10 Per Cent Depreciation Notification Process For Private Banking UK Clients Only

PBUK: Your Investments - Depreciation Notice

Under our regulatory obligations we provide you with a depreciation notice when the overall value of your Discretionary Portfolio, as evaluated at the beginning of your Portfolio reporting period, depreciates by 10 per cent and thereafter at multiples of 10 per cent.  

We also inform you when the overall value of your leveraged financial instrument and/or contingent liability transaction (e.g. FX Options) depreciates by 10% from its initial value and thereafter at multiples of 10 per cent.

This is so that you are aware of the impact of market conditions on the value of your investment holdings with us.

COVID-19: important changes to our depreciation notification process: 

Following feedback from our clients and in light of communications from the UK regulator, the Financial Conduct Authority (FCA), our depreciation notification process was changed in 2020.  Due to the COVID-19 volatile market environment some clients were receiving multiple 10 per cent depreciation notices within a short period of time. To address the impact felt by clients we reduced the number of notices we issue, and if your investments experience a 10 per cent depreciation you will only receive one notification per calendar quarter.  In line with the FCA’s communication, this temporary arrangement has been extended and will remain in place until 31 December 2022.

We are providing general updates on current market conditions on this webpage. We hope you will find these updates useful and recommend you regularly check this webpage for new information. If you would like to discuss the implications of the updates for your own investments, would like further detailed market information or have any other questions you can contact your Relationship Manager or Investment Counsellor.

This change will reduce the volume of depreciations notices you receive. We will contact you again if your relevant investments experience a 10 per cent depreciation during the next reporting period (April to June 2022).

Subject to the FCA’s communications, following the temporary period, we will resume contacting you directly at each 10 per cent depreciation of your relevant investments’ value rather than only at the first quarterly depreciation notice. We will continue to review FCA communications and where appropriate update you of any further changes to the process. 

Market Conditions

The global policy response to COVID-19 was wide-ranging not short of ambition. The result was that it protected the global economy from more severe economic ‘scaring’. Households in the developed world managed to amass large savings which helped create a high demand for jobs when many economies began to reopen last year. Such was the strength of demand for goods, and the rebound in the need for energy, inflation began to accelerate from Q2 onwards. This was exacerbated by shortages in supply chains and surging shipping costs.

Meanwhile the rebalancing of the economy also increased the need for services and therefore financial markets began to rotate away from technology stocks into more cyclical sectors. This caused longer-term government bond yields to begin to rise back towards pre-crisis levels, as investors began to price in a quicker return to more normal monetary policy.

Another leg higher in inflation towards the end of the year turned central bankers more hawkish. Investors also began to change their expectations of rates hikes, expecting the Fed to raise soon into 2022 and with more aggressive policy tightening. After the Fed announced that they would start tapering asset purchases investors accelerated the rotation out of very higher growth, mainly technology equities, into more cyclical equities. The Bank of England also became increasingly concerned with the outlook to inflation and increased the policy rate by 10bps (and then by another 25bps in February 2022). US rates expectations continued to rise during the beginning of January, pushing government bond yields higher, and sending a shock through equity markets. High growth stocks that tend to move inversely to rates suffered while some of the volatility began to spill over to the broader market.

Looking ahead, the path of inflation is likely to continue to play a pivotal role in investor sentiment. Inflation in the US should peak in the first quarter but the recent surge in energy prices, continued supply chain difficulties and tight labour markets mean that investors will face an uncertain policy outlook. This could create some continued volatility in markets as investors react to data and weigh up the impact on monetary policy. Should inflation start to ease, as we expect, then investors should focus more on corporates earnings, which would normally be the case during the mid-cycle phase of the economic cycle, while volatility in markets would be expected to ease.