28 January 2016
Week in Brief: BUSINESS AND THE CITY
ROOMS TO RENT: 50 CENTS: Not if the Chancellor has anything to do with it. The Treasury produced squeals of pain and anger when it changed the tax regime on mortgages taken by private landlords to acquire buy-to-let property, limiting landlords on how much loan interest they could set off against rental income. The Treasury’s motives are not entirely clear; it may wish to deter over borrowing – or any borrowing – in a sector prone to severe cyclical variation. It is also thought that the Chancellor, who is now attacking tax relief on the pension savings of the better off, wants to deter the use of buy- to-let housing as an alternative shelter for higher rate tax payers.
Now the Bank of England is signalling (the old fashioned use of the Governors eyebrows at present, but likely to be followed by written directives) that it too wishes to discourage the over-use of borrowed money in buy-to-let investment. The Bank is looking more at the welfare of the residential market than that of individual investors; it is trying to ensure that the causes of instability in the UK property market, which brought banks to their knees in 2007 to 2011, never happen again. One way is to lean very heavily on the banks, presently contrite but with notoriously short memories, to keep the gearing down on such loans so that there is no surge of stock into the residential property market driving down prices if trouble should recur. The Bank is also concerned that the recent announcements by the Treasury concerning tax allowances could have this very effect. Around 15% of buy-to-let investors have said that they will have to sell if their costs increase over their income (the effect of restricting tax relief). Adding to the Bank’s nervousness, another 45% have said they would sell if prices fell by more than ten per cent. This suggests that around 60% of current investors would be sellers in a weakening market. That is potentially around one million residences coming onto the market, which would certainly have a destabilising effect. (It also suggests relative unsophistication in investment strategies – selling out is not always the best response to a sudden drop in the market) To try to overcome the shock of this, the changes will be phased in gradually, with increased stamp duty on investment purchases from this April and the tax relief changes coming in April 2017.
GOOGLE NORTHERN POWERHOUSE: It has not been a good week for the Chancellor so far. His announcement that the Inland Revenue had reached an agreement with IT giant Google to pay more tax in the UK (it claims its principal place of business in Europe is low tax Republic of Ireland) was not met by congratulations. Instead there was a chorus of protest from all sides that Google had been let off lightly, even from George’s old friend and neighbour in Downing Street, the Prime Minister, who was (though after public comment had been very anti the deal) noticeably cool in his reaction to the announcement.
Several critics pointed to the approaches of France and Italy to the same issue, where, although Google is much less active, their tax departments were able to secure a much larger amount in settlement. The Chancellor’s defenders though point to Googles’ much larger presence in the UK as a positive and mitigating factor – they are investing large amounts into UK kit, including building large premises at King’s Cross, and employ lots of high paid people – who pay tax and do their shopping here.
However that arguments runs, the Chancellor has another problem with his highly feted (by him) Northern Powerhouse concept, to try to create a northern focus of enterprise and economic growth. That has been well received in major northern towns such as Leeds, Manchester, and Sheffield, though rather more nervously in more peripheral cities such as Newcastle and Preston. The concept has concentrated on two enablement concepts – one being to improve infrastructure such as roads and rail lines, and the other to create a centre of excellence in technology and electronic communications. Serious money has been put into recruiting some leading gurus in these fields to get things going and all seemed to be going well – until last Friday, when Claire Braithwaite, head of Tech North, the leading enabler of the tech side of the dream, suddenly resigned. This is understood to be because Tech North is still effectively run by Tech City, based in the City of London, and Tech North, not unreasonably, wants to base itself in the north of England, free from the controls and reporting requirements of its southern incubator. The resignation of Ms Braithwaite and another board member, Alex Depledge, has brought into the open further wrangling, as Tech North is seen as overshadowing the techie growth aspirations of other areas of the UK, such as the West Country. The Chancellor of course has a strong commitment to the north as a northern MP, one of the few in a cabinet job, but also to replicate in the northern conurbation conditions that will reduce inequality between south and north.
Maybe he should persuade Google to move to Barnsley or Rochdale in return for their tax deal….
STOCK UP ON OIL: Or more correctly, stocks go down with oil. Apologies to readers who are fed up with the troubles of the oil market and oil producers, but at the moment we cannot really escape it; oil and its side effects drive so much of our economic life. After oil reached a new low last week, settling at US$27.10, there was a sudden rally on Friday which took it back over $30 a barrel, though it has fallen back just below that level since. It is not clear what is causing these fluctuations but it may be Iran traders, now once again selling in the open market, trying to push the price up a bit.
OPEC, the oil producers organisation which is effectively controlled by Saudi Arabia, has, for the first time for some time made positive noises about the market. (Positive in its case means it thinks the price will go up) It is predicting one further period of weakness and price fluctuation, and then stabilised output with prices moving up. They may be right but as Russia and Iran are both pumping record amounts of oil, and mothballed rigs and shale operations will be easy to restart, this may not go quite as smoothly as they project.
Be that as it may, several firms of analysts have been looking at the correlation between the oil price and stock market performance. Of course, there is bound to be some link as the oil production companies are a big component in the indices but, equally, falling energy prices ought to benefit most industrial producers. In the past falling oil prices have been good for stock markets and vice versa. That does not seem to be the pattern this time though. As oil prices have fallen the markets have weakened; analysts are trying to work out just why. Disruptive effects on engineering and oil related employment must be one factor, but a much bigger one is the threat to the cash requirements of major oil producers – the oil price has fallen much faster than national spending budgets can be adjusted and it is feared that the Arab countries in particular, but also Russia and even Norway may need to liquidate investments to help things at home. That instability – or fear of it – leads to further nervousness, and continuing uncertainty.
SIDEWAYS SHUFFLE: Andrew Bailey, deputy governor of the Bank of England and chief executive of the Prudential Regulation Authority, has been appointed head of the Financial Conduct Authority, senior regulator of the City and financial services. He replaces Martin Wheatley whose contract was not renewed. This is seen as a further growing of the Bank of England’s reach into overall City regulatory control.
FLOATED: And if Mr Bailey should need a yacht to make weekend escapes from his onerous duties, he will be pleased to know that the Fairline yachts group has been bought out of administration by two Russian investors. They are paying £4.5m for the business which will continue on its site at Oundle in Northamptonshire, its other two sites being closed.
KEY MARKET INDICES: (at 26th January 2016; comments refer to changes on one week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.57% (falling); 5 year 1.08% (falling).
Euro€: 1 mth -0.15% (steady); 3 mth-0.09% (steady); 5 year 0.01% (rising)
US$: 1 mth 0.57% (steady); 3 mth 0.70% (steady); 5 year 1.33% (falling)
Currency Exchanges:
£/Euro: 1.30, £ falling
£/$: 1.42, £ falling
Euro/$: 1.08, steady
Gold, oz: $1,098, slight rise
Aluminium, tonne: $1,480, slight fall
Copper, tonne: $4,453, slight rise
Oil, Brent Crude barrel: $29.40, rising with fluctuations
Wheat, tonne: £109, slight fall
London Stock Exchange: FTSE 100: 5,877 (steady). FTSE Allshare: 3,233 (slight fall)
Briefly: The markets are relatively steady at the moment, other than oil, and the LSE seems to have reached a new trading bandwidth. The most interesting area could turn out to be interest rate management in the USA, where it is now widely felt that the Fed’s increase in rates has been a mistake and will have to be reversed before long.
