Hargreaves Lansdown sees 557% rise in trading post-Brexit

Hargreaves Lansdown saw a 557 per cent increase in trading last Friday, following the UK's vote to leave the EU.

The platform saw the equivalent of 17.5 years of normal activity on the website in one day, with many investors rushing to buy amid the market volatility and falls.

Data from the platform showed that there was a 381 per cent increase in investors buying sterling, with the volume of sterling equivalent trades up 837 per cent on the day.

BlackRock topped the list of the most bought funds, with investors flocking to the BlackRock Gold & General fund as many sought out safe haven assets such as gold.

However, a number of investors sought to capitalise on weakness in UK equity stocks, with seven of the top 10 funds being UK equity focused.

The Lindsell Train UK Equity, Woodford Equity Income and Fundsmith Equity funds were the top selling active UK equity funds, followed by a host of UK tracker funds.

The HSBC FTSE 250 Index, Legal & General UK Index and Legal & General UK 100 Index Trust funds all saw healthy inflows.

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It was a similar story on the investment trust side, with City Of London Investment Trust, Edinburgh Investment Trust and Finsbury Growth and Income Trust all featuring in the top five most-bought list.

Ian Gorham, chief executive at Hargreaves Lansdown, says: “This was a record day with trading activity especially brisk. Retail investors took to their screens and mobile phones aiming to capitalise from the volatility, with the vast majority of trades being buys.

“It will take time for the results of the vote to play out in full, but I see no reason why both our clients and our business should not continue to prosper, whether inside or outside the EU.”

AJ Bell said it saw a similar rise in trading volumes on Friday, with a five-fold increase in trading in the morning.

Many investors were taking advantage of falling markets, with AJ Bell reporting three-quarters of its day's trading were people buying, rather than selling.

The rise in trading and volatility in markets led to some people being blocked from trading electronically as market makers struggled to get pricing information for some assets, leading to delays.

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Brexit – a shock for markets, or a crisis?

Investors have been seriously wrong-footed by the result of the EU referendum. But the shock of City traders this morning is nothing compared with the stunned response of the people who thought they ran the country. The economic and political questions raised by this vote will not be answered for years, possibly decades. But the immediate questions for investors are how long the “risk-off” mood in markets will continue and how much damage it will do in the process.

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UK Advisers | UK Asset Managers

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FTSE rebounds after Leave vote as US markets fall

US markets have opened more than 2 per cent lower following the UK's decision to leave the EU, however, the FTSE has rebounded to regain much of its previous losses.

The S&P 500 has dropped 2.26 per cent in trading so far, seeing the sharp selloff following the UK referendum. In particular financials and technology sectors have been hit as investors seek safe havens.

The US Dow Jones average fell by more than 500 points at market open, with investors moving into safe haven assets such as the dollar, gold and US Treasury bonds.

The technology-focused Nasdaq index has seen a larger hit, falling 3.7 per cent on open.

The so-called 'fear index', the Vix, which is a measure of expected S&P 500 volatility over the next month, rose by 40 per cent, marking its biggest increase since August last year.

Columbia Threadneedle global head of fixed income Jim Cielinski says: “Core bond markets have rallied sharply – as market yields have plunged to record lows in many developed markets. The benchmark 10-year US Treasury bond, for example, is lower in yield by around 20 basis points. This takes that yield to around 1.5 per cent, the lowest in recent decades.”

However, the FTSE 100 has rebounded from its previous falls today, which at one point saw an 8 per cent drop.

The blue chip index is now sitting above levels seen on Monday morning, standing at 6,182.25, compared to Monday's open of 6,126.27. The index is still 2.24 per cent down on the day, at time of publishing.

The FTSE had previously rallied earlier in the week, when a Remain vote looked increasingly likely, with the gains from that rally now wiped out.

However, the FTSE 250 has been hit harder and remains down 6.82 per cent on the day. It stands at 16,149.89, down on the 16,688.41 seen on Monday morning.

Sarasin and Partners fund manager Lucy Walker says part of the market rally could be due to opportunities for US traders to pick up cheap UK stocks with the weak pound and support the market. However, she warns that must be weighed up against huge uncertainty in the UK market.

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Back from the dead: Is sub-prime about to make a comeback?

Mortgage experts believe the UK could be heading for a return to the kind of mortgage lending that triggered the financial crisis.

