Wellesley WeeklyWatch – Markets set their sights on higher interest rates

23 March 2021

Stock Take

Markets weigh up what the future investment landscape could look like

The ups and downs of markets have been driven by a number of headwinds and tailwinds over the past few weeks, and the same forces were at play last week, causing choppy conditions for indices.

With various vaccine successes, economies are eyeing up the day they can reopen, and are pondering what investments might look like months from now. Forecasts predict a resurgence in economic activity that will presage higher inflation, and therefore a reversal in government and central bank policies to support asset prices.

Higher inflation could, of course, raise the prospect of raised interest rates. The Federal Reserve (which sets US rates) said last week that it doesn’t expect to do so until 2023, which appeared to soothe concerns in the immediate aftermath of the announcement – with US stocks closing higher.

Last Thursday, the US government bond market experienced another sell-off, which looks to have caused some investors to exit their positions in high-growth and technology stocks – contributing to a 3% slide in the technology-heavy Nasdaq index on the day. That said, they had settled by the end of the week, and even rose on Friday while the wider US stock market fell slightly.

How long will UK rates stay low?

Growth, inflation and interest rates were also on the minds of UK policymakers last week. The Bank of England upgraded its UK economic outlook, but also said that it wouldn’t raise its historically low interest rates in the near future. The Monetary Policy Committee said that it wouldn’t change either the main base rate or the volume of quantitative easing. It stressed that rates won’t go up until it sees inflation staying above 2%.

Futures markets are predicting a modest rate increase next year, although Capital Economics believes it won’t happen until later than that. Ruth Gregory, Senior UK Economist, commented:

“We think the markets have gone too far in expecting interest rate hikes from mid-2022. We think that rates won’t rise above their current rate of +0.10% until 2026.”

It’s bad news for UK cash savers, who are unlikely to see returns on cash improve much for the foreseeable future. Indeed, in the 12 months since the two emergency base rate cuts at the start of the pandemic, average savings rates across all accounts have continued to fall. With the probability that the era of record- low interest rates will stretch well into this decade, those who are overly reliant on cash savings face a real threat to their long-term financial security.

US-China tussles set to take centre stage once more?

Meanwhile, officials from China and the US met last week for the first high-level discussions between the two powers since Joe Biden took office. The meeting was tense, with both sides using their public opening remarks to criticise the other.

The meeting highlights how the relationship between China and the US – and their clashes over trade, technology and politics – will remain a driving force of markets for years to come, especially once COVID-19 (finally) retreats.

When the (micro)chips are down

One of these flashpoints may be over the island of Taiwan. The small East Asian nation is seen by China as a breakaway province that will one day be reunited with the mainland again. It is also the world’s leading producer of semiconductors, which are an important feature of microchips (and therefore lots of different technological devices).

Last week, Samsung Electronics warned that there is a “serious imbalance” in the world’s semiconductor industry. The Korean company, the world’s largest computer chip manufacturer, said that the shortage is affecting its operations. The news has renewed concern around the world about chip shortages, which have already affected car manufacturers this year and could cause problems for many others.

Ajay Krishnan from Wasatch Advisors, Manager of the St. James’s Place Emerging Markets Equity fund, said:

“Semiconductors have become the new oil. They are the key factor of production for the modern economy. Everything grinds to a halt if you don’t have access to them.”

For active managers, however, he believes that the unknowns surrounding these supply issues could be a good thing.

“It isn’t completely clear how all this will play out, but we think it presents opportunities as well as challenges.”

Wealth Check

It’s the final call for this year’s tax-saving allowances, which end on 5th April, with the easiest allowances to take advantage of being pensions and ISAs.

But looking longer term, are further pension reforms still on the government’s agenda? There were only 22 mentions of pensions in the Red Book documents that accompanied this month’s Budget – the lowest number in any Budget since pension freedoms were introduced in 2015.1 Indeed, the freeze of the lifetime allowance was not unexpected, but rumours of cuts to pensions tax relief again proved to be just that. Tax consultations, which will be published by the government tomorrow, may provide more clues about the future direction of pensions taxation.

But given the Treasury’s need to begin balancing the books, it seems certain that the personal tax exemptions, allowances and reliefs available now will not become more generous. Chancellor Rishi Sunak’s decision to also freeze Income Tax and Capital Gains Tax allowances underlines the value of tax shelters such as ISAs and pensions, and the importance of ensuring that the maximum appropriate use is made of opportunities to invest before the end of this tax year.

Both options offer important advantages for retirement savers, so a flexible and tax-efficient retirement plan will normally involve a combination of savings vehicles. Advice is critical to ensuring the right balance.

Effective tax planning can add real value to our wealth over the long term. As the tax burden looks set to rise to its highest level for 50 years2, it will become even more important. Don’t forget you can download out tax year-end checklist here.


1 FTAdviser, March 2021
2 Office for Budget Responsibility, March 2021


The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The favourable tax treatment of ISAs may not be maintained in the future and is subject to changes in legislation.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

The Last Word

“Today I am monumentally fed up with the idea of writing. I haven’t actually written anything for two days, and that makes me fed up as well.”

– A newly unearthed archive reveals that Douglas Adams, one of Britain’s best-loved science fiction writers, suffered from the occasional spell of writer’s block.

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

Columbia Threadneedle and Wasatch Advisors 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.

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