Wellesley WeeklyWatch – Strong stocks soared once more

13 April 2021

Stock Take

Hope floats

The UK passed the next milestone of easing its lockdown restrictions yesterday, while its FTSE 100 index of large public companies benefitted from a buoyant week. Shops, gyms and pub gardens reopened after a lengthy lapse in action, and markets seem to be anticipating some renewed activity to help stimulate economic recovery. Many people will be relishing the opportunity to embrace a sense of normality once again at this key turning point in the government’s ‘roadmap’.

US equities experienced a strong week too – perhaps signalling investor confidence in the country’s economic recovery. It was likewise a positive week for the European market, in spite of comparative setbacks with its vaccination programme. Indeed, European stocks hit a new high last week, with the Stoxx Europe 600 index negating the losses that it has suffered throughout the outbreak.

The inflation situation

The International Monetary Fund stated last week that it foresees minimal long-term economic damage as a result of the pandemic – at least in advanced economies. Acknowledging that there will be a disparity in the future, it said it anticipates at least two years of rapid growth, with the world economy growing by 6% in 2021 and 4.4% in 2022.

During talks about the global recovery last week, the Federal Reserve (the US central bank) released the minutes of its March meeting, at which it reviewed the stance for the US market. The majority of the attendees considered that the risk of unforeseen high inflation was about the same as the risk of more low-key levels, giving a sense of a ‘broadly balanced’ outlook, according to the release.

Mark Dowding of BlueBay Asset Management, Co-manager of the St. James’s Place Strategic Income fund, and his team are scrutinising the data for clues about its direction. He wrote:

“It may be necessary to await data a little later in the quarter before the inflation dynamic becomes somewhat clearer.”

Ever since vaccine programmes were rolled out last year, markets have been assessing if a fast economic recovery could lead to a period of higher inflation. Too high a growth might eventually mean that governments and central banks change their policies in response. These policies (for example, low interest rates) have upheld asset prices since the crisis broke out last year.

Certain corners of the market are fearful that higher interest rates could test the share prices of the companies whose valuations have swelled over the past year. For instance, some large technology companies are trading at high valuations compared to their earnings.

This highlights how crucial it is to maintain a diversified portfolio of investments, wrote Ugo Montrucchio of Schroders, Manager of the St. James’s Place Managed Growth fund. He proposes that the so-called ‘bubble’ in technology stocks is likely to be less relevant to the largest companies with historically strong earnings, but could be applicable to ‘second tier’ technology stocks, whose revenue projections are overzealous.

He added:

“A way to navigate through what may well turn out to be a bubble is to diversify your exposure and cast your investing net as wide as possible.”

‘Tis the season

Investors will be searching for clues this week regarding the health of public companies in their imminent results releases. The ‘earnings season’ is an opportunity for companies to disclose details about their processes, and an important time for investors trying to assess their prospects.

Many investors in the US will be keeping a furtive eye on reports coming in this week from large companies, such as banks and airlines. Needless to say that a lot of companies will report higher earnings over the last three months than during the first quarter of 2020 (which they are compared to).

But what is perhaps more relevant is that they will include information about the level of damage brought about by COVID-19, or by the computer-chip shortages that have been causing problems for manufacturers and technology companies of late. Extraordinary results in either direction can be expected to move markets, this week and beyond.

Wealth Check

Anyone aged 66 or over saw their State Pension rise yesterday, owing to the ‘triple lock’ system that ensures pension payments are aligned with rising prices and average earnings. For the first time since 2016, the rise has been guided by the 2.5% floor this year, instead of matching inflation or earnings growth – just another indication of how the economy has suffered during the last 12 months.

However, apart from this year (2021-22), the new State Pension has been decreasing relative to the National Living Wage for the last five years.1 Over the same period, it’s flatlined at approximately a third of Average Weekly Earnings.2

It’s broadly accepted that the size of the State Pension makes a private pension a necessity, yet these findings highlight the significance of informed retirement planning to be sure that you have enough money to sustain you during that period. Once the State Pension has been accounted for, the average saver still needs a pension pot worth at least £599,667 to achieve a comfortable retirement.3

When you do decide to retire and begin to withdraw an income from your pension fund, financial advice can be your best ally in helping you handle any changes to your circumstances, such as a rise in the State Pension age, or potential tax changes.

Whether you’re saving into a pension, are nearing retirement, or would simply like to know the role of the State Pension within your plans, don’t hesitate to speak to your Wellesley financial adviser today.

Sources:

1 St. James’s Place analysis of Department for Work and Pensions data, April 2021

2 St. James’s Place analysis of Department for Work and Pensions data, April 2021

3 Retirement Living Standards, Pensions and Lifetime Savings Association, 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.

In the Picture

More than 32 million UK citizens have now received at least their first dose of the COVID-19 vaccine, and case numbers have sufficiently slumped for lockdown restrictions to be gradually eased. According to recent polling by YouGov, people are reportedly feeling happier and less stressed, which may be a direct result of the ‘roadmap’. Businesses are optimistic that the lighter mood might give rise to increased spending, which will in turn help boost economic recovery.

The Last Word

“My father, for I suppose the last 70 years, has given the most remarkable, devoted service to the Queen, to my family, and to the country and also to the whole of the Commonwealth.”

The Prince of Wales pays tribute to his father, the Duke of Edinburgh, who died at Windsor Castle on Friday, aged 99.

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

BlueBay and Schroders 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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