Some argue we could see the comeback of sub-prime mortgages on such a scale that these loans could be packaged up and sold in the same way as we saw in the run-up to 2007 and 2008.

Ratings agencies Fitch and DBRS recently rated the first US securitisation backed by sub-prime mortgages since the crash.

The $161.7m (£110m) bond launched two weeks ago is backed by mortgages from US lender Caliber Home Loans and was bought by the hedge fund Lone Star.

Fitch says the deal will be a “trailblazer” and that similar offers are likely to follow in the third quarter.

Brokers say there is demand for mortgages for borrowers with less than perfect credit histories, and a return to securitisation in the sub-prime sector in the UK would fuel appetite for this kind of lending.

Those in the mortgage funding business say the packaging up of loans in this way, were it to see a resurgence in the UK, would look very different to the layered, misrepresented tranches of loans seen in the past.

But has sub-prime lending done enough to overcome its bad reputation? How does this sit with the tougher affordability requirements of today? And can we really get to a place where the return of sub-prime mortgages is a good thing for consumers?

The Savile Row solution

Clayton Euro Risk carries out due diligence on mortgage finance deals and also offers risk management for lenders, institutional investors and third party servicers.

Chief executive Tony Ward says future UK sub-prime securitisations are likely, but will be more tailored than previous mass-market offerings.

He says is partly due to tougher regulation, such as capital requirements for buyers and rules which require sellers to retain 5 per cent of the risk on their own balance sheets when selling on mortgages and loans.

He says: “Investors want a Savile Row solution rather than something off the peg.

“It is more likely that originators will identify buyers– such as pension or investment funds – and construct portfolios specifically for them. They are securitisations, but designed to meet an investor's bespoke requirements. If the investor has a minimum yield requirement then this might require near-prime and sub-prime loans to form part of that package. But there will be much more oversight than there used to be.”

Investors want a Savile Row solution rather than something off the peg

GPS Economics director Gary Styles says: “You have to be very clear about what you mean by sub-prime. In this marketplace there's a lot of difference in how it's described, from one lender to the next.”

John Charcol senior technical manager Ray Boulger says lender appetite for sub-prime lending has clearly waned following the crisis, but says this could change if investors begin demanding it.

He says: “I rather doubt any of the lenders that are currently in that market are doing enough business [for a securitisation].

“But the fact that the first such securitisation since the credit crunch has been done in the US clearly does set the tone, and I would think there is a strong possibility that we could see something similar happening in the UK. Not this year, maybe not even next year, but it's setting the direction of travel.

“Certainly the more appetite there is from investors to offer this sort of mortgage, the easier it becomes for lenders to offer it.”

Specialist buy-to-let lender Fleet Mortgages chief executive Bob Young says there is demand from consumers for more sub-prime lending.

He says: “There is appetite from borrowers for it, and brokers too would like to have more sub-prime back in the market. Is there investor appetite, from a bond perspective? The answer is, if the yield is big enough, there will be interest. The final kicker is, will the FCA allow it?”

But Paragon Mortgages managing director John Heron doubts whether the packaging up of sub-prime loans can return to the UK.

He says: “Although all sorts of things are possible, with financial engineering, I don't see any prospect of material levels of sub-prime loans being generated in the UK market.

“Regardless of investor sentiment, lender behaviour is underpinned by a whole number of things, not least their own approach to prudent lending. But underpinning that is a very tough conduct of business regime which lenders cannot breach. I cannot see any basis on which you could see a return to so-called sub-prime lending in the UK.”

Financial Inclusion Centre co-founder Mick McAteer argues regulation has gone a long way to keeping the mortgage market in check, in terms of curbing the excessive borrowing levels of the past.

He says: “The post-crisis clampdown has been a good thing. It's [now] a much more regulated and sustainable retail mortgage market.

“Yet while it's not the same level of risk as there was before, there is a concern we are getting there. If you look at the Office for Budget Responsibility's projection for overall consumer household credit, in a few year's time it looks like it will rise to pre-crisis levels. I hope we don't get back to that. While a lot of that has been driven by the buy-to-let market, there will be sub-prime in there as well.”

McAteer is also concerned about the knock-on effect of any return to sub-prime lending.

He says: “Borrowers on interest-only mortgages will find it hard to remortgage and they could get pushed into the sub-prime market because they have no other options. That's the real consumer protection angle we are concerned about, the availability of mortgages for people who are coming towards the end of their term and may have to remortgage.”

