WeeklyWatchRecession fears gather pace and banks raise rates

10 May 2022

Stock Take

Lofty UK interest rates

Investors reacted to interest rate rises in the UK and US, as equities witnessed a distinct sell-off in the latter half of last week.

In the UK, the Bank of England’s (BoE) Monetary Policy Committee increased interest rates by 0.25%. The base rate is now at its highest in 13 years, at 1.00%. A third of the committee voted to increase the rate yet further, to 1.25%, which indicates that additional rate hikes are likely in the future, as the economy comes face to face with rising inflation.

The committee also announced further updates to its economic forecasts. It expects UK inflation to break 10% later on in 2022, due to extreme energy price increases to household bills. What’s more, it reduced its 2022 economic growth forecast too, alluding to the increased possibility of a recession.

George Brown, Economist at Schroders, said:

“Concerns amongst the committee about inflation becoming embedded are justified. But we also believe that near-term economic momentum is more fragile than it has concluded. Further hikes will hinge on how the data evolves over the coming months. In particular, whether the deterioration in consumer confidence sees spending scaled back.”

The dismal economic outlook was reflected in the market, with the FTSE 100 dropping 2.1% over the course of the week.

Aggressive Fed tightening

In a similar vein, the Federal Reserve (the Fed) voted to increase its base rate last week by 50 basis points (0.5%) to a range of 0.75%-1.00% – the largest increase since 2000. This was also the first time the Fed had raised rates at back-to-back meetings since 2006, and it forewarned that similar hikes were likely for the next couple of meetings.

Lewis Aubrey-Johnson, Head of Fixed Income Products at Invesco, commented:

“Assume further 50bps hikes at the next two Fed meetings, then 25bps for the remaining three Fed meetings of the year.

“That gets you to 2.5% of tightening – the most in a year since 1994. However, if we add another 25bps for the reduction of the Fed’s balance sheet, then it will represent the most aggressive Fed tightening in a calendar year since 1978. With the US economy running hot and inflationary pressures abounding, investors understand that it will be a tall order to cool things down without creating a recession.”

Market motions

With combative central banks and a weakening economic outlook setting the scene, US markets were precarious last week. Equities swiftly retreated on Thursday and Friday, having initially gained in the immediate aftermath of the Fed meeting. On Thursday, the NASDAQ Composite experienced its largest daily fall since June 2020 at 5%, while the S&P 500 fell 3.5% on the same day. Both fell further on Friday, closing the week lower than they began. This was the fifth straight week of fall-offs for these indices – the worst streak in around a decade.

The week ahead may see yet more challenges, with inflation figures due in the US. It’s anticipated that these will show a further rise to the headline rate.

The MSCI Europe ex UK index slumped by 4.6%, with comparable fears around inflation, the continued war in Ukraine, and strict lockdowns in China weighing on sentiment.

Investment opportunities abound

Given that markets are currently in difficulty, it might seem only too natural to panic. However, shrewd stock-pickers realise that this actually throws up an opportunity. George Droulias, investment Team Member at Edgepoint, notes:

“Typically, it’s during periods of high uncertainty that we see an opportunity to buy growth and not pay for it. The most attractive opportunities often appear in businesses with fundamentals that are tangential to the overarching market concerns.”

This is just one of many reasons why we champion active management in earning long-term returns. Indeed, 2021 saw the market broadly rise, yet it’s in these more challenging times where research and diligent decision-making can truly help fund managers to find opportunities in helping to create long-term good outcomes. As tempting as it may be, exiting after markets have fallen ultimately means missing out on these opportunities.

Wealth Check

The UK’s tax system is notoriously complex, with a rule book thousands of pages thick and regulations seemingly changing all the time.

For many people, tax can present as more of a threat than an opportunity, with perils at every turn. Even the most financially savvy individual can fall foul of tax rules and regulations, whether that’s down to investing in a way that incurs much more tax than is necessary or making pension-income decisions without being aware of potentially expensive tax implications.

While there are many errors to avoid and opportunities that shouldn’t be missed, here are some of the most common and costly tax traps to be mindful of.

Omitting to share

The majority of tax allowances, exemptions and tax-efficient investment opportunities are available to each individual within a couple. For instance, if only one person has used up their ISA allowance for the current tax year, they can gift some money to their partner who has some or all of their allowance remaining. What’s more, the same approach can be taken with each person’s annual Capital Gains Tax (CGT) allowance.

Leaving it to the eleventh hour

Many of us only pay attention to our allowances at the start and/or end of each tax year, says Tony Wickenden, Joint Managing Director of Technical Connection (a St. James’s Place group company).

“This can mean it may be too late to use them, especially Income Tax allowances and exemptions that can’t be carried forward.”

Joining the tax-free cash rush

A routine mistake for those nearing retirement and accessing their pension is to take all their tax-free cash in one go, says Claire Trott, Divisional Director for Retirement and Holistic Planning at SJP.

“It can be used as income in most Defined Contribution (DC) pension schemes to help reduce the Income Tax paid each year, so if you don’t need the lump sum to pay off something, then don’t take it all out. Also, if taken out and not spent, it can increase your Inheritance Tax (IHT) liability.”

Turning down free money

A remarkable number of people forget (or decide not) to reclaim certain payments to which they’re actually entitled. For instance, some higher-rate and additional-rate taxpayers fail to reclaim the pension tax relief they’re due, while the tax relief offered on gifts to charities can also be overlooked. “This can be done via self-assessment or by calling HMRC with the figures,” advises Claire.

The best way of ensuring you don’t fall into any tax traps? Plan in good time, preferably with the help of a professional financial adviser.

“A tax-saving strategy is always best planned before the tax year starts, so that it can be executed in a structured way throughout the year – rather than left to the last minute, when some opportunities may no longer be available,” says Tony.

While tax year-end planning is still worth doing, you’re likely to get better outcomes from planning ahead, too.

This is a complex area where most errors can be easily avoided. It makes sense to seek specialist, experienced advice when it comes to tax and how it impacts your wider financial plans.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

The Last Word

“Irrespective of religious, political or social backgrounds, my commitment is to make politics work.”

Michelle O’Neill celebrates Sin Féin becoming the largest party in Northern Ireland’s Assembly following last week’s Northern Ireland Assembly elections.

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

Edgepoint, Invesco and Schroders 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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