously knock your bank balance. Ill-health, accidents and redundancy can all negatively affect your financial health.

Begin by making sure you have an emergency fund. It’s wise to hold enough money to last you three months of expenditure in an easy-access savings account for a rainy day.

As well as your rainy day fund, make sure you have the right protection in place. If you’re the main breadwinner, consider income protection or critical illness cover to make sure you can maintain your lifestyle if you are unable to work because of a serious illness or an accident.

Consider if you need to review any protection you already have. If your salary or earnings have changed, make sure your insurance policies are keeping pace.

4. Start investing

If you’re not already investing your hard-earned money, investing should be close to the top of your list of financial resolutions.

Investing is one of the best ways to build your wealth and secure a healthy financial future. A well-diversified investment portfolio has the potential for great returns and helps you achieve your long-term financial goals.

Investing can be complicated and there are different tax-saving vehicles you can use to give yourself added advantage, so make sure you do your research. Better still, get in touch and talk to one of our expert financial planners who will help tailor your investment strategy to your circumstances and long-term lifestyle goals.

5. Get into the savings habit

Saving money every month is a great habit to get into. If you don’t already siphon some of your income into a savings or investment account each month, now is a good time to start.

Never have money left over? Review your monthly direct debits. Check you still use all the services you’re shelling out for.

Do you still read the magazine or e-zine you signed up to five years ago? Do you still watch that TV service you subscribed to during lockdown? And what about the gym membership you’ve been paying for and not using?

Be ruthless. If you haven’t made use of it in the last three months, get rid of it and save the money instead.

Set yourself a realistic savings goal. You’re more likely to stick to your savings habit if you’re not stretching yourself too much. Even a small amount each month can soon add up.

6. Plan for your retirement

The earlier you plan for your retirement, the better off you will be.

Ideally, you’ll already be contributing to a pension but, if not, make sure you take steps to set one up and start making contributions as soon as possible.

Contributions you make also benefit from government tax relief, which can be a great way to boost your savings.

If you’re already paying into a pension, consider if you can increase the amount you save each month.

The Annual Allowance allows you to benefit from tax relief on pension contributions up to £40,000 or 100% of your earnings, whichever is lower, each tax year (6 April 2021 to 5 April 2022).

Not everyone likes the way pensions work. Some people prefer to rely on the tax advantages of ISAs (individual savings accounts) or property.

If you’re unsure about what is best for your circumstances, get in touch and we’ll help you make a retirement savings plan that’s tailored to your needs.

7. Protect your estate

With all the financial resolutions you’re making (and will stick to!), an estate plan will ensure your legacy is protected and passed on to your loved ones.

First, write your will. If you already have a will, make sure it’s up to date and reflects both your level of wealth and your wishes.

Without a will, your estate may not be distributed the way you would choose. Wills are especially important if you have children, a spouse, or dependants.

If you are wealthy or own a property or other assets with a high value, it’s wise to consider steps you can take to mitigate Inheritance Tax (IHT). You’ll currently be charged IHT on the value of your estate above £325,000, or £500,000 if you plan to leave your home to a child or grandchild.

Estate planning can be complicated and there are various routes you can take to avoid having to give away your wealth to HMRC. To make sure you’re taking the right approach to protect your legacy for future generations, get in touch.

Get in touch

If you want to get your finances in the best shape during 2022 and would like help knowing what you should focus on and how to achieve your long-term financial goals, please get in touch. Email enquiries@bowmorefp.com or call us on 01275 462 469.

 

Bowmore Financial Planning Ltd is authorised and regulated by the FCA.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

Levels and bases of, and relief from, taxation are subject to change.

How to give your grandchildren the gift of a lifetime this Christmas

Young girl opening gift presented by grandmother with surprised expression

Investing for children is one of the best presents you can give to the young people in your life.

You may have read last month’s article about the miracle that is compounding and how this works to maximise returns on long-term investments. Time is key to growing wealth through compound growth, so start investing for children early enough and you could give them the gift of a lifetime.

