News & Views - VFS Intvfsint.com/experts-opinions/NV_Q2_2017.pdf · 2018-10-19 · News & Views is a marketing communication under the FCA rules. It has not been prepared in accordance

News & ViewsQ2 | 2017

INSIDE

Still risk on after all these years

Getting into a fix

Inheritance tax – keeping up with the changes

Modi’s second bite of the cherry

Postnups on the rise

2 News & Views | Q2 2017

Contents

Q2 views for 2017

Investment featuresGlobal investment market review and outlook 4UK equity market review and outlook 8

Getting into a fix 12

Inheritance tax – keeping up with the changes 14

Modi’s second bite of the cherry 17

Postnups on the rise 21

Contributors

David EsfandiChief Executive Officer

Michel PereraChief Investment Officer

Richard Champion Deputy Chief Investment Officer – UK

Paul Philp Investment Director

David GoodfellowHead of Wealth Planning

Patrick Thomas Investment Manager

Louise Allard Solicitor and Director, Allard Bailey Family Law

Simon McGarry Senior Equity Analyst

Marc PullenSenior Equity Analyst

Leetal StarkInvestment Manager

Investment involves risk. The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested.

Past performance is not necessarily a guide to future performance.

The investments discussed in this document may not be suitable for all investors.

The articles in News & Views are not to be treated as specific advice. They have no regard for the specific investment objectives, financial situation or needs of any specific person or entity. Investors should make their own investment decisions based upon their own financial objectives and resource and, if in any doubt, should seek specific advice from an investment adviser.

News & Views is a marketing communication under the FCA rules. It has not been prepared in accordance with the legal requirement designed to promote the independence of Investment Research and we are therefore not subject to any prohibition on dealing ahead of its dissemination.

Featured stocksIntermediate Capital Group 23Bayer 24Cisco 25Compass 26

David EsfandiChief Executive Officer

News & Views | Q2 2017 3

Welcome

2017 is proving to be a busy year politically. Kicking off with Article 50 and the Dutch election result, we now look ahead to the French and German elections - and consider the first 100 days of the Trump Presidency.

Markets are starting to assess whether the ‘Trump bump’ was worth the hype. To help make sense of the possible implications for investors, our Chief US Strategist, Tony Dwyer, will speak at a series of events in Guernsey, Jersey, London and Isle of Man in early May. Based in New York, Tony had a front row seat in the run up to the election and has been at the epicentre of the change we have witnessed since. He will share his views on the outlook for both the US and global markets. If you would like to attend an event, please contact [email protected].

This year we also welcomed Michel Perera as our Chief Investment Officer. Michel will succeed Nigel Cuming, who I would like to thank for his valuable contribution. Michel is an experienced investment strategist, having spent the past 19 years at JP Morgan Private Bank, and provides his debut global investment market review and outlook on pages 4-7.

Looking more closely at the UK market from a sector perspective, we’re seeing something of a rotation as the influence of a falling pound has become less marked. Richard Champion, Deputy Chief Investment Officer – UK, looks at the highest climbers and biggest fallers in his article ‘Changes in the leader board’ on pages 8-11.

With domestic interest rates set to remain at record lows until at least 2019, we address the challenge of finding income for risk averse investors in Paul Philp’s article ‘Getting into a fix’ (pages 12-13).

On 6 April 2017 we saw the first £100,000 increase to the ‘main residence allowance’ for inheritance tax purposes. David Goodfellow, Head of Wealth Planning, provides more detail on what inheritance tax is, when it is applied and how careful planning can reduce it on pages 14-16.

And when thinking about passing on your wealth, you might not know that there is a growing trend for parents to ask their children to consider a postnup. Louise Ballard, from Allard Bailey Family Law, explains more about why postnups are on the rise as people seek to protect their wealth, on pages 21-22.

In our more regular features, Patrick Thomas, Investment Manager, looks at India as an investment region (pages 17-20); and our featured stocks are Intermediate Capital Group, Bayer, Cisco and Compass.

Finally, I’d like to take this opportunity to welcome our new clients joining us from C. Hoare & Co.’s investment dealing and custody business and Duncan Lawrie Private Banking on the Isle of Man. With a bespoke, personal relationship and a wide range of wealth management solutions all under one roof, I trust you will find everything you need here at Canaccord Genuity Wealth Management. As ever, please feel free to contact me if you have any questions or feedback.


Global Investment Market Review and Outlook

Still risk on after all these years



As we get closer to 100 days of the Trump Presidency, markets will start to assess whether the ‘Trump bump’ was worth the hype. No legislation has yet come out of Washington, so markets are still living in expectation. On the other hand, the Fed has delivered a very clear picture of the US economy over the next couple of years, which may offer better guidance.

If we believe Fed projections, the already long market cycle since the global financial crisis may last for at least a few more years. Indeed, growth is projected to be in the 2% area (See Fig. 1 overleaf), unemployment should stabilise around 4.5-4.7% (Fig. 2 overleaf) and inflation is likely to be in line with the Fed’s target of 2% (Fig. 3 overleaf). Moderate growth without inflation has been behind the strong returns in equity markets since 2009. If we’re to continue in that direction, equities are still the place to be.

Unfortunately, there’s a spanner in the works. President Trump would like US growth to double to 4%, and is preparing legislative proposals to that effect. Doubling

growth would doubtless please his electoral base, but the price would almost certainly be much greater inflation and imbalances in the workforce. The US economy is already firing on all cylinders.

The political fog will have to lift as legislative proposals are announced. President Trump hasn’t yet assembled his top team, and it seems he’s having trouble sharing power with Congress and the Senate, preferring to issue executive orders (and tweets) on foreign and trade policy.

At the moment, the markets are benefiting from strong seasonal flows and optimism on US fiscal legislation – but they may tire of waiting for and start downgrading expectations of fiscal stimulus. Will this be driven by lack of policy activity from the White House and Capitol Hill, by weaker economic data or by the seasonality backdrop?

