Wellesley WeeklyWatch – Inflation data dictated the market tempo

25 May 2021

Stock Take

Fixation on inflation

Last week, equity markets continued to echo the rhythm of recent months. The focal point for investors was the news about growing inflation, and prices were somewhat more unstable following evidence that inflation is indeed on the up, as the efficacy of vaccination programmes means that economies are able to reopen. US and UK stock markets closed the week marginally lower, although the US S&P 500 Index remains close to its personal best.

The likelihood of higher inflation has been at the forefront of the news over the last few weeks. According to recently released data (see ‘In the Picture’ below), UK inflation more than doubled to 1.5% in the 12 months to April, while consumer prices in the US increased by 4.2% over the same period. The prices of lumber and other commodities have surged recently, as the global economy has begun to open up again and demand has rocketed.

Investors are currently preoccupied with the question of whether today’s higher inflation will be a short-term occurrence, or whether it will continue its upswing to the point where central banks across the globe will have no option other than to raise interest rates. The range of such support from central banks has been a plus for asset prices throughout the coronavirus crisis – helping to support markets since they were accelerated last year.

Johanna Kyrklund, Chief Investment Officer at Schroders and Manager of the St. James’s Place Managed Growth fund, commented:

“We don’t have a crystal ball as to what’s around the corner, but as investors we just need to assess the range of probabilities. And it’s clear that there has been a shift in the balance of probabilities compared to when the positive vaccine news emerged in November. Since then, both the MSCI World and S&P 500 have risen.”

She added:

“So, the potential upside remaining has probably shrunk, while the potential downside has grown. The odds aren’t as attractive now, but it’s too early to be overly defensive. There is no recession on the horizon; you need to stay invested and you can’t sit in cash.”

Wednesday last week saw the Federal Reserve release the minutes of its most recent meeting on the matter. According to the publication, its members believe that the bank should set about discussing “a plan for adjusting the pace of asset purchases”. Perhaps a sign of reassurance that the US central bank is in no rush to slash its support?

The power of portfolios

Naturally, fund managers take a range of future possibilities into consideration when building their portfolios, and a period of higher inflation is just one such scenario to account for when selecting which investments to make. Hamish Douglass, Co-founder of Magellan, which manages the St. James’s Place International Equity fund, thinks that his portfolio is well-placed to tackle a new investing environment, for example.

He anticipates that inflation will pull on the share prices of ‘cyclical’ businesses, which are prone to perform well in times of economic growth. Plus it may be a drag on the more speculative stocks too (for instance, innovative technology businesses) – the share prices of which have flourished over the last year.

He continued:

“Around 50% of our portfolio in invested in defensive, high-quality assets. That could be businesses like Nestle and PepsiCo, or it could be McDonald’s. Those assets tend to do very well when markets get scared. It’s why, when markets go down, our strategy tends to protect people’s capital so well. It hasn’t been the best place to be in the past four months, but I’ve got a lot of confidence that the structure of our portfolio will give a lot of resilience.”

Wealth Check

We readily hear about how much we should save for retirement – little wonder, being that it’s often the largest reserve of money we will ever accumulate. However, less is said about when we should save for retirement. Clearly, our circumstances and levels of income are unique and fall within a broad spectrum, yet the challenge can always be mitigated through proactive planning.

According to new research from the Institute for Fiscal Studies (IFS)1 there are good reasons why people should not just simply save for retirement at a constant rate throughout their entire working lives. Just as our incomes and spending needs change throughout life, our pension contributions should likewise flex accordingly.

Individuals who are moving towards peak earnings but also planning to start a family should weigh up how their pension contributions may need to react to accommodate the higher household spending that comes between the years when a child is born and leaves home, says the IFS.1

They recommend the following:

“Most parents aiming to smooth their living standards over their lifetime should save relatively more for retirement before their children arrive, and/or after they have left home.”

Furthermore, they propose that graduates who are repaying their student loans should think about upping their pension contributions by the amount of their repayments once their loans are repaid or written off.

Financial advice can make a veritable difference in helping you optimise your retirement savings strategy by tailoring it to you and your life circumstances. Part of this process is ensuring that you’re saving appropriately for the retirement you have in mind – all the while being mindful of making this adaptable to your present-day life.

If this strikes a chord and you feel that you could benefit from some advice on saving for your retirement, contact your Wellesley financial adviser.

Sources:

1 Institute for Fiscal Studies, ‘When should individuals save for retirement?’, May 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.

In The Picture

UK inflation has risen over the past month, with increased oil prices, rising household bills and shops reopening their doors all being contributing factors, according to the Office of National Statistics. The fact that prices were low at the start of the pandemic also explains the sharp increase.

Even taking into account last month’s rise, the rate of inflation remains below the Bank of England’s target of 2%. Whether it continues its upward trajectory in the coming months will be influenced by how much of the savings UK households have amassed since the pandemic broke out are spent, now that retail, hospitality and travel (to some extent) are back on the cards.

The possibility of higher living costs can be of particular concern for those in retirement. But don’t worry, as your Wellesley financial adviser can support you in creating and reviewing a financial plan that gives you the best chance of keeping up with inflation.

The Last Word

“Our mission, our purpose, is not going to change. It is the opposite. With scale we can have a greater positive impact on the planet.”

Toni Petersson, CEO of oat milk producer Oatly, which went public last week for $1.4 billion.

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

Magellan 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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