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An upside-down view of currencies and interest rates

Whatever your politics, one has to feel a bit of sympathy (maybe) for the new Chancellor. It has been a very tough first week in a new job; lambasted by the media, accused by the Labour leader of ‘crashing’ the pound and causing higher inflation and interest rates; and a bad report from the IMF. It is certainly true that Sterling has been falling, and inflation and interest rates rising; yet to suggest that this is solely down to recent Government incompetence is to take a very narrow view. Putting hyperbole, politics and the minute-by-minute gyrations of the market aside for a moment, let’s take a step back and look at what has been going on.

Sterling’s woes or Dollar strength?
Sterling has been falling against the US dollar for some time, but turning this upside down, the dollar has been strengthening against Sterling. In fact, due to its status as a ‘safe-haven’ currency, and the Fed’s more aggressive rate raising strategy, which has resulted in more attractive shorter-term yields, the US dollar has strengthened against most major currencies over the past year, attracting global capital. It is also a major energy exporter, which adds extra support. The DXY index that tracks the dollar against six major currencies stands today at a 20-year high. As the chart below illustrates, Sterling is largely unchanged against the Euro and the Japanese Yen over the past year.

Figure 1: Dollar strength is the key driver of currency ‘weakness’ – 1 year to 27-Sep-2022


Data: Google.

A consequence of the weak Pound is importing inflation, as around one third of household consumption is made up of imports, which are now more costly.
Narratives that suggest that Sterling is turning into an emerging market currency and that this could lead to a currency crisis are headline grabbing but flawed. The UK has a flexible exchange rate (it is not pegged to any other currency); its financial markets are highly established and liquid; the Bank of England operates independently of the Government; and unlike emerging economies, almost the entirety of its debt is denominated in Sterling .

From an investor’s perspective, a rising US dollar provides a positive contribution to Sterling-based returns, as US assets are worth more – over 20% more – in the past year. This has helped to shore up portfolio returns for many. The UK equity market is down only around 3% in the past year , supported by large holdings to sectors such as energy and low holdings to technology, combined with the fact that a majority of earnings are from overseas, benefitting to some degree from these exchange rate movements. No-one really knows where Sterling will go from here and over what timeframe. Hedging fixed income assets remains sensible as this reduces their volatility and remaining unhedged (i.e. exposed to currency movements) in equity assets continues to make good sense and will support portfolio values if Sterling falls further.

Inflation and interest rate rises
Again, reading the news one might get the impression that rising inflation and interest rates in the UK is a pain inflicted on the population entirely by its Government. Yet to turn this inward looking view outward, rising interest rates are a global phenomenon as the countries grapple with high inflation caused by a rapid growth in the money supply (quantitative easing), supply side issues caused by Covid, and the price pressures on energy and food created by Russia’s war in Ukraine. The fact that the UK Government needs to borrow more, as a consequence of the energy cost support packages and its unfunded tax cuts, is also contributing to rising yields. But take a look at inflation, central bank interest rates, and bond yields in a number of major economies in the chart below.

Figure 2: Inflation and interest rates on 27th September 2022

Data source: Countries’ central banks (note inflation for Germany and Italy is the Eurozone inflation rate).

It is evident that inflation is universally high. Five-year bond yields are at or near 4% in all but one of these economies, and all have risen materially in the past six months. Whilst that is bad news for mortgage and other borrowers, who have benefited from an extremely low cost of borrowing for many years, it is better news for those holding cash or investing in bonds. Despite bond price falls as a consequence of yield rises, long-term investors will be better off, over time , from yields at 4% than at near 0%, which we saw 18 months ago. In the UK real (after inflation) yields on index linked gilts are now in positive territory for the first time since 2010. That is good news for investors. As a consequence, investors’ future liabilities are likely to be more easily funded by their assets .

A few commentators have even begun to question whether the UK will be able to service its debts in the future, grabbing headlines. Yet, the UK still remains a major global economy and while the debt service burden will be increasingly heavy, it issues bonds in its own currency, can print money to pay its debts (in-extremis) and has a maturity profile with around half of its bonds maturing beyond 2030 – far longer than most major economies – reducing the short-term refinancing risks that often accompany defaults. Insurance against UK government debt default over five years implies the risk of default is negligible at less than 0.5% .

