How can the causes of investment failure be minimised?

the devastating consequences of investment failure in the 1930sPerhaps the most high-profile business collapse of the year has been the construction giant Carillion, reinforcing the message that no business is too big to fail and that no-one is immune to investment failure.

It prompted questions over the integrity of its auditors KPMG, who in March 2017 had expressed no concern over reported profits of £150m, even though four months later these proved to be illusory.

It also prompted an exodus of investors once the company’s debts became clear and confidence in its viability plummeted, thereby precipitating the collapse.

But should the investors have known better than to trust a business that diversified into a range of disciplines outside its core competence and embarked on a series of take-overs?

There are many causes of investment failure. It is not a precise science and it does involve a degree of trust, not to mention emotion. Too many investors fail to carry out due diligence before they decide where to put their money.

So, the first thing to do to guard against investment failure is to check more than your target’s profit and loss account. You should also look at its balance sheet and its cash flow statement. You might also ask if you understand the business, how it makes money and what it does with the money it makes. It is all about understanding and assessing the risk factors.

Some causes of investment failure

These include a lack of knowledge about an investment prospect, failure to understand why someone might be recommending an investment or using stock analysis reports from sources that are less than trustworthy.

Having no clear goal or strategy when investing is another pitfall. Knowing what you can comfortably afford to lose and how strong is your appetite for risk is essential.

Investment requires discipline and the ability to be patient as well as identifying the right targets for your investment.  It helps also to have a financial adviser you know and trust, who will guide you to developing an appropriate balance of risk weighted returns in your investment portfolio, so that it is not over- or under-diversified.

Another trap that can lead to loss due to poor investments is over-confidence or expecting a significant return in a very short time frame since this becomes like gambling. Investment is, or should be, a long term activity with a level of monitor of how your investments are performing making decisions about your portfolio.

Finally, it is important to remember the warning that the value of investments can go down as well as up, indeed some investments can be wiped out where for most investors the strategy should be based on understanding risk parity.

How much longer before SMEs get a fair system for dispute resolution with the Banks?

fair dispute resolution with the banks?It looks likely that SMEs still have some time to wait before a cost effective and fair system for dispute resolution with the Banks becomes a reality.

It is now approaching ten years since SMEs’ scandalous treatment at the hands of RBS (Royal Bank of Scotland) and its insolvency arm GRG (Global Restructuring Group), and of HBOS Reading emerged prompting investigations into the way the major banks treat their SME customers.

In July, the FCA (Financial Conduct Authority) announced on completion of its RBS investigation that its “powers to discipline for misconduct do not apply and that an action in relation to senior management for lack of fitness and propriety would not have reasonable prospects of success”.

Andrew Bailey, FCA Chief Executive admitted that its inability to take action should not be seen as condoning RBS’ behaviour.

Earlier in the year UK Finance, the trade body for banking and finance, had appointed Simon Walker CBE – the former Director General of the Institute of Directors – to review the disputes and resolution process.

The result of this SME Complaints and Resolution Review was published late last month and concluded that setting up a new tribunal would be too costly for both Government, SMEs and banks and instead has supported the FCA’s planned extension of powers for the Financial Ombudsman Service to cover business banking customer complaints.

Not surprisingly this has been welcomed by some Banks and UK Finance has called the review a “valuable contribution” to the debate.

Nevertheless, the APPG (all-party parliamentary group) on fair business banking, led by Kevin Hollinrake, has repeated its call for the creation of a financial services tribunal and for a compensation scheme for business customers who were victims of the RBS and HBOS behaviour.

The APPG argues that Walker’s report clearly identifies that there is a limit to the proposals, which do not extend beyond a compensation limit of £600,000, cannot compel witnesses, cannot force disclosure of information nor deal with insolvency issues.

It has also been argued that The Financial Ombudsman Service, even with extended powers, is insufficient since the maximum compensation it can award is £350,000, regardless of the £millions in losses that some SMEs have sustained.

