State Pension Benefits

By John Lansley
This article is published on: 22nd May 2020

22.05.20

If you have moved from one country to another, while it may be comparatively easy to obtain tax advice in order to help you plan your finances, it can be very difficult to find out how your State Retirement Pension will be affected, and this has become more uncertain as a result of Brexit. This article aims to shed some light on the issue

This article aims to shed some light on the issue.

I retired in the UK and moved abroad
Let’s start with something easy – if you have already retired and moved to Spain, France or another EU country, the chances are your only State Pension will be from the UK. With Brexit in mind, as long as you were legally resident in your new home country by the end of 2020, nothing will change, and you will be entitled to the annual pension uplift indefinitely.

Coupled to this is your entitlement to healthcare, in that you will have a form S1 from the UK, which ensures you benefit from full care on an ongoing basis, and which in effect will be paid for by the UK Government.

If you have already left the UK but have not yet reached formal retirement age, as long as you were ‘legal’ in your adopted home before the end of 2020, you will receive the UK State Pension at retirement age and qualify for annual increases. You will also be entitled to a form S1.

Note that, if you have not regularised your situation in your adopted home by the end of 2020, the situation is uncertain, to say the least. You will be entitled to claim the UK State Pension when you reach retirement age, but the uplifts are only due for 3 years and, most importantly, form S1 will not be available.

I left the UK 5 years ago at the age of 55 and have been self-employed in Spain for the last 5 years
Have you been making voluntary contributions to the UK scheme? Are you making contributions in Spain? If you haven’t already done so, obtain a pension forecast from HMRC – use the gov.uk website, sign up for the Government Gateway access service, and check your National Insurance Contribution records, as well as your UK tax records. You’ll have to apply to contribute, using form CF83 attached to the booklet NI38, Social Security Abroad.

You will then be told what pension you can expect at your retirement age, and you can also see how many incomplete contribution years you have. It is generally good advice to continue to make voluntary contributions after leaving the UK (currently £795.60pa), but if you are currently self-employed, you will only have to pay at the Class 2 rate, which is £158.60pa for the current year.

You’ll receive details of how to make up the shortfall, by bank transfer or cheque for past years, and by direct debit for the future if you wish to see payments taken automatically. Importantly, you can also call to obtain advice concerning whether it would be worthwhile doing this, and how additional payments will increase your pension entitlement – it might take a while to get through, especially due to the current Coronavirus lockdown, as it appears they are only dealing with those on the point of retiring, but you should find the staff helpful when you do.

Also, make sure you understand what your Spanish contributions entitle you to and try to obtain a projection of your future pension in Spain. This might prove difficult at present, with offices closed or providing limited services.

Having worked in the UK, Italy and now in Spain, I want to claim my State Pension
The first thing to understand is that you should retire formally in the country you are currently living in, unless you haven’t made any pension

contributions there – in which case you apply to the last country in which you contributed.

So, in this case, you approach the Spanish authorities and will have to provide details of all your employment and self-employment history. Spain will then check with each country concerned (the EU-wide scheme ensures this is possible – work history outside the EU means you may have to apply individually to those countries) and will calculate your entitlement. (But bear in mind that Brexit may have had an impact on this in practice, even though the scheme should not be affected – very much ‘work in progress’).

They will do this by adding together the contribution years of each country and then applying this to their own pension rules. This means that, even if you don’t have the minimum number of years’ contributions in one country, the chances are that the contribution years in other countries will ensure you get a pro rata pension. Don’t forget, official retirement age can vary in different countries, and some state pensions are more generous than others.

Each country will then pay their share directly to you, and if you have continued paying into the UK system it’s likely you’ll end up with a much higher pension than might otherwise have been the case.

How is healthcare affected? Any other issues?
The good news is that receiving your pension locally will mean that your access to the local healthcare system comes with it – no need for a form S1. So, any attempts by the UK to remove themselves from the S1 scheme will not affect you.

Note that, although the UK state pension is paid regardless of your other income, the state pension in Spain is not, in that if you wish to continue to work, Spain will not pay anything to you.

Other financial planning tips?
Despite the UK government’s attempts to water down the ability to ‘export’ your UK private pensions using the QROPS arrangements, this is still possible – but perhaps won’t be for much longer. So, obtain advice about whether such a move would be beneficial, as soon as possible.

Any savings or capital you have should be invested tax-efficiently and with the aim of protecting it against both inflation and exchange rate fluctuations. Stock markets can fluctuate too, sometimes dramatically as we have seen, so be careful you understand the amount of risk your investments are exposed to, and seek help from a suitably qualified professional who will be able to help you over the long term.

Tax increases in Spain

By Barry Davys
This article is published on: 16th May 2020

16.05.20

This is an article for those of us who live in Spain but will apply in every developed country around the world.

The Covid-19 pandemic has led to a worldwide lockdown, including here in Spain. The economy has been shut down with the likes of Seat in Barcelona stopping production and Barcelona tourist numbers collapsing. We all know this because we are all a living part of the lockdown.