Inflation has been the hot topic in market conversations. The Fed intends to hike interest rates three times this year and as many times next year, to make sure inflation stays close to its 2% target (Fig. 4 overleaf). This is, however,

Michel PereraChief Investment Officer

At the moment, the markets are benefiting from strong seasonal flows and optimism on US fiscal legislation – but they may tire of waiting for and start downgrading expectations of fiscal stimulus.


subject to the amount of fiscal stimulus provided by the new administration.

Outside the US, inflation does not seem to be an issue. Contagion from the US bond market is likely if US inflation starts getting out of control – but we wouldn’t expect that at this stage.

European (and UK) woesMeanwhile, in Europe, political risk is affecting French and Italian government bonds and holding back European equities, with German stocks most affected. The Dutch elections eased concerns slightly, but markets will now focus in turn on France, Germany and possibly Italy. Political risk may be overblown, but such fears are liable to hold back investors.

Surprisingly, markets are less focused on the impact of the UK triggering Article 50 than on the rest of the European Union. Internal battles may well emerge over whether the EU 27 should try and safeguard vital trading links with the UK or ‘punish’ Britain to set an example for other would-be leavers. This tug-of-war could damage the EU’s frail economic rally.

The UK is showing signs of inflation affecting consumer spending (see Figures 5 and 6). The resilience of the

UK economy has been impressive given economists’ Brexit fears, but the massive drop in sterling has hit food and energy prices, as well as other goods priced in foreign currencies (such as consumer electronics). In an environment where wages are barely budging, it was to be expected that households would adjust their spending. Nobody is forecasting anything close to a recession yet, but once the Brexit negotiations get going, things may look very different.

Have emerging markets dodged a bullet?One area that’s been outperforming is the emerging world – and not just commodity exporters. Despite concerns about China’s debt levels, social financing and the housing market, past fiscal stimulus has delivered better numbers for the Chinese economy. Furthermore, the potential trade war salvoes from the Trump administration have so far not materialised and the mood seems to be one of cooperation – but it’s impossible to say whether that signals a more pragmatic approach from the Trump team or simply a different priority schedule. The issue may resurface when we least expect it.

Low-risk asset classesGovernment bonds in developed markets have suffered since the middle of last year, particularly since the US

Fig 1: US GDP (YoY %)

Source: CGWM, FactSet, Bureau of Economic Analysis

4%

5%

6%

7%

8%

9%

10%

11%

2009 2011 2013 2015 2017

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

2009 2011 2013 2015 2017

Fig 3: US CPI (YoY %)

Source: CGWM, FactSet, US Department of Labor

Fig 2: US unemployment rate U-3 %

Source: GWM, FactSet, US Department of Labor

Fig 4: FOMC projections

Source: CGWM, Bloomberg, Federal Reserve

-4%

-2%

0%

2%

4%

6%

8%

1966 1976 1986 1996 2006 2016

1%

2%

3%

4%

Mar 2017 Minutes

Mar-17

Dec-16

Sep-16

2017 2018 Long-term2019


election, but they may well have settled into a trading range now (see Fig. 7). If it wasn’t for the fact that they’re seen as protection against the economy going sour, few investors would consider the absolute yields high enough to warrant a place in their portfolio. The higher US yields, though, are attracting European and Japanese buyers, whose domestic yields are 1%-2% less.

Corporate bonds are enjoying the additional economic boost without the fear of an impending recession, leading to spreads tightening even further. Valuations are becoming a little stretched, but don’t suggest that we’re running out of investment cycle runway.

Gold prices have regained some of their post US election losses. Like US Treasuries, the yen and the Swiss franc, gold is often an indicator of worries; all four of these gauges have shown some resilience but are not showing any major concerns.

The question our clients ask us most is about currencies: will the US dollar continue to surge and has sterling stopped deteriorating (see Fig. 8)? Well, it’s unlikely that these trends can reverse at once, but both are subject to political uncertainty. As far as the dollar’s concerned, will Trump really be able to create a US$1 trillion budget stimulus or will traditional fiscal orthodoxy from Congress

prevail? As for sterling, have the markets discounted enough of a hard Brexit risk? We’re watching carefully for signs of oversold complacency before we amend our currency hedging positions.

In conclusionNothing fundamental has changed in the world since the beginning of the year. The political atmosphere is evolving, however, and the changes will guide our decisions about when to take profits or increase risk in our portfolios.

Fig 5: UK CPI (YoY %) Fig 7: Government 10 year bond yields

Fig 6: UK consumer spending (QoQ %)

Source: CGWM, FactSet, Office for National Statistics

Fig 8: US$ vs sterling

Source: CGWM, FactSet, Federal Reserve System, Deutsche Bundesbank, Bank of France, Ministry of Finance

Source: CGWM, FactSet, Office for National Statistics

Source: CGWM, FactSet, WM/Reuters

-1%

0%

1%

2%

3%

4%

5%

6%

2009 2011 2013 2015 2017-1%

0%

1%

2%

3%

4%

5%

2009 2010 2011 2012 2013 2014 2015 2016 2017

US 10Y Germany 10Y France 10Y Japan 10Y

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

1980 1985 1990 1995 2000 2005 2010 2015-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2009 2010 2011 2012 2013 2014 2015 2016

Richard ChampionDeputy Chief Investment Officer – UK


However, watching the markets can be a lot like watching a golf tournament. Great players can drop down the rankings overnight while complete unknowns suddenly start outperforming.

Right now, from a sector perspective, the UK equity leader board has become more mixed, and also broader, as the influence of a falling pound has become less marked.

In 2016, with sterling plunging into the rough, only five out of 19 sectors outperformed the wider market’s gain of just under 17%, led by the resources stocks by a huge margin. Miners were up by more than 100% and oil stocks by more than 60%. The other three outperforming sectors (construction, technology and chemicals) are all relatively small in market capitalisation terms. To illustrate the effect of currency movements in 2016, for investors based in US dollars, the return was actually negative, at -2.2%, and has been the same as the sterling return of 5% in 2017 to date.

Changes in the leader board

UK Equity Market Review and Outlook

It feels as though 2017 has started rather as 2016 ended. UK equities have continued to rally, in part due to the ‘Trump bump’.