Equally, many SMEs have argued that pursuing complaints using the civil courts as an alternative is hugely costly since large defendants generally adopt a strategy of attrition with the aim of causing their SME claimants to run out of money before the case is heard.

It looks as though there is likely to still be a considerable wait before SMEs get a fair and equitable system for resolving disputes with the disproportionately more powerful banks.

Why the big four auditors are under intense scrutiny – an update

investigation into the big four auditorsFollowing the collapse of the company Carillion in February this year the role of its auditors came under the spotlight and investigations were promised, notably by the FRC (Financial Reporting Council) and the CMA (Competition and Markets Authority).

The reason for this was that the business had won several large public sector contracts, among them to build two hospitals, and also because its collapse put a number of subcontractors and jobs in jeopardy. However, primarily it was because its financial health was revealed to be considerably shakier than the directors had suggested.

The company’s annual audit had been carried out by KPMG, one of the big four auditors, and in March 2017 it had expressed no concern over reported profits of £150m, even though four months later these proved to be illusory. Perhaps they may have been reassured by the company’s ‘internal auditor’, Deloitte, which might also be looked into since it may have involved helping ‘massage’ numbers for KGMG to report on.

The role of the auditor is  ”to provide an independent opinion to the shareholders on the truth and fairness of the company’s financial statements,” according to The Institute of Chartered Accountants in England and Wales (ICAEW), one of the bodies appointed to approve and register auditors. Auditors’ reports, filed at Companies House, are used by suppliers and other interested parties to make decisions about their involvement with a company.

Not surprisingly, when the FRC, published the results of its annual inspections of the big four auditors in June it singled out KPMG for an “unacceptable deterioration” in the quality of its work.

But it also found that the overall quality of the audit profession is in decline and that only half of KPMG’s FTSE 350 audits. were deemed satisfactory.  In fairness it should be said that the FRC scores for the others in the big four had also declined. Deloitte scored 79%, down from 82% last year, EY fell from 92% to 82% and PwC was down from 90% to 84%.

It also fined PwC (Price Waterhouse Cooper) £6.5 million for its failings in auditing of retailer BHS two years before its collapse.

The calls for a radical overhaul have been growing as there seem to be so many accounting scandals, such as the recent problems with Patisserie Valerie. The calls reflect public concern about a conflict of interest since these businesses also earn massive fees from their clients for consultancy work.

Earlier this month KPMG announced that it will no longer do consultancy work for the UK’s biggest companies if it is also auditing them.

So when will there be some answers on the big four auditors?

According to a report in CityAM last week there are now five investigations either pending or on the go.

The CMA investigation following Carillion was expected to reveal its findings before the end of the year but it has recently announced that it is also intending to study the entire auditing market to see whether the big four were crushing competition from smaller firms.

Sir John Kingman, the chairman at Legal & General, was tasked by the government this summer with reviewing the operations of the FRC, whose outcome may strengthen its powers. The FRC is also reviewing itself separately from the Kingman investigation.

Shadow Chancellor John McDonnell has commissioned Professor Prem Sikka, an academic at the University of Sheffield, to review the sector and make recommendations with this report due by year end.

Finally, the Beis (Business, Energy & Industrial Strategy Select Committee) leader Rachel Reeves (Labour) has announced that it will review both the Kingman and CMA reviews, probably starting in January.

It will take a while before all the results are in and revealed but it looks like time is running out for the big four auditors and they can expect changes to regulation, to their ability to carry out both audits and consultancy, and possibly, some hefty fines at the end of it all.


Brexit, SME confidence and contingency planning

The Brexit car crash is having a negative impact on SME confidenceConsidering that SME confidence has been plummeting for some months now, last week’s crescendo of Brexit mayhem following the announcement of a mutually acceptable EU-UK draft agreement could hardly have been less helpful.

The 500-plus page document was only released to Cabinet members on Thursday, yet the Brexiteer objections and calls for resignations began well before any of them could have read or digested the details and it is questionable whether there was any comprehension of the implications of the contents or their consequences for businesses.