In response to what looks like the worst economic crisis in the 300 years of modern data collection, governments and central banks around the world have provided some $7 trillion dollars of stimulus packages to economies and workers. It is the fastest and biggest reaction EVER to an economic crisis. Well done, the central banks! It genuinely is helping to make sure that as we slowly exit lockdown, individuals and companies will be in a little better condition to start up again.

Would I have it any other way? No! However, the question we now need to answer comes from Angela Merkel when asked to provide a European bailout in the 2009 crisis; “But where will the money come from?” A valid question. And even more so for the crisis that has come from the coronavirus pandemic.

The money will come, in part, from higher taxation. In the UK today, a menu of proposed increases in taxation has been leaked. In Spain, a loophole in wealth tax legislation that allowed some unit linked insurance savings plans to be exempt from wealth tax has been closed. What is significant is that these changes are coming now, before we are even clear of the lockdown and virus.

The changes to taxation in Spain are likely to include savings tax, inheritance tax and wealth tax in particular. Changes were already being discussed and the economic fallout from the pandemic provides the reason to bring forward these changes. Specifically, the EU has told us to harmonise inheritance tax across Autonomous Communities as there are big differences in the amount of tax to be paid.

In the draft budget for 2020, there is a proposal to change savings tax. At present, we have three bands of tax. The top rate for gains and investment income over €50,000 is 23%. A new band will be introduced for gains and investment income over €160,000 of 27%. We should expect this change to happen soon as it is already in the budget which is going before Parliament for approval. The first case I have seen where this will apply would lead to an additional €48,000 in tax. It is pertinent to bear in mind that these tax rates can apply to the gain on some property sales.

In addition to the wealth tax change described above, we understand that others may now be considered.

Planning actions

Help is at hand. There are planning actions that can be taken to minimise the tax issues. Here is a three point plan to minimise the effect of these changes:

1. Savings Tax. Move investments into Spanish tax efficient investments. These are available and you do not have to move your investment to Spain to qualify. They are available in Sterling as well as Euros and USD. If you would like confirmation on which of your current investments are tax efficient in Spain, I am happy to review them with you.

2. Inheritance Tax. This requires very careful consideration before making decisions to manage inheritance tax. Making sure you can maintain your lifestyle is an important part of this planning, especially for the survivor in the event of one half of a couple passing away. Once these criteria have been met, planning is feasible. A recent case of planning has saved £87,719 in UK inheritance tax for a couple living here in Spain. For nearly all of us from the UK, our estate at death will be assessed for UK inheritance tax.

3. Wealth Tax. Sometimes, the planning for wealth tax is simple. In other cases, not so simple. Care is needed and it is worthwhile asking for a review.

We have had our cake in the form of stimulus to protect the economy. We will shortly find we will have indigestion from eating the cake in the form of higher taxes. Fortunately, we still have a few indigestion tablets available to relieve our pain.

If you wish to discuss tax on your savings, inheritance tax or wealth tax please feel welcome to call. If this helps, you can match your availability for a call with mine online here.

Atypical expat family living in Spain

By Charles Hutchinson
This article is published on: 15th May 2020

15.05.20

Once upon a time there lived a British family in Southern Spain. I say British but in fact the wife had dual nationality, being both American and British. In fact they are still here.

They have 3 children, one adult son from her previous marriage living in the Middle East, their second son in boarding school in England and the youngest, their daughter, with them in Spain. His last position had been as an eminent surgeon in a well known teaching hospital in London. She had been a very successful realtor (estate agent) on the East coast of the USA. They had met through mutual friends when he was at medical conference in Boston. She brought with her to the marriage a respectably sized share portfolio which she had accumulated over the years.

They have a large five bedroom house in leafy suburbia in Surrey, UK. They have owned it since the arrival of their first child, several years after marrying. He sold his flat in central London a couple of years after their wedding and commuted to work every day from Dorking. Summer after summer brought nothing but rain and unpredictable weather. They finally decided to throw in the towel and move, lock, stock and barrel to Andalucia where they purchased a lovely house with gorgeous views over the Mediterranean. There in their retirement they play golf and have grown a circle of good friends, enjoying the lifestyle they had dreamt of in the UK. They rent out their Surrey home to visiting foreign film crews and have it managed by a competent agent.

They have a fair sized investment portfolio with a UK stockbroker who has underperformed their peers over the previous decade, which he learnt from talking to fellow golfers in the 19th hole at the club. He has become keen to change his broker and the portfolio, but is very concerned about the potential Capital Gains Tax.

Relations with their eldest son have become increasingly strained due to his stepfather’s disapproval of her son’s lifestyle in Dubai. It has reached a point whereby he has changed his English Will to exclude him from his half of the joint estate. The parents do not have Spanish Wills.

Also growing is the worry about their house in the UK with rising maintenance costs and property taxes. The decision has been made to sell it. In any event, over the years they have owned it they are sitting on a very fine profit. But it seems that they can no longer label it as their prime home. After all, they have been resident in Spain for some considerable years.

Brexit arrived rather suddenly and they have become aware of their potential position as non EU citizens after the final deadline in December 2020.

While they have appointed a UK estate agent to handle the sale of their UK home, Covid-19 has arrived on the global scene. They watch with horror as their portfolios tumble in value. Before the arrival of the virus, they had a sale agreed and their lawyer has taken a large deposit on exchange of contracts. Now the property market is falling away.

