Friday, 31 March 2017

Is India Being Overlooked By Investors?

People shouldn’t be discouraged from buying Indian equities because of high valuations and the time it is taking for Prime Minister Modi to push his reforms through, although investors should keep an eye on the supply/demand unbalance in the country, something often overlooked.
India was the darling EM of 2014, following the election of the pro-reform prime minister. During those 12 months, the MSCI India index returned 31.58% while the MSCI Emerging Markets index – dragged down by struggling Brazilian and Russian economies – returned just 3.9%. 
Modi achieved a landslide victory in India’s 2014 general election after promising to implement a series of drastic economic reforms. These included a focus on corporate governance, allowing 50% more foreign investment across varying sectors and deregulating prices of natural gas, kerosene and fertiliser pricing in a bid to encourage the expansion of private production.
However the honeymoon period was short-lived as investors grew impatient for Modi’s economic reforms to push through, and rising commodity prices bolstered stocks based in oil-importing emerging market countries.
In a complete role reversal 2016 was all about Russia and Brazil, the commodity-led emerging markets. After being so unloved the Brazilian and Russian MSCI indices returned 98.29 and 84.67% respectively, while MSCI India produced a comparatively meagre 17.57% return.  India went from being the pre-2014 ‘slum-dog’ to being a firm foreign favourite almost overnight, but then in 2015 it seemed investors became disenchanted almost as quickly.
So are investors right to be pessimistic, or do they simply need to be patient and retain a longer-term investment view?
It is important to remember that India had a dysfunctional political federal system which pre 2014 wasn’t working, and things were never going to be turned around overnight.  The PM always indicated that true economic reform in India would be at least a two-term job, if not three.  Modi is already talking about 2024 even though the next election year is 2019. His vision seems to be that he needs 15 years to pull India up by the scruff of the neck and reform it to deliver growth.  The agenda is not pro-business, but rather to make a real difference to everyday lives through provision of job opportunities and growth. 
There are key issues still to be resolved, perhaps the most important one being the economic unbalance between supply and demand which has grown as a result of homegrown manufacturing.  India has a consumption economic, avoiding the typical development model and moving directly from agrarian to consumption.  In recent years demand exploded due to job growth and rising consumer confidence, and supply levels are still playing catchup.  India’s current working age population should not peak until around 2055, and is growing at the expense of the number of young and elderly dependents. This has further increased spending power and led to a consumption boom.
Because of the huge consumption possibility, inflation has periodically derailed the economic and stock market growth cycle,  hence why many of the population have historically chosen to invest in gold.  Now this is slowly changing.  There are a lot of economic reforms in place, keeping inflation in check.  The country can industrialise and roll out infrastructure, and there are no imported inflation issues linked to overseas commodity consumption.  Inflation is more domestically driven, and the reforms will help address bottlenecks in the system.
So the future seems bright, and yet despite this some investors still object on the basis that India now looks expensive, particularly when compared to Russia or Brazil.  While the market lagged its emerging market peers last year, stronger fundamentals have led to the country to fall back into favour with foreign investors.  Year-to-date, the MSCI India index is already up over 16% while the MSCI AC World index has returned less than 7% per cent in sterling terms. 
Even with high equity prices today, there is good reason to believe that the coming years will see strong continued growth coming from India.  The domestic market is enormous with huge potential.  Many local companies have longer-term time horizons (10-15 years in many cases) for how they want business to develop.  In comparison to the US or UK these time frames might seem like an eternity, but they have the advantage of putting less pressure on management teams and allowing better decisions to be taken which will enable consistent, longer-term growth.

I would expect India to be one of the stand out performers over the coming 5+ years, and would certainly recommend this sector as part of a balanced portfolio for investors.

Wednesday, 8 March 2017

UK Budget 2017 Announces QROPS 25% Tax Charge On Transfer

UK Budget 2017 – Key QROPS Implications

Need assistance with your QROPS transfer - discuss your options now. Contact me at 

In summary
Transfers to QROPS requested on or after the 9th March 2017 will be subject to a 25% tax charge, unless;
1. The QROPS is in the EEA and the Member is also resident in a EEA country.
2. The QROPS and Member are in the same country or territory. This is a limited if negligible part of the market.
3. The QROPS is an employer sponsored occupational scheme, overseas public service pension scheme or a pension scheme established by an international organisation.  

