I hope you all had a good summer. We spent ten days in Andernos and then enjoyed a much cooler ten days visiting family in the UK. Whilst I was in the UK I saw an advert in the paper for a bank savings account offering around 5% interest on amounts up to £50,000.

However, I noticed that in order to benefit from this rate you would have to commit to leaving the money there for two full years otherwise if you took the money out you would only get around 2% interest. A quick scan of the finance section of the paper showed similar offers. Now, leaving aside the fact that once you are French resident you can’t open a UK bank account, with inflation in July being 6.8% in the UK these rates are still far below inflation. IF you were to have one of these accounts and be a French resident you would need to reduce the interest rate by 30% because that is the French tax that you would have to pay on any gains. Also there is exchange rate risk that needs to be considered.

Some other accounts were brought to my attention in Jersey. However there is no double tax treaty between France and Jersey so any interest earned would be taxable in both countries.

I always advise people to take advantage of the French tax free savings accounts like the LDDS and the Livret A and the LEP if you meet the income threshold BEFORE investing. If you add the CEL account to this list it effectively means you can hold around €50,000 readily available cash earning tax free interest. These rates are reviewed quarterly on 1st of February, May, August and November. You will be pleased to hear that there have been no changes to these rates as at 1st August 2023.

One of the key points about investments is diversification. Not only are the investments we recommend very diversified in terms of geographic location and asset class but if you have invested with us this is usually only a part of your assets.

All investments whether it is your house, your bank accounts, or your other investments, involve some level of risk. You only have to look at the history of the rates on the savings accounts HERE or the current concerns about house prices and mortgage rates in the UK, to see that nothing is guaranteed in the long term. But what we can show you from the past performance of the investments we offer is that over the past three or five years they have performed well. And the longer the investment term, the greater the likelihood of strong, positive returns ahead of the rate of inflation.

Another thing we managed to do at the end of July was to complete our wills and make stipulations about the guardianship of our children. I wrote about guardianship HERE but I admit I never got round to doing anything about it until now. The husband of a French financial adviser that I recently met is the Notaire in an office in our neighbourhood so we were able to make an appointment with him. We hand wrote our wills before the notaire, signed and dated them and then handed them in with a cheque for them to be registered. It was all very easy and I’m glad that it is now sorted.

By now you should have been able to view your tax statements in your online tax account, if you have any questions about the figures please do let me know.

After a long and much needed break, I am excited to be back at work and arrange appointments with my clients and those who have contacted me. If you want to speak to me about something please do let me know.

Looking forward to speaking or hearing from you soon!

A few tips on how planning ahead, as well as looking back, can make a difficult time much easier on our loved ones. It comes to us all, but we devote relatively little time to thinking about it: death.

Unsurprisingly, most people prefer to avoid thinking about their own mortality, but they are keen to ease the pain for loved ones who are left behind. In this short article I’ll take a look at some tips to make this time a little less hard on your family and I’ll even give you an idea of how you can leave behind a moment of happiness for your closest relatives.

Make ‘The Folder’

My colleague Gareth Horsfall has written about the importance of ensuring your paperwork is in order and stored where your relatives can find everything they’ll need to get through the formalities that inevitably ensue from your passing. The Folder is a central location (digital, physical or both) where you keep a record of all your assets, your bank accounts, your pensions and investments, as well as a copy of all your important documents like birth certificates, marriage certificates, your social security number etc. And, finally, a list of all your internet and device passwords, of which there could be a lot!

Modern life can be extremely complicated whilst we are still alive and it becomes even more so when you have to deal with someone else’s affairs that may not be entirely familiar to you. By collecting all the important paperwork and information in one place, you can ease the inevitable administrative burden and show your loved ones that you were thinking about them. And don’t forget to tell them where they can find The Folder.

Close old overseas accounts and companies

I was once asked to help the wife of a client to deal with some of the inheritance formalities that were required for the settlement of his estate after he died. Wealthy people often have assets in various countries and this can lead to significant extra time and expense when attempting to transfer everything from the deceased’s estate to the beneficiaries.

For example, the ownership of a British Virgin Islands company can’t be transferred to someone else before probate is granted in that jurisdiction, which entails securing the services of a local qualified lawyer. If that company is no longer needed once the deceased is gone then further fees will be incurred in BVI for closing that company. Multiply this scenario across various foreign jurisdictions and it can become quite costly and time consuming in order to settle the full estate.

Conclusion: if you can simplify your affairs by closing underutilized overseas companies or dormant bank accounts, it can save your family a lot of hassle and money later.

Avoid paying more tax than is necessary

Ironically, inheritance tax is a fact of life. It is often only considered when it has to be paid and it can be surprisingly substantial – in France a house can swallow up any allowances you may benefit from, leaving the remainder to be taxed at up to 45% for children and up to 60% for non-family beneficiaries. By using an assurance vie policy as a vehicle for managing some of your wealth you can substantially increase the tax-free sums your loved ones inherit, they may pay a lower tax rate on the amount that is taxed, you can use the beneficiary clause to choose who gets what and the money can grow free of tax during your lifetime if not withdrawn.