Several of their acquaintances both in the UK and in Spain have contracted the virus and they are getting nervous of their own position, their children’s and what to do if they catch it. He is over 65 and becoming more vulnerable as time passes.

This couple faces several significant problems:

She has a US share and bond portfolio which is fully exposed to US taxes
He wants to sell out their UK portfolio and change holdings. It still shows a considerable gain
They want to sell their UK home which is still showing a considerable gain
They have no Spanish Wills which would cause problems in the event of first death, not least if the eldest son invoked Spanish Succession Law, to inherit his share
Although resident in Spain from several angles, they are not actually tax resident here but still tax resident in the UK
Apart from tax considerations, their residence status would become questionable in December 2020 (if the Brexit negotiations deadline is realised)
They need to complete the sale of their UK home as soon as possible before the market falls much further and their buyer pulls out (despite the hefty deposit he has made)

You might think this is just a story, but with only a few changes this was the reality of two of my longest held clients. Not all of the above may apply to you, but I’m sure certain elements of this brief bio resonate with many of you. The important thing to remember is that every element of this situation has a solution. As advisers here in Spain, we are expats too, and over the past years we have come across all (and more) of these situations. And we have always delivered a solution.

Do you relate to, or are you faced, with any of these issues? Do you know someone who does? They all have a solution. Why not call me for a chat over a coffee? If we are still in lockdown, we can talk about it on the telephone, all in the strictest confidence, of course.

Investing for the future

By David Hattersley
This article is published on: 14th May 2020

14.05.20

The start of a ‘new’ normality?
We are lucky to live in the region of Valencia as Phase 1 has started in some areas. Will this eventually lead to some kind of normality and what form will this take? While we have been prisoners in our own homes, the loss of freedoms and the changes that have occurred have led many of us to question what the future holds. With the obvious impact on the environment of less pollution, less freedom to travel and changing work environments, will we change our habits? How will these changes affect our plans for the future? What about our financial position and our relationships with people in the society that we live in? What will the globalised world look like in a year’s time? After all, we’re all connected to global humanity whether we like it or not.

Economy
Without a doubt this will impact global economies. Most economies will go into a recession, perhaps only for the short term, but deeper than we have known for many years. For those of us that have some form of fixed income, investments that are “ holding up” or have only fallen by a small percentage, have liquidity in our finances or have flexibility in our work patterns, we have to consider ourselves lucky.

But what of the future? No doubt there will be changes, but opportunities too.

Investing for the future
It may seem strange to consider this now, but the world has changed. Passive tracker funds and ETFs have produced substantial negative returns and volatility due to short term “overreaction”. Oil prices have fallen through the floor, food has become more expensive and supply chains

have been disrupted with increased costs. Governments will need to recoup lost tax revenue and increase borrowing to keep some economies afloat. Inflation is likely to rear its head, so with cash deposits for the long term returning effectively nil, can these be considered a “safe haven”?

These are the situations that our selected fund managers have to consider. Fortunately they have massive resources available to help them. Who and what are going to be the investments for the future based on a long term view? Where are opportunities going to occur? Who or what are going to be the winners and losers? The fund managers we use are all asking the same questions and provide some hope for the future. Humankind is very efficient at adapting to changes enforced on them. By mixing a variety of managers one can add balance to a portfolio, which many of my clients have benefited from.

Role of the Financial Adviser
During the last few weeks, when face to face meetings were impossible, I regularly kept in contact with my clients via phone calls and numerous video clips that tried to make them smile. I also provided them with current valuations and updates for the variety of portfolios that they held with me. Sometimes these are complex affairs, or may need a simple explanation. I have also assisted, when required, when there were changes in personal circumstances.

But we are social animals and I have missed the face to face meetings, which in my view makes a big difference compared to talking via telephone or video call. Please feel free to contact me for a coffee and a no obligation personal review on anything financial that may be concerning you at this time.

Investing for the long term

By Andrea Glover
This article is published on: 1st May 2020

01.05.20

The coronavirus pandemic is having a huge impact on our daily lives, but for many readers there is also an impact on their pension and investment funds due to extreme volatility in the financial markets and global economic disruption.

We asked Andrea Glover and Tony Delvalle from The Spectrum IFA Group about their thoughts on the current market conditions and the general reaction that they have seen from their own clients.

Andrea explained, “Financial markets don’t like bad news; the current coronavirus outbreak and the oil crisis that reared its head in early March are unfortunately no exception to that rule. We are all aware of the impact such events have on stock markets and although downturns are not unusual, they can be very unsettling. In these situations, it can be natural to consider taking some sort of action, but at times like this, often the best plan is to do nothing at all – particularly when you are investing for the longer term.”

Tony explained further, “It’s important to take a long term view when investing. An investment plan established during more settled times should not be abandoned when there is a market downturn. We keep up to date with the fund managers who are monitoring the markets to ensure the investments are protected as best they can be and grow over the longer term. In times like these, they focus on valuations, investment processes and look to buy more assets at attractive prices and with the appropriate risk for clients.”