A different beast

Chadney Bulgin mortgage partner Jonathan Clark says a new wave of sub-prime securitisation would be good for the market, particularly as the controversial practice of self-certifying income is no longer permitted in the UK.

He says: “The return of securitisation among sub-prime lenders will understandably be viewed with some concern by our industry but as long as these lenders continue to grant their new loans responsibly, it should be good news as it will free up funding and help stimulate competition.  Today's sub-prime market is a very different beast to the pre credit-crunch one as of course, self-certification no longer exists and looks set to remain extinct.”

Your Mortgage Decisions director Dominik Lipnicki says the market needs more lending to those with imperfect credit histories.

He says: “We have lenders that play in that market, and hopefully we will see more of those. The industry has got to represent the people that it lends to. There aren't enough lenders to deal with any niche side of the market. All the big players want the same people. If a borrower falls outside of that, they start having issues.

“Do I see a return to how it was, such as lending money to absolutely anyone? No, but I do see a return to the more sensible end of it, and that's right.”

Could packaging up sub-prime mortgages make a comeback in the UK?

YES

RAY BOULGER

The fact that the first such securitisation since the credit crunch has been done in the UK clearly does set the tone, and I would think there is a strong possibility that we could see something similar happening in the UK. Not this year, maybe not even next year, but it is setting the direction of travel.

If lenders can securitise certain types of lending, it should have the effect of increasing appetite. At the moment, the relatively few lenders still in the adverse credit market are not accepting that much, and that could be another consequence of this [latest deal]. It might be that lenders are prepared to go up the risk curve a bit.

If lenders have to charge significantly more, because there is a degree of risk, there comes a time when borrowers say “its too expensive” and decide to keep renting. Certainly the more appetite there is from investors to offer this sort of mortgage, the easier it becomes for lenders to offer it.

NO

JOHN HERON

It is all about the underlying asset. Could you securitise such mortgages? With the right structuring, yes. But what you do not see in the UK is any flow of such mortgages. Mortgage market regulation is such that we have very robust rules around lending.

All loans have to meet minimum standards, including affordability assessment. So sub-prime is generally associated with a combination of self-certification of income, adverse credit and so forth. Those loans are simply not being generated in the UK market.

Although all sorts of things are possible, with financial engineering, I don't see any prospect of material levels of sub-prime loans being generated in the UK market. Regardless of investor sentiment, lender behaviour is underpinned by a whole number of things, not least their own approach to prudent lending.

But underpinning that is a very tough conduct of business regime which lenders cannot breach. I cannot see any basis on which you could see a return to so-called sub-prime lending in the UK.

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Can advisers overcome their doubts on workplace advice?

Advisers used to dealing with individuals may shy away from the corporate advice market because they think it is too difficult to enter. But auto-enrolment and the Financial Advice Market Review have highlighted the potential of the workplace as somewhere people can access financial services, bringing greater opportunities for advisers.

With this in mind, SimplyBiz recently launched its Workplace Academy, which is accredited by the Pension Management Institute. It is designed to give advisers the knowledge, skills and confidence to provide corporate advice.

“The SME market is hugely under-served and there are a lot of opportunities to have that required conversation around auto-enrolment,” says SimplyBiz Group workplace solutions director Tom Nall.

“There is a tension at small employers that have more limited budgets. A one-size-fits-all approach is easier to implement and has economies of scale but how do you make it feel personal, meaningful and engaging to employees? Advisers need to steer employers around the employee benefits challenge, whether it is childcare vouchers, fitness and health, or the turnover of staff. They need to be a communicator, an employee benefits consultant and a risk consultant,” he says.

The Workplace Academy is open to all advisers, not just SimplyBiz members. For a one-off £500 membership fee, which also includes PMI membership, advisers will have access to one-day induction events that provide an overview of the corporate advice market, a two-day residential course and a programme of face-to-face masterclass events at least three times a year, supplemented with webinars.

“You also get access to me and my team,” says Nall. He explains the availability of speakers for the events has meant the academy's first intake has been put back slightly from June to July, but a series of induction events took place in April as planned. “We already have 12 cases on the go where advisers have gone to induction events, seen the value of having a wider benefits proposition and are working with my team to put it together, so they are ready to act now,” he says.