There is a school of thought, including that of the Chancellor, that the recent support for the supply side of the economy (i.e. increasing productivity and output) by incenting companies and entrepreneurs through tax reductions, may lead to higher rates of sustainable growth in the future, which will, in turn, help to reduce inflation and allow the Government to bring down debt. Obviously, this would take time. The markets currently seem unconvinced. In essence, no-one knows how this all plays out exactly. There is no doubt that there will be uncertainty ahead, but investors who own globally diversified portfolios of equities and higher-quality shorter-dated bonds are well-positioned to weather any possible storms.

The view from a bat’s perch, as we have seen, can provide useful perspective in a world full of politicians, central banks, economists, pundits and active investors all bumping around in the dark.

‘This too shall pass!’, as the late, great John C. Bogle used to constantly remind investors.

Risk warnings
This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Pacem Double-Winners at the 2022 Eastside Awards

The much anticipated Eastside Awards, in association with George Best Belfast City Airport, celebrating all that is good about East Belfast, returned in 2022 with a glittering awards ceremony hosted by television presenter Tara Mills. There was double delight for Pacem as we took the titles of ‘Eastside Award for Business Growth’ and the ‘Eastside Awards Employer of the Year’.

 

The Business Growth Award was open to businesses or social enterprises operating within the East Belfast area that were able to demonstrate growth in terms of business performance and or employment. The award was sponsored by Kainos and there was much joy at the Pacem table when Kainos’ Adam Donnelly announced the we had overcome some very impressive competition to claim the title. According to the judges, this was a very difficult category to judge, and all organisations were commended. Judges were impressed by Pacem’s growth over the last three years in terms of staff numbers, client base and turnover. Our investment in staff training and development was singled out for particular praise.

 

Having won the previous Eastside Award for Employer of the Year in January 2020 (pre-pandemic) we were especially proud, and humbled, to retain the crown of East Belfast’s Employer of the Year. Entries for this award, which was sponsored by Fleet Financial, were invited from organisations who were able to demonstrate their commitment to and the provision of a positive working environment, especially in the areas of employee engagement, employee development, employee health and well-being and opportunities for growth. Judges commented that the standout for them was Pacem’s consistent, balanced focus and investment on our team’s professional and personal development, captured and managed through our ‘personal development plans’. They also highlighted our financial contribution to staff to fit out a comfortable, functional ‘working from home’ set up during and beyond the Covid-19 crisis.

 

Another proud night for Team Pacem

Tips for unsettling times

The news today can feel a little bit unsettling.  There is no doubt that these are tough emotional times for investors.  Russia’s invasion and brutal war in Ukraine is unsettling on both a human and an economic level.  The plight of the people of Ukraine and the broader pitting of Western values against totalitarian oppression weigh heavily.  The impact of the war on energy, fertilizer, commodity and food prices, combined with global supply bottle necks and continuing Covid lockdowns in China are exacerbated by the growth in money supply from quantitative easing and financial support measures taken during the pandemic. This has led to a rapid rise in inflation globally to levels not seen for several decades. That can feel uncomfortable.

From an investment perspective, the impact has been more varied than the news might suggest[1] so far this year.  Global equity markets have handed back some of the, perhaps, unexpected gains of 2020-2021, but not in a uniform manner.  Of note, high growth stocks with poor or non-existent profits have been particularly hard hit, impacting the US broad market (down 18%) and the tech-oriented Nasdaq (down 28%).  Yet, global markets, in GBP terms, are down only 10% or so.  Sterling’s recent fall against the dollar has helped, as overseas assets now buy more Pounds.  The UK equity market is more-or-less flat.  It is worthy of note that a well-constructed exposure to global value stocks has delivered gains of nearly 4% so far this year, from which diversified investors will have benefited.  A similar value outcome has been seen in emerging markets.

Over the longer time horizon that most investors face, equity assets should provide inflation-plus returns to protect the value of wealth. Unfortunately, there are no certain inflation hedges.

The fears of inflation have pushed bond yields higher, with resultant falls in bond prices.  Shorter-dated, higher quality bonds – favoured in client portfolios – have been impacted to a lesser degree than long-dated bonds.  As an example, short-dated UK gilts are down 1.5%, whereas a portfolio of all UK Gilts is down a little over 10%.  The positive is that – going forward – bonds are now yielding materially more than a year ago.

All-in-all, a well-diversified global equity portfolio, with exposure to value stocks and holding shorter-dated high quality bonds, has probably been more solid that the news might suggest, and performance certainly sits well within the bounds of expectation.