Andrea went onto say, “No-one can say for sure how long this downturn will last, as we also have the US presidential elections and the end of the BREXIT transition period to come. We would be naive not to expect some further twists and turns in the short term, but we can look at what’s happened before when faced with global economic, social and political challenges. History tells us that the global stock markets weathered all of these well, with markets recovering over the longer term.”

Tony commented, “We have made sure that we have contacted every one of our clients during this time, to talk through the impact of the current situation. There has been a mixed reaction ranging from clients with further funds wanting to invest, in what they see as an opportune time, to other clients cancelling regular withdrawals so as not to compound any short-term losses. Each client has individual needs, aspirations and attitude to risk and it’s our role to understand this from the outset, as it is fundamental to the advice that we give.

Andrea summarised, “As our clients invest over the longer term, we enjoy long term relationships with them and they have really appreciated the contact, as obviously communication is key in a time like this. It can really help clients through this unsettling period when, understandably, some will be nervous about their pensions and investments. It’s our fundamental responsibility to support our clients through this bumpy ride, providing them with the information and reassurance that they need. ”

Andrea and Tony are fully operational, working from home and are available for calls and video conference during the confinement period.

Central Banks in Italy

By Andrew Lawford
This article is published on: 29th April 2020

29.04.20

Dear All

There is but one topic of conversation in these strange times, and as the crisis unfolds I decided it was worthwhile looking at how the Italian government is responding and considering where we might be heading.

I have decided to produce a pre-recorded webinar in order to provide you with some useful information on the support available to businesses and have even tried to bring a modicum of humour into the arcane world of central banks and economic policies.

Please see the link below for my latest (in truth, my first) webinar.

How long do you wait for things to improve?

By John Hayward
This article is published on: 27th April 2020

27.04.20

16th March 2020 FTSE 100 – 4898.79
24th April 2020 FTSE 100 – 5750.94
Up 17.39%

History has taught that after disasters there are recoveries. Covid-19 may well be around forever, but there will be controls. Some companies will fall victim, but others will survive and be profitable. We can help you be part of that success. Waiting for Covid-19 to go away before investing could result in lost growth and, ultimately, lost income.

Stockmarkets tend to be ahead of public sentiment and often drive how people feel. Whether the overall recovery pattern is a “V” or a “U” or even a “W” is in some ways irrelevant if you have a medium to long term (5+ years) window. I often hear people saying, “I might not be around in 5 years”. This may be true, but for most people there is more chance of being alive in 5 years than not. Even if one doesn’t survive the next 5 years, we can organise finances so that the survivors are no worse off. Not investing guarantees no growth and capital loss in real terms when allowing for inflation.

Relying on your bank to keep your money safe my not be the iron clad guarantee you perceive it to be.

Careful investing with quality management has proven beneficial for many people in the past. Looking for the quick big buck has often benefitted everybody other than the client. Let us review what you have so that you are part of the recovery and that you don´t feel upset in 3 or 4 years’ time because you missed out on an opportunity.

Contact me now and I will be happy to arrange a phone or video meeting.

Can we learn from the past?

By Jeremy Ferguson
This article is published on: 24th April 2020

24.04.20

Long periods of growth in the world, followed by a creeping in of greed, have normally caused previous stock market ‘tumbles’. This time, however, something completely unprecedented has caused it, wiping large fortunes from people’s pensions and savings, for the short term at least.

This latest situation is another great example of the fact that no one really knows what lurks around the corner. Investment managers may be clever people, but it’s simply impossible to accurately predict the timings of markets taking a tumble when events such as this take place.

‘Investing is for the medium to long term’ is something you will always hear about from people like myself. If you have a time horizon that’s very short, it’s normally fraught with danger; investments need time for you to reap their rewards. So my question is, how has the world faired on this front over the last century, and what we can learn from the past?

The first ‘event’ was the Great Depression in the US, which started in the late 1920’s. What caused it?

The early part of the decade was full of exuberance, people borrowing money to buy cars, new houses, and even borrowing to make investments in the new world of the stock market.

Everyone was doing so well, then the whole thing fell apart and nearly 13% was wiped off stock market values. For those people who had borrowed heavily to invest, it was enough to wipe them out. They lost everything, as they couldn’t repay their debts, and then followed the Great Depression. This lasted roughly 12 years until the massive manufacturing effort of WWII kick started the recovery.

Next up, after many years of growth following the end of World War II, was the famous 1987 crash. This was the largest fall in stock market values at that point in history, with a 23% fall. So what caused this? It was similar to the 1929 crash, with the addition of the speed at which people could trade shares in the modern world.

People were borrowing money, leveraging investments with the money, and then things started to go wrong. This time fear took over, with panic selling ensuing, and people lost fortunes very quickly. At that point it was the single biggest one day fall in history.

This was then followed by a 12 year recovery period, with everything being a little more controlled, until the Dot-Com bubble started to inflate. It was a frenzy of over valued companies,

people buying shares they would never have normally bought. It was all so easy to make money. Everyone was involved. Greed fevered a frenzy of madness! Then it all fell apart. The bursting of the Dot-Com bubble in 1999/2000 pushed stock markets down 23% again, but many shares fell almost 100% in value.