Whilst the pension industry were expecting possible changes in today’s Budget in the form of an overhaul of the UK tax relief system, or further reductions to the Annual/Lifetime Allowance limits, it was unfortunately overseas pension schemes, and specifically QROPS, that were the target of the UK government’s attention.  As I was personally listening in to the Chancellor of the Exchequer, Mr Phillip Hammond’s, first ever Budget speech, the words “introducing measures to tackle abuse of foreign pension schemes” did not sound too convincing and sadly that proved to be the case when the full report was released online as soon as the Chancellor had re-taken his seat.

The specific reference within the full report to QROPS is below:

3.46 Qualifying recognised overseas pension schemes (QROPS): introduction of transfer charge – The government will introduce a 25% charge on transfers to QROPS. This charge is targeted at those seeking to reduce the tax payable by moving their pension wealth to another jurisdiction. Exceptions will apply to the charge allowing transfers to be made tax-free where people have a genuine need to transfer their pension, including when the individual and the pension are both located within the European Economic Area. (23)”

In addition to this, HMRC have released guidance notes as to how and when the “overseas transfer charge” will apply and in particular what is meant by “genuine need to transfer their pension” (at least, in HMRC’s eyes).  With this in mind, I can summarise the position as follows in respect to standard QROPS business:

·         The new overseas transfer charge comes into play with immediate effect, with its introduction on 9th March 2017.

·         This will apply for any transfers that meet the criteria for the overseas transfer charge to apply when the signed and completed transfer paperwork is received by the UK ceding scheme on or after 9th March 2017.

·         For cases where overseas transfer paperwork has already been submitted to the UK ceding scheme before 9th March 2017, the transfer should be able to proceed without the overseas transfer charge (if applicable) being levied, however, it would be recommended that contact is made with the UK ceding scheme administrators to ensure that they have safely received and logged the transfer request prior to the deadline date.

When does the overseas transfer charge not apply?

1.       If the member is resident in the same country in which the QROPS receiving the transfer is established.

2.       If the member is resident in a country within the European Economic Area (EEA) and the QROPS is established in a country within the EEA (Note, for these purposes, the EEA includes any EU member state as well as Liechtenstein, Norway, Iceland and in this context, Gibraltar).

*There are also three other instances documented but these relate mainly to transfers to overseas occupational type arrangements.

What is the effect of these changes in the 3 main QROPS jurisdictions?

·         Transfers into an Isle of Man QROPS for an individual who is resident in the Isle of Man will not attract the overseas transfer charge.  IOM QROPS for individuals resident elsewhere would incur the 25% transfer charge, as IOM is not part of the EEA.

·         Transfers into a Gibraltar QROPS for anyone resident in a country in the EEA will not attract the overseas transfer charge.  For individuals resident outside the EEA, a transfer to a Gibraltar QROPS will incur the 25% transfer charge.

·         Transfers into a Malta QROPS for anyone resident in a country in the EEA will not attract the overseas transfer charge.  For individuals resident outside the EEA, a transfer to a Malta QROPS will incur the 25% transfer charge.

Other important notes regarding the overseas transfer charge:

·         If a member’s benefits transfer successfully to a QROPS on or after 9th March 2017 without the overseas transfer charge applying due to both the individual and the QROPS meeting the relevant criteria, a back-dated tax charge could still be levied in the future if the member’s circumstances change within 5 full tax years of the transfer taking place e.g. if the member was to subsequently move to another country in that 5 year period which was outside the EEA.

·         The reverse is also true in that if an overseas transfer charge was taken at the time of transfer but the member’s circumstances change within 5 full tax years of the transfer taking place, and due to the member’s new residency conditions they now meet the relevant criteria, it may be possible to reclaim the 25% tax that was lifted at the time of transfer.

·         The new conditions also apply to transfers from one QROPS (or former QROPS) to another QROPS e.g. switching between jurisdictions if this is within the “relevant period” i.e. 5 full tax years from the original transfer out of the UK pension plan to the first QROPS arrangement.