N26° 46’ 2” W80° 6’ 31”

PALM BEACH, FLORIDA ON PAR

Right now, from a sector perspective, the UK equity leader board has become more mixed as the influence of a falling pound has become less marked


Source: Bloomberg as at 16 March 2017


In contrast, so far this year 10 of the 19 sectors have risen by more than the market’s 5% gain, as the table below shows. Outperforming sectors are highlighted in blue, with below-par performers in orange.

The table shows that four of 2016’s star performers are lagging in 2017. The exception is basic resources, which includes the mining sector.

FTSE 350 sector total returns

FTSE 350 sector Rank in 2017 Rank in 2016Return 2017

to dateReturn

in 2016Return since

31/12/15

Personal goods and household services 1 9 14.7% 12.3% 28.8%

Basic resources 2 1 14.0% 101.5% 129.7%

Autos and parts 3 10 11.8% 10.9% 24.0%

Healthcare 4 14 8.8% 8.0% 17.6%

Food and beverages 5 13 8.3% 8.7% 17.7%

Industrial goods and services 6 8 7.3% 13.0% 21.2%

Financial services 7 12 6.4% 8.9% 15.9%

Insurance 8 16 6.4% 7.4% 14.3%

Banks 9 7 5.9% 14.0% 20.7%

Travel and leisure 10 18 5.4% -1.0% 4.3%

FTSE all-share 11 6 5.0% 16.8% 22.6%

Chemicals 12 5 3.3% 17.4% 21.3%

Construction and materials 13 3 2.5% 35.0% 38.3%

Real estate 14 19 1.2% -9.5% -8.4%

Utilities 15 15 1.0% 7.5% 8.6%

Technology 16 4 1.0% 32.2% 33.5%

Telecommunications 17 20 0.2% -11.3% -11.1%

Media 18 11 -2.3% 9.0% 6.5%

Retail 19 17 -3.4% 0.5% -2.9%

Oil and gas 20 2 -5.1% 60.1% 51.9%


If we see a continuation of the Brexit-driven weakness sterling experienced in 2016, when it fell by 16% against the dollar, sector leadership will probably continue to lie among larger, overseas earnings-dependent companies.

In contrast, oil and gas (last year’s second strongest performer) is propping up the table, with a fall of around 5%. The price of crude oil has dropped by 10% since the start of January, and recent results from the majors have illustrated the difficulties oil companies have in managing their balance sheets, dividends and capital expenditure requirements with oil prices still at half the level of 2014.

Financials, which this time last year seemed perched on the edge of a bunker looking horribly like the crisis period of 2007-09, have stabilised and then recovered, as investors are allocating more assets to the sector.

After plummeting in the last six months of 2016, so-called bond proxies have begun to recover their poise, partly helped by Kraft’s aborted mega-bid for Unilever, which propelled the personal goods sector to the top of the leader board.

In this environment of sector rotation, we’ve grasped the opportunities presented by short-term share price drops to add to companies with strong cash flow and profits growth records at better valuations, including Reckitt Benckiser, Compass Group, RPC and Diageo.

Looking towards the future, prospects for UK-listed shares remain driven by two linked factors: the

performance of the pound and the outlook for UK growth. If we see a continuation of the Brexit-driven weakness sterling experienced in 2016, when it fell by 16% against the dollar, sector leadership will probably continue to lie among larger, overseas earnings-dependent companies, especially if they enjoy some form of pricing power.

If triggering Article 50 hits UK industrial sentiment and we see weaker performance from real personal earnings, with a consequent hit to consumption, UK economic growth may come under pressure. Companies with UK exposure might struggle.

Despite this, we must acknowledge how far the pound has fallen already and how well the UK economy has weathered the shock of Brexit so far.

Remember, over the longer term the smaller company index has tended to outperform its larger equivalent strongly; indeed, year-to-date, the FTSE 250 is marginally ahead of the FTSE 100. Among the UK equity fund managers in our multi-manager portfolios, who typically have a big exposure to FTSE 250 companies, we’ve noted a welcome improvement in performance and a return to form after a generally indifferent 2016. Perhaps now is not the time, despite the political uncertainty surrounding us, to leave all UK companies in the club house.

Getting into a fix

Paul PhilpInvestment Director

0

1

2

3

4

7

5

6

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

UK base rate

UK core inflation (CPI)

Fig 9: UK interest rates vs inflation

Source: Bloomberg as at 24.03.2017


Fixed Interest

Using bond markets to enhance incomeOne common investment theme since late 2008 has been the question of how to get a meaningful return on your cash without taking any undue credit risk. Before 2008, bank cash deposits fulfilled this role by offering good absolute levels of return with limited perceived risk (see the left-hand side of the chart). However, cash on deposit is no longer really an option as interest rates have fallen to near zero. Now many people are

considering fixed interest investment as it can offer a better return than cash for little increase in risk.

Addressing low cash yields is particularly important, because cash depositors have in many respects been paying the price for the reflation of the world economy. Short-term interest rates, in our view, will be kept low for as long as possible to ensure that economic recovery is well established. Over the next few years, cash returns are likely to continue lagging behind inflation, causing a


reduction in the real value of cash deposits (right-hand side of chart). However, there are ways and means within bond markets of addressing these risks and significantly improving on the yields currently available from savings accounts.

UK interest rates could be low for years to comeAlthough the US could raise interest rates two or three times in 2017, we believe there’s only a slight likelihood of UK cash rates increasing ahead of Brexit, currently pencilled in for 2019. The challenges may even continue after the UK’s departure from the EU. If this scenario plays out, we could be looking at several more years of domestic interest rates below 1%.

The income challenge for low risk investors Despite the collapse in bond yields since the global financial crisis, is there still an opportunity to reap returns from the bond markets? Government bonds tend to offer the lowest credit risk but also the lowest yields; so in terms of opportunities, we need to look beyond our domestic gilt market and consider global bonds.

