The UK’s financial position is grim. The economy shrank

by 10% in 2020 with around 700,000 people losing

their jobs. The government will borrow around

£355bn in 2020/21 and another £234bn in 2021/22.

Unemployment is likely to

peak at 6.5%, lower than

initially expected, but still

the highest level in

recent history.

However, a successful vaccine rollout plan has

allowed the gradual unlocking of the economy.

This means a stronger outlook ahead.

The Office for Budget Responsibility (OBR) is currently

predicting growth of around 4% for 2021 and 7.3%

in 2022 with borrowing coming in at lower levels

than previously expected.

There are signs of this

strength in the real

economy. February GDP

data showed the UK

economy rebounding

from January lows.

Forward-looking data is encouraging with recent

economic surveys indicating a sharp increase in

business volumes.

Key issues in personal financial planning

Insight

Page 4 Greening the bond market Page 3 ESG labelling / RenewablesPage 2 Who is making money from Covid?

The headline tax rise was a change in corporation tax from 19% to 25%from 1 April 2023. Most households will not feel this directly, particularly as therate was kept the same for small businesses.

The freezing of certain personal allowances, however, may have more impact,particularly over the longer-term. The Chancellor said the level of tax-free personalallowance will be frozen at £12,570 from April 2021 levels until 2026. The Chancellor also froze the higher rate income tax threshold at £50,270. The OBR says the moves will bring around 1.3m people into the income tax netover the next five years and a further 1m extra people will pay tax at the higher rate.

Just as important for many of our clients is the freezing of inheritance taxthresholds and capital gains tax exemptions at 2020-2021 levels until 2025-26.The IHT nil rate band will remain at £325,000 and the residence nil rate band at £175,000. This is a particular problem at a time when house prices are risingsharply, leaving more of an individual’s estate subject to tax. The OBR says thatby 2025/6, we will have paid £985 million more in IHT than we would have if thenil rate band had risen with inflation.

Capital gains tax had been expected to rise, so the freezing of rates was a welcome reprieve. However, it does increase the importance of using theannual tax-free allowance each year where possible.

May 2021

This year’s budget came with a sting in the tail as Chancellor Rishi Sunak

sought to repair the country’s battered finances in the wake of

the Covid-19 pandemic. He has a £355bn hole to fill. Households will

slowly feel the pinch over the next few years as allowances are frozen.

PAying for the pandemic the 20 21 budget

TA X C H A N G E SThe lifetime allowance for pensions was also frozen at £1,073,100.This is a problem for those with larger pension pots, where additional contributionsor investment growth might take them over the limit. It can be a particular problemfor public sector workers with defined benefit schemes.

Those going over the limit may find they end up with a nasty tax bill: if the valueof a pension pot rises above the limit, retirees will face tax charges on the excesswhen they withdraw the money. These tax charges are high ~ 55% when theexcess is withdrawn as a lump sum and 25% if taken as income.

There are a number of options for individuals to consider, such as ISAs, a portfolioof funds, investment bonds and VCTs but it all depends on the individual. The individual’s tax situation, priority of inheritance tax planning taking into accountthe favourable treatment for pensions, and future retirement plans are all relevantand a careful assessment of all of the options should be made, as well as payingdue attention to the tax consequences of any route taken.

The economic fall-out from the pandemic was always likely to be painful at somepoint and many of the feared tax rises didn’t come to pass. However, the newrules will have an impact and need to be managed properly. Please get in touch if you would like to discuss how the changes arelikely to affect you and what you can do to mitigate their impact.

FREEZING OF LIFETIME ALLOWANCE FOR PENSIONS

INSIDE THIS EDITION

We O.U.£355bn

The UK economyis not out of thewoods, but it does appear to be heading in theright direction.

The state of the UK finances

G R A D U A L L Y

THE SUPPLY CHAINWhile the vaccine developers such as Pfizer, Moderna andAstraZeneca have their name on the door, there are lots of

other companies in the supply chain that make the vaccine delivery possible ~ from themanufacturers of glass vials, or vaccine storage facilities. In this respect, a low profile isan advantage, meaning the companies involved can charge commercial rates. Schrodersbelieves it is these companies that are likely to see the greatest financial benefit in thisphase of the rollout.