And off we went again… over the next 8 years, behind the scenes there was the growing greed that always seems to be lurking. Easy borrowings, people buying houses they couldn’t really afford, remortgaging the ones they had to buy more ‘things’. Banks were selling on loans to other banks.
Easy money was everywhere, seemingly fuelled by greed again. And then, you guessed it, bang! The start of the 2008 Financial crisis as it became known. The American banking system almost collapsed entirely. Never before had greed almost toppled a country. 12 years of recovery followed (sound familiar?) and 2020 is the next focal point! What more is there to say? Another large ‘tumble’ in values again.

So where am I going with this? Every time this has happened in the markets before, afterwards there ensues a protracted period of recovery and growth. The important thing is the ‘line’ keeps going up, albeit in a rather rugged manner.

The below graph is an example of 50 years growth of the 500 largest companies in the US up to the 2008 crisis. It is all over the place, but if you were invested for the medium to long term, the ‘line’ goes up and up, which is why people invest their hard earned pensions and savings. To profit!

This recovery is going to be tough, and in a new and changed world. It will come from companies that are agile, well financed with flexible long term objectives, and who are able to adapt quickly to the ever changing world.

Never has this been so obvious as it is now. If you have money invested, make sure as best you can it is exposed to investments that are most likely to be part of the recovery. A recovery that history has taught us always happened in the past.

Lockdown is a great opportunity to dig out your files to see what you are invested in, and if you need any assistance or a second opinion, I am happy to help. I can be contacted at :

Jeremy Ferguson
The Spectrum IFA Group
Sotogrande, 11310, Spain
Office: + 0034 956 794409
Mobile: + 34 670 216 229

jeremy.ferguson@spectrum-ifa.com
spectrum-ifa.com

Are you staying informed?

By Gareth Horsfall
This article is published on: 23rd April 2020

23.04.20

What is your barometer for political talk? Where do you go to get informed? I think most people would say that polls are a useful, if often wrong, source of information, then there are the International Monetary Fund reports, the European central bank forecasts, newspapers, economic reports, financial institution analyses (which are basically economic reports) etc. I worked out some time ago that most of these were self serving and although some of that information is useful it shouldn’t ever be a real gauge for what the average man on the street is really thinking or doing.

For me, I get that information some where else….mercato Trionfale in Rome where I do my weekly food shop. I find it a hub of differing opinions and characters that all have something to say on the state of the country, world politics and the health of their country. OK, I admit it is probably not quite as well reseached as the other methods mentioned above, but I do find it gives a different perspective on what people are thinking.

Pension Transfer from the EU Institutions

However, whilst writing this I stand humbled because I attended a webinar on the state of the EU, which I will write about for you here. The webinar was hosted by a large Assurance company called Utmost and they had as their

guest speaker a man named Ashoka Mody. I openly admit I had never heard of him before but he has a string of book titles to his name, a career at the World Bank and also influence in the EU’s bailout of Ireland in 2009. The reason I stand humbled is because he was a pretty straight talking economist, it would seem. He had very strong opnions on what is likely to happen in the EU as a result of the Covid 19 crisis and particularly how the crisis will develop in Italy, which is, of course, very important to a lot of us.

So without further ado, here goes my summary that webinar and the evolving situation and some of the thinking about the future of ‘Il bel paese’ and the European Union.

Where is the money going to come from?

Let’s start by saying that whatever predictions are currently being made about the financing needs from the effects of COVID-19, the true reality is that it is likely to be a hell of a lot more than we think. It is likely that the global effects of COVID-19 are going to be felt long after the virus disappears (assuming it doesn’t make a return in the winter) and to return to normal the best estimates are that we will need at least 2 years for travel, business and supply chain to return to pre virus levels

At the moment there is little point looking much further than 2020 as this is so unprecedented no-one really has any answers, but the realistic thinking at the moment is that the cost for BOTH Italy and Spain will be upwards of 20-25% of their GDP in 2020. In monetary terms that is a potential €500 billion black hole in the finances of Italy and about the same for Spain.

To look at the viability of filling this hole, we have to turn to the EU. Just last week they announced a potential €500 billion recovery package which, as we can see, does not even come close to the potential needs of the countries worst affected by the virus. So, what do the EU members states really need from the EU now? The answer is not a financing solution because they will never agree a package big enough as we will look at below. What the EU needs now is a political revolution and who would like to place any bets on that happening?

Normalcy: the condition of being normal; the state of being usual, typical, or expected

I am sure you, like me, have concerns about how the EU is going to deal with this and how Italy will extract itself from this mess, but my more immediate preoccupation is what happens to all the small businesses, restaurants, bars, pubs, shops, etc. How are they going to survive this? And I don’t just mean the lockdown period, because any extended set of conditions put on a return to normalcy which will, in turn, have a further damaging effect on the supply chain. The best economic forecasts predict a return to growth for most countries in Q4 2020, but the likelihood is that growth will only return, after a severe contraction for all of 2020 and a return to growth in the first quarter of 2021.