The corporate bond world offers a variety of higher yielding alternative sources of income and yields of 3-6% are still attainable. With greater credit risk, diversification becomes more critical, yet the problem for retail investors is that the minimum investment is often £100,000 to lend to any one company. Within a cautious approach there are also opportunities to diversify income with some prudent equity income and alternative assets. But again, where there’s greater risk there’s even more need to diversify.

The solution At Canaccord Genuity Wealth Management, we have a history of delivering stable investment returns by taking a well-diversified, global approach. The CGWM Select fund range opens up active management to retail investors from just £10,000. For those seeking cash flow with a conservative risk profile, the Select Bond Fund (100% bonds) targets a minimum annual income of 2.5%- 3%, paid quarterly. If you’re looking for higher growth opportunities, these are available as you move up the Select fund risk ladder.

N37° 5’ 56” W8° 39’ 58”

PORTUGAL FISHING FOR INCOME

For those seeking cash flow with a conservative risk profile,

the Select Bond Fund (100% bonds) targets a minimum annual income

of 2.5%-3%, paid quarterly.

Before investing in this fund you should consult both the prospectus and Key Investor Information Document (KIID) which can be found in the investment funds section of our website www.canaccordgenuity.com.

This Fund invests principally in units in Collective Investment Scheme (CIS). It is permitted to invest more than 35% of its scheme property in transferable securities and money market instruments issued or guaranteed by an EEA state, one or more of its local authorities, a third country or a public international body to which one or more EEA states belong.

David GoodfellowHead of Wealth Planning

Wealth Planning


Inheritance tax – keeping up with the changesNearly two years after the initial announcement about the ‘main residence allowance’ which will, in time, add £175,000 to everyone’s inheritance tax nil-rate band, the first tranche of £100,000 became a reality on 6 April this year.

There’s still some confusion about how this will operate, so here we remind you what inheritance tax is and suggest some ways to mitigate it with careful planning.

What is inheritance tax?Inheritance tax, or IHT for short, is a tax payable on the assets (money or possessions) you leave behind when you die. It’s often referred to as ‘death duty’ for this reason, as the tax is payable when someone dies. The assets making up your estate can include:

• Cash and savings in the bank

• Investments

• Property and valuables, such as art, jewellery etc

• Vehicles

• Businesses you own

• Pay-outs from life insurance policies not held in trust.

The new main residence allowanceIn the 2015 summer Budget, the chancellor announced a new main residence allowance to start in April 2017. This is an additional allowance to the nil-rate band and applies when a parent leaves their main residence to their children or grandchildren when they die.

The individual allowance will initially be £100,000, and it’s set to increase to £175,000 by 2020. As with the usual IHT allowance, it’s also transferrable to a surviving spouse or civil partner.

For example, if one partner dies, their IHT allowance could be £325,000 plus £100,000 for their main residence i.e. £425,000, rising to £500,000 by 2020. On the death of the second partner, the couple’s combined allowance could potentially reach up to £1m of allowances before IHT becomes payable, although

This is for illustrative purposes only and not to be treated as specific advice. This article is based on our current interpretation of Inheritance Tax proposals. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.

Tax benefits depend upon the investor’s individual circumstances and clients should discuss their financial arrangements with their own tax adviser before investing. The levels and bases of taxation may be subject to change in the future.


only £350,000 can be set against the main residence. This new allowance is reduced for estates worth more than £2m.

Who pays the IHT?It’s usually paid by the executor of your Will or the administrator of your estate, using funds realised from your estate. An executor is someone appointed by an individual’s Will, whereas an administrator is a person who takes control in the absence of a Will. It’s important to make a Will to ensure that your estate is distributed as you would like.

IHT is payable within six months of the date of death, although it’s possible to pay it in instalments if the estate includes assets that are difficult to sell.

If you make certain kinds of gifts during your lifetime but die within seven years after making them, the recipients of the gifts may be liable to pay IHT.

Exemptions where no IHT is payableThere are a number of exemptions to IHT, which are:

• A husband and wife or civil partners can give gifts of any value to each other during their lifetime, as long as you’re both domiciled in the UK.

• You can make gifts to other people, of up to £3,000 each year, although you can’t combine this exemption with the £250 gift allowance explained below. You can carry forward any unused allowance to the next year – but only once. This is known as the ‘annual gift exemption’.

• You can make any number of gifts of £250 or less each year. These gifts are meant to cover things such as birthday and Christmas presents. However, you can’t combine this with the £3,000 limit if you’re making a larger gift to the same person.

• You can make gifts to UK-established charities, national museums, universities, the National Trust and certain other bodies.

• You can make gifts to people and certain trusts more than seven years before your death; these are known as ‘potentially exempt transfers’.

• You can make gifts as part of your ‘normal expenditure’ – this exemption allows you to give away

N51° 8’ 19” W2° 7’ 54”

GLOUCESTERSHIRE, UK MAIN RESIDENCE

In the 2015 summer budget, the chancellor announced a new main residence allowance that starts this month.

How much IHT will I have to pay?


money from surplus income, providing the gift doesn’t reduce your standard of living, is not from capital and forms some pattern of regular spending. A good test is if the money comes from your current account.

• You can make gifts to people getting married, up to: £5,000 from each parent of the couple, £2,500 from each grandparent or more remote relative, £2,500 from bridegroom to bride (and vice versa) or between civil partners, and £1,000 from anyone else.

Is there anything I can do to help manage IHT?There are many ways in which you can legitimately reduce IHT or even fully mitigate it. These are some of the options available:

• Spend or give it away – this is the simplest and easiest option, as long as you live for another seven years after the date of the gift; just make sure you don’t give everything away.

• Give away your excess income regularly – unspent income that otherwise increases the estate can be distributed. You could also use it to pay for the cost of life cover.

• Life cover – this is another simple way of reducing or mitigating the impact of an IHT bill. The premium

and amount of cover will normally be fixed, giving you control of your estate, rather than having to make substantial gifts. You can use the annual allowance or unspent income to fund the cost of cover.

• Using trusts – this is important if you don’t want to lose control of your capital. Some trusts will pay a fixed level of income, while others can offer you additional benefits, such as protection from divorce or bankruptcy.