Although there is not a set number of places at the Workplace Academy, Nall tends to have no more than 30 advisers in a room at the events. “I find it difficult to have an interactive session with speakers where there are larger groups than that,” he says.

The Workplace Academy covers various modules such as group risk, health and wellbeing products, salary exchange benefits, auto-enrolment, credit broking and business protection. It also covers soft skills that advisers need to compete in the corporate advice market, particularly as they may be dealing with people in areas like HR for the first time.

“If we didn't focus on soft skills it would be difficult to give advisers the confidence to step into the workplace context,” says Nall. “Advisers are not just getting technical knowledge; they also have access to real practitioners.

“Advisers will leave the events with the ability to start a conversation with clients and know how to partner with other business advisers. It's important to give people the theory but also the practical benefit of ongoing support.”

Adviser view: Alan Lakey, senior partner, Highclere Financial Services

I would imagine this would be pretty successful. Most advisers start off with, and are comfortable with, individual needs as these tend to be straightforward. As soon as it comes to advising a business, the rules are slightly different and the products are different. Advisers are fearful of getting involved because it's out of their comfort zone. They might not understand accounts and, from an insurance viewpoint, the balance of premiums when directors insure each other and many other aspects. You could probably understand these things if you trawled the internet and made copious notes. But advisers don't have time to do this. If advisers want to grow their business, corporate advice introduces them to the directors of businesses and gives access to their personal needs.

Adviser view: Tim Harvey, managing director, HR Independent Financial Services

This is not one for me. The reason some advisers are reticent is that it's such a strange area for them to be involved in. Once you've agreed with the employer what needs to happen, it's a payroll function, so you need set up a system that will drive it. If you were to move into this area, the question is likely to be: what am I charging for? If you do auto-enrolment, what else are you going to pick up? Shareholder protection or pension contributions for employers? I'm not sure there's much money to be made; it's a prospecting activity. The problem for many advisers is not having to find more clients, but having too many. Pre-RDR, when there were loads of advisers, it would have been brilliant.

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FCA unveils new FAMR working group members

Scottish Widows chair Nick Prettejohn will lead the 15-strong Financial Advice Market Review working group, tasked with working on three recommendations from FAMR.

Prettejohn was also chair of the FAMR expert panel.

Eight of the 15 FAMR expert panel members have returned to be on the working group. They are:

• Which? policy and campaigns director Alex Neill,


• Nationwide group product and marketing executive director Chris Rhodes,


• Legal & General savings director Jackie Noakes,


• Nutmeg director Nick Hungerford,


• Fidelity investment trusts head Nicky McCabe,


• Old Mutual Wealth chief distribution officer Richard Freeman,


• Keyte Chartered Financial Planners director Robin Keyte,


• Financial Services Consumer Panel chair Sue Lewis.

Also on the working group are:

• Financial Services Consumer Panel's Caroline Barr,


• Citywide Financial Partners founder and FCA Smaller Business Practitioner Panel chair Clinton Askew,


• Wesleyan Assurance Society group chief executive and FCA Smaller Business Practitioner Panel member Craig Errington,


• St James's Place chief executive and FCA Practitioner Panel member David Bellamy,


• Virgin Money UK chief executive and FCA Practitioner Panel member Jayne- Anne Gadhia,


• Barclays personal banking chief executive and FCA Practitioner Panel member Steven Cooper,


• Money Advice Service policy manager and Financial Services Consumer Panel member Teresa Fritz.

The working group will concentrate on three recommendations from the FAMR: to work with employer groups to develop a guide to the top 10 ways to support employees' financial health, to publish a shortlist of potential new terms to describe guidance and advice, and to lead a taskforce to design a set of rules and “nudges” to try and increase consumer engagement.

An announcement on the FCA website says: “Members have been selected on the basis of their expertise and interest in advice and guidance, and also their ability to attend meetings and to contribute to its work. They will act in a personal capacity rather than represent the views of their firm or organisation.”

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Mike Aldridge: Why advisers should hold annual protection reviews

Despite numerous stories in the press that “life policies do not pay” the latest claims statistics released by providers present a very different case c

The stats show the percentage of life claims paid tend to be in the high 90s. Cancer came in as the top cause for claims on life policies, as well as critical illness, terminal illness and children's critical illness policies.