Extra Member Payment Charge Provision

·         For transfers to QROPS on or after 6th April 2017, the new legislation widens the scope of UK taxing provisions on payments out of the QROPS from such transferred funds so that, in addition to applying if the member has been a resident in the UK in any one of the last 10 full tax years, they will also apply for the first five full tax years following the original transfer out of the UK regardless of how long the member has been a non-UK resident.

Action steps clients:

·         You should immediately review all pending QROPS transfers where the transfer paperwork has not yet been received by the UK ceding schemes, or by the transferring QROPS scheme administrators (if it is a QROPS to QROPS transfer).

·         If pending QROPS falls into the criteria where the overseas transfer charge would apply, you should not proceed with the transfer at this stage and revert to the respective adviser or contact myself as the transfer will now be subject to a 25% transfer charge.

·         If pending QROPS business falls into the criteria where it would be exempted from the overseas transfer charge, the transfer can proceed as normal.

·         To avoid any uncertainty, you should ensure that contact is made with the transferring schemes and obtain their confirmation that the paperwork is in place and the transfer can proceed based on pre-9th March 2017 conditions.

We appreciate that news of these drastic measures have been sudden for all concerned and the information above is fairly complex, so if you have any queries or want to understand some more of the finer details please do not hesitate to contact me to arrange a call to discuss further as there are QROPS alternatives available.

Friday, 3 March 2017

Fed Concerned at Lack of Market Volatility.

As a follow up to last week’s article regarding Trump’s trade policies, it seems we can now add the Federal Reserve to the list of worriers about investor complacency as stocks set new records almost daily (the S&P 500 has already gained 3.7 percent this month, posting seven record closes in the process).  Officials at the US central bank have recently expressed concern that the low level of implied volatility in equity markets appeared inconsistent with the considerable uncertainty attending the outlook for Donald Trump to deliver on pro-growth campaign policies.  This at least according to the minutes from the Fed’s meeting three weeks ago, which were released this week.
For now at least, stock turbulence has been all but banished from the market. The Chicago Board Options Exchange Volatility Index, a gauge of investor anxiety also known as the VIX, has been unusually calm in recent months. It’s less than two points above its 15-year low, even as the S&P 500 Index catapults to new highs. The measure rose 1.5 percent Wednesday, the first time it’s posted back-to back gains this month.
Fed members now join a multitude of market observers, analysts and investors, all of whom are scratching their heads over a consistently suppressed VIX.  Sure, optimism for economic fundamentals could be putting a cap on market volatility. But others see more credence in the Fed’s explanation, where stocks appear to be plotting their own trajectory based on policy expectations under President Donald Trump.  Take Trump’s upcoming address to Congress on Feb. 28, where he’s expected to reveal details of his tax reform plans.  It is possible that any delays in implementing the program could shake the market from its calm, particularly considering the questions surrounding U.S. relations with global trade partners which were discussed in last week’s article.
It seems that almost everyone is wondering why equity market volatility is so low given the uncertainty that exists.  Would-be tax policies, overseas concerns, relations with China are all potential pitfalls, and yet at least for now the waters remain eerily calm.  All of the quiet could make for a rude awakening, according to any number of analysts and fund managers alike.  Some have pointed specifically to the disconnect in expected volatility for stocks versus other asset classes. The VIX fell to a 19-month low against a gauge of Treasury price swings in late January, while the current ratio between the two remains 15 percent below its average since the start of 2014, data compiled by Bloomberg show.
In the minutes, central bank officials voiced concern about the pace at which the U.S. equity market has advanced.   Some believe that fast rising stock prices might reflect investors’ anticipation of a boost to earnings from a cut in corporate taxes or more expansionary fiscal policy which might not materialize, and there are those who feel this could spell disaster for the markets.   While it isn’t unusual for the Fed to comment on financial market conditions, taking a such a hyper-specific look at the stock market and volatility is notable.  However some investors remain optimistic, stating that even if policy doesn’t play out to investors’ expectations, healthy market fundamentals should support any momentary pullback.

This continues to be an area of huge importance to market performance for 2017, and it will surely be something that all investors will watch closely over the coming months as the world waits for Trump’s political intentions to be become more defined.  I remain of the opinion that the markets will see greater volatility as the year progresses, and am encouraging my clients to air on the side of caution until a clearer picture becomes available.