WeeklyWatch – Expectation of rate rise does little to stem UK recovery, but what about the long-term?

26 October 2021

Stock Take

Interest hikes on the horizon?

Last week saw the Bank of England suggest that an announcement of increasing UK interest rates could happen in the next two weeks – however, recovery continued regardless.

Inflation dropped to 3.1% in September, compared to 3.2% in August. A positive sign? Perhaps, but the Bank of England’s chief economist Huw Pill told the Financial Times it was likely to rise to around 5% early next year.

He also gave a clear signal that a rate rise announcement could be made as early as the Bank’s Monetary Policy Committee meeting at the end of next week (4 November), describing the situation as finely balanced.

Evidence pointing towards an imminent rate rise is building – Pill’s comments came hot on the heels of a speech from BoE Chief Andrew Bailey, who said the central bank would have to act to keep a lid on inflation – widely interpreted as a comment on a potential rate rise.

Markets did not react in a panicked manner to these statements, however – the FTSE dropped just 0.24% over the week. Part of the reason for this – as Martin Hennecke, Asia Investment Director at St. James’s Place, notes – is because any increase in interest rates will be gradual and coming from a historically low starting point. He said:

“Central bankers and governments will probably have to toughen their language somewhat soon, though; and at least be seen to take inflation seriously, if not launch some actions here or there – if small ones – to maintain the impression that there is no reason to worry much about inflation…simply because if they didn’t, sovereign yields – and thereby government refinancing costs – would likely rise significantly.”

Nevertheless, it’s prudent to be aware of the growing inflationary risk when considering investment decisions, Hennecke warned:

“Investments that can provide protection from inflation over time include any type of physical assets, of course, but also the asset class of equities as well – noting that companies with an edge in the market will typically be passing on rising costs to customers in the form of higher prices charged for their goods and services… though passing on of costs may not always happen in a linear way, and clearly equity prices can still be volatile and subject to correction risks.”

Counting the cost

As companies look to weather the storm of inflationary pressures, some have begun to pass on these costs to consumers, or suggest that price rises are likely in the future – including Unilever and Akzo Nobel (the parent company of paint brand Dulux).

According to Mark Dowding, Chief Investment Officer at BlueBay Asset Management, there’s currently some room for price increases for consumers:

“With rising prices, sentiment indicators have stalled somewhat recently, but the consumer continues to spend, as highlighted by US retail sales last Friday showing 12% year-on-year growth and Chinese retail sales outperforming expectations. This indicates that, for now, companies have the power to pass on higher prices to consumers, and so those prices are more likely to show up in inflation, rather than impacting corporate margins.”

This has been reflected in recent company results, with several companies beating earning expectations over the past week.

Strong earnings helped buoy US and European markets, with the S&P 500 breaking its own record high by Thursday. The Nasdaq Composite and STOXX Europe 600 both finished the week up, although neither quite reached the historic highs they hit earlier in the year.

Investors on alert

Despite the positives, it’s important to keep one eye on the current challenges – not least the persisting supply chain issues, with the chip shortage especially affecting a wide range of companies. On Friday, for example, Renault revealed it will produce at least 300,000 fewer vehicles this year as a result of a shortage of components. These shortages may well continue into 2022.

At the same time, COVID-19 numbers are continuing to rise in the UK, and energy prices remain high; while the Chinese property industry remains brittle following the struggles at Evergrande, which only narrowly avoided a default last week. Equity prices are therefore rising in the face of these potential challenges.

As always, diversification is the order of the day for investors – playing a key role in helping you achieve long-term returns as different sectors come under different pressure, and at various times.

BlueBay is a fund manager for St. James’s Place.

Wealth Check 

Regular health checks can help identify early signs of health issues – certainly, the older we get, the more it makes sense to schedule them in, to give us some peace of mind.

The same can be said of your finances – and all the more so when you’ve taken retirement. Just as physical and mental health can become more complex as you age, so too can your financial plans.

Once you move into retirement and start to take an income from your pension pot, you’re exposed to a new set of risks – such as sequencing risk and longevity risk – which tend to have impacts that only become clear when it’s too late.

It’s crucial to regularly review your investments to be able to recognise and minimise the impact of those risks, advises Danni Brotherston, Head of Advice Policy and Development at St. James’s Place Wealth Management:

“Ongoing advice is important before retirement, but arguably even more so in retirement – especially if you remain invested or you’re heavily reliant on other assets to provide an income.”

In a climate where redundancies are rife, some people may have been forced to consider retirement a little prematurely. Others are choosing to extend their working life, favouring a more gradual approach to retirement – while some have even returned to the workplace in a bid to boost their savings.

“You need to evaluate the impact all these types of events can have on your financial objectives and vulnerability – all the way through retirement,” Brotherston insists. This includes everything such as gifting an inheritance, divorce and changes to your health. She adds that changed circumstances in retirement are often associated with health – and how life expectancy and expenditure can thereby be affected.

Regular financial ‘health checks’ at least once a year will refocus on your needs and goals, ensuring your investments continue to reflect your risk appetite and that everything remains in line with your objectives. Indeed, regular financial health checks could be just what the doctor ordered! Brotherston concludes:

“Everyone has different priorities, and an adviser who really knows you can help you to make the right decisions – by adapting your strategy to your personal wants and needs.”

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.

The Last Word 

“The most valuable sneakers ever offered at auction – Michael Jordan’s regular season game-worn Nike Air Ships from 1984 – have just sold at $1,472,000 in our luxury sale in Las Vegas.”

– Auction house Sotheby’s confirms the most expensive sale ever of game-worn footwear, after the basketball legend’s size 13 trainers were snapped up by a collector.

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 St. James’s Place.

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