WeeklyWatch – Positive news from China and Europe buoys markets

19th September 2023

Stock Take

A brighter economic outlook shines from the east

Several equity markets bounced last week as investors processed relatively positive economic news from China, with the country’s industrial output rising 4.5% in August, compared to a year earlier. This rise, which was higher than the 3.7% increase reported in July, was followed by the relaxing of rules around reserve requirements for banks by 0.25%. This move aims to increase liquidity in the Chinese market – although it does come with its own risks.

Nevertheless, all positive moves – and ones that have made investors optimistic that China might have weathered the worst of the post-Covid storm.

Fuel prices spark inflation bump in US

Inflation is still very much on investors’ minds, though. Rising US inflation served as a caution that inflation might take longer to reduce and that interest rates might also remain higher for longer.

Indeed, the US saw inflation increase from 3.2% in July to 3.7% in August. The culprit? Oil prices – which have been on the climb since July due to events overseas. Oil has been especially politicised since Russia’s invasion of Ukraine and recently Saudi Arabia announced plans to cut production through to the end of 2023. A barrel of Brent crude will now cost your over $90 a barrel, compared to the $70–80 you could find it as a few months ago.

Ian Shepherdson, Chief Economist at Pantheon Macroeconomics, commented:

“[The new inflation figures] raises the odds of a rate hike next week but not by much; we expect the Fed to remain on hold, but to signal willingness to hike again depending on the data. Our take on the data over the period before the November meeting suggests the Fed won’t hike then, either. We think the chance of another hike is about 25%.”

Reasons to be cheerful in Europe

In Europe, softer messaging – and a 0.25% hike on interest rates – from the European Central Bank (ECB) lifted markets.

While the change in central interest rates wasn’t a huge surprise, the accompanying commentary drove market direction. ECB president Christine Lagarde said that although inflation continues to decline, it’s still too high. She noted:

“Based on our current assessment, we consider that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target.”

Lagarde added that future decisions will be set at ‘sufficiently restrictive levels’ for as long as needed.

Interpreting this statement, Felipe Villarroel, Partner at TwentyFour Asset Management, explained:

“Our take is that this is likely to be the ECB’s last rate hike for now. We see economic data for the remainder of the year continuing to weaken, albeit we do not expect a significant recession as we see growth being barely positive. In the meantime, inflation will be materially lower mostly due to the impact of past rate hikes and base effects. This is not an environment that’s conducive for further rate rises considering the monetary policy stance is already considered restrictive.”

European indices like the STOXX 600 and DAX 40 finished the week up – taking heart that European interest rates were likely to flatten for now.

The favourable economic winds didn’t stop at the channel, with a number of UK shares also lifted by the news from China. It was also a good week for UK equities, with the FTSE 100 finishing the week up over 3%. The messaging from the ECB combined well with the successful listing of UK chip giant Arm Holdings Plc to create a ‘feel-good factor’ for UK markets – despite Arm ultimately listing on the NASDAQ, not the FTSE.

Wealth Check

While on the face of it it’s a positive to be cashing in on an asset, it’s wise to get your head around Capital Gains Tax (CGT) – so you don’t end up paying more than you need to.

Essentially, when you sell an asset that’s risen in value since you bought it – from selling a second property to cashing in a share portfolio – you may have to pay CGT on your profits. It’s important to remember that it’s not a tax on the whole amount, just on the profit – or gain – you make.

How much CGT you pay depends on your income and the asset you’re selling. In the UK, for higher- or additional-rate taxpayers who are selling residential property, you’ll pay 28% CGT on your gains above the annual CGT allowance. When it comes to other types of asset, such as investments or high value items, you’ll pay 20% CGT (this doesn’t apply to the main family residence).

For basic-rate taxpayers, CGT is charged at 18% for residential property and 10% if you’re disposing of other assets. However, if your gains tip you into the higher-rate tax threshold, you may pay tax at both rates.

CGT is a complicated area of tax-planning, and getting on top of it is an important part of managing your money and assets as tax-efficiently as possible.

One possible way of avoiding – or at least reducing – this tax bill is by giving an asset to your spouse or civil partner. Or you could split it with them. By doing this, both of you can use your individual CGT allowance (currently £6,000 in the UK) and reduce the amount of tax payable overall.

You could also look at staggering the sale of assets over several tax years and make the most of several years’ CGT allowance. For example, you could sell part of a share portfolio on 3rd April and the rest on 6th April to take advantage of two years’ CGT allowance.

Another option is offsetting any losses you’ve made on other assets. So, if you have a share portfolio or family heirloom that sold at a loss, for example, you can use that to reduce the taxable gain on another asset you’re selling, such as property.

Over time, investing more of your assets in an ISA or pension can shelter them from tax. You might want to think about a Bed and ISA – this is where you sell shares (the Bed part) and buy them back within an ISA wrapper to shelter future gains.

You’ve got a number of options if you want to reduce the amount of CGT that you pay. It will, however, be highly dependent on your personal circumstances and you may need to manage the reduction over time – which is why expert financial advice is very important when it comes to CGT.

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 is generally dependent on individual circumstances.

In The Picture

Despite recent increases from the Bank of England, you’re unlikely to find a bank account that offers interest rates above inflation. This article from St. James’s Place explains why we think investing is the best way to beat inflation.

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 Last Word

“Most of the early response to any big crisis like this is done by the local community…but we…the international community, we need to come in behind them and provide the support at scale that’s proportionate to these massive needs.”

Rick Brennan, the World Health Organization’s emergency director for the Eastern Mediterranean region, on the recent flooding in Libya.

TwentyFour Asset Management is a fund manager for St. James’s Place.

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SJP approved 18/09/2023