The suspense will doubtless continue this week, as we wait to see whether enough MPs submit letters to trigger a vote of no confidence in the Prime Minister and whether the document will even be approved in the House of Commons.

If it is not, what then – leaving the EU with no deal at all?

How can SME confidence be maintained and what price contingency planning?

Back in October the FSB (Federation of Small Businesses) had already warned that a no-deal Brexit would be “catastrophic” for SMEs and result in them postponing investments and cutting their workforces and Bibby Financial Services’ SME confidence tracker had revealed that 61% of importing firms expected a decline in profits if they could no longer access the EU single market.

Nevertheless, the Prime Minister yesterday continued with her positive messages about the agreement with a speech at the CBI annual conference. The CBI, while conceding that the draft agreement is not perfect, has urged parliament to endorse the deal, to protect business from the “wrecking ball” of leaving the EU without an agreement.

Mrs May’s focus in her speech was on immigration and the opening up of opportunities for skilled migrants earning £30,000-plus p.a. from all over the world, not just from the EU.

For months SMEs have been warning of shortages of workers, both low-skilled, seasonal and higher skilled, and of recruitment difficulties pushing up wages in an economy that is as near full employment as it has ever been. It has been one of the main concerns particularly in the hospitality, construction and farming sectors since the decision to Brexit was made.

The CBI chief, Carolyn Fairbairn said yesterday that the shortages of workers were “a really serious issue and we do have a huge difference with government on [it].” She questioned the idea that if you shut off the low-skilled route jobs are going to be filled: “Pulling up the drawbridge would be a very damaging thing to do.”

Increased costs, of course, apply not only to wages, but also to the many business that are locked into an EU-wide supply chain, whether it is for raw ingredients for food manufacture, materials for manufacturing, components needed for repairs or new equipment and machinery.

What can SMEs do to prepare for the post-EU world?

The FSB has advised its members to “step up their no-deal planning” as the prospect of the UK leaving the EU without a deal in March increases.

Clearly contingency planning has to move to the top of the SME agenda.  It will likely mean stockpiling supplies of the necessities to enable production to continue, and that will mean sourcing additional storage space, which is reportedly rapidly running out. It will mean spending any reserves to acquire these essential items rather than investing in growth for the future. It may mean setting up small satellite offices within the EU and making arrangements with EU suppliers in advance of the March deadline.

This applies to most SMEs including those who don’t trade with the EU since most firms use equipment that relies on imported consumables and spare parts.

All of this will have a significant impact on many SME businesses who will need to stockpile essential items to continue trading in the short term at the expense of longer term plans.

It could mean postponing investment in AI, robotics or new plant that would enable businesses to grow and be ready for the competitive challenges of IR 0.4 (the Fourth Industrial Revolution).

This was reinforced at yesterday’s CBI conference by Carolyn Fairbairn, who said: “Our firms are spending hundreds of millions of pounds preparing for the worst case – and not one penny of it will create new jobs or new products.

“While other countries are forging a competitive future, Westminster seems to be living in its own narrow world, in which extreme positions are being allowed to dominate.”

Contingency planning will also mean, as I often advise, maintaining an intense focus on cash flow, collecting in overdue payments and reducing debts.

Essentially, it means SMEs will have adopt the World War II advice to “keep calm and carry on” in the face of all this uncertainty.

Is it any wonder that SME confidence is at a low ebb?

Corporate boardrooms – a hostile environment for female executives?

Rani Lakshibai - a woman taking on a hostile environmentDespite the depressing picture of a decline in the number of women holding senior executive positions in FTSE companies, there have in the past been many impressive female leaders such as Rani Lakshmibai, the Queen of Jhansi in India, who led her troops in battle (with her baby son strapped to her back) during the Indian Mutiny/First War of Independence in 1857.

In July this year the UK’s Cranfield Institute published the results of its 20th FTSE Women on Boards Report which reported a marked drop in the numbers of female CEOs (chief executive officers) and CFOs (chief financial officers) and other executives on the boards of FTSE 250 companies and that the numbers had remained static for FTSE 100 companies.

