Kleinwort Hambros confident that volatility in global markets will continue in 2023

Whether you are reading this as a business-owner, professional advisor, or an investor, we all must try to make sense of the world in 2023, with so many clear challenges and threats, yet still with opportunities. What might 2023 have in store for us and our financial plans?

CASH IS BACK

Cash is back as a source of meaningful returns (BoE rate at 4% now), after 14 years since the Global Financial Crash and subsequent ‘cheap’ money. With inflation still around 10% (but trending downwards), cash won’t preserve purchasing power, but for many fearful investors, ‘risk-free’ cash is appealing. We must remember that some investors have come into the market because of the low returns on cash for the last decade. So, we might expect to see this trend reverse.

Credit and leverage will consequently come under review. Meanwhile many clients have used cheap debt to build up leveraged property portfolios and to buy bigger houses. With 2022 having seen sudden reversion to historically more ‘normal’ rates, the cost of credit will bring challenges. Property as an investment will always be favoured by many, but now demands much more careful scrutiny.  Furthermore, with the reduction in set-off allowances and other administrative burdens, property investment may look unattractive. We offer a case study here to bring this alive in the real world.

I Pensions

• Depending on what occurs, we might see planning needed around any changes to lifetime allowance.
• Contribution advice will continue to be a hot topic for high earners as they try to get to grips with what they can and can’t contribute.
• Those clients getting the wake-up letter 5 years from retirement will have an annuity as a consideration. While these have been poor value for the last few years, they may look more attractive.

I Tax legislation changes

• Any changes to income tax, dividends or CGT are likely to bring these more into focus for clients. Should tax rates become overly onerous, structures come more into focus to try to reduce this when taxation increases.

• Non-domicile regime would appear to be under review and so those currently utilising will need to consider.

CONCERN OVER INFLATION

Inflation will continue to concern investors as they look to try to keep up with the increasing costs that they face. This is both those in accumulation phase, (does this mean I need to save more?) and those in decumulation (the buying power loss that they may face). Clearly if inflation does come down sharply this may well reduce. However, the more persistent inflation is the more challenging for the investor.

Hopefully 2023 will be a better year for investment than 2022 has been to date. It is likely we will continue to see volatility. Focusing on objectives and filtering out the noise will continue to be one of the foundations of our service.

CASE STUDY

BRIDGING LOAN TO UPSIZE AN ENTREPRENEUR WITH MODEST INCOME

I Scenario

At Kleinwort Hambros, a banker was introduced to an entrepreneur who had set up a Tech Company that, with the help of early level investment from the Private Equity sector, had started to make steady progress in both terms of turnover and market awareness.

As the company was very much in the initial stage of growth, the individual was taking a modest income from the business. However, this wasn’t the clients first start up and with a previous success behind them thought that they could afford an upsize in property (£3m to £7m) and had already found the dream family home.

The property was in high demand so the client needed to move quickly, and it became apparent that they would need to transact before they sold their existing property and therefore an open bridge was required.

As with most Entrepreneurs and Business owners, income from their ventures is not always uniform or contractual, so obtaining mortgage finance can be difficult through the regular high street channels as this does not meet prescribed income multiple underwriting criteria.

They had no relationship with Kleinwort Hambros, but the introducer felt that we would be best placed to provide for their personal circumstances and requirements.

I Solution

Time was scarce, so we needed to direct resource with speed and precision. The banker and a member of our Credit Advisory team therefore met with the client’s CFO, Accountant and Solicitor within 24 hours in order to achieve an appropriate level of understanding of their credible income and repayment options.

By working as a team with the client advisers, and by analysing both personal and business assets and income we were able ascertain suitable and appropriate levels of income and repayment strategies to cover both a short-term open bridge and longer-term mortgage finance.

The open bridge was provided over an 18-month term which provided enough time for the clients existing property to be sold. The interest rate was variable, and the reference rate was over KH Base Rate. No early repayment fees applied.

The longer-term mortgage was provided over 7 years, which accommodated for the sale of the client’s company. The amount was split into variable and fixed parts, which provided the client with an appropriate level of protection from rising rates whilst having the flexibility to repay the variable rate portion without any early repayment charge. The speedy execution of the transaction was such that the client was able to move in within 6 weeks of receiving our offer letter.

Interest rates on the loan may exceed any gain on the investment. They may also change during the term of the loan. There may be an extra risk if you borrow in a different currency to the currency of the assets in your portfolio. We recommend you consult your tax adviser before using the service. Property is a high-risk, long-term investment, so it may not be suitable for everyone.

Your home may be repossessed if you don’t keep up repayments on your home mortgage.

For more information

Contact Jeremy Hill

Kleinwort Hambros

Newbury Office

[email protected] – 020 7597 3445

SG Kleinwort Hambros Bank Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The company is incorporated in England & Wales under number 964058 with registered office at One Bank Street, Canary Wharf, London E14 4SG