• Specialist investments – it’s possible to invest in a range of permitted UK companies and achieve IHT exemption after only two years by attracting Business Property Relief. This is a higher-risk approach when compared to the alternative options, but it offers quick relief and you don’t have to give any assets away –which means you have ongoing access to your capital.

How we can helpThe rules surrounding IHT are complicated and changing all the time. It’s important to ensure your financial arrangements are up to date and take account of the latest legislation.

If you’d like some specific IHT planning advice, please contact your Investment Manager, who can introduce you to a member of our wealth planning team.

Example if single Example if married or in a civil partnership

Total estate £1m

Nil-rate band £325,000

Amount subject to IHT £675,000

40% IHT £270,000

Total estate£1m

Nil-rate band£650,000

Amount subject to IHT£350,000

40% IHT £140,000

Property

Valuables Savings

£1,000,000

Lorem ipsum

If you are single and die during the 2017-2018 tax year with an estate worth more than £325,000 (after deducting debts, including loans or overdrafts, and expenses such as funeral costs), 40% IHT will become due on anything above £325,000. This sum is known as the nil-rate band.

If you are married or in a civil partnership, the nil-rate band is

£650,000. This means if one partner dies and leaves their estate to their surviving partner, when the second

person dies, their nil-rate bands are combined so that 40% IHT will only be

due on assets above £650,000.

Patrick Thomas Investment Manager


Modi’s second bite of the cherry

After a shaky few months towards the end of the year, markets seem to have concluded that India’s reform project is back on track. As India is currently one of the best performing indices in 2017, we agree.

Modi’s ruling Bharatiya Janata party (BJP) performed strongly in the state elections, winning a landslide victory in Uttar Pradesh, India’s most populous and politically important state. This allows India to continue with pro-business policies that should deliver economic growth and support markets.

The win also puts the BJP on course to regain power in the national elections in 2019. Those who complain that Modi’s government has not been reformist enough (and there are plenty of justified criticisms here) will look closely at his second term, when the BJP should finally have a majority in the upper house, hoping to see real bite in his policymaking.

Markets saw the five state elections conducted over the past month as a referendum on Modi’s contentious policies, in particular the painful fallout from the decision to ban all 500 and 1,000 rupee notes. These are the salient points:

• By winning 434 of the 690 state assembly seats contested, including 80% of the 403 seats in Uttar Pradesh, the BJP has become the majority party in 10 out of 29 states, and shares power in another five

• A huge majority of India’s population is now ruled locally by the BJP and its allies, making it much easier

India

Modi is arguably India’s most influential leader of the past 30 years. He threw himself into election campaigning, where his personal charisma should shore up the BJP’s vote in states where the party has historically been weak.


for Modi’s government to push through central policies that require state support

• The first state election win in Uttar Pradesh since 2002 completely contradicted polls that predicted a close result

• It was accompanied by a resounding victory in the Himalayan state of Uttarakhand and credible performances in the smaller states of Manipur and Goa

• The only really disappointing result was in Punjab, where the BJP’s ally was ousted by the national opposition party.

India’s federal parliamentary democracy operates with dual central and state governments, with rolling elections to state assemblies every five years, so these elections were profoundly important.

Reform The renewed mandate ensuing from the elections means the BJP should encourage Modi to push ahead with his political and economic agenda, including a

swift rollout of the goods and services tax, arguably the biggest fiscal reform since independence in 1947. There’s also likely to be a further crackdown on dirty money and a revived campaign to enlarge the formal economy, which should raise both tax returns and productivity.

Modi is arguably India’s most influential leader of the past 30 years. He threw himself into election campaigning, where his personal charisma should shore up the BJP’s vote in states where the party has historically been weak.

His message of economic development, coupled with a populist crackdown on the corrupt elite, appealed to poor voters across caste lines, even though they bore the brunt of the suffering caused by demonetisation.

The BJP’s political momentum now puts it in poll position in other upcoming state elections, including Modi’s home state of Gujarat. This bodes well for prospects of winning a second term in 2019.

N28° 36’ 48” E77° 13’ 4”

NEW DELHI, INDIA RAJPATH

The renewed mandate ensuing from the elections means the BJP should encourage Modi to push ahead with his political and economic agenda.


We still see India as an attractive market, and if the BJP wins the general election in 2019 Modi will finally be in a position to push through genuinely substantive reforms in his second term.


HeadwindsHowever, let’s not forget the risks surrounding this rosy view of the future trajectory for Modi’s India:

• GDP growth suffered less than expected after demonetisation, coming in at 7% in Q4 2016, but the national accounts don’t capture the most vulnerable parts of the economy; these are informal, cash based and will undoubtedly have been hit hard

• Public spending alone will not increase investment across the economy without dealing with overleveraged public-sector banks

• India is always vulnerable to higher commodity prices and weak external demand

• Donald Trump’s protectionist pronouncements also pose a risk

• Modi’s government still has no majority in the upper house of parliament, where the opposition will almost certainly block its most ambitious plans to reform inflexible land and labour laws

• A strong showing in state election victories will eventually give the BJP more seats, but the lag effect in India’s two-tier electoral system means it’s unlikely to secure a working majority until 2018 at the earliest.

ImplicationsWe still see India as an attractive market, and if the BJP wins the general election in 2019 Modi will finally be in a position to push through genuinely substantive reforms in his second term. This should provide an even stronger structural growth story to underpin earnings growth. If 2016 has taught us anything it is not to rely on election result forecasts – but the recent regional election performance is hugely encouraging.

We use a variety of funds to access Indian equities, which are an increasingly important element of global equity exposure in client portfolios.

Louise AllardSolicitor and Director of Allard Bailey Family Law


Postnups on the risePostnuptial agreements are becoming more popular, but what exactly are they – and do they signal the end of romance? Louise Allard of Allard Bailey Family Law looks at recent developments.

Allard Bailey Family Law

Most people have heard of a prenuptial agreement (prenup), but fewer have heard of her little brother the postnuptial agreement (postnup).