Here are some tips to help keep things in perspective at this challenging emotional time:

Tips for unsettling times

  1. Accept the uncertainty of markets – a well-diversified portfolio protects you from any one area of the markets suffering particular pressures. Your portfolio will probably be performing better than the headlines suggest.
  2. Don’t measure your portfolio’s performance from the previous top of the market, but over a longer and more sensible timeframe, and from where you started. The last few years have been really good to investors.  Giving a little back is part of any investing journey.
  3. Try not to look at your portfolio too often. Get on with more important things in your life.  Once a year is more than enough, but that takes some will power!
  4. Accept that you cannot time when to be in and out of markets – it is simply not possible. If you resign yourself to this fact, investing feels much less stressful.
  5. If markets have fallen, remember that you still own everything you did before i.e. the same number of shares in the same companies, and the same bonds holdings.
  6. Most crucially, a fall does not turn into a loss unless you sell your investments at the wrong time. If you don’t need the money, why would you sell?
  7. The balance between your growth (equity) assets and defensive (high quality bond) assets was established by your adviser to make sure that you can withstand temporary falls in the value of your portfolio, both emotionally and financially. A recent fall in the markets does not change this.
  8. Be confident that your (boring) defensive assets will come into their own, protecting your portfolio from some of the pain of material equity market falls, if they occur.
  9. If you are taking an income from your portfolio, remember that if equities have fallen in value, you will be taking your income from your bonds, not selling equities when they are down.
  10. Your adviser is there – at any time – to support you. They are a source of fortitude, patience, and discipline on which you can draw.

These are unsettling times, but your best defense is to keep to your plan, remaining invested in a well-diversified, robust portfolio and leaning on your adviser if necessary.

‘This too shall pass!’ as the legendary investor and founder of Vanguard used to say.

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale.  This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Data source

World equities (developed) iShares Core MSCI World ETF USD Acc
Emerging markets value Dimensional Emerging Mkts Val A USD Acc
Emerging markets Vanguard Em Mkts Stk Idx £ Acc
Global Value Dimensional Global Value GBP Acc
US broad Market Fidelity Index US P Acc
Tech stocks (NASDAQ) Invesco QQQ ETF
Short-dated Gilts iShares UK Gilts 0-5yr ETF GBP Dist
All Gilts iShares UK Gilts All Stks Idx (UK) H Inc

Market data used in this article represent the returns from funds capturing these specific market risks. They are provided for informational purposes only. All performance in GBP terms, except for US markets (USD).

[1] Data used in this paragraph uses market returns from funds capturing these specific market risks, as examples.  See endnote for details.

Winners Crowned at Belfast Business Idea Award 2022

Belfast-based entrepreneurs gathered at the Belfast Business Idea Award finalists’ night on Friday May 6 at Danske Bank to hear this year’s winners announced.

A Belfast City Council initiative, supported by Danske Bank and Pacem Accounting & Tax Advisory, the competition is designed to unearth, recognise and help fast track the best business ideas in Belfast. Councillor Ryan Murphy, Chair of Belfast City Council’s City Growth and Regeneration Committee said: “The beauty of the Belfast Business Idea Awards is that it’s the strength of the idea that’s assessed, rather than the achievements of the venture.  So people who have yet to set up a business have just as much chance of winning as those who’ve already started to trade successfully”.

Five winners pitched their idea to an independent judging panel, with the overall winner being decided live on the night via audience vote. The overall winner secured a cash injection of £2,500 to help their business grow. Each of the five winners also received a support package worth over £3,000.

The 2022 Belfast Business Idea Award Winners were:

  • Emma Corbett – Insurin – Overall winner
  • Eimear O’Rourke – Allergy Act
  • Harry Mc Anulty – The Plant Alchemist
  • Orla McKeating – Still I Rise Diversity Storytelling
  • Conleth Mallon – Injuiced

Speaking at the finalists’ night, overall winner, Emma Corbett from Insurin commented: “From my own experience as a type 1 diabetic, I understood that more could be done to guide and help those newly diagnosed with type 1 diabetes physically, mentally and emotionally. Insurin started out as my final year project at Ulster University whilst studying Interaction Design. Then I realised it had a lot of commercial potential, but needed help to build both the product and business – which is why we entered the Belfast Business Idea Award. I want to say a huge thank you to Belfast City Council, Danske Bank, Pacem, Innovation Factory and Enterprise Northern Ireland for their support. There’s so much talent and innovation here, so I’m honoured to win and look forward to growing Insurin with the help of the generous support package.”