Giving the children you love a healthy financial start to adulthood could help them: fund further education; get a firm step onto the property ladder; or explore the world, without worrying about the cost of enjoying half-decent accommodation on the way.

Apart from the invaluable financial freedom they might enjoy, investing for children is also a fantastic way to help them learn important money lessons. As they get older, you can involve them in conversations and decisions about how and where their money is invested.

We did the sums, so you don’t have to

Our research, published in FT Adviser, revealed that if an 18-year-old today puts £1.71 a day into their pension until age 68, they could have saved £1 million.

While this calculation is based on a growth rate of 10%, even if the world is in a lower growth phase, because of the miracles of compounding over time this still means that you don’t need to save hundreds of pounds a week to be a millionaire at 68.

While £1 million might feel like a stretch, the idea of putting just £1.71 into a pension each day can seem far more achievable. This £1 million milestone assumes a growth rate of 10%.

Imagine what you could do if you started saving for your children or grandchildren from the day they were born.

Capitalise on time with compound growth

Invest for babies and young children and you’re already winning. The sooner you start, the longer the money will be invested and the more your infant will benefit in later life.

Starting with this long-term approach means you can gain from the benefits of time.

However the money may be spent in the future, taking advantage of the first 18 years of a child’s life will put them in a powerful position to generate more wealth. It could make a massive difference to their life choices in early adulthood.

While you might not quite reach a million by the time they turn 18, you can make significant progress by investing in a pension or Junior ISA (JISA) from when a child is born.

Stop and think about how and where to invest

Before you rush into putting money away for the children in your life, make sure you consider your own financial situation first.

Ask yourself these five questions:

  1. How much can you afford to save for others after your own needs have been met?
  2. Where and how do you want to save the money you put away?
  3. How much risk are you prepared to take in pursuit of better returns?
  4. What costs are involved in setting up, managing and accessing the investment?
  5. Do you want to make your investment plan tax-efficient?

Decide which investment vehicle will suit your goals

If you’re new to investing for children, the main options are either a Stocks and Shares Junior ISA (JISA) or a child’s pension.

Investing through a JISA

A JISA is a useful long-term investment vehicle that allows you to save up to £9,000 a year (2021/22).

While parents or guardians must open the JISA, once set up, anyone can make payments into it.

One of the primary benefits of investing in a JISA is that you guarantee the money belongs to the child. Because the child is the ultimate owner of the JISA only they are allowed to access the money.

Once they reach 18, they can withdraw the money. Alternatively, they can transfer the account to an adult ISA, keep the funds invested and continue to add payments into it on a regular or ad hoc basis.

Potential returns on a JISA

If you saved £9,000 into a JISA every year from the child’s birth, the JISA could be worth £255,953.68 by the time they turn 18.

This calculation is based on an assumed growth rate of 5%.

The above sums assume all dividends are reinvested and don’t take account of fees, which will make some difference to the final sum.

Whatever the growth rate you achieve, there’s no disputing the long-term power of compound interest. If you can’t put away as much as £9,000 each year, save what you can into a JISA for your grandchildren and, over time, you should still see healthy growth while they are growing up.

The money will be free of both Income Tax and Capital Gains Tax when they withdraw money from their JISA. Alternatively, they can continue saving and benefiting from more and more compound interest by transferring their JISA to an adult ISA.

Start contributing to a pension

An alternative to a JISA is to save into a pension. This isn’t as crazy as it sounds.

As with a JISA, the pension must be set up by the child’s parent or guardian but, once in place, you can pay money in and get tax relief on payments up to £2,880 each tax year. The government automatically tops up contributions by 20% – even for a child – so an annual payment of £2,880 automatically becomes £3,600.

Of course, you can pay in more than this but you’ll only get the tax gains on the first £2,880 you contribute, unless your child or grandchild happens to have earnings above this amount.