Everyone hates paying inheritance tax, so when you know that your children can inherit an extra 152,500€ each tax-free if the money is coming from an assurance vie policy, it quickly becomes apparent how much you can save them (don’t forget: in order to get the maximum benefit, you should start your policy before you turn 70). They say there are only two things that are certain in life: death and taxes. Whilst you can’t avoid the first, your family might avoid the second with a bit of foresight and planning.

Finally, leave them something really personal

You’ve finished tidying up the loose ends of your life, you’ve done all you can to minimize the tax your family will pay and your affairs have been put ‘in order’. You have made every effort to ensure your passing will be as little of a burden on your beneficiaries as is possible, you have made a difficult time less difficult by thinking ahead. There is also a way to use this moment to bring some joy into the lives of those who love you: by thinking back on your life.

A memory journal is a little treasure that helps you to record some of the most precious moments of your life, to be passed on to your children or grandchildren. It is a guided book that contains prompts and questions such as ‘How did you meet my mother?’, ‘What was your favourite subject at school?’, ‘Tell me about the happiest or greatest memories of your life’ or ‘What did you feel when you first saw me after I was born?’ It gives you the opportunity to leave your family the story of your life, your most intimate thoughts and feelings, perhaps alongside a few photos.

Money and paperwork are important, they have to be dealt with. Put everything in order, in advance, and you will be doing your family a big favour. Leave them as much money as you can tax-free and you’ll ensure they will be better off. And finally, a few of your own words left alongside the admin makes this difficult time more bearable. These things are easily put off, you may not even want to think about them, but if you take action sooner rather than later, I promise you will never regret it.

If you would like to speak me about planning ahead and putting your family affairs in order, please get in touch. I’m here to help and happy to answer any questions with no obligation.

This update is a look back at 2022 and the year so far in 2023! I believe that 2022 was one of the toughest years of the 25 of my career in terms of the very difficult conversations I had with many of my clients. Those 25 years included the DotCom Bubble, 9:11, the invasion of Afghanistan, the second Iraq war and the Global Financial Crisis.

2022 was different for one main reason… it seriously affected Cautious and Balanced investors and as most of my clients are retired and therefore dependent on their capital for income, it means they need to take a more cautious or balanced approach to managing their money.

So what happened?
At the start of 2022 markets were pricing in a low to moderate increase in interest rates for the whole year, how wrong they were … in fact, the US Federal Reserve raised rates by 4% in 2022 and have carried on into 2023 and many other central banks followed suit.

When interest rates rise, the values of government and corporate bonds fall but long-standing portfolio theory states that bonds must always make up a large part of cautious portfolios, hence the very difficult year for cautious investors. Equities (shares) didn’t fare much better but have shown a faster recovery towards the end of 2022 and into 2023.

This chart shows four different typical risk profiles over the last 2 ½ years taking in the recovery from Covid to the inflation spike, invasion of Ukraine and the year so far. Highlighting the tough times that cautious (green line) and balanced (orange line) investors have had over the past few years.

So why did this happen?
Inflationary pressures had started to build up as economies reopened after the Covid pandemic. Supply chain disruption during the pandemic created shortages, which collided with a sudden increase in demand. An under-investment in energy, particularly fossil fuels also contributed to inflation through higher oil and gas prices.

The war in Ukraine shifted this inflation problem to a full-blown cost-of-living crisis. Central banks were slow to act initially, thinking it was all linked to the pandemic, but it soon became clear that rising prices would be more persistent than expected. Central banks had no alternative but to raise interest rates.

Financial Markets in 2022

Equities
2022 was a year most investors would rather forget, with bond and equity markets seeing significant falls and uncomfortable volatility. Importantly, holding a portfolio of bonds and equities provided little protection, as both asset classes proved correlated to high inflation.

The year also saw a considerable rotation from “growth” to “value”, ending the long dominance by the technology sector. In particular, many of the stock market darlings of the previous decade saw weakness – Meta Platforms, Amazon, Alphabet and Netflix. At the same time, investors had assumed the strong performance of areas such as e-commerce during the pandemic would persist in a normal environment. It didn’t, earnings fell and share prices were hit hard.

Energy was the only obvious victor at a time when commodity prices were high, though share price rises slowed in the second half of the year as governments demanded a share of their windfall profits. Nevertheless, the sector remained the best performing of 2022.

The UK stock market outpaced most of its international peers due to a bias in the year’s most popular sectors such as mining, commodities, oil and gas, and the shift away from growth sectors such as technology, which are only lightly represented in UK equity markets.