It found that there were 30 women in full-time executive roles at FTSE 250 firms, down from 38 last year, equating to just 6.4% of the total, and of these there were just six female CEOs and 19 CFOs.

Although the numbers of female executives in FTSE 100 companies had risen from 27.7% in October 2017 to 29% by July 2018, the women recruited were largely in non-executive director roles.

All this is despite a drive to reach a target of 33% of female executives on FTSE 100 boards by 2020, set by the government-backed Alexander-Hampton review.

At the moment just four FTSE 100 companies – the retailer Next, the online estate agent Rightmove, the financial services provider Hargreaves Lansdown and the builder Taylor Wimpey – have 50% or more women on their boards. The CBI (Confederation of British Industry) director general is also a woman, Carolyn Fairbairn.

Among the USA’s Fortune 500 companies, analysed by the Pew Research Centre, it is much the same story. Just 10% of 5,700 CEOs and CFOs in Standard & Poor’s Composite 1500 stock index companies are women.

There have been some high-profile female CEO resignations too, including Indra Nooyi, from PepsiCo, Denise Morrison, from Campbell Soup, and Meg Whitman, from Hewlett Packard.

Changing the boardroom culture to a less hostile environment for female executives

There is some evidence that the way female executives are treated is different from the way male executives are.

In an article in the Evening Standard recently the writer Anthony Hilton cited the treatment of top 10 accountancy firm Grant Thornton’s female CEO Sacha Romanowich, who he said was “effectively forced to resign” after three years.

An anonymous memo was sent to the press, he says, raising concerns about Romanowich’s alleged “socialist agenda”.  She had talked about social mobility, capped her own remuneration to well below that of other Partners in Grant Thornton and introduced a scheme to give all the staff a share of the company’s profits. Some of the company’s rivals spoke out about the brutal treatment she had been subjected to.

It was a similar story of rumour, innuendo and gossip, he says, that led to the eviction of Barbara Judge last year as chair of the IoD (Institute of Directors).

The question is whether such tactics would have been used against male executives.

On Tuesday this week, the Guardian reported on a call from Sir Philip Hampton, chair of the Hampton-Alexander Review referred to earlier, for consumers to boycott the firms that are “so clearly out of touch”.

This was after it was found that Five British companies have failed to appoint a single woman to their boards two years after the target set by the Review.

Sir Philip, who is the CEO of pharmaceuticals company GlaxoSmithKline, said: “it would be good to see pressure from the media, politicians, ourselves [as business leaders] and consumers” put on companies that are clearly out of touch with the 21st Century.

There is a theory, called the Glass Cliff, that says that women (along with other “minorities”) are more likely than white men to be promoted to CEO of weakly performing firms or during times of economic decline. Arguably, therefore, they are being set up to fail. If true this is appalling.

Historically, we are not short of examples of able female leaders, from the Rani of Jhansi mentioned above to Boudica or Boudicca, a queen of the British Celtic Iceni tribe who led an uprising against the occupying forces of the Roman Empire in AD 60, to Queen Victoria, who ruled over the vast British Empire, to two female leaders of the Tories, Margaret Thatcher and Theresa May.

It is true that female politicians are subject to some appalling bullying, insult and harassment particularly on social media.

It is also not unusual for male executives to explain the lack of female executives with excuses such as a shortage of suitably able female candidates, or that women are temperamentally unsuited to the cut and thrust of the boardroom.

Is it any wonder that in such a hostile environment for women the 19th and 20th Century attitudes of the male dinosaurs in many boardrooms are so hard to change despite the fact that they are limiting their businesses to a narrower pool of available talent than they otherwise might have?

Why is this Tory Government intent on destroying SMEs?

Wrecking ball destroying SMEsAt the October 2018 Tory party conference, the Prime Minister reiterated her support for businesses, calling them “the wealth creators, the risk takers, the innovators and entrepreneurs …. who generate jobs and prosperity for our country” yet the Government’s actions seem set on destroying SMEs and entrepreneurial initiative.