Critical illness claims paid by the main providers are also comfortably above 90 per cent. The average age of critical illness claimants with L&G was 46 years, rising to 47 years with Aviva and 48 years with Royal London. It is always distressing to see the amount of children's critical illness claims, although, at the same time, great to think how much the payouts will have helped support families through an incredibly difficult time.

Income protection presents a similar picture, with over 90 per cent of claims paid too. Again, cancer is high in the reasons for claim, alongside musculoskeletal and mental health issues.

What I find staggering is the sheer amount of money being paid out. For instance, L&G paid out £277m worth of life claims to almost 7,000 people, while Aviva and Friends Life life insurance, critical illness and income protection policies paid out more than £839m to 23,000 customers and their families.

We often talk about the number of people in the UK that do not have cover, yet the amounts paid out by the main providers still amount to hundreds of millions of pounds.

Worryingly, there are also customers that have taken out policies but are not fully aware what cover they provide, nor when and for what they can claim. We had a case recently where an adviser called a client to offer a review of their protection needs, only to be told that arranging cover would be impossible, as they had been diagnosed with cancer the previous year.

When the adviser asked whether they already had a policy and whether the claim had gone through smoothly, he was told they had refrained from making a claim due to concern over how it might impact on future insurance premiums. The amount of cover in this instance was in excess of £150,000.

Had the claim been made, and presumably been successful, the client would not only have been relieved of a significant amount of financial pressure at the time but would also have benefited from the additional support associated with many policies today.

Claimants often say the added support such as counselling services, physiotherapy sessions and practical advice, as well as having someone at the end of the phone, can play as crucial a role in recovery as the reduction in financial pressure from a payout.

It is so important advisers keep in touch with their clients for this reason and why we should keep pushing within the industry for annual reviews. It would also be great to see more good news stories in the press highlighting the fact that, while there may be a small number of claims rejected (rightly or wrongly), there are thousands being accepted and millions of pounds being paid out to families at a particularly devastating time.

Mike Aldridge is sales director at London & Country

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Where has the £65bn Brexit cash gone?

Outflows sparked by the possibility of Brexit might take longer to return to the UK as more market uncertainties take their toll on investors, experts are predicting.

Some £65bn has been pulled out of the UK in March and April amid growing uncertainty over the EU membership referendum, Bank of England figures show.

The Bank says the money was either taken out of the country or converted into other currencies in the two months to April.

Axa Wealth head of investing Adrian Lowcock believes the money that has left the UK has gone into US markets and expects more outflows in the coming weeks.

Lowcock says: “Much of the flow out of the UK has been linked to the weakness of sterling, which has been more volatile than the UK market, so investors have been buying currencies such as US dollar and Japanese yen which are defensive.”

In March alone £59bn was pulled from UK assets and currency.

A total of £77bn was withdrawn in the half-year to April, according to the BoE.

But Hargreaves Lansdown senior analyst Laith Khalaf says there is not “a tell-tale dent” in sterling or stock or bond price moves over that period, so it is difficult to track the actual direction of cash outflows.

AJ Bell investment director Russ Mould says in March and April sterling did not do “too badly” against the major currencies and lost only “a little ground” against the euro, yen and gold.

In the first week of June UK equity funds saw redemptions for the 12th out of the previous 14 weeks, totalling $2.6bn in outflows, the 10th consecutive outflow over the same period, says Bank of America Merrill Lynch.

Mould says: “It's unlikely any |money that has exited would dash back in the event of a 'leave' vote but the timing would then depend on how trade and political negotiations

develop, as well as any policy response from the Bank of England.”

Lowcock expects money to flow back to the UK “pretty quickly” in a few months but, if the vote is for Brexit, any reinvestment in the UK will be subject to fluctuations.

Mould says a remain vote would soothe nerves but appetite for sterling relative to other options will depend on factors other than just the EU verdict, such as approaching elections in Europe and the US as well as any moves by the US Federal Reserve, the Bank of Japan and the European Central Bank.

He adds the UK economy is still heavily indebted, with high current account, trade and budget deficits and a big imbalance between growth in services, construction and manufacturing.

Mould says: “If housing wobbled, then the UK would be potentially in some difficulty, and the Government is doing its best to keep those plates spinning, with Help to Buy Isas and even the new scheme for intra-family, intra-generational loans.

“This degree of borrowing can only be pushed so far before something has to give and house prices stall or begin to drop simply because mortgages chew up too much of people's disposable income, even with rock-bottom rates.”