Potential returns on a child’s pension

If you invested £2,880 into a child’s pension every year from when they are born, the pension fund could be worth £104,761 by the time they are 18.

The above calculation is based on the full invested amount of £3,600 every year, growing at an assumed rate of 5%.

If they continued to pay in at the same rate over the next 50 years, their pension pot could be worth more than £2 million. This is based on a 5% growth rate which, when you consider that the average equity market return has been around 10% a year over the past 100 years, is relatively conservative.

The above sums don’t take account of fees, which will make some difference to the final sum.

As long as the pot doesn’t exceed £2 million, any growth is free of tax, which helps it to increase in value. Like any investment, its value can go down as well as up.

Get in touch

If you want to give the children in your life the gift of a lifetime and would like to discuss all the available options or the type of fund which might be suitable, please get in touch.

Email enquiries@bowmorefp.com or call us on 01275 462 469.

 

Bowmore Financial Planning Ltd is authorised and regulated by the FCA.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

Levels and bases of and relief from, taxation are subject to change.

Why you need to manage your emotions and your money together

a jigsaw puzzle of the outline of a human head

Often, it can feel like your rationality and your emotions conflict with one another, especially when you’re making decisions. And, while we’d all like to think that logic will win, your feelings can unfortunately and frustratingly get the better of your thoughts.

Ordinarily, this can be of fairly low importance. You make so many choices in a day that, if you end up making one that isn’t quite right, it probably won’t matter in the grand scheme of things.

But, when it comes to your money, these choices can have wider consequences. A mistake with your finances could be debilitating to your entire financial situation, affecting your ability to afford your lifestyle, and potentially even having an impact on the future.

That’s why it’s important to keep an eye on your emotions when managing your money so that your finances are secure even if you feel like you’re struggling to keep them together.

Here’s why it’s so difficult to manage your emotions and your money, as well as what to do about it.

Financial rationality is a myth

A reassuring point to know if you’ve ever struggled with money and emotions is that financial rationality is essentially a myth. No matter how logical people think they are, heuristics and biases will typically get the better of everyone.

In a study by researchers at Harvard Business School, they presented a choice to a range of retail and professional investors: if a company you hold a stake in is acquired by another firm, what do you do with the stocks you’ve suddenly inherited without intending to?

Logically, according to the researchers, you should sell; after all, you never intended to buy these shares and you don’t know what their value is, so the right choice would be to sell until you have more information.

But of course, that’s not what the research found. Instead, 80% of individual investors chose the default, passive action of holding on, despite this perhaps not being the best option.

Interestingly, some professional investors also chose this approach, too – 30% of what the study calls “institutional” investors chose the same default, passive action.

In the view of the researchers, this shows that when it comes to money, people are “inertial” rather than “logical”; they’ll make the choice that requires no action, even if the evidence is to the contrary.

In essence, what this means is that while you shouldn’t, you inevitably almost always will take the path of least resistance – and so will everybody else.

Missing out on your money

On an everyday basis, the impact of these inertial decisions can start to stack up. You can get stuck in the same patterns because it’s easier to do so than make decisions.

This can see you miss out on opportunities, particularly in investing, simply because it required you to change your habits.

It’s equally straightforward to miss out on opportunities because of the fear of loss, too. This is because of a remarkable phenomenon known as “loss aversion”.

First identified by economists Daniel Kahneman and Amos Tversky in a paper entitled Journal of Risk and Uncertainty, loss aversion is a fear of loss based on past experiences.

According to Kahneman and Tversky, the pain of loss is twice as strong as the pleasure of a gain. As a result, people tend to make decisions that avoid losing over the possibility of a win.

Together, the fear of loss and the inertial approach to money can mean you end up missing out on the opportunity to make the most of your money.

For example, it could stop you from making investments, choosing to save instead as it’s the familiar territory with a lower chance of losing money.

Risk can mean reward with money – but it doesn’t always

Of course, if it’s possible to be illogical by being passive, it naturally follows that it’s possible to be illogical when making decisions, too.