WHAT HAPPENS NEXT?The Covid-19 outbreak is far from over. Developing nations such as Brazil and India arestill struggling with severe second waves and the whole world faces a race against timeto vaccinate before new variants of the virus emerge. This creates an ongoing need forpharmaceutical and biotechnology companies to come up with new vaccines andtreatments. Clinical trials are already starting on the next generation of vaccines and theUK Government is already discussing a third ‘booster’ vaccine this winter.

At this point, the pharmaceutical groups may start to try and negotiate better terms. As such, they may then prove a more valuable source of revenuefor the companies involved.

ACCIDENTAL WINNERS

It shouldn’t be forgotten that there are a whole host of companies outside the medicaland biotechnology area that have benefited from Covid. This is perhaps most evident inthe technology giants, such as Amazon, Apple, Facebook, Google, Microsoft and Netflix.They have been the main beneficiaries of the mass move online.

This was seen in their most recent results. Amazon, for example, reported that net salesincreased by 40% in the second quarter of its financial year compared to the same timelast year. Facebook reported a higher-than-expected $18.7 billion in revenue for thesame quarter. These results outpaced even the most optimistic expectations. Delivery services and e-commerce names have also seen a boost, along with cloudcomputing companies and those helping companies digitise.

These companies have been in a better ~ and less controversial ~ position than thepharmaceutical companies to make money from the pandemic. As such, they haveperhaps been the biggest winners from the crisis. However, the landscape is changingand time will tell whether they can sustain this advantage as the crisis recedes.

Schroders suggests that some of the differences between the share priceperformance of the four companies with a successful vaccine may be downto the technology behind the vaccines rather than the vaccines themselves. BioNTech, which partnered with Pfizer, and Moderna are specialistbiotechnology firms. They have made considerable investment into mRNAtechnology and the vaccine development not only vindicated this investment butalso paved the way for other important vaccines in future. Their higher gains mayreflect the future potential of this technology.

It’s clear that vaccine developers are unlikely to make significant gains from thevaccines themselves. Many have also agreed to provide doses to developing nationsat low or zero cost.

The global vaccine programme has been an

astonishing success story and a tribute to the

skill and innovation in the pharmaceutical

and biotechnology industries.

Moderna’s Covid-19 vaccine, for example,

was designed and made in just two days

from the genetic sequence shared by

the Chinese authorities.

The numbers on the Covid-19 vaccines areeye-popping: by February of this year, the UKhad ordered around 400m doses of variousvaccines to administer to its 66.5m citizens.The US government had ordered 600m dosesof the Pfizer and Moderna vaccines alone.More than 1bn doses have already beenadministered worldwide.

WHO IS MAKING MONEYFROM COVID-19?

PHARMAInvestors might have thought that developing asuccessful vaccine for a virus that has had suchdevastating consequences would come with significantrewards for the companies involved. However, shareprice returns have, in most cases, been relativelylacklustre. Pharmaceutical companies have beenrightly cautious about being seen to profit from disaster and AstraZeneca, famously,has distributed its vaccine at cost.

The chart below from Schroders shows that Moderna has seen a share price spike,while Pfizer has made some smaller gains. AstraZeneca shares, possibly becauseof all the political controversy surrounding the vaccine, have actually lost value. The sector also had its vaccine failures, such as Sinofi and GSK and overall, the sector’s performance has lagged the wider MSCI World index.

Insight ~ Page 2

Huge field hospitalinside stadium atSao Paulo, Brazil

<

>

Oxygen refillingcentre in

New Delhi,India, (April, 2021)

Some vaccine makers have outperformed othersSix-month share priceperformance (total return) %

260

240

220

200

180

160

140

120

100

80Oct 2020 Nov 2020 Dec 2020 Jan 2021 Feb 2021 Mar 2021 Apr 2021

Source: FactSet as at 12 April 2021

MSCI World Index/ Pharma Biotech & Life Scie

MSCI World Index

BioNTech SE Sponsored ADR

AstraZeneca PLC

Pfizer Limited

Moderna, Inc.

