WeeklyWatchInstability in markets as UK economic slowdown is underway

17 May 2022

Stock Take

Growth on hold

The global equity market continued to experience instability last week, given that consumer confidence and tightening monetary policy persisted in hampering growth.

Last week, the FTSE 100 concluded the week marginally up, following the revelation that the UK’s GDP rose by 0.8% in Q1 2022.

This didn’t quite meet the Bank of England’s forecasts of 0.9%. Over the quarter, there was a downward trend, with 0.7% growth in January, 0% growth in February, and a 0.1% contraction in March.

Broadly speaking, economists were pessimistic regarding the rest of the year in the UK.

Modupe Adegbembo, Economist at AXA Investment Managers, said:

“Growth is likely to remain subdued in the coming months as consumers grapple with rising energy prices and tax increases, which policy is doing little to offset. Savings will play some part in supporting consumption, but there is large uncertainty about where these reserves lie and how they will be used by households.”

George Brown, Economist at Schroders, said he anticipated that the economy would shrink over the second quarter, thanks to capacity constraints, low consumer confidence, the increasing income squeeze and a ‘sharp contraction’ in June due to the Queen’s Jubilee bank holiday weekend.

As for beyond the second quarter, he commented:

“We suspect the UK will avoid falling into a technical recession (two consecutive quarters of negative growth). Contractions incurred by the Jubilee celebrations in 2002 and 2012 were followed by sharp July rebounds. We think history will repeat itself and ensure that GDP grows over the third quarter as a whole. Beyond this, we think that the economy could head back into reverse in the fourth quarter as the Ofgem price cap rises by a further 40% or so. A key factor will be what additional support the Chancellor provides and whether this comes in the autumn Budget or if he bows to pressure for an emergency fiscal package.”

UK and US economic outlook

This week is set to see the release of inflation data in the UK, with the headline rate expected to have increased again, this time to 9.1% – its highest rate in over three decades. Unemployment, which is predicted to have remained at 3.8% last month, and retail sales are likewise due this week.

In the US, meanwhile, equities continued to fall last week, as worries around the economic outlook again affected investor sentiment. With the Federal Reserve pledging to raise rates rapidly amid spiking inflation, hopes for a soft landing (in other words, where an economy shifts from higher growth to lower growth but avoids a recession) for the US have disintegrated. The S&P 500 fell by 2.4% – the sixth consecutive week of decline.

The fall occurred in spite of somewhat strong earnings from companies in the index. Capital Economics reports that, of the circa 90% of companies that have so far announced their results, around three quarters have exceeded expectations, and aggregate earnings for companies in the S&P 500 are anticipated to grow by around 10% in 2022 and 2023.

Rising interest rates are eclipsing positive results and driving the market downturn. “This may mean there’s a silver lining for equities,” suggested Thomas Mathews, Markets Economist at Capital Economics. He noted that the S&P 500 has often sprung back more swiftly when monetary policy is behind the fall, compared to earnings-driven falls.

EU prognosis

The picture in the EU was brighter, where a strong latter half of the week witnessed the DAX in Germany ultimately closing +2.6%. Overall, the MSCI Europe Ex UK was up 0.57%.

That said, these headline rates conceal perpetual instability across the continent, as economies wrestle with the consequences of the ongoing war in Ukraine – not to mention concerns about the effects of China’s zero-Covid strategy, too.

Diversification delivers

This only goes to highlight how important long-term thinking is for investors. Indeed, it may well be uncomfortable to see markets swing up and down, yet it’s crucial to remember that reacting to the news cycle can sabotage your long-term strategy. Remaining invested in a diverse portfolio that’s matched to your level of risk and spread across different asset classes, and speaking with your adviser about the instability, means you can navigate the circumstances with increased confidence.

Wealth Check

As people get older, long-term care is more likely, and it can be an expensive business – all the more so if you’re one of the 850,0001 people in the UK suffering from some form of dementia.

How much does dementia care cost?

The average cost for nursing care in the UK is £50,0002 a year – however, it varies, depending on where you live. That’s almost 40% more than standard residential care.

Who funds dementia care?

It’s a common belief in the UK that if you’re suffering from dementia, your care costs will be met by the NHS due to the fact that it’s an illness. Be mindful, however, that dementia sufferers often have to fund their own care-home fees.

Ros Clarke, Long-term Care Consultant at St. James’s Place, explains that, to qualify for Continuing Healthcare (CHC) – in other words, where the NHS will pay for your care, either in part or totally – you need to have a “primary medical need” (please note that CHC doesn’t apply in Scotland).

“Qualifying for CHC is very tricky, and most dementia sufferers will not be considered eligible. Although a medical condition, the care needs of people with Alzheimer’s are often considered to be ‘social care needs’, and people who are suffering from it often don’t meet the necessary criteria.

“It’s also important to remember that CHC isn’t means-tested. If you’re eligible, you’ll receive funding, regardless of your financial circumstances.”

Unsure about whether you or a loved one might qualify for CHC? Clarke advises getting in touch with Beacon – an organisation offering a free consultation to assess your eligibility and offer guidance on whether it’s worth challenging a decision that has not gone in your favour.

Take action now

“Start having conversations about this as early as possible in your financial journey, so you can put some planning in place for this potentially happening to you.”

Clarke recommends setting up a power of attorney (POA), so that a trusted person can make decisions on your behalf if you no longer have the capacity to.

“Without one in place, being able to do anything for a person with dementia is a minefield, even if you’re their next of kin. Your powers to manage their finances or make healthcare decisions for them are severely limited. But with one in place, you can ensure that important decisions can be made quickly. And, again, act now before it’s too late – once someone has dementia, it’s no longer possible to set one up as they may not understand what they’re agreeing to.”

POAs involve the referral to a service that is separate and distinct to those offered by St. James’s Place and are not regulated by the Financial Conduct Authority.

Sources:

1 Dementia, NHS, accessed April 2022

2 Laing and Buisson Care Homes for Older People, 2022

 

The Last Word

“For us, it’s not just a victory in Eurovision, of course – it’s more than that. We saw full support from all European countries. We received highest points from 40 countries.”

– Ukrainian TV Presenter and Eurovision Commentator Timur Miroshnychenko on what his country’s victory at Eurovision meant.

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

AXA Investment Managers 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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