The finalists also had the opportunity to hear from, and put questions to, two of NI’s most successful entrepreneurs, David Johnston and Lynsey Bennett, founders of Belfast businesses, OutsideIn and Lusso Tan which have gone on to compete, and win, on a global scale.

Speaking at the finalist’s night, Elizabeth Crossan commended all applicants and expressed her enthusiasm towards working with the winners,

We are looking forward to working alongside the newly crowned winners of the 2022 Belfast Business Idea Award by providing six months free accountancy services. We love helping new businesses develop and grow and to play a part in their journey is a real privilege. We can’t wait to see what is in store for these blossoming businesses and predict great things ahead –  watch this space”.

Digital assets and blockchain technology

Blockchains, Web3, the metaverse, NFTs, cryptocurrencies, Bitcoin, Dogecoin, dApps and DAOs. These terms have surged into mainstream media, from nowhere over a decade ago. At time of writing the total value of crypto assets, if instantaneously and in a costless manner converted to USD (a large assumption), sits at around $2tn[1]. To provide some perspective, Microsoft’s total market capitalization currently sits at around this figure[2]. Are they now too big to ignore? This note explores ten important points to remember if considering an allocation to digital assets.

  1. Complexity and perceived sophistication do not make something a good investment: An innovative product will not necessarily be revolutionary. There are many highly technical solutions in the digital assets space with exciting prospects, but without the benefit of hindsight it is impossible to know what technologies will become commonplace.

‘Investors read confusing, jargon-laden articles and become convinced that smarter people than themselves are investing, so they should too’ [3]

For most, it is not necessary to gain an in-depth understanding of the mechanics and nuances of digital assets and blockchain technology. Many people drive cars without a detailed knowledge of how the gearbox works or how the engine uses the fuel to generate power. It is, however, useful to understand some high-level characteristics and considerations.

  1. There are legitimate challenges to the future of many digital assets: A philosophical debate exists around what derives an assets’ ‘value’. What gives a verifiably ‘owned’ 600×600 digital image – which can be infinitely reproduced – worth? Why is a bitcoin[4], with little use in daily life and not in physical form, valued at tens of thousands of dollars based simply on its verifiable scarcity? Why Bitcoin, and not any of the other 10,000 or so cryptocurrencies? How can widespread adoption get round the challenge of high transaction fees and slow transaction times – Ethereum (another decentralised blockchain) for example can only process up to around 30 transactions per second[5], whilst Visa claims capacity for over 65,000[6]? It’s difficult to give firm answers to these questions, though they are valid challenges for these technologies to overcome to achieve mainstream adoption.
  2. Watch out! Fraudulent activity, hacks and outright theft are real risks that exist in the space, with little-to-no route to compensation for investors. Currently, there do appear to be some significantly vulnerable points – in the process of purchasing digital assets – whereby illicit activity occurs at a cost to investors. Examples of hacked wallets, stolen funds, corrupt exchanges, and fake cryptocurrencies are frequent in financial media. These are unfortunate realities that exist. The Twitter account @web3isgreat provides insights into illicit activity in the digital assets space, with a sobering regularity[7].
  3. Transaction costs are high: Owning digital assets directly can be costly. Transaction fees are high, and liquidity could reasonably be an issue, particularly at time of large market swings. According to bitinfocharts.com, median transaction fees for bitcoins tend to be around $1, though have been as high as $28 in 2021. Ethereum’s fees have been higher and more variable[8]. There are limited options to buy pooled investment products to gain exposure to digital assets, and those that are available are expensive.
  4. Much of the digital assets world is unregulated: A reasonable starting point as an investor is to first avoid any investment that is unregulated. A lack of regulation gives rise to increased risks of criminal activity at a cost to the investor, and most likely an investment in which it is more difficult to know the true inherent risks. Much of the digital assets world is unregulated. This may change in time, though the very nature of true decentralisation makes it difficult for a central regulator to engage in necessary oversight.
  5. Environmental impact concerns are valid and material: Although the digital assets industry is broadly aware of the issue and has taken steps to improve the climate impact, it is still significant. The method of verification of bitcoin transactions is energy intensive, as miners compete for newly minted bitcoins by producing the most powerful processing units. The Cambridge Bitcoin Electricity Consumption index provides some interesting comparisons[9], such as the fact that the estimated energy usage from mining bitcoins is comparable to the energy usage of countries such as Poland and comprises over 0.6% of global energy consumption. As another example, energy consumption of the Bitcoin network in a single year could power all kettles in the UK for over 30 years!
  6. There have been some great innovations: There is no doubt that there are some exciting and potentially disruptive innovations in the space. The challenge investors face is that without the benefit of hindsight it is impossible to know which innovations will pervade.
  7. Many investors can benefit from indirect exposure to digital assets: By owning a diversified basket of securities one can own the public companies that are developing, selling or implementing the technology. Investors calculate the expected future cashflows of firms – giving them a market value – and so owning these firms in a market weight gives investors the aggregate view of each company’s future.
  8. Ownership of many digital assets comes with a highly volatile journey: Significant price swings are regular in the world of digital asset ownership. In the past five years, the price of a bitcoin has seen daily movements of up to +26% and down to ‑39%[10]. It’s a bumpy ride.
  9. Many are unaware of the tax consequences of ownership: Many investors are unaware of any potential tax liabilities that may arise due to ownership. A nationwide survey[11] in the US issued by Wakefield Research – commissioned by CoinTracker – found that just 3% of respondents correctly answered a list of questions correctly relating to when crypto investors would be liable to pay tax. Proceeding without due caution can land investors in hot water.