Whenever a SME encounters financial difficulty that make it difficult to keep up to date with its VAT and PAYE payments, it is invariably HMRC (Her Majesty’s Revenue and Customs) that is criticised for its heavy-handed and unsympathetic behaviour in recovering monies owed.

There is some truth to this given recent revelations of a surge in HMRC action to seize assets, which had risen by 45% in the tax year to March 2018, following a 23% increase in asset seizures the previous tax year. It is debatable whether asset seizure is an effective arrears-gathering measure, given that the seized assets are often then sold at auction for little value and the seizure effectively prevents a business from continuing to trade in a way that can pay off arrears.

It is worth remembering that HMRC does have discretionary powers, such as to agree Time to Pay arrangements to help businesses in arrears to settle their outstanding taxes over time although it is not obliged to offer this facility and no doubt is reluctant to do so if previous arrangements have failed.

Crucially, it must be remembered that HMRC is a tool of Government such that if HMRC is increasing its pressure on businesses, whether via asset seizure or by resorting to litigation, as I have reported in several previous blogs, then surely it is because the pressure is coming from the Government to improve its collections and recoveries.

However, the recent changes to HMRC’s creditor status and to directors’ liabilities in the October 30 Budget are telling.

Firstly, the Chancellor announced a restoration of HMRC’s status as a preferential creditor albeit behind employees unlike its pre Enterprise Act 2002 status of ranking pari pasu (equally) with employees. This means that the recovery of unpaid PAYE, CIS and VAT as any other taxes collected by businesses on behalf of HMRC will rank ahead of suppliers and unsecured creditors in insolvency.

Secondly, the Chancellor announced a measure in the Budget that has so far provoked little comment; he proposes to make directors and advisers jointly and separately liable for the preferential tax liabilities in insolvency. The details no doubt will clarify the nature of any actual liability such as if the insolvency is deliberate or not but this will effectively allow the appointed insolvency practitioners to hold directors to ransom by threatening expensive litigation against the directors personally.

This second measure is likely to be a significant deterrent to anyone becoming a director and also to entrepreneurs and indeed anyone wanting to set up a new company.

Since there also seems to be a disparity between HMRC enforcement action towards SMEs when compared with the seeming light touch on larger enterprises, it is reasonable to conclude that this Tory Government has abandoned entrepreneurs and is intent on destroying SMEs.

Who will become a director once they know what potential liabilities they are taking on?

As ever, government actions speak louder than words.

Is fear for the future the explanation for a rising numbers of insolvencies?

does fear for the future rule your business decisions?The increased number of insolvencies, largely due to CVLs (Creditors Voluntary Liquidations) between July and September this year is a worrying, but hardly a surprising, trend.

There has been a gradual upward trajectory in insolvencies for much of 2018 but it seems to be accelerating. The latest figures, for Q3, show an increase of 8.9% on the previous quarter and an increase of 19.3% compared with Q3 in 2017. CVLs make up the bulk of the quarter’s insolvencies at 71.6% of the total, that is 3,083 out of 4,308 and the highest number of quarterly CVLs since January to March (Q1) 2012.

As for much of the year the construction industry had the highest number of insolvencies in the 12 months ending Q3 2018, followed by the wholesale and retail trade and the repair of vehicles industrial grouping.

For some time now, it has been clear that businesses have been holding back on investment for growth given the climate of uncertainty that the economy has been in for two years now, and yes, many cite the lack of clarity over the outcome of the Brexit negotiations as their reason for holding off.

My regular readers know that I believe no SME business can afford to stand still without risking eventual failure and that in difficult times I advise focusing relentlessly on cash flow as well as a regular review of margins and Management Accounts.

Nevertheless, it is understandable that there is little confidence in the future after two years of tedium, and, some would argue, incompetence in the negotiations and it may be that the rising insolvencies are a sign of businesses – and creditors – running out of patience or room for manoeuvre.

