WeeklyWatch – French election throws financial curveball

18^th June 2024

Stock Take

Quoi de neuf? – What’s new, France?

Surprises don’t go down well in the markets. French President Emmanuel Macron’s decision and subsequent announcement to hold a snap election comes mere weeks before Paris hosts the Olympics and just a couple of days after their commemoration of the 80^th anniversary of the D-Day landings. Investors were taken aback and were forced to digest another huge announcement in a week that’s already been very eventful!

Marine Le Pen’s far-right party emphatically defeated Macron’s centrist alliance in the European Parliament elections earlier in June. Macron’s election announcement has added to rising fears about Europe’s future political direction. As a result, there was a sell-off in risk assets, which in return set the tone for global markets at the start of the week.

BlueBay Asset Management’s Mark Dowding noted:

“It appears that Macron has thought that either he can rally a coalition to stop Le Pen, and so reaffirm his mandate and halt the momentum of National Rally in its tracks, or alternatively, should the far right prevail, then he hopes they will make a mess of their time in office and thus stymie Le Pen’s presidential run in 2027. However, this has a bit of a sense of a gamble, and politicians such as David Cameron in the UK might be able to tell a thing or two about how such gambles have a habit of blowing up in your face.”

Europe puts the brakes on China’s car exports

On Wednesday, the European Commission stated that from July they would impose extra duties of up to 38% on imported Chinese electric cars, thus taking the highest level of tariffs to nearly 50%. Chinese car exports increased by more than 50% in 2023, so Beijing snapped back and subsequently declared that they would take “all necessary measures” to safeguard their interests.

By Friday, there were reports that Germany was attempting to stop or soften the EU tariffs, highlighting the damage to global trade that it could cause if it went ahead. Germany’s warnings were echoed by the European car industry. China accounts for almost one-third of German carmaker’s sales – it’s no surprise that the nation is trying to find a friendly solution.

A combination of tariff-induced worries, growing fear over political uncertainty and the disconcerting sounds coming from the Fed all worked together to cause European stocks to suffer their biggest weekly loss of 2024.

UK economy makes a mockery of political campaigns

In the UK, figures revealed that unemployment had risen to 4.4% in the three months leading up to April, which is its highest level in two and a half years. On top of this, the economy didn’t grow in April, as wet weather deterred shoppers and construction slowed – just what Prime Minister Rishi Sunak didn’t need…

The timing of this revelation has done nothing to help Sunak’s election campaign, where he’s stated that, under his guidance, the economy is improving. However, wage growth is rising faster than goods prices, which is at least one positive for the PM’s election pitches.

Indications of a cooling labour market mean that it’s unlikely that the Bank of England will change their mind regarding interest rates. It’s expected that they will opt to keep rates on hold this month while they wait for signs that inflation is coming down.

The US still holds back

On Wednesday, there was a much-needed boost for markets. In May, inflation flatlined and prices didn’t increase – the first time since June 2023. The annual rate of inflation subsequently eased to 3.3%, just a fraction under the 3.4% that was expected by markets. Core inflation (excluding less stable elements like food and energy) grew at its slowest annual pace in over three years.

This information nudged markets to price in the likelihood that the Fed would make interest rate cuts in both September and December. But the positivity was soon extinguished. By the end of the two-day policy meeting, the Fed decided to hold interest rates steady, which was expected. They went on to say that they were anticipating only one rate cut at the end of the year.

Chair of the Fed, Jerome Powell, commented that the Fed was content to leave rates where they are until the economy sends a clear signal that action was needed, either through a more significant easing in inflation or a jump in the unemployment rate.

Powell’s resulting statements hinted that policymakers have accepted a slow predicted decline in inflation back to the 2% target.

In among all the uncertainty, the S&P 500 closed with a new record high, where it has grown 14% over the course of this year. The encouraging inflation news kept people optimistic for a soft landing of the US economy – where the Fed will be able to control inflation and cut interests while growth continues to be resilient.

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

Wealth Check

Plan to live your best retirement life

Planning your retirement can be a daunting task. And if you’ve saved or invested in several different assets over the years, this can be even more complex. But the first thing to start with, as is the case for most of us, is to consider your pensions.

Good news! Generally, the first 25% of what you take out of a Defined Contribution pension is tax-free. After this threshold, you’ll be taxed at the marginal rate of income tax.

But what are the other options available to help fund your planned retirement?

If you have money saved in ISAs, you won’t need to pay Income Tax or Capital Gains Tax on any amount that you take out.

Are my pensions taxable?

In short, yes. State, Defined Contribution or Defined Benefit are all taxed– if the amount of pension income that’s received exceeds the personal allowance of £12,570 for the 2024/25 tax year.

Will I have to pay tax on my pension regardless of the type that I have?

Your personal allowance is £12,570, and if your annual pension income along with any other income you get from savings or part-time work is less than this, you’ll not pay income tax.

How does this impact someone who has different types of pensions?

If you’re interested in or have a combination of a Defined Contribution pension and a Defined Benefit pension, we highly recommend thorough financial advice on the matter.

Are other retirement incomes taxable?

If you have income coming in from multiple sources, they will need to be declared on your tax return so that you’re taxed the correct amount. Your personal allowance is usually applied to your pension first or employment income if you’re working.

Be aware – Emergency Tax hazard lurking

Since the pension reforms that took place in 2015, Emergency Tax is applied to initial payments from pension schemes as a general rule. By taking a large taxable amount, you could be paying far too much tax. Emergency Tax serves as a temporary measure until HMRC work out your correct tax code.

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.

You can also access free impartial pensions guidance from the Pension Wise website, or you can book an appointment over the telephone on 0800 011397.

In the Picture

UK parliamentary elections are just around the corner. Research conducted by Opinium on behalf of St James’s Place concluded that short term issues dominated the top 10 financial priorities of adults living in the UK.

The Last Word

“Let’s enjoy this magical summer of football in a spirit of fair play and respect and let’s create some unforgettable memories together. Let’s be united by football!”

– Aleksander Čeferin, President of UEFA, as he welcomes in Euro 2024.

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: 17/06/2024