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Ex-Schroders trader sentenced for insider dealing

Former Schroders equities trader Damian Clarke has been sentenced to two years behind bars after pleading guilty to nine counts of insider dealing.

Southwark Crown Court heard the offences took place over nine years between 2003 and 2012, during which time Clarke was initially an assistant fund manager, before becoming an equities trader in 2006.

The judge described the offences as “pre-meditated, deliberate, and dishonest”.

Clarke's profits from the insider trading totalled £155,161.98.

FCA director of enforcement and market oversight Mark Steward says: “This is yet another case involving a city professional caught and jailed for abusing the market that employs him. Insider dealing is increasingly detectable these days and, where detected, more likely to lead to terms of imprisonment and shame rather than glamorous profits and fame.”

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Lenders rubbish prospect of legal action after West Brom ruling

Skipton and Manchester Building Society are defending raising interest rates on some of their mortgages amid claims the lenders' behaviour could be challenged in court.

Earlier this week the Court of Appeal ruled that West Bromwich Building Society should not have raised tracker interest rates without a rise in Bank of England base rate.

Landlord group Property 118 brought the case, and is now raising money and eyeing similar cases against Skipton, Manchester and Bank of Ireland.

Skipton hiked its SVR on residential mortgages from 3.5 per cent to 4.95 per cent in 2010.

In 2012 Manchester raised tracker rates for some borrowers by up to 1.5 per cent.

Bank of Ireland raised rates on 13,500 base rate tracker mortgage customers in February 2013.

Property 118 initially aims to raise £60,000, and had already received donations totalling £14,400 by the end of last week, according to its crowdfunding website.

The website says: “When we have raised enough money we plan to take further action against the Bank of Ireland, Skipton Building Society and Manchester Building Society in respect of changes they made to their mortgage terms which we believe are unlawful.”

But Skipton defended its rate hike as being lawful and unavoidable. It says the findings of the West Brom case are not transferable.

Mortgage Strategy understands the board of Manchester share Skipton's view. Bank of Ireland would not comment.

A Skipton statement says: “We note that the recent decision of the Court of Appeal in the Alexander v West Bromwich Mortgage Company Ltd case was very fact specific to the offer letter and terms and conditions of business used by that society at the relevant time and is not of any wider application.

“Skipton remains firmly of the opinion that under the terms and conditions of its mortgage offer it lawfully had the right to remove the standard variable rate (SVR) ceiling that applied until 1 March 2010 to the majority of its borrowers with SVR-linked accounts.

“The decision, taken over six years ago, to exercise the society's right to remove the SVR ceiling was permissible because of the exceptional circumstances provision in its mortgage offer.”

Skipton says the historic low base rate qualifies as an 'exceptional circumstance' and allows the rate hike.

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China's economic bounce may already be over

By Mike Riddell (17 May 2016)

Most people would explain the rally in global risky assets since mid-February as being primarily down to the spectacular volte-face from the Federal Reserve, where Janet Yellen (and others) dramatically toned down their narrative that the Fed would be hiking rates as many as four times in 2016. This explanation makes a lot of sense, although I would argue that the underlying reason for the sudden dovish outburst was possibly more to do with the dramatic weakening in the US economy that had occurred since December (which we discussed here) than with the still-prevailing belief that the Fed had suddenly, somehow, become globally aware.

But the jump in risk appetite hasn't all been about the utterance of a few words from policymakers in the world's biggest economy. The world's second-biggest economy has also played a major role.  

China's economy was staring into a very deep hole last year. Real estate prices were tumbling in almost every city. The economy was stagnating, with the Caixin China Composite PMI having slumped to 48 in September last year, the lowest since January 2009. The renminbi came under severe pressure, not helped by its semi-peg to the soaring US dollar, and huge and destabilising capital outflows were the consequence of this.

The authorities in China have responded to last year's slowdown by unleashing a monetary stimulus that on one measure is greater than the expansion of 2009. The chart below shows that the ratio of M1 money supply growth to M2 money supply growth, which has historically been a good indicator of economic momentum, has reached the highest level since data began in 2005. The M1/M2 ratio is a measure of liquidity in an economy, where M2 money supply is a broad measure consisting of cash, savings and deposits flowing through an economy (therefore including loans and securities investments, which is why M2 is equivalent to credit growth), while M1 money supply is a narrower, more liquid component including only cash and demand deposits.