Overconfidence in certain investments can lead you to hold on to them for too long, putting your money at risk even if there are clear indicators that you should choose a different path.

Similarly, you may also become a victim of the “endowment effect”, an extension of the inertial approach. The endowment effect sees you put more emphasis on your prior convictions, rather than new information.

As a result, even when the evidence for a decision is in front of you, your previous experience overrides this and informs your choices.

Overconfidence like this can be just as damaging to your money, driving you to make decisions that put your money at risk, even though it isn’t the logical choice.

Taking on extra risk can be lucrative. But become swept up in the inertia of your prejudices and it can quickly become a problem.

A financial planner can help you manage your psychology

Often, the best thing you can do to help you manage your money without the influence of your emotions is to find support from a professional, such as a financial planner.

A financial planner can provide personalised advice on your money, helping you to see which of your choices are logical and where you’re being overpowered by your feelings.

They can also act as a sounding board for your ideas and decisions, giving you access to two brains rather than one.

By outsourcing to another person, you can remove your prejudices and biases, improving your chances of making choices that are logical, rather than emotional.

Work with us

If you’d like help managing your emotions and finances, no matter your personal preferences for risk or your relationship with money, then please get in touch with us at Bowmore Financial Planning.

Email enquiries@bowmorefp.com or call 01275 462 469 to speak to one of our experienced advisers.

Please note

Bowmore Financial Planning Ltd is authorised and regulated by the FCA

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Is investing in China a good idea?

Beijing, China Central Business District cityscape

China offers investors diversification from Europe and North America.

China’s economic size and relative sophistication are appealing, with a huge middle class and development in science and technology offering attractive opportunities for growth. Yet Chinese politics may put you off investing in the region.

Read on to find out why investing in China should be considered as part of any well-diversified investment portfolio.

Navigating tricky politics

While there are clear advantages to investing in a market as large and diverse as China, there are concerns about the Chinese Communist Party (CCP).

Earlier this year, the CCP made some serious regulatory changes to crack down on large Chinese technology companies. This included restrictions on how data is collected, stored and used. It also banned online gamers under the age of 18 from playing on weekdays.

Additionally, further action was taken to restrict the activities of private Chinese education companies operating for a profit.

While these policy changes may seem draconian to those of us living in the western world, these regulation policies are in fact designed to foster a sustainable and healthy environment for technology and internet industries in China.

The hope is that this will help to increase their global competitiveness. Ultimately, the Chinese government wants to show that their regulatory framework ensures they are fully compliant, which should cause increased inflows of investment.

Supporting this theory, the president of the Chinese web giant Tencent, Martin Lau, reacted positively to the news, saying, “the regulation has been quite loose in the past and new regulations are necessary to help identify and rectify industry misbehaviours. New regulations will emphasise compliance [and] social responsibility, as well as fair and proper behaviour.”

Even so, these moves spooked the market and prompted questions around China’s attitude towards their capital markets and foreign investment.

Regulatory changes shake China’s stock markets, but sharp rebounds often follow

Although these new regulations could slow down the growth of some Chinese companies, there are signs of strong resilience.

Given that the long-term aim for the regulatory changes is to create a more level playing field for Chinese businesses, the long game should help attract significantly more foreign investment.

It’s not the first time target regulatory changes have shaken China’s stock market, and it’s unlikely to be the last, but, on the upside, these are often followed by sharp rebounds.

Investors who can stomach the risk of heightened volatility tend to be rewarded with strong returns. In fact, the MSCI China index has returned 12.3% over 20 years compared to 9.3% for the S&P 500.

China’s bear market is linked to near-term policy uncertainty

Understanding that the bear market in China is linked to near-term policy uncertainty, rather than wider economic problems that could linger, should give investors some comfort.

Since you should invest with a long-term view, while regulations might cause blips in share prices, in the longer term they should aid greater levels of foreign investment in Chinese companies. This should help your investment in the country to grow.

