WeeklyWatch – Diversification is the order of the day amid rate rises

12 April 2022

Stock Take

Markets continue to falter under inflation fears

Inflation continued to be a hot topic with investors last week, as markets gave a frosty reaction to the likelihood of the Fed moving fast to battle escalating inflation. On Tuesday, Federal Reserve Governor Lael Brainard commented:

“Today, inflation is very high, particularly for food and gasoline. All Americans are confronting higher prices, but the burden is particularly great for households with more limited resources. That is why getting inflation down is our most important task, while sustaining a recovery that includes everyone.”

She went on to summarise two key methods the Fed will use to lower inflation – namely, a series of interest rate rises and reducing the balance sheet at a rapid pace, starting as soon as next month.

Diversify to thrive

The news caused investors to sell stocks in companies whose balance sheets are most exposed to short-term rate rises – triggering a slump in the tech-heavy S&P 500. That said, this wasn’t the full picture, as Stephanie Butcher, Chief Investment Officer at Invesco, co-managers of the St. James’s Place Corporate Bond fund, noted:

“…some areas of equity markets manage quite well in an inflationary environment. What will really determine the extent to which the equity markets too can stay at these sorts of levels and where they move from here is going to be earnings delivery.”

She added that, amid current uncertainty, it’s important that investors don’t put all their eggs in one basket. Holding portfolios with a blend of sectors, asset classes and fund managers (i.e. diversification) leads to improved client outcomes, due to having exposure to areas of that market that respond differently to inflationary environments to help you achieve smooth and consistent returns. In short, with a diversified portfolio, you can be assured that your investments aren’t dependent on any one outcome.

UK households feel the squeeze

Turning to the UK, and some commentators believe that this economic slowdown could prevail for months to come, following ongoing cost-of-living challenges and economic headwinds caused by the war in Ukraine. Furthermore, GDP growth for February was 0.1%, below market expectations of a 0.2% rise.

Adegbembo Modupe, Economist at AXA Investment Managers, observed:

“We expect growth to begin to slow materially as the real income squeeze impacts households; some measures point to the worst real income fall on record. It will also hit firms as they deal with rising costs. Both look set to weigh on activity, further impacted by falling confidence, tighter financial conditions and weaker external demand.”

Eyes on French politics

Across the Channel, election season is causing some uncertainty in France, with a late surge in popularity of French Presidential candidate Marine La Pen. Although this is the second time she has locked horns with President Macron (following the 2017 presidential election), polls suggest it might not be the same comfortable victory for the incumbent. Although Macron won the first round of voting, polling indicates the second round could swing either way.

A Macron victory would very much be a continuation vote, while a Le Pen win could cause some worries among EU policy makers, putting additional pressure on markets.

Unpredictable political cycles are part and parcel of long-term investing. Again, a diversified portfolio and strategic asset allocation can help smooth out some of this volatility and will ultimately drive returns.

Wealth Check

A new year marks new beginnings and a clean slate – so the start of the new tax year on 6th April 2022 means now is the perfect time to set some new goals. What’s more, early use of the fresh tax allowances and exemptions could be rewarding over the longer term, helping you achieve the future you want.

Here’s a reminder of the main tax exemptions and allowances, and what has – or hasn’t – changed for this year.

Income Tax and National Insurance

The personal allowance is the amount of income you don’t have to pay tax on, and it remains at £12,570. The basic rate is still 20%, and the higher-rate threshold (at which you start paying 40%) is £50,270.

National Insurance contributions (NICs) are increasing by 1.25% this tax year as a Health and Social Care Levy. The majority of employees will pay National Insurance at 13.25%, taking the total tax from their salaries, including 20% basic rate, to 33.25%.

Sunak, on the other hand, has also raised the NIC threshold by £3,000 as of July 2022 – aligning it to the personal income tax allowance at £12,570. The idea behind this is that around 70% of NIC payers will pay less, despite the Levy.

Dividend and savings income

Basic-rate taxpayers can continue to earn £1,000 interest on savings before paying tax in 2022/23 through the Personal Savings Allowance. The allowance remains at £500 for higher-rate taxpayers, and it’s zero for additional-rate taxpayers. Furthermore, the dividend allowance has remained unchanged at £2,000.

The government has also increased Dividend Tax by 1.25%, meaning investors and company directors owning shares in their business will pay more on their earnings.

Personal pensions

In spite of all the supposition about possible reductions in pensions allowances, they’ve been left untouched for this tax year.

Most people can get tax relief on pension contributions up to £40,000 a tax year – or 100% of relevant earnings, if less.

That annual allowance continues to decrease for individuals with an adjusted income in excess of £240,000 and threshold income over £200,000. The minimum reduced annual allowance this year is £4,000.

The lifetime allowance – the maximum you’re allowed in your pension pot before an extra tax charge is triggered – remains at £1,073,100 for 2022/23, and will stay frozen until 2026.

ISAs and Junior ISAs

The ISA subscription allowance stays at £20,000 for 2022/23, including for Stocks & Shares ISAs and Cash ISAs.

The Junior ISA annual allowance likewise remains unchanged at £9,000. Together with children’s pensions, Junior ISAs are an ideal opportunity to help give children a financial head start. However, 61% of the £971 million subscribed to Junior ISA accounts in 2019/20 was in cash.1

Parents should re-evaluate these cash positions in light of the current ultra-low interest rates, particularly if it’ll be several years before your children turn 18 and can access the funds.

Inheritance Tax and CGT

The Inheritance Tax (IHT) nil-rate band for 2022/23 continues to be £325,000 but has been frozen until 2026. The additional residence nil-rate band, where residences pass to direct descendants, stays at £175,000.

Sunak has frozen the annual Capital Gains Tax (CGT) exempt amount for individuals at £12,300 until 2026. Effective and repeated use of your CGT annual exempt amount is a good way of transferring assets into ISAs or pensions to protect them from any future tax liability on income or gains.

The value of an investment with St. James’s Place will link directly to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA or a deposit with a bank or building society.

The bases, levels and reliefs from taxation can change at any time and depend on individual circumstances.


1 Commentary for annual savings statistics, Gov.uk, June 2021

In The Picture

Source: Financial Express, Analytics. Stock market represented by the FTSE All Share Index. Data as at 31 December 2021.

Please be aware past performance is not indicative of future performance. The value of an investment may fall as well as rise. You may get back less than you invested.

The Last Word

“Following the bounce at the start of the year, it’s no surprise that economic growth slowed in February. Near-term challenges to the outlook have ramped up since, with a growing cost-of-living crunch set to weigh on growth.”

Alpesh Paleja, Lead Economist at the CBI

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

AXA Investment Managers, Bluebay and Invesco 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.

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