A postnup is signed after the wedding. Like a prenup, it sets out the couple’s intentions for what will happen to their assets if they separate later. It should be entered into freely, couples should have the benefit of independent legal advice, and both parties should have a clear idea of the marital assets before they sign the agreement. They should also take professional advice to make sure they meet the necessary criteria.

Are we losing sight of romance? Why the increase in postnups now?No one can deny that a postnup is a practical proposition, but being prepared doesn’t have to exclude romance. There is the story of some newlyweds signing their postnup at the wedding – straight after cutting the cake – to the cheers of their guests. That might be a step too far for some, but couples agreeing a postnup might well be saving themselves a lot of unnecessary heartache

and expense further down the line. Neither of which are very romantic!

At Allard Bailey Family Law, many of the couples we advise about prenups have separated and then reconciled. When re-starting their relationship, they’ve decided that they want to agree what would happen to assets if they separate again and this time there’s no way back.

They’ve seen how hard it is to make decisions when a relationship is breaking down, and how difficult it can be to think clearly when you’re hurt and angry. They’re savvy enough to realise that things can go wrong, and it’s better to reach an agreement while they’re enjoying the best of times, rather than wait until they’re going through the worst of times.

Some couples have simply seen friends and family go through a breakup and watched a seemingly happy couple embark on a long process of disagreement and litigation. They recognise that they never want to be in that situation and take steps to avoid a similar fate.


Postnups have only become a significant part of the legal landscape in recent years. They may not have been an option when some couples tied the knot, but now that they are an option, those couples are having ‘that conversation’.

Talking of ‘that conversation’, some couples find it difficult to broach the subject of a prenup before the wedding. There’s a lot to plan ... it’s an easy conversation to avoid ... it just didn’t come up. Once time has passed they may be able to bring up the subject of long-term financial planning, and a postnup might be part of the answer.

There’s a growing trend for parents to ask their children to consider a postnup. If a parent wants to ensure their wealth is left to their children and grandchildren, and not their daughter- or son-in-law, they might consider asking their children to agree a postnup as a condition of naming them as a beneficiary in their Will.

Another reason couples consider a postnup is that either one or both of them have been married before and they’ve either been through a difficult divorce, or they

want to make sure their existing children benefit from their estate. It’s a practical solution to a problem that otherwise might cause worry and stress.

The overwhelming theme is one where couples have agreed that taking practical steps before separation provides both parties with security. The courts are increasingly recognising prenups and postnups as long as certain conditions are met, and that seems to be the reason for the increased uptake. There have always been good reasons for a postnup – but perhaps an increasing certainty of their validity is responsible for their rise in popularity.

Is it the end of romance? I don’t think romance will ever be out of date. Taking control of your life and your future can be liberating and allows you to enjoy the moment – romance can follow on from there.

Louise Allard is a solicitor and Director of Allard Bailey Family Law, a niche family law firm based in the heart of the legal district in London. www.allardbailey.com

N51° 30’ 7” W0° 9’ 22”

LONDON, UK THE END OF ROMANCE

Taking control of your life and your future can be liberating and allows you to enjoy the moment – romance can follow on from there.

Share price 720p12 month high 755p12 month low 510pP/E 12 month forward 13.6xDividend yield 12 month forward 3.6%Dividend cover 12 month forward 2.1xNet debt as at 31/3/2015 £685m

Intermediate Capital Group

Featured Stocks

Intermediate Capital Group (ICG) is a specialist asset manager with over 27 years’ history in private debt, credit and equity, operating a range of different investment strategies.

After a difficult global financial crisis, the management decided to diversify the business model and started to build a fund management company. This typically charges an annual management fee of 1.5% and a performance fee of 20% on third party assets.

Between 2010 and 2015 the management made a number of important internal investments, including a scalable infrastructure platform, an in-house distribution department, and a wider range of products. They’ve now embarked on a three-year strategy aimed at:

• Delivering at least £4bn of annual fundraising

• Broadening their client base

• Making selective acquisitions to expand their product range

• Optimising their co-investment ratio by investing less of their capital in new funds.

We’re attracted to ICG because we believe long-term investors will continue to diversify away from equities and gilts into alternative investments such as private equity and debt. Independent research has found that 90% of

institutional investors are expecting their allocation to alternative assets to grow over time. They also estimate that this asset class will grow from US$8tn in 2013 to between US$14tn and US$16tn by 2020. With interest rates forecast to remain well below historical averages, we expect demand to remain robust.

ICG’s third party assets are extremely sticky, given that investors are usually required to commit capital to an investment strategy for between 7 and 12 years. Its revenue margins can stay relatively static, as low-cost Exchange Traded Funds can’t compete. As a result, growth has been rapid, and ICG currently has €22.6bn of third party assets under management. In the medium term, the management sees scope to grow this to between €30bn and €35bn. Importantly, the valuation multiple at which it’s likely to trade should increase over time as profits become more reliant on fund management.

ICG also has a strong stable management team with an excellent track record of returning cash to shareholders through special dividends. They’ve done a great job of de-risking the group, with less financial leverage now than in the lead-up to the financial crisis, while their own investments are more diversified. Despite the share price having performed well in recent years, we continue to see ICG as an attractive long-term investment.

Intermediate Capital Group

Source: Bloomberg and Quest®

Note: All data as at 17 March 2017. Rebased to 100

Simon McGarry Senior Equity Analyst

Past performance is not a reliable indicator of future returns

-

50

100

150

200

250

300

350

Mar 2012 Mar 2013 Mar 2014 Mar 2015 Mar 2016 Mar 2017

FTSE 350Intermediate Capital Group


Share price €106.9 12 month high €110.512 month low €85.3P/E 12 month forward 13.6xDividend yield 12 month forward 2.7%Dividend cover 12 month forward 2.9xNet debt as at 31/12/2016 €13.6bn

Bayer

Featured Stocks

Bayer was founded over 150 years ago as a dye manufacturer, developing into a chemical company with international operations. While dyestuffs remained its largest division, new businesses, including pharmaceuticals, were added. It was within pharmaceuticals that, in 1899, Bayer developed its most famous product, aspirin.

