WeeklyWatch – Market recovery after initial Evergrande losses

28 September 2021

Stock Take 

The Evergrande effect 

While fears surrounding a wider fallout from the crisis engulfing Chinese property developer Evergrande haven’t yet been realised, global shares were nevertheless brought down on Monday last week. The S&P 500, for example, saw its worst fall since May, as investors worried about the chances of another Lehman-Brothers-style crash.

Most major Western markets were able to recover these losses by the end of the week, such as the FTSE 100, which ended the week up over 2% – this did, admittedly, come after two consecutive weeks of falls.

The Bank of England (BoE) also helped UK equities by keeping interest rates low at 0.1%, as well as continuing its programme of UK government bond purchases.

Energy panic

It seems energy has dominated headlines this past week, and for good reason – wholesale energy prices skyrocketed, causing issues for the UK economy. While several energy providers have gone under, the government was forced to bail out a CO2 provider to ensure the UK food industry would have enough of the gas to continue operating. Ironically, this came the same day as the government also launched its successful Green Gilt issuance.

The ongoing HGV driver shortage, along with increasing commodity prices elsewhere, has led to much speculation about increasing inflation as winter approaches. The long queues at petrol stations made headlines over the weekend, and some attributed the shortages to the HGV driver problem.

Inflation worries

According to the BoE, we can expect inflation to rise above 4% during the winter, before falling back to 2% in the medium term. This could cause an issue for cash savers, who will see their spending power eroded if inflation were to hit this high level while interest rates remain so low.

Analysts have now been looking towards the Monetary Policy Committee (MPC) meeting taking place in November to see the direction that the Bank will take. The Head of Macro Research at AXA Investment Managers, David Page, noted, for example:

“In terms of the monetary policy outlook, it was no surprise to see policy unchanged today, but Dave Ramsden’s vote to tighten policy adds to market expectations that the MPC could raise interest rates in H1 2022. However, November’s MPC meeting will be interesting in assessing to what extent the BoE’s persistent growth optimism is fading.

“Moreover, the evolution of the labour market over the coming quarters will be critical. We do envisage some increase in unemployment as furlough ceases and some alleviation of labour supply shortages as ‘normal’ life resumes into autumn, despite the ongoing risks from COVID. That being the case, we fully expect inflation to fall back materially in H2 2022 and the BoE to largely look through the current inflation spike.”

As the fears of a global contagion from Evergrande faded, both the Nasdaq and S&P 500 in the US had recovered from their early week fall by Friday.

Across the pond

On Wednesday, the Federal Open Market Committee (FOMC) kept interest rates low in the US and voted to continue its asset-purchase programme. Chair Jay Powell, however, suggested that the situation may change soon; indeed, half of the FOMC participants forecast a rate rise next year. Powell said that it was his view that the conditions to begin tapering federal economic COVID-19 support had been met, and that the committee could have a tapering announcement as soon as its next meeting in November.

Both the US and UK central banks have continued to push a potential interest rate rise further down the road; however, Norway’s Norges Bank became the first major Western central bank to lift its rates since the pandemic began. While it lifted its rate from 0% to 0.25% on Wednesday, it also indicated expectations that rates would rise again by the end of the year.

The STOXX Europe 600 took a fall in the wake of this news, but still managed to finish the week in the green. Many investors will now be questioning whether this move by Norges Bank will cause other central banks to follow suit sooner rather than later.

Elsewhere in Europe, markets awaited the results of Germany’s general election on Sunday in anticipation – the election marked the end of Angela Merkel’s 16-year reign as Chancellor of Europe’s largest economy. As with any altered political backdrop, investors will be keen to keep a close eye on any potential policy shifts coming as a result.

Wealth Check 

Pensions remain the first port of call when it comes to saving for retirement. However, while they should form a fundamental pillar of any retirement savings plan, they should by no means be the only pillar.

People working today are expected to live for two or three decades after retirement, and there are more income options available on reaching that stage, too. It’s therefore important to make the best of the different tools at your disposal, such as Individual Savings Accounts (ISAs).

ISAs and pensions differ in one major way – their tax treatment. The annual ISA allowance is currently £20,000, which can be used across Cash ISAs, Stocks and Shares ISAs, Innovative Finance ISAs, Lifetime ISAs, and Junior ISAs (albeit with annual limits of £4,000 and £9,000 on the latter two, respectively).

Contrastingly, there’s no tax on pensions when you pay in because the government offers tax relief on pension contributions at your marginal Income Tax rate. This means that for every £80 paid in, your pension scheme can claim another £20 in tax relief (meaning a £100 contribution costs £80). Higher-rate taxpayers get 40% pension tax relief, so that they only need to pay in £60 for every £100 contribution, and those on 45% Income Tax rate can claim relief at 45%. The amount over the basic rate of tax is often reclaimed via the individual’s annual tax return.

From a tax perspective, then, consider where the two products fit into your overall financial plans. This is where you’ll find your Wellesley adviser very useful, as they can help you answer questions, such as which pot to access first in retirement and what the tax implications might be.

The value of an investment with Wellesley Wealth Advisory 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.

A Stocks and Shares ISA does not have the security of capital associated with a Cash ISA.

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

Please note that Wellesley Wealth Advisory does not offer Cash, Innovative or Lifetime ISAs.

The Last Word 

“We will fight in the coming days to make sure that Olaf Scholz becomes Chancellor. The citizens want that.”

– General Secretary Lars Klingbeil of Germany’s Social Democratic Party insists that the party will lead coalition discussions after an extremely tight German election result.

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 Wellesley Wealth Advisory.

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