Click here to view chart

The Chinese economy has picked up on the back of this stimulus, with the composite PMI bouncing back from its September low and returning to its average of the past five years. Together with the depreciating US dollar, the cyclical rebound in China has also helped fuel the commodity price rebound, which has in turn provided a much-needed boost to emerging markets and commodity exporters.   

But while the quantity of China's growth may have stabilised, the quality of growth has sharply deteriorated. China's huge monetary easing resulted in real estate services jumping 9.1 per cent in Q1 from the previous year, while construction rose 7.8 per cent. It appeared that China was back to its bad old ways, and gunning for short-term gain, where the expense is surely long-term pain.

What's perhaps even more disconcerting is that the economic rebound in China hasn't been considerably greater, given the scale of the stimulus. Official growth numbers in China are notoriously unreliable but China's economy grew only 1.1 per cent in Q1 from the previous quarter, the slowest quarter-to-quarter expansion since 2011. The chart above suggests that China's monetary stimulus should have resulted in a far greater growth rebound. It's also curious that the surge in M1 hasn't been accompanied by a surge in M2.

And the most recent monetary data releases, together with wide reports that the PBOC has (perhaps in response to recent warnings from the IMF) asked its banks to cut down loan underwriting, suggest that the cyclical recovery in China may already be over. After a surge in new yuan loans in Q1, last week's release showed a sharp fall as China's banks underwrote 555bn yuan in new loans in April, down from 1.37tn in March and well below market expectations of 800bn.

If the brake truly is being applied to China's cyclical bounce, then it won't be long until China's severe structural problems re-emerge. I (and others) have written many times in the past five years about why China's growth rates are set to plunge (for example, click here): China faces a daunting challenge, where private debt levels are in excess of many developed countries' pre-2008, where the working age population is now falling (relaxation of the one-child policy came 20 years too late), and where China is now suffering from a competitiveness problem on the back of years of real exchange rate appreciation, but can't depreciate its currency without causing a re-emergence of destabilising mass outflows. Running higher and higher credit leverage in an effort to hit an unsustainable growth target can only end one way.

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Scott Gallacher: This is the golden age of advice but poor practice lingers

Since the introduction of the RDR we have finally started to be seen by most as professional advisers.

The insurance company salesman image may linger on for a while yet for some, but it still feels like a golden age for financial advisers and planners.

The RDR raised standards, reduced competition and started to change the public's perception of us. At the same time, the continued bank crisis and record low deposit rates have forced people to reconsider their “cash is best” belief. Pension freedoms have suddenly, and completely unexpectedly, made pensions sexy.

These factors, coupled with the baby boomers reaching retirement age, means that, for most financial advisers I speak to, life is great and business is booming. I acknowledge the advice gap but I would suggest it is an issue for politicians and regulators rather than individual advisers.

Naturally, however, there are always some concerns. Current examples include short-term worries such as Brexit and longer-term fears about the supposed threat of robo-advice.

Brexit is primarily an investment worry, just like the Millennium Bug and leaving the European Exchange Rate Mechanism before it. It does not alter what we do or how people need us. In fact, it is probably good for advisers in the short term as it prompts a few more calls to us from people worried about the possible impact.

Robo-advice could be argued as more of an ongoing concern; however, I do not think it is really an issue for genuine financial advisers or planners. Robo-advisers at the moment are just reactive, whereas real people are time poor and want someone else to do the hard work.

Some are so reactive they do not even address the basic question of how much one should be saving or investing to achieve a good retirement, instead relying on the client to tell them how much they want to save.

Despite this being a golden age, however, there is no room for complacency: some advisers still need to raise the quality of their advice. At this point, I would urge readers to put down their pitchforks, since, if you are taking the time to read this, you are likely one of the good guys.

I probably have a slightly jaundiced view of other advisers' work as I generally only see examples when clients are dissatisfied with their existing adviser and are looking to switch. No doubt those clients receiving excellent advice are generally happy, hence we rarely see examples of others' great work.

But the work we do see from others is too often fundamentally flawed.

This varies from highly questionable investments at one end, to a complete lack of even basic tax planning such as Isas and capital gains tax planning. Unfortunately, I do not think higher qualifications on their own will address this issue, since I have seen plenty of examples of highly qualified advisers giving poor advice.

That said, on the whole we are a great force for good and have a great future. We just need to continue upping our game.

