WeeklyWatch – UK’s new PM faces unenviable list of challenges

6 September 2022

Stock Take

Liz’s to-do list

As voted by 0.29% of the population, Liz Truss succeeds Boris Johnson as the Conservative Party leader, and will be the UK’s next prime minister.

Following a brief visit to Balmoral today, she will then need to address the unenviable list of challenges facing her.

Whether or not Conservative Party members are illustrative of the general population is debatable. Yet one point they do agree on is that the new prime minister should prioritise the cost-of-living crisis. According to Ipsos research in July, this was top of the list of issues for 43% of Conservative members in a recent survey, with 40% of Britons naming it as their main concern.

And rightly so. Last week, Goldman Sachs warned that inflation in Britain could hit 22% in 2023 if energy costs continue to escalate – for context, the Bank of England expects a 13.3% peak this October. Goldman Sachs went on to say that it does not anticipate the recent upsurge in European gas prices to continue, and yet even if energy costs were to temper, it predicts that inflation will peak at 14.8% in January.

Analysis by Carbon Brief foresees that UK households will spend 10% of their income on vehicle fuel, gas and electricity this winter – double what they spent in 2021 – making the current energy crisis worse than those in the 1970s and 1980s. However, new habits are already underway, as shown in a study by the Financial Fairness Trust, which states that a third of households have cut down on the number of showers they take, while the same proportion have reduced their cooker and oven use.

Additional proof of the inflationary challenges was revealed via the British Retail Consortium’s data released last week, showing that consumers are paying unparalleled prices in shops. Prices rose by 5.1% in the 12 months to August – the largest increase since records began in 2005.

Recession woes

The benchmark FTSE 100 index closed the month down almost 2%, while recession and inflation fears hit the domestically focused FTSE 250 harder, as it dropped 5%. Sterling lost nearly 5% against the dollar in August – the most since the Brexit vote back in 2016.

Capital Economics predicts that sterling could dip to $1.05 in the months ahead – its lowest level since 1985, based on its forecast that the energy crisis will thrust both the UK and eurozone into a recession, with the US getting away with a more moderate slowdown.

Euro-energy squeeze

The energy squeeze intensified in Europe last week, when Russia turned off gas supplies to Germany, its top customer, via the key Nord Stream 1 pipeline. First stating the need for three days of maintenance, the state energy firm Gazprom then went on to declare that an oil leak would see it close indefinitely. This came about soon after the G7 nations agreed to cap the price of Russian oil in support of Ukraine.

According to EU Council President Charles Michel, Russia’s move was “sadly no surprise”.

“Use of gas as a weapon will not change the resolve of the EU to accelerate our path towards energy independence. Our duty is to protect our citizens and support the freedom of Ukraine.”

US stocks suffer

The end of the month was no smooth ride for US stocks, as investors weighed the Federal Reserve’s inflation-fighting efforts. Having reached a four-month high mid-month, the S&P 500 index then fell on four consecutive days to register its poorest August performance in seven years.

Loretta Mester – Cleveland Fed President – remarked that she anticipated benchmark interest rates will go above 4% early next year and stay there throughout 2023. This further dampened investors’ hopes that the US central bank would put the brakes on its rate hiking plan in the face of a recessionary environment.

Friday brought news that US non-farm payrolls rose by 315,000 in August, following an increase of 528,000 in July. The report further fortified expectations that the Fed will continue with its outsize interest rate increases. Next week’s CPI inflation news is unlikely to change that.

US investment managers Payden & Rygel observed:

“Financial markets have enjoyed a summer reprieve, with many investors hoping that the Fed has already done most of the work to rein in price pressures. But, unfortunately, that hope may have been premature. The stop-start inflation-fighting debacle of the 1970s didn’t end well for the economy or the markets. This time the Fed is unlikely to stop (ease policy) until the inflation dragon has been slayed. Not allayed, but slayed.”

Wealth Check

Divorce can be a hugely emotional life event, and no doubt the last thing on your mind would be how it could impact your tax bill – yet this calls for some serious consideration.

Seeking the best legal and financial advice is crucial to guarantee you get what is due to you when your marriage or civil partnership breaks down.

How is tax impacted by a divorce?

While there may be no apparent reason for the tax officer to be looking into your financial affairs at such a difficult time, there are tax implications to splitting your assets, and everything must be divided in the correct way.

For instance, pensions are assets that are often overlooked, yet they can be hugely valuable and need to be addressed. There are three ways pensions can be split in the UK: earmarking, sharing, or offsetting against other assets. Wherever you live, weighing up the different available options is vital to ensure your financial well-being.

Tony Clark, Senior Propositions Manager at St. James’s Place, comments that including the pension in a financial settlement on divorce is particularly important for women:

“This is because they typically have underfunded pensions, because we have not yet got pay equality. It’s improving, but at a glacially slow pace.”

The value of specialist advice

The consequences of not dealing with your financial affairs in the best possible way when you divorce could mean it costs both of you a lot of money. It could be that the help you need goes beyond what a lawyer can offer.

All the more so as tax changes occur – for instance, the UK Government is proposing new rules on divorce and Capital Gains Tax in April 2023 to allow you up to three years to divide your assets without incurring a bill.

For the best financial results, a financial adviser is your best bet, but you may also benefit from a divorce coach to help you get through this emotional period.

Don’t hesitate to get in touch today if you’re getting divorced – and together, we can look objectively at your finances and changed goals to help you make the best long-term decisions for your future.

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.

In the Picture

As an investor, it’s perfectly natural to be concerned if your investments fall in value if markets move against them. But what really matters is time in the market, not timing the 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

“Mikhail Gorbachev was a one-of-a kind statesman. The world has lost a towering global leader, committed multilateralist, and tireless advocate for peace.”

– UN Secretary General Antonio Guterres paid tribute to former Soviet leader Mikhail Gorbachev, who passed away last week.

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

Payden & Rygel 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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