WeeklyWatch – Volatility remains amidst second wave fears while UK relaxes slightly after postponed Budget announcement.

29 September 2020

Stock Take

Another week, and another landmark political speech for us to digest – this one in the form of Chancellor Rishi Sunak’s Winter Economy Plan, which was given after the Treasury scrapped the usual Autumn Budget in favour of further special measures to deal with COVID-19.

Goals for the government now include an effort to reduce spending on job support schemes while at the same time limiting damage to jobs and the economy. Plans now include a wage subsidy scheme similar to the one that exists in Germany, which will replace the furlough scheme that finishes in October. The scheme will pay a portion of worker’s wages, as long as their employer is prepared to offer them at least a third of their typical hours. And thanks to unofficial announcements appearing in the press in the days running up to the speech, the news was met with only a muted response from UK markets.

The question on everyone’s lips is, of course, will it work? And some experts believe that it will help to limit further economic damage to the UK. Capital Economics suggested that “they go some way to cushioning the blow to the economic recovery from the new restrictions to contain COVID-19 and limiting the long-term hit to unemployment… [but they] won’t eliminate the hit entirely.” They expect GDP to stagnate during the final quarter of the year, and not return to its pre-crisis level until the end of 2022.

Second wave fears affect stocks

Rising infection rates and slowing economic recoveries across the continent had an effect on European stock markets as they slid during last week – airlines, car manufacturers and banks were all among the biggest fallers, as these are more likely to be affected in the event of a downturn. They did, however, rebound on Monday.

Markets in the US were similarly down after the Chairman of the US central bank warned that Congress needs to agree on a new economic stimulus plan soon, warning: “The economy is recovering robustly, but we are still in a deep hole.”

But while they’ve agreed on the need for a stimulus, Republicans and Democrats disagree over how big the package should be; this lack of progress has been a heavy weight on investor sentiment recently. Last week, Democrats provided a new source of optimism with the news that they have begun a new proposal.

What all this means for investors is that you should continue to expect volatility in equity markets. As winter approaches without any vaccines, markets are prone to ups and downs, as Mark Dowding of BlueBay Asset Management, Co-manager of the St. James’s Place Strategic Income fund, has noted.

“For now, it seems entirely plausible for stocks to rally or fall by 10% in the space of the coming week without very much ‘new news’ at all,” he said.

However, he adds that while the short-term outlook points to more volatility, the longer-term prospects for markets are brighter: “Ultimately, we believe that policy support and a better outlook in 2021 will mean that the current market correction does not extend too far.”

US election looms

This week, we’ll see the first live debate between the two US presidential candidates. While there have been plenty of headlines and speculation generated by campaign trail rhetoric, leading to market jitters, it’s important to remember that the outcome of the contest isn’t inherently good or bad for investors as long as they think strategically, and for the long term.

“Although the market likes to focus on events like elections, political trends tend to play out over months and years. Politics can create short-term noise, but if you can withstand the volatility, it’s best to sit on your hands and wait for it to pass,” noted Johanna Kyrklund, Chief Investment Officer at Schroders and Manager of the St. James’s Place Managed Growth fund.

“The more important topic for markets is COVID-19. The identity of the next US president is a sideshow in comparison.”

Wealth Check

After the level of speculation that the Chancellor was planning to announce tax increases, the Budget postponement will have come as welcome news to some. And although it is unlikely that they would have been introduced at this point in the pandemic, long-term tax rises do appear inevitable given the UK’s mounting public debts; government borrowing between April and August was a record £173.7 billion.

There is a growing sense that ‘wealth taxes’ – Inheritance Tax (IHT) and Capital Gains Tax (CGT) – are being considered as a way to help pay down the UK’s financial obligations. Both of these have been the subjects of reviews ordered by the chancellor.

More welcome news came last week for anyone relying on their State Pension in retirement after the government passed a bill ensuring that the ‘triple lock’ (under which the State Pension increases in line with wages, inflation, or 2.5% – whichever is highest) will remain in place. There were fears that the impact of COVID-19 on earnings would cause it to come under review, as it could surge in 2021 following this year’s decline. Claire Trott, Head of Pensions Strategy at St. James’s Place, noted that the news is “one less thing for those relying on their State Pensions to worry about, and should be welcomed.”

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

The Last Word

“I’ve certainly spent more time in my garden listening to birds than I have for a very long time. A lot of people have suddenly realised what deep, profound joy can come from witnessing the rest of the world – the natural world.”

Sir David Attenborough, who joined social media app Instagram last week to spread his urgent message about climate change, reveals how he has spent lockdown.

BlueBay and Schroders are Fund Managers for St. James’s Place.

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 or Wellesley Wealth Advisory.

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