Revolutionary technological advancement is a brilliant consequence of the capitalist system, and a key factor in economic growth. The world of digital assets and blockchain technology is exciting and it would not be entirely surprising to see some of the innovations (many of which might not even exist today) become commonplace. There is, however, a relatively deep technical knowledge required to understand digital assets, even at a high level. This does not make them a sensible investment, and any investment in cryptocurrencies should be seen as a sunk cost.

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

[1]      https://coinmarketcap.com/charts/, accessed 20th April 2022

[2]      https://companiesmarketcap.com/, accessed 20th April 2022

[3]      Pickard, A. (March 2022). ‘Cryptocurrencies: The Power of Memes’. https://www.researchaffiliates.com/

[4]      For those eagle-eyed, grammar focussed readers the ‘b’ in bitcoin is not capitalised here. The official Bitcoin glossary states: ‘Bitcoin – with capitalization, is used when describing the concept of Bitcoin, or the entire network itself. e.g. “I was learning about the Bitcoin protocol today.”

        bitcoin – without capitalization, is used to describe bitcoins as a unit of account. e.g. “I sent ten bitcoins today.”; it is also often abbreviated BTC or XBT.’

[5]      https://www.ft.com/content/16eaf1b9-08fb-4454-a4eb-ac662cdd8590 Accessed 15/04/2022

[6]      https://www.visa.co.uk/dam/VCOM/download/corporate/media/visanet-technology/aboutvisafactsheet.pdf

[7] https://twitter.com/web3isgreat

[8] https://bitinfocharts.com/comparison/median_transaction_fee-btc-eth.html#3y

[9] https://ccaf.io/

[10] Data source: http://www.investing.com/

[11] https://www.cointracker.io/blog/crypto-taxes-youre-not-alone Accessed 15/04/2022

Pacem Support Belfast Business Idea Award 2022

Pacem is delighted to, once again, support the Belfast Business Idea Award 2022. The Idea Award, supported by Belfast City Council, Danske Bank, Pacem, Enterprise NI and Innovation Factory, differs from other awards in that it is the strength of the idea that is assessed, rather than the achievements of the venture so far. The competition is designed to unearth, recognise and help to fast track the best business ideas in Belfast and means that people who have yet to set up a business have as much chance of winning as those who have already started to trade successfully.

Applications for the 2022 Belfast Business Idea Award will be open from Friday 1st April 2022.

The prize pool is outstanding and will make a real difference to early-stage businesses and those thinking of taking the next step with their idea. The overall winner will receive £2,500 cash plus a support package (below) worth over £3,000. The other four finalists will also receive a support package worth over £3,000 which includes:

• 1 year Innovation Factory membership (including an open plan co-working desk, access to masterclasses and on-site bespoke business mentoring)
• 1 year free access to the new ENI Community, encompassing free Eniplus membership
• Six months free accountancy services (including software) from Pacem Accounting and Tax Advisory

All Idea Award applicants will receive:• A VIP place at Finalist’s Night on Friday 6th May May where they will hear from (and get to put their questions to) some of NI’s most successful entrepreneurs.
• A 1-2-1 consultation at which they will be signposted to the most relevant sources of support for their idea or early-stage business (including funding, programmes, premises etc).