Insight ~ Page 3

Progress on renewablesThe waters are muddied by a number of factors: the first is a relative lack ofstandardisation on industry terms. Until relatively recently, fund groups couldlabel their funds as ‘responsible’ or ‘ESG’ without a lot of independentverification. In November 2019, the Investment Association launched anindustry-wide framework to categorise the most common approaches toresponsible investment. This weeded out the worst offenders, but the range ofapproaches still makes it difficult for investors to know what they are getting.

For example, some fund groups will simply exclude all companies that scorebadly on a range of metrics, such as carbon emissions or diversity. Others willtake an engagement approach, which means they may still be invested in oil andgas or tobacco but will open up a dialogue with the company to improve their behaviour. Others take a ‘best in class’ approach, picking the strongestperformer in a specific sector. All may badge themselves ESG, but investors maybe surprised to find their ethical fund holding fossil fuels or tobacco.

There is also the added (though welcome) complexity that many fund groups nowhave a sustainability overlay across all their funds. In a recent fund presentation,we noted that the JP Morgan Emerging Markets Investment Trust ~ which isn’tlabelled as an ‘ESG’ or ‘sustainable’ fund ~ had a carbon emissions score of 8.2 tonnes CO2e per $m invested. This compares to 225 tonnes CO2e per $minvested for the MSCI Emerging Markets index. The fund’s carbon intensity was 11xlower than the benchmark. This is astonishing, but also illustrates the importanceof lifting the lid on individual funds when looking for sustainable options.

There are new rules emerging that may make a difference. The SustainableFinance Disclosure Regulation came into effect in March. This has beendesigned to standardise reporting on sustainability by fund groups, givinginvestors a framework for analysis. However, the first iteration of theregulation is fairly light-touch and the revised rules aren’t due until 2022. There is also a European ‘Taxonomy’ being created, which should enable fundmanagers to gather specific, comparable information from companies andincorporate it into their decision making.

Ultimately, the analysis and selection of responsible investments is still a minefield. Disclosure is getting better all the time, but investors still needto be alert. It is vital to look beyond the headline label of ‘ESG’ or ‘sustainable’to understand a fund manager’s approach and how effective it is at managingthese risks.

The momentum behind sustainableinvestment funds is now well-established and many of our clientshold them as part of their portfolios.However, picking sustainable fundsisn’t easy ~ it is far more than simplyfinding funds with a ‘responsible’,‘ESG’ or ‘ethical’ badge. We needto ensure funds are walking thewalk as well as talking the talk.

On 6th April this year, Easter Monday, the UK recorded its‘greenest day ever’: 60% of the energy on the grid in the UKwas generated from solar and wind farms, with another 16%from nuclear reactors, making it the lowest carbon intensity dayrecorded since National Grid records began in 1935.

Environmental, Social, and Corporate Governance(ESG) refers to the three central factors inmeasuring the sustainability and societal impact ofan investment in a company or business.

E S G l a b e l l i n g :a l p h a b e t s o u p

This shows how the UK’s energy mix is shifting away fromfossil fuels and towards renewable energy sources. In 2020,demand for electricity fell to 181g of CO2/kWh, partlybecause office blocks were closed and there was lessdemand during lockdowns. However, to meet ambitiousclimate targets, the UK will need cut its carbon intensity toaround 50g of CO2/kWh by 2030, which will mean furtherinvestment in renewables.

It also means leaving fossil fuel options behind. In March,the UK closed one of only two remaining coal-fired powerstations. West Burton, a power station in Nottinghamshirewill be decommissioned from September 2022, leavingUniper's Ratcliffe-on-Soar as the only power stationgenerating coal-fired electricity on the British grid. The government has committed to closing all of Britain’scoal-fired power stations by October 2025.

The energy transition is building momentum. This has beenreflected in share prices, with renewable energy companiesperforming well in 2020 and carbon-intensive industriesperforming poorly. This has shifted somewhat in 2021, butthe long-term direction of travel is clear.