Scott Gallacher is director of Rowley Turton 

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Steve Bee: Knowledge is power on DB schemes

Pensions are pay. The pension fund backing a defined benefit scheme is the deferred pay of a company's employees, ex-employees and, quite likely, retired employees. It does not belong to the company, nor does it belong to the Government.

Once commonplace, DB pension schemes are now dying out in the UK. The modern trend is for company pension schemes to be structured around defined contributions instead. Company pension funds accruing on a DC basis are also the deferred pay of a company's employees, ex-employees and, sometimes, retired employees.

If we are lucky, by the time we reach retirement age we will have accrued two major lifetime assets: the houses we live in and the pensions we will live on. Both purchases are likely to be of similar value if we have been in a workplace pension scheme that encouraged the deferment of high levels of income. Most DB schemes did just that, as do some DC schemes.

There is no reason why a DC scheme should encourage employees to defer lower levels of income than is the norm for a DB scheme, it just happens to be the way it is in this country. It is something employers, the pension industry and the government have gone along with for many decades now. It is the current fashion, if you like, for employees in DC schemes to defer less income for later in life than employees in DB schemes. There is no sensible reason for it.

The main advantage employees in DC schemes have is that it is easy for them to appreciate how much (or how little) money they are putting aside for retirement. Their deferred income is held, in effect, as a cash account in their name. They can keep track of the value of their lifetime pension asset just as they can keep track of the value of their other likely lifetime asset, their house.

Employees in DB schemes are not so fortunate in that respect. While they will know to the penny the likely value of their house, they will often have no clue whatsoever as to the value of their assets in the company pension scheme. In my opinion, that is both crazy and dangerous.

I am of the view that every member of a DB scheme should be told the cash transfer value of their accrued pension entitlements on request, and at least annually, as a right. Trustees of such pension schemes should be required to make such important information available.

A so-called black hole in a DB pension scheme is not a black hole in a company's accounts, nor is it a black hole in the Government's revenues. It is a black hole in employees' savings from income they have deferred for later in life for their retirements. That is a serious issue that should also be reflected in each employee's annual statement of pension value, so affected employees are aware of the deficit in their fund and how it may affect them personally well before they reach retirement.

Steve Bee is director at Jargonfree Benefits

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FCA rejects approval for Connaught advice firm facing £1m in claims

The FCA has refused an authorisation application from the directors behind a firm facing over £1m in claims over advice to invest in the collapsed Connaught Income funds.

The regulator says Strabens Hall is facing “inevitable insolvency” due to anticipated liabilities of £1.05m to eight of its customers who complained to the Financial Ombudsman Service about advice to invest the Connaught Income fund 1.

Strabens Hall directors Adam Benskin and John Halley applied for FCA authorisation for a company called Independent Family Advisers Ltd, which was incorporated in December 2013.

IFAL wanted FCA permission to acquire the Strabens Hall business – including its assets, staff and clients – but without the anticipated liabilities if the business becomes insolvent.

IFAL was to fund Strabens Hall after it entered insolvency so it could pursue a legal dispute with its professional indemnity insurer. The company believes this would lead to a settlement that would benefit the FOS complainants.

In its final notice, the FCA says it does not consider IFAL “fit and proper”.

It says: “The application, as submitted and as developed in representations following the warning notice, lacked detailed and clear proposals on issues of importance to consumers.

“It also lacked an appropriate recognition of the gravity of the anticipated circumstances of Strabens Hall's failure and the consequences it could have for consumer creditors, public confidence in the system for redress provided by the FOS and for those funding the FSCS.

“In this case, the FCA notes the inadequacies in the original application and that IFAL has been slow to make changes to its application, that clarification has been provided in a piecemeal and incremental fashion and that IFAL has required considerable input from the FCA in developing its application.”

The Connaught Series 1 fund was suspended in March 2012 and Money Marketing revealed investors faced losses of up to 50 per cent.

In March 2015, the FCA announced plans to investigate Capita Financial Managers and Blue Gate Capital, the operators of the failed Connaught Income Series 1 Fund, after it withdrew from talks with the firms.

“The Marching Band Effect”: Are we really as diversified as we think?

Dr. Andrew Lo, Founder and Chief Investment Strategist at AlphaSimplex, says the financial market has experienced the 'Marching Band Effect' over the past few years, with the various elements moving to left and right together and feeling the risks as one, making the effect more dynamic.