WeekWatch

19 June 2023

Stock Take

Global markets performed well last week, as investors reacted to inflation and interest rate news from the US.

US headline inflation fell to 4.1% in May. This compared to 4.9% in April and was less than half of what it was a year ago.

The fall was helped by a drop in energy prices, but food prices are also no longer rising by as much as they were before.

With inflation continuing to fall, the Federal Reserve chose not to increase interest rates for the first time in over a year. Since it began increase interest rates, they have jumped from 0.25% up to 5.25%.

While the pause was significant, it is important to note that, unless some unexpected economic data in the next few weeks causes a rethink, we haven’t seen the end of interest increases yet. Another two hikes are expected this year.

Sebastian Mackay, Portfolio Manager at Invesco, noted the Fed is facing two notable dilemmas. One is: “The scale and the persistence of the inflation shock and the Fed’s initial inertia to respond means they no longer have the luxury of being forward looking – they need to see hard evidence that inflation is on a steady downward path before they can begin cutting rates. At the same time forward-looking indicators do indeed suggest that inflation will slow quite sharply over the next year. As a result, the risk is that the Fed’s focus on current inflation data results in them overcooking the tightening and bringing about a severe recession.”

The second dilemma he noted was that different sectors do not have the same outlooks. AI-related tech and advanced manufacturing are booming, for example, while old industries with more debt are feeling the impact of the higher interest rates. The Fed is needing to balance the needs of all of these businesses, as it looks to reduce inflation without causing a sharp recession.

European markets remain behind their American counterparts when it comes to both inflation and interest rates. Although Eurozone inflation has been on a downward trend for a while now, it remains high at 6.1%.

Given all this, analysts were not surprised to see the European Central Bank (ECB) lift interest rates again last week. The key rate remains below their American and British counterparts, however, at 3.5%.

Mackay notes: “Although CPI inflation has started to soften, the strength of the labour market, wages in particular, underpins the ECB’s concern about inflation remaining high for too long. The scale of excess inflation in Europe, coupled with the ECB’s single-minded focus on inflation means there is an increased likelihood of the ECB persevering with interest rate hikes, even as growth indicators weaken. After all, they have form of hiking into a recession in 2008 and 2011.”

There were more central bank decisions in Asia. In China, which came out of its COVID-19 lockdown later than the West, markets rose after the country’s central bank cut interest rates to help stimulate its post COVID-19 economic recovery.

Japanese markets also rose on news its central bank will be keeping interest rates at their current rate. The Bank of Japan (BoJ) has been something of an outlier this past year, keeping rates low despite inflation above its 2% target.

Martin Hennecke, our Head of Asia & Middle East Investment Advisory & Comms, said he has been unsurprised by the BoJ’s actions, but mainly for a reason they might not want to promote. He said: “Japan has the highest sovereign debt burden across the developed world, which arguably can best be kept under control via negative real interest rates. This predicament might continue to support the country’s equity market though, as local savers with high cash exposure become increasingly wary of the risk of purchasing power loss and start to re-discover investing as an avenue for mid-longer term inflation protection.”

UK markets will have their own moment in the sun later this week when the Bank of England (BoE) announces its own interest rate decision. The Bank is widely expected to increase rates again, pushing them up to at least 4.75%.

The BoE is facing increasing calls to consider the impact of these increases on UK consumers. Last week the average two-year fixed-rate mortgage hit 6%. According to think tank The Resolution Foundation, people looking to remortgage their homes will end up paying an average £2,900 a year more from 2024.

Even with these fears, the FTSE still finished last week up over 1%.

Wealth Check

Across the UK today 5.7 million people are carers, supporting a loved one who is older, disabled or seriously ill.1 Looking after someone can be rewarding, but it can make life very challenging, both emotionally and financially.

The number of people caring informally for aged relatives is likely to continue rising as the older generation live for longer. The ranks of ‘sandwich carers’, who look after both their children and an elderly parent, are expected to swell too, as the average age when becoming parents for the first time is increasing.

So what support is available to you if you’re caring for an elderly person?

Financial advisers are of course experts in investing, tax and inheritance matters, and retirement planning, but much of their work also involves helping individuals and families find appropriate care, meet the cost of it and manage life’s big transitions. This includes helping people who have become unpaid carers.

Ros Clarke, Long-term Care Relationship Manager at St. James’s Place explains “A good adviser will be able to answer your questions around care – including how much home care costs per hour or whether next of kin are responsible for care-home fees. This can be reassuring and help families with forward planning.“

Ros continues, “But just as important is an adviser’s ability to explain what’s possible from a carer’s perspective. For example, a cashflow plan could show that a family could factor some practical help with caring into their budget. Sometimes, financial assets can be managed more effectively to pay off a mortgage, reduce debts or create an income stream.”

Another option is to check the financial status of their elderly relative with regards to their entitlement to help with care costs.

For some families, bringing in professional carers on a temporary basis (either in the home or through residential care) may be an option, which will give unpaid carers a break.

Ros says, “Our advisers can outline how much you can expect to pay for care either at home or in a care home based on the individual’s needs. They can advise on managing costs and anticipating any issues that could arise.”

Sources:

1Facts & Figures, Carers UK, accessed May 2023

In The Picture

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The Last Word

I know the anxiety people will have about the mortgage rates, that is why the first priority I set out at the beginning of the year was to halve inflation because that is the best and most important way that we can keep costs and interest rates down for people.

Prime Minister Rishi Sunak says he ‘intends to stick to the plan’ and focus on reducing inflation.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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SJP Approved 19/06/2023

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