Wellesley WeeklyWatch – Markets eye up the many faces of inflation

02 March 2021

Stock Take

Lock, stock and barrel

Last week saw the share prices of US technology companies take a downward turn. The Nasdaq index of US stocks, which attracts many technology companies, had fallen by approximately 3.5% – however, towards the end of the week, prices started to revive once more.

Fast-growing technology stocks have considerably eclipsed the rest of the market over the past couple of years. Since coronavirus unleashed itself upon the world last year, ‘stay-at-home’ stocks that saw their earnings swell during lockdown periods also revelled in further share price growth. That said, since successful vaccine developments were declared last year, stocks in other sectors approved by ‘value’ investors have likewise enjoyed a renaissance.

Jim Henderson of Aristotle, which manages the St. James’s Place North American fund, implies that last week’s change may be an indicator that the rapid growth of Big Tech is having somewhat of a breather.

“That train seems to have slowed,” he stated, pointing out that last week’s movements in US stocks seem to be in line with that trend.

“There certainly does appear to be a continuation of the growth/value rotation that started late last year. In February, the value benchmarks have outperformed the S&P 500 by some 350 basis points [3.5%],” he added.

The savviest of approaches for investors is to uphold a well-diversified portfolio. With funds invested in assets on both sides of the rotation, their performance won’t depend on whichever style of investment is trending from one month to the next.

The inflation equation

In anticipation of higher inflation, markets experienced some movement last week. They appear to be gauging a future in which a swift post-COVID-19 economic recovery leads to higher inflation, and interest rates are duly raised.

The chair of the Federal Reserve dealt with concerns about inflation in last week’s meeting with Congress. Glossing over fears that inflation might spike later in 2021, he announced that the central bank would retain its high level of support for the US economy, which has helped bolster stock prices since it came into effect last year.

“The market is focused on inflation, both the good and the bad of it,” said Dan O’Keefe of Artisan Partners, which manages funds for St. James’s Place.

Stock prices are affected in different ways within a higher-inflation environment, he stated. A rapid economic recovery would be beneficial for particular ‘cyclical’ stocks, whereas higher interest rates are gainful for the financial sector.

“In this environment, our financial holdings, such as BNY Mellon and Citi, should benefit strongly. Modest inflation along with economic recovery would also be positive for many of our names, such as American Express, Expedia, Booking.com and Southwest Airlines, for example.

“On the other hand, the end of the low interest rate and low-inflation environment would arguably be bad for the high-priced growth stocks that have led the market for several years now,” he concluded.

Interest rate hike?

Here in the UK, inflation is also under scrutiny, as the market muses about when the Bank of England might begin to put up interest rates ahead of a potential post-COVID spending boom. The futures market is pricing in a first increase in the second half of 2022, and up to +0.75%-1.00% in five years’ time.

On the other hand, Capital Economics maintains that interest rates won’t move from their current record-low rate (+0.10%) within the next five years. It alleges that higher inflation will be fleeting, perhaps falling off in 2022, and that the Bank’s ability to loosen monetary policy will be reduced by government spending. Whichever way the pendulum swings, the onward journey will have its ups and downs for those reliant on cash savings.

Markets are inherently forward-looking, and so much of last week’s change in the share prices of US technology companies was linked to weighing up what the world will look like in future months. In the nearer term, however, the situation appears much brighter, thanks to the government’s ‘roadmap’ for lifting the current lockdown in the UK.

Boris Johnson’s announcement at the start of last week centred on a four-step plan to ease the present restrictions in the UK. There are some initial hints that people have seized the opportunity to regain a ‘normal’ life (see In the Picture). While markets refocus their vision in response to the changing landscape, the expectation is that life is about to take a turn for the better for most people.

Wealth Check

The countdown is underway to when we learn of Chancellor Rishi Sunak’s plans to boost the UK economy and cover the extraordinary cost of its pandemic support. As tomorrow’s Budget approaches, the question still lingers as to whether any substantial tax changes to savings and investments will be made known.

It’s predicted that more radical or complex moves will be delayed until a second Budget later in the year. This view was reinforced by the announcement that the government will now publish several tax consultations at the end of March, implying that the chancellor is set to boost revenues in the future.

Nevertheless, there were reports last week that Sunak has more pressing plans to freeze the lifetime allowance1 – the maximum amount of benefit that can be drawn from pension schemes without mobilising an extra tax charge. The allowance in this tax year is £1,073,100, and the move could accumulate £250 million a year by 20242.

One thing we can be sure of is that the tax regime for investments and pensions will not dig deeper into its pocket. Should this indeed be the case, maximising your tax allowances before the end of the current tax year is all the more meaningful. Speculation continues over the future of pension tax relief, highlighting the importance of higher rate and additional rate taxpayers putting as much as they can afford into their pension pot.

Capital Gains Tax (CGT) is not protected by the government’s triple lock pledge on Income Tax, National Insurance and VAT, and could therefore be amended to increase revenues. That could come about through closer alignment of Income Tax and CGT rates, or a decrease in the annual allowance from its current £12,300. The Office of Tax Simplification recommended in its 2020 review that it should be cut to somewhere between £2,000 and £4,000.

There are just 24 working days to go until the end of the financial year – which tax-planning actions could you take to bring you closer to your financial goals?


1,2 www.thisismoney.co.uk, 26th February 2021

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.

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

The future of the tourism industry looks brighter, following last week’s announcement about the relaxation of lockdown measures. The higher probability of international travel this summer is positive news for companies hard-hit by the pandemic, such as airlines, hotels and hospitality.

The Last Word

“In the short-term, we need to protect the economy and keep supporting it through the roadmap, and over time what we need to do is make sure our public finances are sustainable.”

– Chancellor Rishi Sunak tells Andrew Marr about his priorities ahead of an important Budget.

The information contained is correct as at the date of the article.

Aristotle and Artisan are fund managers for St. James’s Place.

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.

FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE®” is a trademark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

© S&P Dow Jones LLC 2021; all rights reserved.

Back to news