Bayer hit the headlines last year with its intention to acquire Monsanto. The US$66bn acquisition is the latest step in a decade-long process that has transformed Bayer from an industrial conglomerate into a life sciences company. Along the way Bayer has shed its chemicals business and reduced its exposure to materials sciences (e.g. high performance plastics, adhesives and sealants) with the listing of Covestro. Bayer still owns 64% of Covestro, but intends to sell down to a non-controlling stake.

If the Monsanto deal goes through, it will significantly bolster Bayer’s position in crop science, catapulting Monsanto and Bayer from third and fourth place respectively (in terms of 2015 sales), to first place globally. Its life science sales will also be more evenly split between healthcare and crop science. The merger should be a good strategic fit, as it plays to each company’s strengths; Monsanto is primarily a seeds business and Bayer is mainly a crop protection business.

Combined, they will be more balanced in terms of seeds (45% sales) and crop protection (55% sales).

Bayer’s healthcare business is divided between pharmaceuticals and consumer health. Pharmaceuticals has had a great track record of late, with five recently launched drugs accounting for 33% of the division’s €16.4bn of sales in 2016. Bayer believes these five drugs have a combined sales potential of over €10bn, while the division also has a robust pipeline of potential new drugs – six of these could have a combined peak sales potential of around €6bn.

Following Bayer’s 2014 acquisition of Merck’s consumer care business, it’s now the global number one in the over-the-counter (OTC) drug market. The OTC market has significant structural growth drivers, including the ageing population, better informed consumers with a desire for more self-care, a drive to lower healthcare costs and growing emerging market demand.

Bayer’s shares are attractive, even if the Monsanto deal falls through. Excluding Monsanto, Bayer’s shares are trading on 13.6x 12-month forward earnings, which we believe undervalues the growth prospects of the existing businesses. While the Monsanto acquisition won’t be cheap, it will give the group significant potential growth opportunities.

Bayer


Note: All data as at 17 March 2017. Rebased to 100These figures are shown in euros.These returns may differ significantly when converted to other currencies at the prevailing exchange rates.


Marc Pullen Senior Equity Analyst

-

50

100

150

200

250

300

350


FTSE 350Bayer


Featured Stocks

Cisco

Cisco was founded in 1984 by husband and wife Len Bosack and Sandy Lerner, when they invented the multi-protocol router in order to email each other from different buildings at Stanford University. Today the company has annual revenues approaching US$50bn, over 70,000 employees and around 400 offices worldwide. Cisco’s activities are broadly divided into products (75% of sales) and services (25%). The product division includes the switching and network routeing businesses (which made the company’s fortunes and still account for around 60% of the division’s sales) as well as new growth businesses such as collaboration, security and wireless.

The company operates in an intensively competitive environment, where it needs to defend its market share while simultaneously investing in new growth businesses. It’s also transitioning its business to a more software- and subscription-focused model. This may add a headwind to sales growth during transition, but the trade-off should be more predictable future revenue streams with greater longevity.

Cisco’s results for the three months ended 28 January 2017 highlight these dynamics: service revenue was up 5% compared to the second quarter of the previous year, while product revenue fell by 4%. Within the product division, security saw a 14% increase in sales, with collaboration and wireless up 4% and 3% respectively.

Network routeing and switching were down 10% and 5%. Deferred revenue (an indication of recurring revenue) grew by 13% to US$17.5bn, with Cisco indicating that 31% of its total second quarter revenue was generated from recurring offers, up from 28% a year ago.

Cisco’s business sits at the heart of a major growth trend, as companies are increasingly using technology to grow, drive efficiencies, and gain a competitive advantage. Several underlying factors are driving this trend, including: the ‘internet of things’, the increasing popularity of the cloud, and the development of programmable, flexible virtual networks.

Ultimately we believe Cisco is ideally placed to benefit from the tectonic shifts affecting the industry. Although its shares are up 70% over the last five years, its earnings growth has more than kept pace, with its EPS growing by an average of 11.3%pa. This has meant that Cisco’s 12-month forward P/E ratio of 15.9x remains attractive compared to the current US communications equipment sector and US market average P/E of 18.4x and 19.3x, respectively. It’s also comfortably within the 7.6x to 23.9x P/E range that the shares have traded in over the last 10 years.

Share price US$34.212 month high US$34.412 month low US$26.2P/E 12 month forward 15.9xDividend yield 12 month forward 3.3%Dividend cover 12 month forward 1.9xNet debt as at 31/07/2017 -US$34.2bn

Cisco

These figures are shown in US dollars. These returns may differ significantly when converted to other currencies at the prevailing exchange rates.




Marc Pullen Senior Equity Analyst

-

50

100

150

200

250


S&P500Cisco


Featured Stocks

Compass Group

Compass Group is a food and support services business, and one of the world’s largest contract catering companies. Operating in over 50 countries, Compass provides services across an array of private and public sectors. It boasts an impressive portfolio of clients, with 96 of the Fortune 100 companies, including Amazon, Disney and Google. Developing the business through strategic acquisitions and organic growth, Compass continues to focus on delivering outsourced catering and hospitality services, plus a range of soft support services, such as cleaning, reception and building maintenance.

Compass provides a bespoke service through a ‘sectorisation’ strategy: it offers targeted services from specific industry brands based on expertise, with synergies realised from shared pricing power, operating systems and back office administration. This approach strengthens its competitive position and sets it apart from industry players with a single-brand approach.

Compass’ vast purchasing scale and commitment to investing in the business allow it to dominate as market leader. The company shares cost savings with clients, resulting in impressive client retention rates of 94-96%. Risk is reduced by ensuring that no single client represents more than 3% of revenues.

Business and industry provide the largest revenue source for Compass, with the greatest opportunity seen

in areas like education and healthcare. Outsourcing catering services can reduce costs by 5-10% and is increasingly becoming the preferred option for public services. Combined with encouraging momentum in the US outsourcing market, this ensures sustainable revenue growth.