The signs for the future are not good

In the last week the CBI (Confederation of British Industry) quarterly survey has revealed that smaller British manufacturers expect their output to dip for the first time in seven years during the next three months. It found that order books are struggling as Brexit approaches, with firms reining in their investment plans as a result. Optimism about export prospects for the year ahead is also at its the weakest level since April 2009.

Lloyds Bank’s monthly barometer of business confidence has also shown a marked slide particularly among smaller SMEs and the net positivity balance had fallen by 9% to -7%.

While the latest IHS/Markit purchasing managers’ index (PMI) for the construction industry improved to 53.2 in October a slowdown in housebuilding across the UK and in new orders is weighing heavily on construction, proof, if any were needed, that in this sector particularly survival depends on growth.

On top of this has come the news that two European suppliers of car parts, Schaeffler and Michelin, announced plans to close UK factories, although both deny this has anything to do with Brexit. Instead they cite dwindling demand for smaller tyres.

As reported in the Evening Standard yesterday, research by Populous World has predicted that around 12,450 smaller businesses in London and the South East may go under if there is a no deal Brexit, with the figure at 7,900 failures even with a deal.

As if that were not enough, there will be more pressure on struggling businesses following the restoration of HMRC to preferential creditor status in last week’s Budget, albeit that this is restricted to recovery of unpaid PAYE, CIS and VAT as the taxes collected by businesses on behalf of HMRC.

Given all the above and that HMRC has become increasingly aggressive in seizing assets and in litigating to recover money owed and, as calculated by Pinsent Masons, that the average length of cases of unresolved tax battles going through the courts is now 39 months, it is perhaps no surprise that creditors are running out of patience and CVLs are climbing rapidly.

Many lenders, creditors and even shareholders would appear to be pursuing a strategy of ‘better some cash now rather than waiting for more later’. Is there a real fear of worse to come?

Is Buy-to-Let property still a good investment?

Buy-to-Let residential property focusThe Buy-to-Let residential property sector is the focus of this month’s sector blog.

For several months now, the rate of growth of UK house prices has been slowing down, although this has been somewhat skewed by significant reductions in London and the South-east of England.

There is no doubt that the UK still faces a housing shortage, particularly for affordable homes, with purchase prices still way beyond the means of many potential buyers. In theory this should preserve demand for privately rented homes given that almost everywhere in the country there are lengthy waiting lists for council housing.

However, there have been a number of measures and announcements in the last couple of years that may signal that becoming a Buy-to-Let landlord is no longer such an attractive proposition, especially for private landlords, rather than for property owning businesses.

Landlords are subject to a number of taxes including stamp duty, a one-off tax on the purchase of a property valued above £125,000. In fairness this applies to all buyers and the amount payable goes up in stages depending on the purchase price. So, the duty payable is £3,750 on the first £125,000, £6,249.95 on prices from £125,001 to £250,000 as examples. Stamp duty for second homes now also attracts a 3% surcharge.

But private landlords must also pay tax on their rental income and the summer budget of 2015 changed the amount of tax relief available on the interest on buy-to-let mortgages, which since April 2017 can now only be claimed at the basic, 20%, level of tax, regardless of whether the landlord is paying this or the higher rate of income tax. The same budget also abolished the “wear and tear” tax relief with effect from 2016, which allowed landlords to claim tax relief of 10% on rental income.

On selling a property a landlord must also pay capital gains tax, but only if they sell at a profit. However, they can deduct some expenses incurred in buying, selling or improving the property.

This build-up of pressure on private landlords over the last couple of years, has, according to a report from the Intermediary Mortgage Lenders Association’s (IMLA), resulted in a reduction in new investment in the Buy-to-Let sector from £25 billion in 2015 to just £5 billion in 2017.

In October this year, the Residential Landlords Association (RLA) called on the Government to force Buy-to-Let mortgage lenders not to refuse mortgages to landlords where a tenant is a benefit claimant. RLA research found that “two-thirds of lenders representing 90% of the buy-to-let market did not allow properties to be rented out to those in receipt of housing benefit”.