Bonds
It was a grim year for bond markets, which had to contend with rising inflation and interest rates. Where the US led, other bond markets followed. The UK has its own idiosyncratic problems, when an ill-judged ‘mini-budget’ under new Prime Minister Liz Truss in September 2022 crashed the pound and caused a spike in UK borrowing costs.

As discussed above, rising yields meant significant losses for investors. Most bond investors saw double-digit falls in their bond investments over the year. It may be little reassurance, but bond prices have recovered from those lows and yields are now at more reasonable levels reflecting the interest rate environment more accurately. They may once again be able to fulfil their traditional role in portfolios – as a source of income and a diversifier from equities.

Financial Markets so far in 2023

So, with this backdrop and a difficult year behind us how have things fared so far in 2023?

Firstly, the gloomy scenario envisaged by many economists at the start of the year has not come to pass. The much-anticipated US recession has been deferred, while financial markets have remained resilient.

The IMF is now predicting a rise in global growth for 2023 though much of this growth won’t becoming from developed economies while emerging markets economies are expected to expand led by China and India.

Inflation has come down but has proved far stickier than many expected, with labour markets remaining healthy across most major economies. This has forced central bankers to continue raising interest rates. While the US Federal Reserve appears to have paused with central bank rates of 5.25%, the UK and eurozone central banks are still raising rates and have indicated further rises may lie ahead.

Financial markets have been resilient. The disruption created by the collapse of several banks proved short-lived, with swift action from policymakers and regulators preventing wider problems.

The US stock market has seen a surprising surge from the technology sector. After a grim year in 2022, against expectations, they roared back in 2023. The galvanising force has been generative artificial intelligence, with excitement around Chat GPT creating interest in semiconductor companies such as Nvidia as businesses look to invest in this new technology.

The US economy continues to deliver mixed messages. A buoyant labour market has continued to reduce expectations of a deep recession.The Fed has remained resolute on interest rates, although it paused rate rises in June, it has made it clear that it is willing to raise them again should inflation continue to rise.

Recession appeared an inevitability for the UK economy at the start of the year. As it is, it has not materialised, with falling energy prices, government support and a resilient consumer all acting to shore up growth. Inflation has remained stubbornly high and so the Bank of England has been forced to keep raising interest rates, which are now expected to peak at around 6%.

The UK stock market had a weak start to the year as commodity prices fell and the banking sector was hit by the failures of Credit Suisse in Europe and Silicon Valley Bank in the US. The resurgence of US technology stocks also impacted the UK market as investors swapped from “value” back to “growth” companies.

It was a stronger period for stock markets in Europe as company earnings improved and outstripped the US early in the year. A mild winter and prompt action by governments across the region saw an energy crisis averted. The region was also lifted by the resurgence of China, which is an important export market, particularly for Germany and Spain.

The European Central Bank raised interest rates to 3.5% in June, their highest level in 22 years. Eurozone Consumer price inflation declined steadily from over 10% in October 2022.

The outlook for Asia has been dominated by China. The country’s reopening in October 2022 led hopes of galvanising global economic growth at the start of the year. However, the initial stock market rally petered out as growth has not bounced as many had hoped. Confidence has not yet returned to pre-pandemic levels.

Asian markets have continued to lag their global counterparts as expectations of a swift return to economic growth in China have receded. Nevertheless, there remain plenty of reasons to be optimistic as Chinese stimulus for infrastructure projects is beginning to feed through to the economy.

Japan has been rediscovered by investors in 2023, with veteran investor Warren Buffet making a high-profile investment in the country’s stock markets. The Japanese economy is also starting to improve as reopening gathers pace and wage growth drives consumer spending. As a net importer, it is also benefiting from lower oil prices, which is helping to improve the Government’s fiscal position.

Bonds
The yield (interest paid) on US ten-year government bonds dipped in April, but moved back up as investors started to anticipate more rate rises ahead. Short-dated bonds now have higher yields than longer-dated bonds. This situation is known as an inverted yield curve and means investors expect rates to be cut over the longer term.

This “inversion” is currently common place, with 37 countries now trading with inverted yield curves, including the UK,Germany, France and Canada.

Conclusion

Financial markets seem to be in a holding pattern, waiting to see how much impact higher interest rates will have on economic activity and looking for clear signs that the interest rate cycle has peaked, and the next rate move is downwards. From the strength of China’s recovery to a potential recession in the US to the resilience of the corporate sector, there are major questions going into the second half of this year.

I am, once again, very grateful to the team at Evelyn Partners for their help in putting this summary together and hope it is useful in framing where we are today and how we got here.

They have some excellent articles on the impact of AI and the basics of how Bonds work.

https://www.evelyn.com/insights-and-events/insights/megatrends-how-will-ai-impact-your-future-investments

https://www.evelyn.com/insights-and-events/insights/the-basics-of-bonds