IMPORTANT  NOTICE The content of this newsletter is for information purposes only, it is not intended to be used to make investment decisions. We cannot accept any responsibility forany financial loss incurred as a result of anyone acting upon this information. Any comments we make regarding taxation are based on our understanding of current tax and HMRC legislation,which often change. Past performance is not necessarily a guide to the future and the value of investments can go down as well as up and you might get back less than you have paid in.Taking any pension benefits early can reduce the income you will receive later in life. Income drawdown is not suitable for everyone and advice must be sought before making any decisions.

Churchill Investments plc is authorised and regulated by The Financial Conduct Authority

Insight ~ Page 4

Greening the bond market

For further information

Our website www.churchillinvestments.co.uk contains our regular newsletter Insight and other publications and articles of interest.

Contact details

To arrange an appointment, or for further advice, please contact us on 01934 844444 or Email: info@churchillinvestments.co.uk

Churchill Investments plc, 9 Woodborough Road, Winscombe, North Somerset BS25 1AB

Governments across the globe have launched ambitious plans to ‘green’ their economies, moving away from fossil

fuels and towards renewables, creating new infrastructure and shifting the transport mix. In many cases, the

financing for these initiatives will come from green bonds, the newest kid on the fixed income block.

Some caveatsAs with some other areas of sustainable investing, this is arelatively new market and still has its teething troubles. It isimportant to look under the bonnet because a green bondissued by government A may have very different ‘green’credentials to a bond issued by government B. For somebonds, the money is simply reserved for improving acompany’s sustainability profile, which can mean that itsultimate use can be a little vague.

There are checks and balances, however. The InternationalCapital Markets Association (ICMA) has created the voluntaryGreen Bond Principles (GBP) so investors can check whethergreen bonds meet their transparency and disclosureguidelines. The Climate Bond Initiative also does a lot ofwork to analyse and track green bonds.

A final problem is the popularity of green bonds. Some of the recent issuancehas been 10x oversubscribed. This means they can be issued with a ‘greenium’~ in other words, they pay a lower income than an equivalent non-green bond.This isn’t necessarily a problem as long as demand holds up and it almostcertainly will, given the weight of money heading towards the green bond sector.However, it may become a consideration in future.

The final problem is that green bonds are still bonds and as such, cannot getround the problem of low interest rates. The fixed income sector as a whole doesnot pay a particularly attractive income and there are always risks if inflationspikes higher.

That said, in spite of these issues, green bonds present ESG-focused investorswith new options in an asset class where it had previously been difficult to invest.As the market matures, a lot of the teething problems may be ironed out and itshould present opportunities.

Green bonds are debt instruments that are used to financespecific social or environmental projects. This might be inareas such as renewable energy, energy efficiency and greenbuildings, pollution reduction, clean transportation,sustainable water, or sustainable agriculture.

Social bonds tackle inequality, health, or education,while transition bonds explicitly support the transitionto renewable energy. In contrast, money raised throughnormal bonds can be used for any purpose the issuinggovernment or company sees fit.

They first came to market in 2007but have taken off in the last fewyears as the sustainability agendahas gathered pace. In 2016, greenbond issuance was around $100bn.Last year it was just under $300bnand this is expected to rise as highas $360bn in 2021. In aggregate,the green bond market is currentlyover $1 trillion in size.

All flavours of issuer have gotinvolved. The Italian governmentrecently launched Europe’s largestgreen bond debut, at €8.5bn. The UK, German, and Frenchgovernments plan to follow suit. Companies are also issuing greenbonds, although the market is smaller: Apple has issued a $1.5 billiongreen bond, while French multinational utility EDF issued a €2.4 billiongreen bond to boost its renewables capacity in 2020.

It has generally been harder forfixed income investors to gogreen ~ as a lender to acompany rather than an owner,they have less leverage to forcechange. This means that themajority of ESG funds have beenequity funds rather than bondfunds. Green bonds have beenseen as an important way for fixed income investors toincorporate sustainability in their portfolios.

Now a number of the major fund groups have launched greenbond funds and there are more options for fixed incomeinvestors. This means it is possible to construct more diversifiedsustainable portfolios.

A growing market