Looking further ahead, private landlords may eventually find demand for rental properties reducing in view of the Prime Minister’s announcement at the Tory Party conference in October that the cap on local authority borrowing to finance council-house building would be removed.

However, this week, an article in the Independent newspaper revealed that more than half of local authorities in England, many of them in areas of greatest need for new homes, would be unable to take advantage of this because they did not have the right type of accounts, known as housing revenue accounts (HRAs).

This, and a feared slowdown in new builds by Housing Associations, has led to the Office for Budget Responsibility (OBR) predicting that the result would be fewer than 9,000 new homes over the next five and a half years, rather than the 10,000 a year predicted by the Government.

The future for the private Buy-to-Let sector is therefore less certain than it was. Despite the pressure on landlords, those who see property as a long-term income investment will benefit from the demand providing their borrowings and maintenance costs are minimal. A change of government might of course change all this.

November 2018 Key Indicator – investment and asset classes

choosing asset classes is like crystal ball gazingIn such a febrile market it takes nerves to make investment decisions about which asset class to follow when there is the danger that an asset’s value can reduce. At the moment it seems as if choosing between asset classes is a bit like consulting a fortune teller.

Why? Because the global, regional and national economies are beset by influences that are making them very volatile for a variety of reasons.

In October, the IMF (International Monetary Fund) forecast that global growth would remain at its 2017 level but that “expansion has become less balanced and may have peaked in some major economies”. It notes also “the negative effects of the trade measures implemented or approved between April and mid-September”.

However, this is as much political as it is economic, notably, the USA’s imposition of trade tariffs particularly on China, but also its threats of sanctions on Iran.

The prospect of a trade war with China is particularly alarming and has wide-reaching implications in that the Chinese economy has been slowing and its currency, the Yuan, has been devalued substantially over recent months. While this should make Chinese exports more competitive, tariffs might reverse this. It must also be remembered that China holds some $1.2 trillion worth of US government bonds and should it decide to dump them, this would cause a rise in US interest rates triggering a knock on impact on inflation which would reduce the demand for Chinese goods.

Similarly, in the UK as the Brexit negotiations near their endgame with little or no clarity in sight, businesses and investors have been holding back on investment with some setting up outposts in Europe, as a precaution against the absence of any sensible agreement.

Growth and productivity in the UK economy have been anaemic for some time, arguably since the 2008 Great Recession.  In Europe, too, growth is slowing.

The result has been huge volatility in share prices across the world’s stock markets and in exchange rates, not least £Sterling, which has been yo-yoing in response.

What asset classes to invest in?

There are four main asset classes:

* Equities, or shares

* Bonds, debt or fixed-income securities

* Cash, or marketable securities

* Commodities such as agricultural products, metals, including gold, energy supplies such as oil

Alternative asset classes include real estate, or valuable inventory, such as artwork, stamps and other tradable collectibles.

While the advice is always to invest in a range of assets to spread the risk and it is often argued that one investor’s loss is another’s gain, in this climate it is difficult to determine which asset classes are the safer option and which offer growth prospects.

After a long period of share price growth, here in the UK at least, the appetite for buying equity in a business is low. The recent stock market declines and volatility are an indication of the uncertainty investors are currently feeling. Another concern that has been emerging is that businesses in the technology sector have been over-valued or will be unable to sustain their current profit levels in the future.

The equally volatile currency exchange rates has made the buying bonds, debt and fixed-income securities somewhat risky although they are being seen as a medium-term safety investment until the stability and predictability of other asset classes is restored.

With commodities, again there is a political dimension.  Oil prices have been rising, partly out of concern for supply from Iran given Donald Trump’s threatened sanctions, and partly because the Opec countries have been keeping prices high in the light of this. Also, commodities rely on consumption and growth which have stalled.

Gold, on the other hand, has been plummeting since February according to quarterly reports published on the website it were down by 6% in Q2 this year (April to June) and by a further 5% in Q3 (the three months to August). Their analysis attributed this to investors switching to the $US as a safe haven against geopolitical concerns. This is apparently consistent across the metals and mining sectors, they say.

