WeeklyWatch – Stagflation spooks markets

20 April 2022

Stock Take

New highs

It was a week of records that many would rather not see set, with both the UK and US clocking new inflation highs.

On home soil, new figures from the Office for National Statistics (ONS) showed that CPI inflation rose by 7.0% in the 12 months to March 2022, compared to 6.2% for the 12 months to February. While rising food, restaurant and hotel prices were noted, the ONS attributed the inflation increase mostly to the surging costs of petrol and diesel.

The elephant in the room is, of course, the sharp uplift (54%) in utility prices, which came into effect at the start of April. It’s safe to assume, then, that next month’s inflation figures will make for even less enjoyable reading than the most recent statistics.

Indeed, Ruth Gregory, Senior UK Economist at Capital Economics, predicted that CPI inflation in the UK could potentially reach 8.7% next month. She commented:

“While we suspect April could mark the peak, we think it will remain above 7.0% in 2022 and above 3.0% for most of 2023. With high inflation feeding into price/wage decisions, we think the Bank of England will have to raise rates further than it expects, perhaps to at least 2.0% next year.”

Stagflation: A short-term worry?

Concerns about high inflation and lower – or stagnant – growth has led to talk of stagflation, which is defined as a combination of the two factors. This harmed short-term confidence in equity markets, and the FTSE 100 fell 0.7% over the shortened work week in the lead-up to Easter.

That said, while markets might have reacted to the spectre of stagflation, in the long term, the situation for investors may not be so worrying. This is certainly the view of Pzena Investment Management, who committed in its latest Quarterly Report:

“Markets tend to recover quickly from geopolitical shocks, and in the one sustained period of stagflation [1973-1982] equities performed roughly in line with long-term performance, and value outperformed.”

Inflation goes global

Inflation is currently a worldwide phenomenon, which again highlighted why diversifying across geographies (as well as industries and asset classes) can help smooth performance over a longer period of time and provide some balance when one part of the market is not performing so well.

In the US, headline CPI reached 8.5%, its highest level for over 40 years. It’s driven by similar issues as the UK, and the central bank is expected to continue to increase the interest rate from its COVID-19-induced lows over the coming year.

In equity markets, the S&P 500 ended the shortened week -2.1% lower, with the technology sector remaining under pressure. The FTSE 100 performed better (despite falling), and remains up overall for the year. However, this followed a period of sustained overperformance by the S&P 500, driven by strong tech performance in 2021.

Looking further afield, the Reserve Bank of New Zealand increased its official interest rate by half a percent to 1.5% last week in an attempt to combat inflation.

Inflation was also a topic of discussion in the European Central Bank’s (ECB) Monetary Policy meeting last week. Eurozone inflation hit 7.5% in March, compared to 5.9% in February, with fingers pointing at high energy and food prices once more. That said, the ECB did not increase interest rates at the meeting. Following the meeting, ECB President Christine Lagarde said:

“In the current conditions of high uncertainty, we will maintain optionality, gradualism and flexibility in the conduct of monetary policy.”

With war in Ukraine still raging, central banks across the globe will likewise be looking to maintain an element of monetary flexibility.

Wealth Check

If you’re thinking about making the best of later life while also planning for your family’s future, tax allowances and reliefs can make a bigger difference than you might expect. Here are three key rules to follow:

  1. Plan, plan, plan

The process of making sure that your beneficiaries can get the best from the assets you leave behind will often begin with Inheritance Tax (IHT) planning.

While few estates actually pay IHT, it’s not worth risking the 40% tax charged on assets above the nil-rate band and the Residence Nil Rate Band. Tony Clark, Senior Propositions Manager at St. James’s Place, comments:

“When you’re trying to come up with a plan for passing on wealth, traditionally it’s about trusts, property and so on. But people are increasingly using their pension pots , and some are using them to skip generations.”

A pension has long been one of the most tax-efficient ways to pass on wealth – they sit outside your estate for IHT purposes. For example, if you die before you turn 75 and you haven’t accessed your pension, your beneficiaries can receive all of it tax free, provided they claim it within two years of your death.

  1. Make the most of ISAs and gifting

If you’re planning to pass on as much of your pension as possible, you’ll need to consider where else you get your income from in retirement. ISAs offer shelter from Income Tax and Capital Gains Tax, but remember that the money you hold in them will form part of your estate for IHT purposes.

You could also consider gifting – you can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate (and you can use the previous year’s allowance, too, if you haven’t already).

  1. Seek practical and emotional support

There’s a lot to think about when considering what to leave behind – the wide range of options available, the continual changes to tax rules, the complexity of certain aspects of IHT and, of course, the emotional impact of any conversations. This is where the support from an experienced financial adviser can really help. Clark comments:

“Retirement continues to change, with implications for how inheritance planning works. Advice is especially crucial here to balance your own needs and those of your loved ones.”

Take control and give you and your family choices – get in touch with a financial adviser today!

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

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

The Last Word

“The courage it took to come is indescribable. You want to tell your truth, the truth. The world is united behind you. I hope we learn how the world can better support you.”

Prince Harry greets the Ukrainian team at the Invictus Games.

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

Pzena Investment Management is a fund manager 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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