Stock Take
The fallout from the new UK government’s “Growth Plan” continued last week with the domestic sovereign bond market experiencing unprecedented volatility.
The announcement of huge tax cuts alongside the previously announced energy subsidy package – both to be funded through considerable borrowing – spooked financial markets. The result was that government bond yields surged, and sterling fell sharply relative to other currencies at the start of the week.
This prompted the Bank of England (BoE) to intervene to bring about stability. In the middle of the week, the BoE said it would reverse plans to start selling gilts and would instead start buying them. This appeared to calm markets, and by Friday’s conclusion, bond and currency markets had stabilised.
While this may have settled markets for now, Azad Zangana, Senior European Economist and Strategist at Schroders, suggested long-term questions remain: “The Bank's decision to step in to stabilise the gilts markets with purchases makes sense in the short term, but this is ultimately a credibility issue with fiscal policy. This is the wrong time to be acting as lender of last resort when it goes against the Bank's primary objective of fighting inflation. It seems that the BoE will fight the market instead of hike rates aggressively as the market is demanding, resulting in a worse outlook for sterling.”
This turmoil in the UK added to the nervousness in equity markets, which continued to fall last week. Mid and small-cap stocks faced heavy selling pressure, with the FTSE 250 falling by 4.5% while the larger FTSE 100 declined by 1.8%.
While in the short term this might cause UK equity investors a headache, Benjamin Jones, Director of Macro Research at Invesco, said that it has left UK stocks more attractively valued than before and that – given the volatile backdrop – there is likely to be much opportunity for stock-picking in the UK.
“We remain optimistic on the outlook for UK equities going into the final quarter of the year and 2023, while recognising that uncertainties in the global economy and the geopolitical landscape make the range of possible outcomes wide,” he noted.
Last week, Q2 GDP figures were revised favourably, from a small decline to a slight growth. Importantly, this means the UK is not currently in a recession.
This may be a temporary situation, however, as Jennifer McKeown, Head of Global Economics Service at Capital Economics, said global central bank actions were likely to push world economies into a recession. Capital Economics is now predicting UK interest rates to peak at 5%, US rates to peak at 4.5%-4.75%, and Eurozone rates to peak at 3%.
These higher rates are likely to slow growth, and Capital Economics is now predicting a US recession is increasingly likely. It also expects the eurozone to experience a recession, and that fiscal stimulus in the UK will not prevent a recession there given the adverse financial market response.
With investor confidence fragile, and more interest rate rises expected, global markets struggled last week. The S&P 500 retreated by 2.9% as it fell back to levels last seen in November 2020, with the technology-heavy NASDAQ index concluding the week 2.7% lower. Moves in Europe were muted compared to their global peers, with the MSCI Europe ex UK index falling by 0.6% despite the growing threat of recession.
Meanwhile in Asia, Chinese equities remained on their recent downward trajectory as currency weakness and an increasingly challenging economic outlook contributed to a 2.1% weekly fall in the Shanghai Composite.
While markets are currently notably down this year, counter-intuitively, this could present something of an opportunity for those willing to play the long game, says Martin Hennecke, our Head of Asia Investment Advisory. He notes; “Investor sentiment remains poor, while attractive valuations can be found in many places. There are still risks in the global economy, which will always be present in times of general pessimism. However, we should not forget that markets are always anticipatory by nature. Historically, some of the best investment opportunities often coincide with the greatest broad-based investor pessimism.
“In fact, a historical analysis of over a 100 years of stock markets actually reveals a surprising negative correlation between economic growth and stock-market returns.”
Wealth Check
This year has been a difficult one, financially speaking, for households in a range of income brackets. The cost of living has risen substantially as inflation has soared and remains close to a 40-year high, household energy bills have skyrocketed, and interest rates are rising. Meanwhile, investment markets have been choppy, which has been an additional source of stress for those planning their financial future.
You may think that we can’t do anything to help, but it’s during the hard times that the value of financial advice really shines through.
We can help you tackle a whole range of money-related issues. The ultimate goal is for you to reach a place of financial wellbeing, which can include:
- Making the most of your money on a day-to-day basis
- Being financially capable of dealing with the unexpected
- Feeling confident, empowered, and knowledgeable
- Making smart use of debt, investments, insurance policies, tax reliefs and financial products to help you on your journey
Why financial planning is important
You’ve probably already put in place structures and routines to help you reach your goals. These may include budgeting, savings goals, monthly contributions to pensions or investments, and insurance or income-protection policies.
The challenge in the current environment is that some of these best-laid plans fall apart. This can be either because people’s incomes are so stretched that they can’t keep up with commitments such as pension contributions or savings, or because people actively stop working towards their goals out of fear of what’s ahead - it’s a mindset of battening down the hatches.
We spend every day creating specific, actionable plans to help people reach their aims, based on realistic calculations of how much they’ll need. We can tweak and fine-tune these so that people who feel they can’t afford to save for retirement or keep up their financial commitments are able to do so.
As well as being a sounding board for your financial concerns and creating action plans for getting ahead, we can accurately assess how you as an individual may be affected by the current environment. Whether it’s the impact of inflation on your cash savings, how rising interest rates could influence your retirement plans, or how a recession may affect your business, we can provide a range of forecasts tailored to your circumstances.
These should offer reassurance because your worst-case scenario may not have the terrible effect you fear. Whatever the situation, rest assured that there will be a financial solution – and we’ll make sure you find it.
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested. An investment in equities does not provide the security of capital associated with a deposit account with a bank or building society.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
In The Picture
Tom Beal, Investment Director at SJP, offers his tips for navigating times of uncertainty, and how to reach your long term financial goals despite fluctuating market conditions.