Cogs and Wheels

We have to imagine that the whole world economy is a machine which is comprised of cogs and wheels and for the machine to keep working all the cogs and wheels must keep moving. If one slows then it inevitably has a slowing effect on the whole machine. Not only, but if we imagine the supply chain of a restaurant for example (I choose this because there may be social distancing rules applied to restaurants when they reopen) and

assume that they can only open initially at the capacity of 30-35% of their pre virus levels, then effectively that slows the whole supply chain down to 30% as well. It is not correct to say that it will affect only the restaurants, but also the lavanderia that cleans their table cloths, the food suppliers, the deliveries of detergents, the wine consumption etc. This affect of an extended return to normalcy could be the difference between many businesses reopening and staying permanently closed.

We can extend this thinking globally as well based on different countries coming out of lockdown at different times. If we think about global trade in it’s most basic defintion it is an exchange of goods. A buyer finds a seller and they make an exchange. But, if in the case of Italy, it comes out of lockdown and businesses start again, will they be able to find buyers, or even sellers of their goods and services if other countries in the world, the USA, the UK, Russia, China etc have continued restrictions in place themselves and they can longer trade in the way they did before?

The system is a machine of cogs and wheels which are all inter-dependant on one another. When the wheels stop turning it affects the whole machine.

The ripple effects in the EU?

The first thing to remember about the eurozone economies is that coming into this period, nearly all the eurozone countries were in or near recession.

Italy has been in a low growth, low inflation cycle for about the last 30 years. This crisis is expected to cause respective contractions to the economies of Italy and Germany of -9.1% in 2020 and -7% followed by growth in 2021 of +4.8% and +5.2%. Unfortunately the reality is likely to be much worse.

Italys’ national debt to GDP ratio is predicted to rise to 155% and it could very well fall into a persistent deflation spiral. This is very bad for business, the economy and the country as a whole because it will exacerbate the effects of the debt meaning that Italy has to pay even more back to meet it’s debt obligations in world financial markets, meaning less investment in infrastructure schools, hospitals, and public services. Could we see even more forced privatisation of public utilities and services?

In short this is a very bad situation!

As I also explained above, the effects will not only be isolated to Italy and Spain, but the rest of the EU. For example, French banks have lent approximately €300 billion to Italian banks in recent years. Italian banks are almost inevitably going to wobble after this crisis and we might have to expect some bank failures (the subject of my next E-zine). But, if they default on their obligations, what will be the ripple effect on French banks? And French banks are not the only banks that have lent to Italian banks in recent years. Also, Greek, German, Spanish, Portuguese…can you see the trend?

So how will the EU deal with this crisis?

The short answer is don’t expect anything from the EU. It is likely that we will see a new idea almost every day in the press but none of these will solve the problem because one the single biggest failure of the EU project. No political alignment. We cannot fix a financial solution without first having a political solution, because any political solution ultimately means that there will be a fiscal transfer from one country in the EU to another, and neither the Dutch nor the Germans are willing to take that risk.

The European central bank already owns 23% of Italian government debt and to bear the cost of the Covid 19 breakout it would need to purchase another 25%, meaning that the ECB would be holding nearly 50% of Italian government debt. If we remove the morally right thing to do for a moment, it is perfectly understandable that the Germans and Dutch would

not want to be on the hook for this amount of debt should Italy fail to pay its debt obligations in the future, because of its inability to manage its economy.

National interest will always come first, over EU solidarity. Let’s bear in mind that Germany is also going to have to apply it’s own fiscal stimulus and if EU bonds were created then that would mean a transfer of approximately €200-300 billion euros of government debt transfer from Italy to Germany alone. It might be the morally correct thing to do, but is it the practical thing to do?. Is it right that other EU states should shoulder the burden of debt from less efficient Southern European states?

A quick look at history

You may think that these are historically unprecedented poltical times, but you would be wrong. We only need to look at the USA to see what happens when no political union is in place:
Between 1776 and 1789 the US was like Europe is today. It was a group of federal states that all operated their own finances and budgets. This was also the time of the War of Independence from Great Britain. In 1788 a currency union was formed and the US dollar was granted as the common currency across the USA, allowing them to spend without the worry of exchange rates. Following the currency union a federal government was formed in 1789. At this point the federal government now had a right to tax the nation. However, this led to a fractures between individual states, principally those in the north and those in the south and lead to the American civil war in 1861 – 1865.

So there we have an example of a similar situation as that of the EU, but with one major difference: The EU doesn’t have a federal government in place and without a federal government, (but a currency union), then the central bank (the ECB in the case of the EU) does not have the authority to bail out the individual member states in the time of need. In other words the central bank cannot play it’s role of being a lender of last resort. Herein lies the problem.

In the USA, as we have already seen in past weeks, they will essentially ask the Federal Bank to print as much money as is required to bailout the nation. If they lend to any institution, municpality or corporation and that entity fails to pay their debt obligations then the

taxpayer will bear the burden for that debt and it will be added to the governments existing debt obligations, which they can then, over time, work to payback or erode through inflationary measures.

taly, as per all EU member states, have no lender of last resort, (independent central bank) to which they can turn to bear the cost of the measures introduced during the Covid 19 outbreak.

So where do we go from here?

Well, it is quite clear that this is going to swiftly move from a health crisis to an economic crisis and then even more quickly to a political crisis.