Bonds – no pain, no gain

For the past 40 years or so, bond investors have, in a sense, been spoiled by an almost continuous fall in yields from over 14% in the 1980s, which – as bond prices move in the opposite direction to yields – resulted in strong capital gains in addition to the income received. That may have felt good at the time, but each time yields fell it simply reduced the future returns from bonds from that point forwards.  UK 5-year gilt yields, for example, eventually reached a point – 0% – where they delivered no expected return at all, even before inflation was taken into account.  The insurance premium for owning high quality bonds to balance a portfolio against equity market falls was very high, but there was not much one could do to avoid this.

If you ask any investor if they would like higher or lower returns in the future the answer is a given.  Today the Bank of England’s base rate is only 0.75%.   Fortunately, short-dated, high-quality bonds in a number of major markets are now yielding in the region of 1.5% to 2.5% as yields have risen quite substantially over the past few weeks, as markets have begun to reflect the risks of higher-for-longer inflation.  The chart below shows what has happened to various global bond yields since the end of 2020. Going forwards that is a good thing.

Figure 1: Bond yields have been rising fast

Data source: UK – Bank of England, US – Federal Reserve, Australia – Reserve Bank of Australia

Unavoidably, the short-term cost of attaining higher yields is small capital losses on shorter-dated bonds.  These should be viewed in the context of the potential downside of equities at times of poor markets and other bond alternatives.  For a longer-term investor this should be seen as a price worth paying for higher future returns.

To illustrate the point, imagine that you bought a bond yielding 1% a few weeks ago, but yields demanded by investors to own these bonds have now risen to 3%. If you wanted to sell your bond no-one would buy it at a 1% yield, but you might find a buyer if you dropped your price, thus raising their yield.  Markets work pretty well and once its price fell to deliver a yield of 3%, you would start getting bids.

Although you suffered a capital loss[1], your bonds now have a higher yield going forward, which will compensate you for this loss over time[2] and deliver a higher return thereafter.  That is a good thing for any longer-term investor.

The news potentially gets better.  Today, there is quite a steep difference between cash rates and five-year bonds in some markets.  As a hypothetical example, if you hold a five-year bond for a year, it becomes a four-year bond, and its yield will reduce. We also know that yield falls lead to price rises.  So, our expected return from owning bonds will therefore be the sum of the yield-to-maturity on the bonds held plus any capital gain that might arise from a steep bond yield curve (this is known in the bond world as ‘roll-down yield’). Note though that there are no guarantees that this extra return will be collected as market yield movements, which are random in nature, may change the picture.

It is also worth noting that the yield rise impact has been materially less severe in high quality, shorter-dated bonds than for longer-dated and lower quality bonds, as the chart below illustrates.

Figure 2: Longer-dated and lower quality bonds have taken more pain in 2022

Source: YTD to 30-3-2022.  Various ETFs (see endnote). * = hedged to GBP

In reality, no one knows if yields will rise again, stay the same or fall. Remember that if there was any certainty in which direction yields should move, they would already have moved!  If they do rise again, owners of bonds will take a bit more pain, but they will end up in an even better place with yet higher expected future returns. Patience and a long-term view are required.

No pain, no gain.

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Endnote – Figure 2 data series:

iShares UK Gilts 0-5yr ETF GBP Dist., iShares £ Corp Bond 0-5yr ETF GBP Dist., iShares Global HY Corp Bd ETF GBP H Dist., iShares Global Corp Bond ETF GBP H Dist., iShares Core UK Gilts ETF GBP Dist., iShares £ Index-Lnkd Gilts ETF GBP Dist., iShares JP Morgan $ EM Bd ETF GBP H Dist.

[1] The actual amount of the loss is equivalent to the duration of the bonds multiplied by the rise in yields e.g. 3 year bonds with a 1% yield rise will fall by 3%.  Duration is similar to the maturity of the bonds.

[2] In practice, the time it takes to recoup these losses and begin to benefit from the higher yields is equivalent to the duration of your bond portfolio.  Short-dated bonds take less time than longer-dated bonds to start benefitting from higher yields.

