WeeklyWatch Sunak’s £15 billion support package and US market rebound

31 May 2022

Stock Take

Supportive measures

Last week, Chancellor Rishi Sunak declared a £15 billion support package to help the population handle growing fuel costs, following weeks of increasing political pressure.

Many households are up against mounting gas and electricity bills, which will likely soar once more in October, as the annual price cap is set to go up by a further £800. Sunak announced a £400 energy grant for all UK households to help with these cost increases, alongside additional grants for those with means-tested disability benefits, pensioners and low-income households.

In part, the move will be funded by a windfall tax on the profits made by gas and oil companies. Yet additional borrowing will cover much of the rest.

David Page, Head of Macroeconomic Research at AXA Investment Managers, commented that the package was more targeted and larger than anticipated, and would serve as a buffer against growing energy costs.

He went on to say, however:

“Assuming that today’s package will be largely debt financed, this amounts to additional fiscal stimulus, something that is likely to maintain growth in excess of trend in Q3 this year. As such, we think that this will lead the Bank of England to tighten monetary policy further to ensure that inflation falls back sufficiently over the coming years.”

Paul Dales, Chief UK Economist at Capital Economics, put forward four key outcomes as a result of the package:

  • Household income won’t drop as far this year as had been expected – however, it will still fall.
  • GDP growth will be approximately 0.3% higher than previously forecasted.
  • Inflationary pressures will increase. Capital Economics raised its 2023 inflation targets from 4.3% to 4.8%, with half of this increase being a direct consequence of these measures.
  • Increasing inflation will mean the Bank of England will need to do more to meet its 2% inflation target. It will therefore likely increase interest rates to a greater extent.

 
US recovery

In the US, meanwhile, the S&P 500 went up by over 6.5% last week – boosted by solid retail sales data. April saw purchases rise by 0.9%, while the March data was also revised higher. Wage growth remains below the rate of inflation, but the surge in activity can be ascribed to households spending savings they accrued during the pandemic. While unsustainable over the long term, the recent strength in consumer spending indicates that US economic growth is above 3.0% in the quarter – reversing the contraction of Q1.

Eoin Walsh, Partner, Portfolio Management at TwentyFourAM, said this spending trend mirrored recent comments from US banks. He observed:

“We think that the large US banks probably have the best insight into the health of the US consumer, as they service all cohorts of the population and all sectors. Therefore, comments from Bank of America (BoA) CEO Brian Moynihan stating that BoA’s customers are yet to spend significant stimulus money, possess higher deposits than a year ago and are spending more, support the view that the US economy remains relatively healthy.

“These comments followed the JP Morgan CEO, Jamie Dimon, saying that the US economy remained strong and “credit looks really good”. The sources of these comments are well-regarded and mean investors have reason to reconsider the growing view that the US economy was heading for a hard landing.”

Weak Chinese equities

This can be contrasted with developing markets, which for many reasons have been in difficulty recently – one being the continued weakness of Chinese equities. Over the past year, these have struggled with tightening regulations in some sectors, issues with property developers (most notably Evergrande), and, most recently, due to renewed COVID-19 concerns. The latter of these points has seen Shanghai implement a strict lockdown for some time now.

There are, however, a number of individuals who propose that pessimism around China could be peaking. Tom Wilson, Head of Emerging Market Equities at Schroders, affirms:

“Unlike many other countries, policy stimulus is being applied and if the zero-COVID-19 policy leads to fewer restrictions, the economy could rebound from a low base. Emerging market investors are underweight China, according to industry surveys, and the equity market has cheapened.”

Wealth Check

A bear market is a period when markets fall, and an inevitable part of investing in stocks and shares. It’s possibly the greatest challenge that investors will face – not because of the potential losses, but the poor choices we’re likely to make when markets look ‘bearish’.

By contrast, a bull market is a period when markets rise. The decision-making will differ, depending on which type of market you’re in. During a bear market, long-term, smart decisions can often seem absurd in the short term. During a bull market, absurd long-term decisions can often look smart in the short term.

We’ve compiled a list of reasons to stick to your long-term plans – even in bear markets – with the help of St. James’s Place Director of Liquid Markets, Joseph Wiggins.

Inevitability

Bear markets are a fundamental aspect of investing in stocks and shares. The long-term return from owning stocks and shares would be markedly lower were it not for bear markets. While we can be sure that they’ll occur, we can’t know when or why. What’s important is to stay true to your long-term plans when bear markets do happen.

No regrets

As share prices fall, hindsight bias will go haywire. It’ll seem clear that the warning signs were everywhere in that a bear market was imminent! However, red flags can abound during other periods, yet with no bear market occurring.

Focus

It can be all too tempting during a bear market to react to economic developments to maximise your returns or minimise your losses. Bear markets instil panic. We suddenly stop worrying about the value of our portfolio in 30 years’ time, and instead start thinking about the next 30 minutes. Take a step back and stay true to the principles of when you first invested.

Mindset

Bear markets may feel like unfortunate financial losses in the short term. Whereas, in fact, they’re simply a repricing of the long-term cash flows generated by the market or a business. Keep in mind that the underlying value of those businesses doesn’t change anywhere near as much as that of short-term market pricing.

It can be tricky to see anything ahead but unrelenting negativity during a bear market. You might experience an internal struggle, where rational thought will be overcome by emotions. This is why it’s crucial to embark on your investing journey with a strong set of principles.

One such important principle is having a clear, long-term goal without reacting to short-term uncertainties. Adopting this kind of mindset should mean that you can weather the storm of a bear market.

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

“I can’t protect everyone from all the global challenges we face, [but] the policies announced today will put billions of pounds back into the pockets of hard-working families.”

– UK Chancellor Rishi Sunak announces his energy support package in Parliament last week.

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

AXA Investment Managers, Schroders, and TwentyFourAM 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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