May CPD Newsbrief — Investment principles and risk
Japan’s report card: Could do better
2013 was a year of contrast for the Japanese economy. It began strongly; Q1 and Q2 courted growth rates of 1.2% and 1% respectively (Q-on-Q) but the second half of the year, it seems, saw something of a stall; Q3 brought growth of just 0.3%, with that modest pace maintained into Q4.
But from one perspective at least, lower growth in the second half of the last year need not concern the more enthusiastic followers of Abenomics. Indeed, though it might seem counterintuitive, stronger domestic demand is probably responsible for the slowdown by pushing up the total of imported goods and services − a sector that detracts from, rather than adds to, the final figure in the GDP calculation (imports detracted around 0.6% in the final quarter). Domestic demand has been underpinned by rising levels of employment; unemployment stands at 3.7% compared with 4.3% a year ago.
There can be little doubt that Prime Minister Shinzo Abe, in concert with Haruhiko Kuroda, the Governor of the Bank of Japan, has had a positive impact on a battered Japanese economy. But the benefits of that positive impact are not evenly distributed. Business confidence and consumer confidence are on a separate path with business optimism contrasted with household pessimism. Real wages are still falling − down 1.1% in 2013. If Japan is to resume sustainable growth, that will have to change.
In fact, if the first half of 2014 looks anything like the second half of 2013, momentum is lost. The message from the financial markets is that Abe’s capital is not unlimited. In spite of the Bank of Japan’s continued efforts to double the monetary base (including purchases of exchange traded funds), the Nikkei 225 Index fell 9% in the first quarter of 2014.
VCT share issues blocked by HMRC
Venture capital trusts have been forced to stop issuing new shares after HM Revenue & Customs guidance made it appear the companies would lose their tax-efficient status if they did so.
The legislation is intended only to prevent VCTs using new, uninvested money to pay dividends to investors from 6 April, but the wording of current guidance issued as part of the Budget could be taken to mean that any VCT paying dividends to shareholders who joined post-April 6 would lose its tax-efficient status.
The Association of Investment Companies (AIC) has issued guidance to members of the situation and is in discussions with HMRC about a resolution to the issue. In a statement, the AIC said: “As currently drafted, the legislation could be read to say that a VCT paying dividends (or making other forms of payment) out of reserves created from the reduction of share premium or capital to any shareholder allotted shares on or after 6 April 2014 will lose status. The loss of status would arise irrespective of when the reserve was created. This interpretation contrasts with earlier indications of how the provisions on return of capital were intended to operate.”
HMRC responded that, it its view, “the new section 281(1)(f) does deliver the policy intent. That is, we do think that it has the effect of resulting in a withdrawal of approval only where a repayment of capital is in respect of capital raised from shares issued on or after 6 April 2014.”
Nevertheless, in order to “allay concerns about any perceived ambiguity”, there will be an amendment to section 281(1)(f) during the passage of the Finance Bill which will clarify that only capital raised in respect of shares issued on or after 6 April 2014 is affected.
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