WeeklyWatch – The spotlight remains on banks
28th March 2023
Stock Take
The Fed pivots its plan
Mike Tyson may have been better known for his boxing prowess than his life wisdom, but he certainly made a good point when he said: “Everyone has a plan until they get punched in the face.”
Last week, the US Federal Reserve was duly obliged to abandon its original plan due to the recent banking turmoil. In the volatile week following Fed Chair Jay Powell’s congressional testimony, interest rate expectations had shifted from a 0.5%-point hike to only a 50/50 chance of a 0.25% rise.
On Tuesday, Powell confirmed a quarter-point increase and stated that the Fed had curtailed its tightening scheme due to the banking crises. He also hinted that the resultant tightening of credit conditions was tantamount to one or more rate hikes. At 4.75%-5%, the key interest rate is at its highest level since 2007.
Notably, the Fed toned down its previous message that “ongoing” increases would be needed, saying instead that, “Some additional policy firming may be appropriate.”
Keith Wade of Schroders observed:
“The banking crisis is a sign that tighter policy is biting and, in our view, will tame inflation once the lagged effects have been allowed to come through.”
Wade noted that although the central bank and the markets share the expectation of another hike in May, their predictions differ beyond that point. The Fed committee projects a steady rate through 2024, while the market anticipates a 0.5% reduction by year-end.
Investor fears over the banking crisis eased in the early part of the week in the aftermath of the rescue deal for Credit Suisse and reassurance from central banks around the world about the security of their respective banking sectors.
Jonathan Harris of Schroders commented:
“Bank businesses are much more conservative, capital is multiple times higher than it was in 2008, liquidity is closely regulated, and central banks are in a much better place to respond given their experiences since 2008.”
The BoE follows suit
News broke on Tuesday that UK inflation had unexpectedly jumped to 10.4% in the year to February, up from 10.1% in January. Food prices increased at the fastest rate in 45 years, with the shortage of salad and vegetables a significant factor.
The inflation news only added to expectations that the Bank of England (BoE) would raise interest rates again, which it did. Thursday’s announcement of a further 0.25% increase, taking the base rate up to 4.25%, was the eleventh time rates have been put up since December 2021.
BoE Governor Andrew Bailey said he was more optimistic that the UK can avoid recession. The Bank said it now expects slight growth in the second quarter of the year having anticipated last month it would decline by 0.4%. However, Bailey cautioned against businesses raising prices, warning that if inflation were to become entrenched, interest rates would need to rise even further. He added:
“If all prices try to beat inflation, we will get higher inflation.”
Retail fights back
At the end of the week, the Office for National Statistics (ONS) released a report showing a stronger-than-anticipated increase in retail sales for February. Although sales volumes have returned to pre-pandemic levels, they remain 3.5% lower than the previous year. Discount and second-hand stores drove sales growth, highlighting the financial pressure on consumers.
The brisk start to the year by major economies was also indicated by an unexpected acceleration in business activity in the eurozone in March. Consumer spending on services played a significant role in this growth, raising hopes that the region can avoid a recession and allowing the European Central Bank to continue its tightening policy.
Similarly, in the US, a survey conducted by S&P revealed that both the manufacturing and services sectors experienced a surge in business activity in March. This marks the first time since September that new orders have increased across the board, suggesting a positive trend for overall business growth.
Investor nerves derail Deutsche Bank
Despite these signs of economic resilience, European banking stocks took another pummelling on Friday as Deutsche Bank found itself the next victim of investor nervousness. German Chancellor Olaf Scholtz sought to shore up confidence in the country’s biggest bank after its shares fell as much as 14%. Analysts agreed with Scholtz’s assessment that Deutsche is not the next Credit Suisse. “We view this as an irrational market,” observed Andrew Coombs of Citigroup.
The S&P 500 ended another volatile week in marginal positive territory, as did key UK and European indices. Following a risk-on tone at the start of the year, stock market leadership has shifted to more defensive and growth sectors like healthcare and consumer staples over the last month, highlighting again the importance of a diversified portfolio strategy.
Wealth Check
As financial advisers, it’s important to consider all of our clients’ needs – not just their goals and aspirations, but any circumstances that might impact how they relate to their finances, for example, neurodevelopmental conditions.
One such condition is attention-deficit hyperactivity disorder (ADHD), which can have an impact on many aspects of adult life, including work, personal relationships and finances. Although it’s often associated with children, ADHD affects around 1.9 million adults in the UK1, with a growing number receiving a diagnosis at that stage in their life.
Difficulty with concentration and focus, plus impulsive and hyperactive behaviour can be traits among people with ADHD. Impulsive behaviour can make you overspend and buy things you can’t afford. Research found that almost half (48%) of respondents with ADHD said they often spent money impulsively, compared to just 12% of the general population. Forgetfulness is also a problem – those with ADHD are almost three times more likely to miss bill payments occasionally or often (49%) than those without the condition (18%).2
Jake Bevans, Specialist Escalation Adviser – Technical Services at Technical Connection at SJP, understands this: he was diagnosed with ADHD six months ago. Working out whether something is an ADHD symptom or part of his personality can be challenging, explains Jake. “I went for a long time without being diagnosed so I have developed coping mechanisms,” he adds.
If you have ADHD, Jake recommends being clear during the first meeting about how you’d like to work with a financial adviser. This may not mean stating that you have ADHD but could simply involve asking for reminders of things you need to do, as you can sometimes be forgetful when it comes to topics you aren’t engaged with.
This advice is the same for everyone dealing with advisers for the first time, but it’s more significant for neurodiverse clients. That way, the adviser will know they may need to go the extra mile to help you as a client with ADHD, says Jake.
He concludes:
“It’s worth highlighting to your adviser that understanding the ‘why’ is more important to you than the ‘how’; the ‘why’ is what will keep you interested. A good financial adviser should make this clear anyway. As for the ‘how’, if you can be part of the financial problem-solving, it may also help with engagement and commitment.”
Sources:
1 ADHD Incidence, ADHD UK, accessed March 2023
2 Living With ADHD Can Cost You an Extra £1,600 a Year Because of Difficulties Managing Your Money, Monzo.com, June 2022 (from a survey of 506 people living with ADHD, with a shorter survey of 2,068 UK adults to provide comparison answers).
The Last Word
“Between short-term opinion polls and the broader interest of the nation, I choose (the latter). If it is necessary to accept unpopularity today, I will accept it.”
– Emmanuel Macron, President of France, defends the recent increase to retirement age in France.
Schroders 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.
Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2023. FTSE Russell is a trading name of certain of the LSE Group companies.
“FTSE Russell®” is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.
© S&P Dow Jones LLC 2023; all rights reserved
Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.
SJP Approved 27/03/2023