WeeklyWatch – UK interest rate could end the year 14x higher

13 December 2022

Stock Take

Back to reality following World Cup defeat

For a time, the World Cup was providing a happy distraction from the current recession, rising interest rates, high inflation and a series of national strikes in December for English football fans. Sadly, Saturday’s defeat by France will have served as a shocking return to reality.

Unfortunately, if the bank raises interest rates by another 0.5% as predicted, the upcoming week is going to be even more challenging. This means that the UK would end 2022 with interest at 3.5%, as opposed to the 0.25% it started with.

Mark Dowding, Chief Investment Officer at BlueBay, did in fact call the UK’s outlook “grim”, noting:

“With real disposable incomes forecast to fall 7% over the next two years, workers across several industries – railways, teachers, nurses, postmen, border control – are striking on higher wage demands. With no political will to change direction, the strikes look set to continue into 2023, paralysing many parts of the economy.

“Meanwhile, the Bank of England is boxed in, given the mortgage rate pass-through onto the economy. We continue to believe that until there is the political will to bring inflation down, from the government and its institutions, the UK’s economic vulnerability will be laid bare.”

China ease COVID lockdown policies

In China, attitudes have become more optimistic recently. Contrary to the West, which abandoned lockdowns at the beginning of the year, China has maintained its ‘zero-COVID’ policy, causing many Chinese cities to remain under lockdown for much of the year.

As a result of the escalating protests that followed, the government has started to soften these policies over the past few weeks.

For investors in China, coming out of lockdown was at least momentarily joyful as the MSCI China index ended the week 6.6% higher.

Even if it is too soon to assess the impact that the end of China’s lockdown will have in the long run, Absolute Insight’s Adam Wolfe identified four markers to watch out for:

How does China’s public health fare as it becomes more open?
How much of an economic disruption can be expected when China transitions out of lockdown?
What effect will the reopening have on public sentiment?
What happens as Chinese savers enter the market again?

Wolfe summarised his thoughts on the expected result by noting:

“The bottom line: The end of the zero-COVID policy increases the chances that China’s economy will boom in the second half of next year. But the path forward will be messy. Tracking the public health response, economic disruptions, household sentiment and financial stability will be key over the next six months.”

Inflation is one area that China’s reopening might have an impact on globally. By lowering demand, the zero-COVID policy has helped to lower inflationary pressures this year. When China reopens, demand will increase once more.

Inflation in the UK and the US

This year, the UK saw double-digit inflation. There have been indications that it might be peaking, though. For instance, the Manheim Used Vehicle Index fell 0.3% in November (or 14.2% compared to November last year). The CEO of US housebuilder Toll Brothers also recently asserted that construction costs are starting to decline.

However, Martin Hennecke, Head of Asia Investment Advisory and Communications at St. James’s Place, warns:

“Investors might be well advised not to become complacent about inflationary risks altogether, noting that a weakening US Dollar, China re-opening unleashing pent-up demand and, somewhat ironically, higher interest rates themselves, could all turn out to rekindle inflation longer term.”

In the US, the latest inflation figures are set to be released this week, and the Fed will meet to decide how much to raise interest rates in the following months. Despite good economic indicators, US markets actually declined last week. This has happened because stronger economic data may offer the Fed more leeway to raise rates.

It is worthwhile emphasising the significance of having a well-diversified portfolio once more in light of the fact that different regions of the global economy are at different phases of their post-COVID recovery. This will help to smooth out some of the volatility markets are currently experiencing.

Wealth Check

There is a frenzy of activity at the end of every tax year as people try to maximise their tax reliefs and allowances. But when you think about taxes, you shouldn’t only focus on the end of the tax year. Instead, focus on how those tax considerations should entwine with your lifelong financial plan at every stage.

This is called taking a holistic view of your finances. It means looking at both your current financial circumstances and what you want your future to look like. Your financial plan will incorporate any factors that are unique to you, while considering what’s happening in financial markets and the wider world to some extent too.

Although tax planning isn’t necessarily a ‘visible’ part of wider financial planning, tax matters nonetheless play a critical role in almost every element of your personal finances – and therefore affect your financial well-being too.

And how important is tax in financial planning? Simply put, it’s crucial.

First, a financial adviser gets to know you, your objectives and your aspirations. Then they work with you to develop a strategy that can help you accomplish your goals by putting all the puzzle pieces together: helping you to save money, take advantage of tax efficiencies, invest in your future and protect your wealth. And you’re left with a coherent blueprint for the future.

Tony Clark, Senior Propositions Manager at St. James’s Place, explains that the final step is determining what products or tax wrappers will work best for you. He says:

“Every financial activity that you plan will have tax already included and thought about. Where a lot of people come unstuck is that they look at the products first. They think, ‘What can I do for tax? I’ll stick some money in my pension or my ISA.’

“But if you’re able to think like an adviser would, start with ‘What’s my plan?’ and then use that armoury of tax-efficient allowances and reliefs. We can build an advice picture and guide you in the best way to achieve your objectives, plugging in the products for whatever you need at the right time. That’s a holistic approach.”

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 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

We are all aware of the significance of retirement savings. But how much income do you need annually to retire in comfort? (Source: Pensions and Lifetime Savings Association, 2022)

The Last Word

“The last few weeks have been a rollercoaster of emotions, each and every one of our team gave everything we have to be ready for what was thrown at us, we got close, but not close enough.”

– Marcus Rashford reflects on England exiting the World Cup over the weekend.

BlueBay is a fund manager for St. James’s Place.

The information contained is correct as at the date of the article. 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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SJP Approved 12/12/2022