There seems to be no political will in the EU to create EU Bonds to alleviate the burden on Southern European states who were most severly affected by Covid 19. The only solution being offered at the moment is to extend the European Stability Mechanism to Italy, Spain and other affected states which is ( without going into details) an offer of loans at low to zero interest rates, but which must be paid back and with conditions attached. This is something which Italy is going to try hard to fight against. This isn’t a financial crisis but a health crisis and they believe, and I am with them despite the financial and political consequences, that the EU must bear the burden of the additional debt created because of this crisis. Italy does not want to take loans with conditions attached because it is essentially the same financial treatment as that imposed on Greece in 2010. The only outcome from that was complete financial hardship and a failing economy. Italy is, obviously, keen to avoid the same fate as is Spain.

So that leads us nicely to the term which we are likely to see in the press in the coming weeks and years ahead: QUITALY.

Is Italy going to decide to do a Brexit and leave the EU. Before any Brits, like myself, who have taken citizenship in recent years, start to panic about the possibility of Italy leaving the EU as well, it should be noted that the Italian constitution would prevent a hasty and

quick action, (They couldn’t do a Brexit!!) and even if they were to hold a referendum on the matter it would take years of negotiation within the warring Camera dei Deputati and Senato to even arrive at a referendum.

So we have a long way to go yet, but one thing is clear. Political opinion is changing in Italy. In recent surveys 42% of Italians said that they didn’t want to leave the EU, but an equal percentage said that they would want to. 50% of Italians said that they did not want to take any money from the European Stability mechanism if it came with any conditions attached, but conditionality will be key to the future of the EU, and the economic health of Italy.

As you might imagine at this time, this is stoking more populist revolt and Matteo Salvini is now number 1 in the polls. The Frattelli D’Italia led by Giorgia Melloni ( who is a far right party allied with Salvini’s, La Lega) is also polling well and her ratings are rising fast. It is not beyond imagination that when the Covid virus passes, a political crisis will quickly ensue, Conte and the M5S coalition will hold on to power by a thread but a Salvini / Melloni coalition could be very quickly ushered into power in the not so distant future. Prepare yourselves!! I can only add that my conversations with Italian friends, people I chat to at the market and with some clients has turned from being very EU positive to negative. One of my clients probably hit the nail on the head when he said, “if the EU cannot get their finger out on this one, then I can’t really see the point of a politically unified EU anymore and it should return to it’s roots and become merely a trading block, with freedom of movement). I am inclined to agree.

What can we expect?

The Eurogroup [the group of EU finance ministers] is meeting on Thursday 23rd April to discuss the future. Conte will be meeting with them to try and negotitate a good financing outcome for Italy.

The likelihood is that the EU will do what they are good at and kick the problem into the long grass. They will not provide any concrete solution, which will throw Italy and possibly Spain into a spiral of recession, deflation, more political infighting and economic hardship. The Eurogroup only has €500 billion euros at it’s disposal to provide unemployment insurance, economic stimulus, and the fight the Covid 19 virus across the EU. It is nowhere close to the amount required. The ball park figure would be closer to a € 1trillion. The sad fact is that the European Central Bank could print € 1trillion euros, if only it had the mandate to do so from all EU member states.

In truth, Germany will likely have the last say. Brexit has already left a funding hole of approximately €60 billion in the EU budget and so the logical conclusion is that Ms Merkel will give the problem the kiss of death by requesting that the issue of funding is placed in the EU budget and each country will be left to fight it out with other member states as to who pays what and when. In others words it will fall into the bureaucracy of the EU. The problems will persist in Italy and economic hardship will worsen.

So what does this mean for our money

Well, to try and leave this E-zine on a positive note for investors, at least, we can be thankful that there is a whole world out there in which we can invest and whilst Italy likely sees hardship, other countries will exit this crisis and proper. One country that springs to mind is China. So for all our concerns about the country that we live in, we shouldn’t worry too much about our money. I can’t say for sure when stock markets will recover fully. We may be waiting until the end of this year at the very earliest, but they will and with a well managed, diversified portfolio with good oversight, then your portfolio will recover as well. The economics will play out over a much longer period. One upside for currencies is that it could weaken the Euro which would make those who have assets in USD or GBP, for example, worth a lot more. Maybe a return to the heady days of 1:45 GBP to 1 €?

All I can say that it is all to play for. In the meantime, I will be taking a closer look at Italian banks in my next E-zine as they could be a huge risk to use, and to financial markets in the months and years ahead.

Longer Term Perspective

By Chris Webb
This article is published on: 22nd April 2020

22.04.20

One of my favourite songs is, ‘The Show Must Go On’ by Queen, arguably one of the best bands ever. How apt the opening lines sound now. It’s day 41 of our lockdown as we bunkered down on the 11th of March, a little earlier than the national lockdown came into force and I wont lie and pretend its been plain sailing. Having two children home schooling and trying to run our businesses from home at the same time has been quite a challenge, but the overriding feeling has been and still is that the show must go on…

Emotionally this might just be the toughest period that we all have to go through. Every day is a new challenge. But as we all know, we can’t just sit and stare at the walls and feel sorry for ourselves.

All of us will have had different emotional barriers to face. They might be the feeling of confinement and reduced work capabilities; they might be a feeling of panic and anxiety trying to deal with the unknown situation we are in; they could be dealing directly with this virus, either having caught it themselves or having a loved one infected.

