WeeklyWatch – Investors optimistic as the Year of the Rabbit begins with a bounce

31 January 2023

Stock Take

A year of stability?

Earlier this month marked Chinese New Year, as we bid farewell to the tiger and embrace the Year of the Rabbit – thought to signify stability and contemplation.

This would be an appealing change of pace after last year’s volatility, and investors will undoubtedly be hoping this cosmological sentiment rings true – rather than emulating the rabbit in the ‘Great Race’ legend. Here, the fabled bunny quickly bounced ahead, but soon tired and stopped for a nap…and was ultimately overtaken.

Global markets have indeed started the year with a spring in their step – registering their third weekly gain in four. That said, trading conditions were quiet, with many Asian markets closed for the Lunar New Year celebrations and investors elsewhere awaiting the outcome of central bank meetings on both sides on the Atlantic in the week to come.

Will the Year of the Rabbit bring stability and a steady path to success? Time will tell…

The clouds gather over tech stocks

It was a mixed week in the tech realm, with Microsoft ringing in the start of the tech earnings season with better-than-expected fourth-quarter results. However, it’s important to remember the bellwether recently laid off nearly 5% of its workforce (10,000 jobs) and has seen demand for its cloud services noticeably dip as customers grew more wary in the face of the economic slowdown.

Add to that the downbeat outlook for the current quarter and all eyes will be on other tech heavyweights this week – Meta, Alphabet, Amazon and Apple are scheduled to release their results.

It’s been a bumpy road for tech stocks over the past few years – they drove the bull market in growth stocks during the pandemic, but the turnaround in fortunes saw the tech-heavy Nasdaq index suffer its worst year since 2008 and its first four-quarter fall since the dot-com crash.

Cautious optimism in the S&P 500

The 2023 picture for the wider S&P 500 is also still unclear, with two-thirds of companies reporting fourth-quarter earnings so far posting better-than-expected results, while warning of a tough year ahead. Data showed that US business activity contracted for a seventh straight month. However, figures showed that contraction in the manufacturing and services sector was shallower than expected in the first few weeks of the year.

Is the renewed optimism about the economy (that’s buoyed equities in recent weeks) grounded in reality? Investors will be guided by results for the final quarter of 2022, both in the US and Europe.

(Some of) the results are in…

The former is already seeing results – and it’s largely positive news. Last week, the US announced that economic growth held up better than expected in the fourth quarter of 2022, growing at an annual rate of 2.9%.

Despite more major redundancies following hot on the heels of Microsoft and other tech giants last week, global stock markets rallied on hopes that a resilient US economy and slowing inflation would enable the Federal Reserve to engineer the desired soft landing. The MSCI World Index hit a five-month high.

The eurozone hops out of recession territory…

Industry experts have been keeping a close eye on a survey by Consensus Economics, which recently forecast that the eurozone will avoid recession this year, boosted by lower energy prices, bumper government support and the earlier than anticipated reopening of China’s economy.

Just last month, the same survey predicted the bloc would plunge into recession – showing the sharp shift in global economic sentiment.

…while the UK suffers a blow

Another turnaround in predictions didn’t favour UK Chancellor Jeremy Hunt, however. Ahead of his March Budget, the Office for Budget Responsibility (OBR) warned that it had overestimated prospects for medium-term growth in the economy and intends to revise down its forecasts. The downgrade would obliterate the government’s £9.2 billion wiggle room from the Autumn Statement. This may require the Chancellor to make more savings in March to keep within his fiscal rules to reduce debt.

Official figures showed that government borrowing surged to record levels last month, driven by support for energy bills and the impact of higher inflation on the government’s debt repayments. In a speech outlining plans to grow the UK economy, Hunt warned that tax cuts in the Budget were unlikely.

Ahead of this Thursday’s Bank of England rate-setting meeting, markets are anticipating a hike of 50 basis points, taking the base rate to 4%. However, Mark Dowding of BlueBay is cautious. He says:

“Although this would certainly be justified by inflation and wage data, we are concerned at spreading signs of economic weakness. Meanwhile, house prices are looking very vulnerable and we think that it will be very difficult for UK rates to exceed a 4% ceiling without the risk of crashing the UK housing market and the UK economy along with it.”

Wealth Check

The Year of the Rabbit is thought to signify stability and contemplation. With this in mind, and with reductions in tax reliefs and allowances looming for 2023/24, now’s the perfect time to ensure you’re taking maximum advantage of them in this tax year.

Chances are that when thinking about retirement, you have an emotional reaction to it. Some days you won’t be able to imagine hanging up your work hat; other times, you’ll be counting the days. Whichever camp you fall into, one day you’ll be ready for that retirement party and will be looking forward to a comfortable, rewarding retirement. And this is something that takes careful financial planning.

‘Modern’ retirement is about making sure you’ve got plenty of options to achieve the retirement you imagine. That’s why it really pays to use your tax allowances and reliefs each year to boost your pension pot and lay some solid foundations for your financial future.

Tony Clark, Senior Propositions Manager at St. James’s Place, commented:

“Saving enough in a tax-efficient way helps to buy you plenty of life choices. You want to look at pensions and ISAs, of course, as well as other products with varying degrees of risk and tax efficiencies.”

The first step is to think about your current financial landscape and make sure your money and assets are working as tax-efficiently as possible.

If you’re in the UK, you’ll almost certainly have ISAs and pensions as sources of income in retirement. Since both of them can help shelter you from tax on dividends, interest and profits, using them well can help make your funds go much further.

One of the best ways to boost your pension pot before tax year-end is to use your full pension annual allowance if you can. In 2022/23, this is still 100% of your salary or £40,000 – whichever is lower. If you can, use your full £20,000 tax-efficient ISA allowance, too.

The turbulence of the past couple of years has made many people rethink their long-term life plans – and it’s good to know that you can do something practical right now to help your short- and long-term financial well-being.

Clark concludes:

“There are lots of ways to achieve what you want, and an adviser will help you understand the most tax-efficient way of getting there, such as the decisions you need to make, the allowances you can use and the best order in which to use them.”

Your adviser is there to help you plan when you retire, how you want to spend your retirement – and which tax allowances can help you make it happen.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

In The Picture

Here at Wellesley, we often talk about the importance of diversification when investing, and that’s because different industries and regions will face specific challenges and therefore will perform differently over time.

The below chart shows how areas of the world have contributed to world GDP growth year-on-year over the past 15 years and how they’re forecast to do so in coming years.

The Last Word

“It is right that we advanced bit by bit, that is the only principle that can work in such dangerous conditions also for Europe.”

– German Chancellor Olaf Scholz on the decision to begin sending German-made Leopard 2 tanks to Ukraine.

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 Wellesley or St. James’s Place.

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SJP Approved 30/01/2023