Global market update

July saw a huge re-embracing of risk assets after the weakness in June. This was prompted at first by better economic news – though this had started to wane by the end of the month – and there were also some high-profile corporate earnings announcements, which gave equity markets a boost.

Equities were the top-performing asset class in July, with the UK the place to be. US equities also did well, while European equities performed roughly in line and Japanese equities saw weaker performance. Corporate bonds were largely flat and government bonds fell slightly on the month.

Equities were initially given a boost by an International Monetary Fund report that raised global growth forecasts from 4.2% to 4.6%. The UK was one of the few countries where growth prospects were downgraded, but the change had been largely expected on the back of the ‘austerity’ Budget in June. There was also better news from Europe where PMI data showed improved confidence in the manufacturing sector while the weaker euro finally seemed to be feeding into positive growth for companies in the region.

But the good economic news did not hold up. Mid-month, Federal Reserve chairman Ben Bernanke said economic conditions were “unusually uncertain” and the struggling banking sector and near-collapse in the Greek economy were delaying a US recovery. And so it proved at the end of the month when US GDP growth figures came in behind expectations – the economy grew at an annualised pace of 2.4%, compared to expectations of 2.7%.

There was also bad news from China as the announcement the country’s growth had slowed to “just” 10.3% – from its previous level of 11.9% – spooked economists. The more optimistic pointed out this was a natural consequence of Beijing’s strategy of withdrawing its stimulus packages and tightening monetary policy, but it still raised fears of a double-dip.

Back in Europe, the much-anticipated banking stress tests proved something of a damp squib. There were few surprises and most analysts thought them insufficiently rigorous, which means they essentially failed in their primary aim – of restoring confidence in the sector.

So why did equities hold up? Principally, the strength of corporate profits continued to support prices. July saw the start of the second-quarter reporting season and early signs were promising. Shell and Exxon, for example, saw a near-doubling of profits, which helped ride out the worsening economic news.

How to build your portfolio

The word 'portfolio' is simply a shorthand term for the collection of investments you own across all your accounts. Ideally this will be spread across a variety of assets - equities, bonds, property and cash - in a mix that has been determined by that your specific objectives. The process of deciding how much to invest in each asset class is known as asset allocation. For example, equities have traditionally offered higher returns over the long term but at the price of increased risk while, at the other end of the scale, cash has offered both security of capital and stability but with a fluctuating income and no chance of capital growth. Actual returns are dependant on many variables, such as the health of the economy in which you are invested, inflation, interest rates and market sentiment. The elements that impact each asset class vary and as a result, one asset might be doing very well at the exact same time another is doing badly. However, it is difficult to predict which one will be doing well - or badly - at any one time. Hence, if you mix the asset classes together and have a little bit of exposure to each, this can help balance out the peaks and troughs of the individuals. Your age, your financial position and your attitude to risk are all crucial considerations to make sure you get the proportions right and build the most appropriate portfolio. It is therefore helpful to speak to an expert who can more easily help you achieve the right mix.

The Coalition Government making its presence felt

An increase in capital gains tax (CGT) will be at the heart of any package of reforms. Currently, at a rate of 18% on "non-business assets", this is likely to increase to close to 40%.

The income tax threshold is likely to rise to £10,000 from April 2011, with plans to ditch the employee part of the proposed National Insurance increases.

The £1 million threshold on inheritance tax was always unlikely, while the Lib Dems have had to give up on their "mansion tax" on properties worth more than £2 million.

Public sector pensions are to come under scrutiny, with a commission to assess their sustainability.

Victims of the Equitable Life scandal in 2000 will benefit from a new compensation scheme that goes beyond that devised by the Labour government.

Save thousands with salary sacrifice

High earners should exploit salary sacrifice rules when planning their pension saving, allowing them to avoid some of the tax rises imposed by the Budget and pre-Budget report.

In brief, from 6th April a 50% upper rate of tax has been introduced for income over £150,000, and the personal allowance (the first slice of income on which no income tax is due) is also to be gradually removed. Currently staning at £6,475, this allowance will reduce and completely disappears for those earning approximately £113,000 or more. From 6th April 2011, National Insurance contributions will also increase by 1%, both for employees and employers.

These rises coincide with a wider range of changes that will make pension saving less tax efficient for those with high incomes. For the moment, those with incomes of more than £130,000 are to be hit, but are the government just lining up for further changes?

These changes make the option of salary sacrifice, where people give up some of their salary in return for an employer pension contribution, more attractive.

Social Care White Paper is welcome but people entering care will continue to need proper financial advice.

The Social Care White Paper seeks to set up a National Care Service (NCS). However, even if Labour wins the next two elections, it will take at least 5 years to conduct a proper examination of the funding options and delivery of a NCS. This means that many of the people entering residential care homes in the next 4 years will have died by the time a NCS is established.

These people urgently need care funding advice now. This issue is significant with 130,000 people entering residential care homes in England each year, of which 41% or 53,000 people are wholly self funding. Of this number only 7,000 receive proper financial advice about how to fund their care needs.

And this does not include the 20,000 co-funders or the hundreds of thousands of people who require domiciliary care.

As the ageing population rapidly grows IFAs will continue to provide vital specialist financial advice, although as a consumer you should ensure that you seek out an adviser that is appropriately qualified, holding the CII CF8 qualification, or similar.

Covering childcare costs that never end!

Many parents have bought life policies in the past assuming their children would be independent at 18. New research shows parents are funding their children for much longer, so new protection options are needed.

Gone are the days when your little ones flew the nest at age 18, leaving you to breathe a sigh of relief that your current account might at some point recover. Becase of the difficult economic environment, parents today cannot expect to get their financial freedom back until their children are much older.

Day-to-day living is more expensive, jobs harder to come by, and house prices are high with loans often difficult to obtain without paying a large deposit or a very high rate. According to The Children's Mutual, 93% of parents are still providing towards their childrens' finances until they are 30, and 16% of parents are still supporting their children beyond the age of 30.

This raises the question, do parents have sufficient protection in place? Even if they have sensibly planned ahead to ensure their offspring are financially supported, will that support continue if something should happen to one or other of the parents?

With children being financially dependent for longer, it makes sense to review existing policies to see whether the sums assured allow for the extra money that older children now need from their parents.

It seems that providing a secure financial future for their children is becoming an ever-expanding financial commitment for parents. This makes it vital to keep protection cover up to date with changes in the social and financial landscape.