A look at the 2021 budget and how it could affect your investment strategy.
Our nation has just been on the receiving end of a wide-ranging budget, following a hugely challenging time in the pandemic, which has cost in the region of £400 billion to support people and businesses.
The big question for investors is what impact the pandemic with its economic cost, followed by a budget that is far-reaching in consequences, have on your investment decisions.
Are there new opportunities for investors like yourself, or is it more of the same? Will investing see an increased or decreased risk factor?
What impact will the budget have on your investment strategy?
At Avantis Wealth, we see the budget as a tale of two halves. The first half introduced measures to stimulate economic activity in the short term and provide continued individual support to furloughed workers.
Additionally, it included various initiatives to support business sectors that have been particularly hard hit by the pandemic, like hospitality, events, the arts and more.
The second half of the budget focused on measures to reduce massive government borrowing – the largest in history outside the two world wars.
There are numerous ways that the debt can be reduced or made more palatable, and some of those approaches have economic consequences for investors.
We all understand that the Government can tax us more – and in fact, has announced it will do so with rises to corporation tax from 2023 to 25%, freezing of tax-free personal allowances and the lifetime allowance for pensions.
The tax rises already announced will result in the highest tax burden for 50 years and a complete reversal of what traditional conservative governments have stood for.
However, there are two other ways that the debt burden can be reduced:
- Through inflation – which reduces the real value of repayments. If the Government allows inflation to edge towards (say) 3% annually, in 10 years the debt burden will have reduced by about 35%. That makes an enormous difference.
- Through growth – if the Government can encourage and stimulate faster growth, then profits and therefore the tax taken from business increases. Growth and increased profitability have a broader benefit in potentially increased employment and increased wages, thus growing the treasury tax take from individuals.
As a result of these two powerful adjuncts to raising tax, you can expect to see the Government being quite relaxed about higher inflation, focusing on working hard to encourage and stimulate business growth.
What does this mean for investors?
Investors for growth
Traditionally approaches to growth consisted of a share portfolio of quoted stocks. In December 1999, some 21 years ago, the FTSE 100 index stood at around 7,000, as of the 11th of March 2021, it was 6729.
In other words, if you had simply held a basked of FTSE 100 shares, your portfolio would be worth less than it was 21 years ago.
We have indeed ignored the impact of dividends, which are hugely important in improving this challenging position. But we have also skipped the effects of inflation. The impact of dividends and inflation even each other out, so my premise that shares have lost money over 21 years is broadly true.
The big question is, what can investors expect over the next 5-10 years? On the positive side, we expect a bounce back from the lower economic activity during the pandemic, with the pundits talking about an estimated growth of 7% in 2022.
But what happens then? The Government will encourage growth and support additional infrastructures, including building a new UK bank in Leeds and an Economic Campus in Darlington.
Set against this is a much higher corporation tax from 2023, rising from 19% to 25% for larger companies.
And we do not know if the rest of the world will recover as quickly as the UK.
There will be some exceptional winners from sectors such as tech, automation, non-meat foods, medical innovation, online retail and green energy.
Investors in Property
In recent years property landlords have been struck by the withdrawal of mortgage relief, many other increased costs and general hassle. Genuine rental profits have fallen for many landlords, and we see droves of them looking to exit.
We do not think the exodus is going to change. Residential BTL will remain in good demand, but far more research and care will be needed to avoid investing in a ‘lemon’ that sucks you dry!
Also, the pandemic has thrown up new winners and losers in other areas of property.
Commercial landlords with shopping centres or individual shops, large town centre offices and related car parks are already struggling with vacancies and demands for lower rents.
On the other hand, distribution warehouses are booming alongside the growth in online shopping, and provision for the elderly will continue growing.
The property picture is mixed, with continued demand for residential property, housing association property, etc. Developers in these sectors can continue to do well, particularly if risks can be reduced and controlled by good buying strategies, sector expertise and contacts, tight project management and competitive pricing on sale.
Innovative and shroud developers will see many opportunities to convert retail and office space into mixed-use residential space in sought after central locations throughout the UK.
Investors in savings accounts
For mainstream savers, the picture remains bleak.
It is tough to find an account that pays even 1% a year, even if you lock your money away for 12 months.
We even have pundits talking about negative interest rates where you must pay for the luxury of a bank looking after your funds!
We cannot see this changing anytime soon.
Inflation may increase and push rates up a little bit, but even if they doubled to give you 2% pa, this would not provide the income you need.
At the moment, if you stick to mainstream investments, you are most probably dipping into capital to give you the income you need.
At Avantis Wealth, we hope it lasts, but as a long-term strategy, it has little going for it in terms of savings.
Of course, if you have to do it, you must.
In conclusion, the budget announcements are unlikely to create any significant changes in mainstream investments for either property, growth or income investors.
The last 20 years have been incredibly challenging, particularly for growth investors since 2000 and savers since 2008.
There are always niche opportunities to do well, but these require time, expertise, contacts, and project/risk assessment skills. At Avantis Wealth, we select and bring these niche investments to our clients.
The investment portfolio focuses on the following profile:
- Fixed income – contractual payments which could be monthly, quarterly, or annually
- Rewarding returns – typically 7% – 15% a year
- Exit strategy – defined term, typically from 12 to 36 months
- Security in place – via legal charge, guarantee or debenture
If you’d like to review the Avantis investment portfolio, which is only available to High Net Worth and Sophisticated Investors, please contact us.