The company has delivered a consistent stream of good numbers: full-year results to the end of September 2016 reported underlying free cash flow of £908m (up 26%) and a 5% increase in organic revenue growth to £19.9bn, including 8.1% growth in North America. The company’s strong track record is supported by a robust balance sheet.

Compass pursues a low-risk growth strategy by strengthening core competencies and developing a more comprehensive service to existing clients in key markets. Expanding its market share by targeting local competition and facilitating outsourcing for new clients has generated impressive earnings growth, increased organic turnover and improved profit margins.

This growth has been sustained in an environment of rising labour costs; driven by high levels of client retention and new business. Compass is a well-run business which is cash generative. This has allowed for sustainable dividend growth, while acquisitions keep the revenue line growing.

Leetal StarkInvestment Manager

Share price 1514p12 month high 1548p12 month low 1212pP/E 12 month forward 20.3xDividend yield 12 month forward 2.4%Dividend cover 12 month forward 2.0xNet debt as at 31/12/2015 £3.1bn

Compass Group

Past performance is not a reliable indicator of future returnsSource: Bloomberg and Quest®


-

50

100

150

200

250

300


FTSE 350Compass



Investment involves risk. The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested.

Past performance is not necessarily a guide to future performance.

The investments discussed in this document may not be suitable for all investors.

The articles in News & Views are not to be treated as specific advice. They have no regard for the specific investment objectives, financial situation or needs of any specific person or entity. Investors should make their own investment decisions based upon their own financial objectives and resource and, if in any doubt, should seek specific advice from an investment adviser.

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

News & Views is a marketing communication under the FCA rules. It has not been prepared in accordance with the legal requirement designed to promote the independence of Investment Research and we are therefore not subject to any prohibition on dealing ahead of its dissemination.

This document has been produced for information purposes only and is not to be construed as a solicitation or an offer to purchase or sell investments or related financial instruments. The information contained herein is based on materials and sources that we believe to be reliable, however, Canaccord Genuity Wealth Management makes no representation or warranty, either express or implied, in relation to the accuracy, completeness or reliability of the information contained herein. All opinions and estimates included in this document are subject to change without notice and Canaccord Genuity Wealth Management is under no obligation to update the information contained herein. None of Canaccord Genuity Wealth Management, its affiliates or employees shall have any liability whatsoever for any indirect or consequential loss or damage arising from any use of this document.

Canaccord Genuity Wealth Management and/or connected persons may, from time to time, have positions in, make a market in and/or effect transactions in any investment or related investment mentioned herein and may provide financial services to the issuers of such investments.

Canaccord Genuity Wealth Management does not make any warranties, express or implied, that the products, securities or services mentioned are available in your jurisdiction. Accordingly, if it is prohibited to advertise or make the products, securities or services available in your jurisdiction, or to you (by reason of nationality, residence or otherwise) such products, securities or services are not directed at you.

Canaccord Genuity Quest® is used under licence and with permission of Canaccord Genuity Ltd. Accounts, Share Prices & Global Consensus Estimates data provided in conjunction with S&P Capital IQ © 2015; Benchmark Sector comparatives are based on the Global Industry Classification Standard (GICS®) and provided in conjunction with S&P Capital IQ © 2015 (and its affiliates, as applicable). see restrictions. Share prices are relative to the MSCI USA IMI (see restrictions) Quest® is at this stage registered in the UK and in the USA, and common law trade mark rights are asserted in other jurisdictions. CFROC, CITN and triAngle are trademarks of Canaccord Genuity Limited.

Canaccord Genuity Wealth Management (CGWM) is a trading name of Canaccord Genuity Wealth Limited (CGWL) and Canaccord Genuity Financial Planning Limited (CGFPL) and Canaccord Genuity Wealth International Limited (CGWI) which are wholly owned subsidiaries of Canaccord Genuity Group Inc.

CGWL and CGFPL are authorised and regulated by the Financial Conduct Authority (registered numbers 194927 and 154608) and have their registered office at 41 Lothbury, London, EC2R 7AE. CGWL is registered in England no. 03739694, CGFPL is registered in England no. 02762351.

ContactUnited Kingdom 41 Lothbury London UK EC2R 7AE

T: +44 20 7665 4500

Guernsey Trafalgar Court Admiral Park, St. Peter Port Guernsey GY1 2JA

T: +44 1481 733900

Isle of Man Anglo International House Bank Hill, Douglas Isle of Man IM1 4LN

T: +44 1624 690100

Jersey PO Box 3, 37 Esplanade St Helier Jersey JE4 0XQ

T: +44 1534 708090

If you prefer to receive this magazine in electronic format, please email us at [email protected]

canaccordgenuity.com

Canaccord Genuity Wealth Management (CGWM) is a trading name of Canaccord Genuity Wealth Limited (CGWL), Canaccord Genuity Financial Planning Limited (CGFPL) and Canaccord Genuity Wealth International Limited (CGWI) which are wholly owned subsidiaries of Canaccord Genuity Group Inc.

CGWL and CGFPL are authorised and regulated by the Financial Conduct Authority (registered numbers 194927 and 154608), and have their registered office at 41 Lothbury, London, EC2R 7AE. CGWL is registered in England no. 03739694, CGFPL is registered in England no. 02762351.

To help make sense of President Trump’s first 100 days and the possible implications for investors, we are pleased to welcome our Chief US Strategist, Tony Dwyer to speak at a series of events. Tony had a front row seat in the run up to the election and has been at the epicentre of all the change. He will be sharing his experience and views on the outlook for the US and global markets.

Guernsey Tuesday 2 May – 12.00

Jersey Wednesday 3 May – 12.00

London Thursday 4 May – 18.00

Isle of Man Friday 5 May – 12.00

For more information or to register your interest to attend, please visit get.canaccordgenuity.com/100-days-of-president-trump/ or email us [email protected].

100 days of President Trump

Documents

News & Views - VFS Intvfsint.com/experts-opinions/NV_Q2_2017.pdf · 2018-10-19 · News & Views is a marketing communication under the FCA rules. It has not been prepared in accordance