WeeklyWatch – Inflation dip boosts UK market amid global uncertainty

25th July 2023

Stock Take

Inflation drop inspires market confidence

After poor inflation data for most of the first half of the year, a significant decrease in June helped boost market confidence in the UK.

Inflation in the headline CPI dropped from 8.7% in May to 7.9% in June. Although it still remains much higher than many of the UK’s economic competitors, the CPI was far below market forecasts.

The substantial drop will allow the Bank of England (BoE) some leeway at its upcoming meeting to talk about interest rates. The BoE was anticipated to increase interest rates by 0.50%, but as inflation is currently less than previously expected, it might opt for a lesser hike of 0.25%.

Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, made a prediction in the wake of the announcement that inflation may drop sharply in the next few months and average about 7% in the third quarter. This is partially explained by the fact that the cap on oil and petrol prices fell in July and is probably going to do so again in October. Food price inflation should also decline as the economy continues to recover from the first shock of Russia’s invasion of Ukraine in 2022. Tombs concluded:

“Accordingly, we continue to think that the worst is over for UK households and that the MPC will not need to raise Bank Rate all the way to 6.25%, as markets priced-in yesterday. We still think that the Committee will hike Bank Rate by 0.25% next month and by a further 0.25% in September, before then standing pat with Bank Rate at 5.50% in the final two meetings of this year.”

UK markets show resilience amid concerns…

Stock markets reflected this confidence as the FTSE 100 and FTSE 250 increased by 3.1% and 3.4%, respectively.

Despite these advances, UK shares are still cheap in comparison to those of their rivals in the EU and, notably, the US. For some time now, investors have become weary of the UK market. The UK market was reviewed by Schroders in its quarterly report, who highlighted that this may present a long-term opportunity:

“If there is a source of short-term frustration, it is that the UK market remains ignored by investors. Even when companies do well (beating consensus estimates), their share prices are not moving significantly. 150 years of stock market history tells us that this cannot last forever and that undervaluation is the only reliable catalyst for outperformance in the long run.”

UK banking is one industry that hasn’t performed well. Bank values have been declining for years as a result of the challenge to make money due to low interest rates. Since interest rates have increased, concerns that this may lead to widespread consumer defaults or a potential mortgage collapse have hampered their worth.

However, the most recent BoE stress test of UK institutions came to the following encouraging conclusion:

“The results of the 2022/23 annual cyclical scenario stress test indicate that the major UK banks would be resilient to a severe stress scenario that incorporated persistently higher advanced-economy inflation, increasing global interest rates, deep and simultaneous recessions in the UK and global economies with materially higher unemployment, and sharp falls in asset prices.”

…While global markets face uncertainty

Market performance outside of the UK was more unpredictable. The technology-heavy NASDAQ dipped by 0.6% in the US, while the S&P 500 rose 0.7%, with value stocks dominating the market last week. Results from industry heavyweights Tesla and Netflix didn’t ignite the market the way investors had hoped. Many US businesses, including other large tech firms, will release their quarterly results in the coming days, which will probably have an impact on how well the US markets perform as a whole.

With German and French stocks seeing consistent increases, European markets made slight gains, with the MSCI Europe ex UK Index increasing by 0.6%. This occurred despite economic statistics revealing that the eurozone continues to face economic difficulties, plus a tumultuous weekend Spanish election. Alberto Nez Feijóo, the leader of the conservative Popular Party, ended up winning the most seats. However, even with the backing of additional right-wing groups, he will fall short of a majority in parliament, increasing the likelihood that another election will be held soon.

Wealth Check

Organising social care in later life can quickly tear a hole in your purse or wallet. Without nursing fees, the cost of residential care currently stands at slightly over £46,000 per year.1 And in cities like London and Brighton, the yearly total exceeds £50,000.1

Anyone in the UK with assets over a specific level who is not eligible for NHS support must often pay for some or all of the care themselves. For funding care at home, different thresholds apply.

Many people think the state will step in and pay more of the bill if you can reduce the amount of your assets by giving up money, property or income. In legacy planning, giving money away to lower your overall estate is a common practice that, in principle, might increase your eligibility for government-funded care in later life.

But be careful! The rules for donating property and assets are fairly tight. You can better grasp these with the aid of a financial adviser, who can also ensure that you don’t violate the ‘Deprivation of Assets’ guideline.

According to the Deprivation of Assets rule, reducing your assets so they won’t be considered in your needs assessment could be seen as you deliberately trying to steer clear of self-funding your social care.

‘Deliberately’ is the key word. If your local council determines that you intentionally decreased your assets to avoid paying care facility expenses, they might calculate your fees as if you still possessed the assets. It would be as though you never distributed them.

For individuals and their families, this can be extremely upsetting. One of the most stressful aspects of moving into a nursing home is worrying about finances and whether they will last as long as you need them to.

Making social care arrangements, whether for your parents or for yourself, can prove challenging and stressful. Before transferring ownership of assets to someone else, it is essential to get early financial guidance to help ensure that your good intentions don’t end up backfiring.

A long-term financial adviser who is familiar with your family and your own personal life objectives can lend emotional support in addition to their professional advice while you make these choices.

1UK Care Guide – The data is based on a survey of care homes between December 2022 and February 2023. Each care home had a minimum of 25 beds. The costs provided are for those residents privately funding all their care.

In The Picture

The impact of the mega-cap stocks has been undeniable thus far this year. Over half of all returns (54%) have been accounted for by the top 10 businesses in the MSCI World Index. Particularly noteworthy are businesses like Alphabet, Amazon and Tesla, which highlight the rising importance of big tech in the financial scene.

If US corporations are so dominant, you may be wondering if they’ve become more expensive? Although some measures do indicate that US stocks are now thought to be pricey, it’s important to keep in mind that valuations do not predict future performance. Before making an investment choice, it is wise to consider a company’s fundamentals as well as its growth potential, profitability and market position.

Our fund managers continue to seek out areas of value and take into account industries that could be currently undervalued or ignored. These may be chances for lucrative investment possibilities.

View our mid-year forecast document here to find out more about the factors influencing markets.

The Last Word

“It’s so exciting. Every minute of that game was fun, and the crowd was amazing, and I think it was a good place to start in this tournament.”

– US footballer Sophia Smith celebrates after the US begin their defence of the Women’s World Cup with a victory over Vietnam.

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

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SJP approved 24/07/2023