It doesn’t matter what the factor is, it’s guaranteed that we have all been dealing with emotions far more during the last 5/6 weeks than we have ever had.

On top of dealing with our own family’s emotions, I am having daily conversations with my clients about their investments during this period and the emotional impact it is having. All it takes is to watch the news channel to clearly see how volatile the markets have been. This is an additional emotional crisis for some, particularly if they aren’t experienced investors.

All my clients will know that I talk a lot about the different hats you need to wear when investing in the markets. There is the investment hat and the emotional hat. The investment hat is the exciting one that drives your investment decisions; the emotional hat is the one that pulls you back a little and makes you consider your choices. In my opinion the emotional hat is the most important one. It only lets you make decisions that you are happy with and have thought through.

Here are my top tips for dealing with the emotional side of investing; hopefully it will help steer you through the coming weeks.

The Rational, Irrational and Emotional Struggle
It is a challenge to look beyond the short-term variances and focus on the long-term averages.

The greatest challenge may be in deciding to stay invested during a volatile market and a time of low consumer confidence. History has shown us that it is important to stay invested in good and bad market environments.

During periods of high consumer confidence stock prices peak and during periods of low consumer confidence stock prices can come under pressure. Historically, returns trended in the opposite direction of past consumer confidence data. When confidence is low it has been the time to buy or hold.

Of course, no one can predict the bottom or guarantee future returns. But as history has shown, the best decision may be to stay invested even during volatile markets.

Declines May Present Opportunities
An emotional roller coaster ride is especially nerve-racking during a decline. However, the best opportunity to make money may be when stock prices are low. Buying low and selling high has always been one of the basic rules of investing and building wealth. Yet during these emotional and challenging times it is easy to be fearful and/or negative, so let’s turn to the wise advice of one of the world’s best investors, the late Sir John Templeton:

“Don’t be fearful or negative too often. For 100 years optimists have carried the day in U.S. stocks. Even in the dark ’70s, many professional money managers—and many individual investors too—made money in stocks, especially those of smaller companies…There will, of course, be corrections, perhaps even crashes. But, over time, our studies indicate stocks do go up, up and up”

Watching from the Sidelines May Cost You
When markets become volatile, a lot of people try to guess when stocks will bottom out. In the meantime, they often park their investments in cash.

But just as many investors are slow to recognize a retreating stock market, many also fail to see an upward trend in the market until after they have missed opportunities for gains. Missing out on these opportunities can take a big bite out of your returns.

Euro / Dollar Cost Averaging Makes It Easier to Cope with Volatility
Most people are quick to agree that volatile markets present buying opportunities for investors with a long-term horizon. But mustering the discipline to make purchases during a volatile market can be difficult. You can’t help wondering, “Is this really the right time to buy?”

Euro / Dollar cost averaging can help reduce anxiety about the investment process. Simply put, Euro / Dollar cost averaging is committing a fixed amount of money at regular intervals to an investment. You buy more shares when prices are low and fewer shares when prices are high, and over time, your average cost per share may be less than the average price per share. Euro / Dollar cost averaging involves a continuous, disciplined investment in fund shares, regardless of fluctuating price levels. Investors should consider their financial ability to continue purchases through periods of low-price levels or changing economic conditions. Such a plan does not assure a profit and does not protect against loss in a declining market.

Now May Be a Great Time for a Portfolio Check Up
Is your portfolio as diversified as you think it is? Meet with me to find out. Your portfolio’s weightings in different asset classes may shift over time as one investment performs better or worse than another. Together we can re-examine your portfolio to see if you are properly diversified. You can also determine whether your current portfolio mix is still a suitable match with your goals and risk tolerance.

Tune Out the Noise and Gain a Longer-Term Perspective
Numerous television stations and websites are dedicated to reporting investment news 24 hours a day, seven days a week. What’s more, there are almost too many financial publications and websites to count. While the media provide a valuable service, they typically offer a very short-term outlook. To put your own investment plan in a longer-term perspective and bolster your confidence, you may want to look at how different types of portfolios have performed over time. Interestingly, while stocks may be more volatile, they’ve still outperformed income-oriented investments (such as bonds) over longer time periods.

Believe Your Beliefs and Doubt Your Doubts
There are no real secrets to managing volatility. Most investors already know that the best way to navigate a choppy market is to have a good long-term plan and a well-diversified portfolio. But sticking to these fundamental beliefs is sometimes easier said than done. When put to the test, you may begin doubting your beliefs and believing your doubts, which can lead to short-term moves that divert you from your long-term goals. To keep from falling into this trap, call me before making any changes to your portfolio So that’s my tips for fighting your way through the emotional impact of investing. I hope it is beneficial to you. The main point to take away from this is that THE SHOW MUST GO ON.

Stay calm, stay invested, don’t make crazy rash decisions and in a short time, this will be a blip in the past. If you want to discuss the risk element or have a second opinion on your investments, I am happy to conduct an initial consultation and present any recommendations free of charge. You can get in touch using the contact details below.

Don’t delay your financial plans. For planning, yesterday is better than today, which is better than tomorrow