The underlying theme seems to be that the future income and growth of most asset classes are uncertain, at least for the moment, making it harder to decide what, if anything it is relatively safe to invest in.

STOP PRESS: In the light of the above it is no surprise that the Bank of England today voted unanimously to keep interest rates unchanged at 0.75% “because of rising uncertainty among UK businesses” about the outcome of the Brexit negotiations.

Autumn 2018 Budget offered some cheer for SMEs and the High Street

Budget - pulling rabbits out of hatsThere were few surprises in yesterday’s budget given that much of it had been leaked in advance although it did allow the Chancellor to make a joke about no new rabbits being pulled from hats.

Much of the budget was aimed at addressing the concerns of SMEs on the High Street with a promise to cut business rates by a third for those retailers in England with a rateable value of £51,000 or less. This offers an annual saving of “up to £8,000 for up to 90% of all independent shops, pubs, restaurants and cafes”, which should please the FSB (Federation of Small Businesses), which had asked that any relief be applied to “hospitality and service businesses, not just retailers”.

However, the Chancellor also stressed that the High Street had changed forever and that therefore there would be £675m of co-funding to create a “Future High Streets Fund” to support councils to draw up plans for the transformation of their High Streets, such as perhaps including converting empty shops into homes to increase town centre footfall.

SMEs and especially those in rural areas will also welcome the confirmation of a 30% growth in infrastructure spending (both on roads and IT) amounting to £30 billion, which included the £420 million already announced for pothole repairs.

Although the BCC (British Chambers of Commerce) wanted to abolish the apprenticeship scheme, SMEs did at least get some relief on their contributions which was reduced from 10% to 5%.

In a bid to stimulate stalled business investment in capital such as in plant & machinery, the Annual Investment Allowance is to be increased from £200,000 to £1m for two years from 1 January 2019.

The Chancellor announced that the UK would introduce its own tax on large digital companies, the likes of Amazon, with a global revenue of at least £500 Million a year.  He stressed that it would not be a tax on sales but on the in-country earnings of these companies expected to be at a rate of 2% and applied from April 2020.

The question is whether it will actually be introduced given that there will first be consultations and, given the time frame, how much help it will be to those SMEs already struggling because of the online competition?

Fuel duty rates were frozen for the 9th successive year, which will be welcomed by the Freight industry as well as others that rely heavily on vehicle use.

Entrepreneurs’ Relief was also tweaked with a number of measures including an increase in the minimum period throughout which the qualifying conditions for relief must be met to be extended from 12 months to 24 months.

While subject to further consultation before it is introduced on 1 April 2020, the maximum recoverable R&D tax credit in any tax year is to be restricted to three times the company’s total PAYE and NIC liabilities.

From April 2019, the PAYE tax-free personal allowance threshold increases quite significantly from £11,850 to £12,500 and the 40% higher rate tax threshold from £46,350 to £50,000.

The VAT registration threshold was frozen for the next two years at £85,000.

The budget also covered insolvency & tax avoidance by directors

And, slipped in with virtually no reaction from anyone so far is a change to the status of HMRC, which will now become a preferred creditor in insolvencies. Given that I have already reported on HMRC’s use of increasingly aggressive tactics including an increase in asset seizure from small businesses it will be interesting to see what difference this makes to HMRC tactics. This would overturn the 2002 Enterprise Act which removed HMRC as a preferred creditor but we have yet to see the detail.

Directors and others involved in tax avoidance, evasion or ‘phoenixism’ are to be made jointly and separately liable for company tax liabilities where there is a risk that the company may deliberately enter insolvency

And some fallout from Carillion

In the wake of the Carillion and other high profile business failures involving PFIs (Private Finance Initiatives) there will be no more such arrangements. PFIs will be abolished.

Finally, the national living wage is to increase by 4.9%, from £7.83 to £8.21, something that will bring little comfort to SMEs.

Of course, all of the above comes with the large caveat, that depending on the outcome of the Brexit negotiations there may have to be a second budget in the spring.