Spare Room to Stellar: The Lusso Tan Story

Pacem is delighted to continue its support of an initiative entitled ‘Spare Room to Stellar‘, alongside Belfast City Council and Danske Bank. Spare room to stellar is designed to inspire and equip Belfast entrepreneurs to start and grow a business. It does this by firstly sharing the stories and lessons of businesses that started in a spare room in Belfast and have gone on to compete, and win, on a global scale.

The second film released in the 2022 series is that of Lynsey Bennett and Lusso Tan. Hear how Lynsey started her ever-expanding, revolutionary tanning brand providing inspiration and tips for early-stage businesses and entrepreneurs alike.

Watch the highs, lows, habits and how-tos of starting/growing a business from humble beginnings. Sit back, enjoy and then act on your idea or early venture by booking a signposting consultation over at www.spareroomtostellar.com 

You can watch the Lusso Tan story here:

Employee Spotlight – Jamie Galway

Each fortnight we will be spotlighting a member of the team so that you can get to know the people behind the Pacem brand. This week we feature trainee accounting technician, Jamie Galway. Jamie joined Pacem as an apprentice in August 2021. She is currently completing her HLA Level 5 Accounting Technicians course and supports our accountancy team in delivering a range of services including preparing accounts, bookkeeping and payroll.

Jamie tells us a bit more about herself below.

Employee name
Jamie Galway

Your role at Pacem
Trainee Accounting Technician

How long have you been with Pacem?
7 months

What does your day-to-day role entail?
On a daily basis I support the accountancy team in delivering a range of services for our clients. This usually involves VAT returns, year-end accounts, both weekly and monthly payroll as well as some general admin tasks.

How would you describe yourself in three words?
Motivated, positive and friendly

Tell us something that might surprise us about you.
From the age of 4 up until I was 18 I was an Irish dancer for Dominic Graham School of Irish Dance. Almost every summer we were visiting different countries to perform in their Celtic festivals and taught the locals some of our moves, however our favourite festival was Festival de Ortigueira as this was like a second home for us!

What do you like most about your job?
I really enjoy learning every day alongside my college classes on a Monday as I can put everything I have studied into practice, which I find really helps. I do also enjoy doing a little VAT or bank reconciliation in work, I don’t know what it is about them that I find satisfying but I do like problem solving!

Favourite Food
100% has to be a chippy, although Morton’s in Ballycastle is the go to!

What is something you learned in the last week?
This week I discovered that running really isn’t as easy as some people make it look! I have been training for my first half marathon in London in just over 2 weeks and I still struggle to break through the ‘wall’ that people talk about!

Favourite film
This is a tough one although I’m going to have to go with the Harry Potter movies as a collective or Fury as my favourite war movie.

The Ups and Downs of Spring Statement 2022

National Insurance Contributions (NICs)
Despite lobbying to delay the upcoming 1.25% increase in NICs payable by employees, employers and the self-employed, the government has decided to go ahead as planned from April 2022, to provide additional funds for health and social care.

Increase in the starting NIC threshold for individuals

The annual level at which employees and the self-employed start to pay NICs was due to increase from £9,568 to £9,880 from 6 April 2022. This increase will go ahead but be further uplifted to £12,570 from 6 July 2022, effectively aligning the point at which an individual starts to pay NICs with the £12,570 income tax personal allowance. In the tax year to 5 April 2023, this is a NIC cut worth £267 for most employees and £207 for most self-employed individuals.

Class 2 NIC liabilities of the self-employed
For the self-employed, some individuals will find that they no longer need to pay Class 2 NICs from April 2022. The small profits threshold will be set at £6,725 as planned but the requirement to pay Class 2 NIC will only apply to those with self-employed profits over £11,908. This will benefit approximately 500,000 self-employed individuals by saving them £165 a year.

  • From 6 April 2023, Class 2 NIC will only be payable by those with profits over £12,570.

Income Tax
The Chancellor has committed to reduce the basic rate of income tax from 20% to 19%, but not until 6 April 2024. It is estimated that this will save 30 million individuals an average of £175 per year.

VAT Rates in the Leisure and Hospitality Sector
No extension has been granted to the leisure and hospitality sector for use of the reduced 12.5% VAT rate on eligible supplies including food, non-alcoholic beverages and hotel and holiday accommodation. The VAT rate applied to these supplies will revert to 20% from 1 April 2022 as planned.

Fuel Duty
Fuel duty has been cut by 5p per litre for 12 months from 6pm on 23 March 2022. The Treasury report that this will save the average car driver £100 a year and the average van driver £200 a year.