WeeklyWatch – Global markets falter amidst tough talk in the investment sector

05 October 2021

Stock Take

A crisis of confidence?

The continuing fuel crisis, worries about inflation, lagging growth, concerns around the Chinese property market and tough language from central banks about their plans – all of these compounded over the last week to help push down global markets.

Political uncertainty in the US only served to add to the pressure. Having driven billions of dollars into a host of support measures during the pandemic, the US government was swiftly closing in on its debt ceiling. In the absence of any sort of resolution, the government would ultimately shut down and there would be a historic potential default on US debts – both of which would drastically impact investors and bondholders, not to mention the wider global economy. However, on Thursday, the government was able to pass a ‘continuing resolution’ – essentially giving the government a deadline of 3 December to fund a more long-term solution.

The beginning of the week turned out to be particularly gruelling for equity investors, as markets were repositioned prior to anticipated interest rate rises in the future. For example, on Tuesday, the S&P 500 witnessed its worst day since May – falling 2% – with a similar story playing out for the Nasdaq and the STOXX Europe 600, which also both fell over 2% on the same day.

Adrian Frost from Artemis (Manager of the St. James’s Place UK Income and UK & International Income funds) observed that, despite the fact that September can often be a difficult month for equities, there were a number of unusual factors behind this year’s sharp decline:

“The S&P 500 peaked at a record 4,536.95 on 2 September. It is now down 5% (though still up over 14% year-to-date). That’s consistent with September’s bad habit of being the meanest month of the year for equities. Fears about inflation, supply chains, COVID-19, tapering and China’s bubble in property explain the fall.”

Diversify to survive

While the past year has seen US markets broadly posting robust levels of growth, September’s lacklustre performance serves as a timely reminder about the importance of having a diversified investment portfolio in order to help reduce certain cyclical risks.

For instance, while equities have fallen this past week, bond investments have experienced comparatively better performance. Mark Dowding, Chief Investment Officer of BlueBay (Co-manager of the St. James’s Place Diversified Bond, Global High Yield Bond and Strategic Income funds) discerned a growing sense that inflation may not be as short term as previously thought. He went on to note that recent improvements in bond returns demonstrate a rectification of an undershoot from the previous quarters. As central banks taper their asset-purchase programmes in the upcoming months and years, he added, it is acceptable to expect these returns to continue to gain ground.

The UK and EU picture

Heightened gas prices and a shortfall of HGV drivers in the UK – together with a somewhat panicked general public – brought about a shortage of petrol in forecourts across the country for the majority of last week. The crisis unravelled towards the end of the previous week, before dominating the headlines over the weekend, and continuing last week.

The UK faces similar inflationary and interest rate rise concerns as the US, meaning last week’s fall for the FTSE was to be expected, albeit by a lower amount. Indeed, the FTSE had not bounced back as strongly as its US counterparts prior to this, and it continues to be below its pre-pandemic peak.

Likewise, the EU is facing inflationary pressure, with headline rates reaching 3.4% in September. There is an ongoing global debate regarding the nature of this inflation – at first, central banks said it was transitory, yet with supply chain issues stifling supply and energy prices being on the up, some are starting to wonder how long this so-called ‘transitory’ period will go on for.

Jack Allen-Reynolds, Senior Europe Economist at Capital Economics, said:

“Looking ahead, further increases in inflation seem a near certainty. Admittedly, governments have taken steps to limit electricity and gas price rises, but that won’t stop energy inflation from accelerating. After all, double-digit energy price hikes kicked in today in Italy.

“What’s more, we expect to see the impact of high-input costs, including shipping, feed through to core inflation. We now think that the headline rate will reach 4% by November – and even though it is likely to fall sharply next year, recent strong outputs raise the chance at the ECB’s December meeting that it will announce an end to the PEPP [Pandemic Emergency Purchase Programme] in March.”

He forecasted that inflation will come to rest below 2% in 2023.

Wealth Check

What are the general expectations around the UK government’s Autumn Budget and Spending Review on the 27th of this month?

This year has already seen two sets of changes from the Treasury – the first being the last Budget (announced in spring this year, having been deferred from 2020 due to COVID-19), and the second being last month, when the government publicised increases in National Insurance contributions and higher taxes on dividends.

Nevertheless, despite these two major announcements this year, it might be foolish to assume that this month’s Budget will therefore have a ‘lighter’ touch.

“It’s always a bit dangerous to make those kinds of assumptions about an upcoming Budget,” remarks Tony Wickenden, Director of Technical Connection.

As he identifies, the government hasn’t made any key change on capital taxes, having commissioned reports on Inheritance Tax and Capital Gains Tax earlier this year. The reports, produced by the Office of Tax Simplification, have put forward a range of proposals on both topics.

Wickenden adds that, similarly, the possibility of changes to pension tax can’t be ruled out.

The potential for changes – however likely or unlikely they might be – is a crucial reminder to maximise on your annual tax allowances. Base your tax planning on the current rules, and be sure to regularly review your financial plans with your Wellesley adviser.

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

The Last Word

“At the start of this crisis I made a promise to do whatever it takes, and I’m ready to double down on that promise now as we come out of this crisis.”

– Chancellor Rishi Sunak lays the ground for his speech today at the Conservative Party conference.

 

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

Artemis and BlueBay 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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