While attempting to time any market is a tough challenge, China can be even more difficult to predict.

In the short to medium term, regulatory rollout could continue. Property prices could also fall, damaging consumer confidence. In addition, the potential for Covid concerns could destabilise the situation, with the US-China relationship possibly affecting the short-term outlook for growth.

News stories, such as the Evergrande crisis, that grab the world’s headlines add to the potential for volatility.

Why China should be considered as part of a diversified investment portfolio

Despite the potentially troubling property sector, there are still plenty of reasons why China is a good home for your investments. Here are three of them.

  1. Entrepreneurship drives growth

China’s economy is driven almost entirely by privately-owned businesses. This high level of entrepreneurship is helping to drive growth beyond the areas being targeted for reform.

According to research carried out by McKinsey, almost 87% of employment is in private companies. These firms are also responsible for 88% of China’s total exports.

  1. China’s unique characteristics reduce the threat of a crisis

Because the Chinese government controls both sides of the banking system, the threat of an economic crisis is reduced.

State-owned enterprises are the largest borrowers. The region’s reliance on internal funding makes it more resilient and the vast domestic capital available means it is not especially vulnerable to any sudden withdrawal of capital from foreign investors.

In terms of lending, the government holds significant stakes in the large banks and would find it relatively easy to recapitalise them in the event of a crisis.

  1. China is the second-largest economy in the world

Although China is the second-largest economy in the world, it has a small equity market and represents only 5.4% of the global equity market.

To put this in perspective, the largest economy in the world – the USA – has a 57% share of the global equity market.

Whatever you may think about the authoritarian Chinese government, the gap between Chinese and US firms is rapidly closing. Chinese companies on the Fortune 500 generated $8.3 trillion in revenue in the past year, compared to $9.8 trillion for US firms.

Additionally, according to McKinsey, China’s middle-class population is estimated to reach 550 million by 2022, more than one and a half times the entire US population.

McKinsey also found that $1 of every $3 of global investment made by companies over the past decade has been in China.

To overtake America, the Chinese government knows that they must increase investment into their stock markets. This means that although the regulation changes imposed may seem harmful to the economy, take a long-term view and their moves may not seem as crazy as you first thought.

Get in touch

If you are interested in learning more about investment opportunities in China and how you can profit from expert insight and long-term growth, get in touch.

Email enquiries@bowmoream.com or call us on 0203 617 9206.

 

The value of your investments can go down as well as up, so you could get back less than you invested.

Past performance is not a guide to future performance.

Bowmore Asset Management Ltd is authorised and regulated by the FCA.

5 reasons to make regular investing your top new year resolution for 2022

Couple at home working on laptop computer

Instead of saving up a chunk of money to invest once you’ve reached a certain amount, regular investing allows you to invest a set amount into the markets each month.

Saving little and often is a habit that will make a big difference to your overall levels of wealth over the longer term.

One of the biggest advantages of regular investing is that you put your money to work straight away, rather than waiting for one point in the year where you make a lump sum investment. Over the last five years, there have only been three calendar quarters where markets have finished in negative territory (finished the quarter lower than where they started).

In other words, 85% of the time markets have been rising, so by sitting on cash you are losing out on potential capital growth.

Regular investing can also be an ideal way for parents or grandparents to save money for children. By investing regularly while children are growing up, it’s possible to accrue a healthy lump sum. This can then be used to cover university fees, a deposit for their first property or an adventure, such as world travel or starting their own business.

Here are five more reasons regular investing can be a sensible option if you want to grow your wealth.

1. Builds discipline

Investing regularly helps you build good habits and keeps you committed to a long-term investment strategy. Ultimately, if you commit to regular saving, it doesn’t take long before you start to build up a sizeable pot.

With investments, typically, the longer you leave your money invested, the greater the potential rewards. Over time, your regular investment should build up, no matter how little you might save each month.

A good approach is to invest a fixed portion of your income each month. This way, as your income fluctuates over your working life, you can adjust the amount you’re saving in line with the amount of money you are making to build up a future nest egg.

2. Benefit from compound growth

Compound growth is the most powerful and underrated benefit of long-term investment.

Compound growth has its largest impact during the latter stages of your investment journey. For example, 10% growth on £1,000 is only £100, but 10% growth on £1 million is £100,000. So starting early and setting good habits is vitally important if you want to reap the full rewards of compound growth.

Even if the amount of money you’re investing each month may seem small, every little counts and will ultimately make a big difference later down the line.

Einstein is reported to have said compounding was the eighth wonder of the world, yet few people understand how powerful it is. This is still true to this day.

To illustrate the power of compounding, if you invested £500 a month from your 16th birthday to your 21st in a fund that delivered 5% a year, and made no other contributions for the rest of your life, by your 60th birthday you’d have almost £300,000 (The Calculator Site).

3. Bounce back faster after market dips

If markets fall, investing at regular intervals means your money will buy more stocks or shares when their prices are low. Likewise, you’ll buy fewer stocks or shares if you invest when markets are high. This means that the percentage decline in the value of your investment is also lower when markets fall. This is commonly referred to as pound cost averaging as it helps to eliminate the impact of volatile markets as over term you end up buying the average market price.

However, if you’d invested sizeable sums irregularly, and the market declined, you might have placed all of your money into markets at a high price. This, in turn, would mean you’d see a significantly larger decline in value.

4. Pick up potential bargains

When stock market prices start to fall, many people panic and tend to avoid investing at that point in time. Investors who get spooked by market changes may pull their money out of the market or refuse to enter the market until things settle down.

However, because fear drives prices artificially low, this is often the best time to buy into the market. At times like these, adding to your investment means that you may enjoy larger returns when the markets rally.

Many people find it difficult to remove emotion from investing and so struggle to benefit from market downturns.

For example, if you go shopping in the January sales and find a jumper that you really like for a 50% discount, you’d think that’s a great deal. However, if someone offers to buy into a company after it had fallen by 50%, your first reaction is likely to question why it has fallen and should I be avoiding investment.

Most of the time, a company does not become a bad company overnight, but wider market news may have caused the stock price to move considerably lower. Like the jumper, the company is now at a discount.

Regular saving removes the emotion from investing.

The table below shows how a regular £1,000 investment every month during 2018 compared with a £12,000 lump sum invested at the beginning of the year. In both cases, dividends are reinvested and don’t take fees into account.

Source: Bloomberg

5. Avoid temptation to “time” the market

Some people will agonise over when they should invest their money in the stock market, hoping to find the ideal time to buy. This approach is incredibly difficult and, as we all know, there’s rarely such a thing as “perfect”. Even the most seasoned of investors would be queuing up for a crystal ball if there was one.

With this in mind, professional investors and money managers with large sums to invest will drip feed their funds into the market over time (usually over the course of a few months, depending on the circumstances). As the strategy of seasoned professionals, it’s a great approach for novice investors.

Instead of trying to buy and sell at the right time, regular investing means you remain fully invested. As an illustration of how beneficial this can be, the chart below shows the impact of missing the best days in the market:

A £100,000 investment in developed markets equities from January 2005 to January 2020

 

Source: Bloomberg, MSCI Daily Total Return Gross World Index

Missing the top 20 days over 15 years reduced the end investment value by more than £250,000, from £443,014 to £188,941.

Get in touch

Regular investing is a powerful discipline that you can use to build your wealth. The sooner you start, the better. Invest this way and, with time on your side, you’ll be well-positioned to ride out any short-term volatility and you can avoid the problems of attempting to time the market.

To find out more about how we can help you invest your money wisely and how you can profit from expert insight and long-term growth, email enquiries@bowmoream.com or call us on 0203 617 9206.

 

Bowmore Asset Management Ltd is authorised and regulated by the FCA.

The value of your investments can go down as well as up, so you could get back less than you invested.

Past performance is not a guide to future performance.