WeeklyWatch – Faith in the economy restored?

20^th August 2024

Stock Take

Hooray for the UK

Last week saw a host of encouraging economic data revealed, boosting confidence in global markets. The UK’s GDP was one of the most positive results, seeing growth of 0.6% in the second quarter of the year in comparison to the first quarter, which already saw a decent amount of growth. Overall, the UK’s GDP has increased by 0.9% since the second quarter of the previous year, despite 2023’s recession.

This is particularly encouraging news for the new Labour government as they continue to lay out and implement their economic plans. A number of tax rises are expected to be announced by the Chancellor in her upcoming Autumn Budget in October – the extra economic headroom will be highly welcome.

However, Hetal Mehta, Head of Economic Research at St James’s Place, cautions:

“It’s been an exceptionally strong first half of the year, so a near-term reversion back to a more modest pace of growth would seem likely.”

June saw no GDP growth; however, this was in part down to delays in purchases by businesses as they awaited the results of the general election.

Is inflation still the villain in the UK’s economic battle?

Inflation continues to be the thorn in the UK’s side. Despite hitting the Bank of England’s 2% target earlier in the year, in July it rose once again to 2.2%, as revealed by the Office for National Statistics. The Bank of England predicts a spike in inflation to 2.75% over the unfolding months, followed by a gradual reduction to get back to 2% in 2025.

But this is still better news than expected. Forecasters had initially predicted inflation to increase to 2.3% over this period as a result of the rise in energy prices. And core inflation, which doesn’t include unpredictable food and energy prices, actually fell from 3.5% to 3.3%.

Putting plans into place

The UK’s inflation figures were met with a positive reception by markets, and along with the promising GDP statistics, gave the FTSE 100 a boost – exemplified through its 1.75% increase last week.

Despite the positivity, the UK can’t become complacent. As the second half of the year continues to unfold, the economy isn’t expected to perform well and is predicted to slow down quite a bit. The Bank of England have already started to reduce interest rates and more reductions, albeit gradual, are to be expected.

Mehta states:

“Interest rates are coming down, but many people will be refinancing mortgages on to higher rates. There is little scope for a big fiscal injection. That said, household savings have been building, so there is scope for consumers to run down savings and spend more.”

US inflation tumbles

Across the pond, concerns surrounding a possible US recession continued to diminish. The nation received highly encouraging news as their inflation figures fell for the fourth consecutive quarter, now standing at 2.9% – its lowest level since the first half of 2021.

Now, more than ever, the markets sit and wait expectantly for the Federal Reserve to make a substantial cut to their interest rates. But this view is still not favoured by everyone.

Chief Investment Officer at Bluebay Mark Dowding states:

“Substantial Fed easing will occur if growth slows materially and, of course, this is a plausible scenario. However, in the short term, we are more inclined to believe that the economy can retain momentum, and this will mean that rates decline on a much more modest trajectory.”

Following the positive inflation news were the US jobs and retail figures. Recession panic has truly been quashed.

Consequently, US markets continued to recover after their falls in July and early August. There were increases for both the S&P 500 and NASDAQ, 2.89% and 4.24% respectively. It’s worth noting that the S&P 500 is currently less than 2% from its peak in July.

Despite best efforts…

Once again, Japan continued to face more struggles in light of their recent big falls. Their equities suffered the biggest loss from the latest market wobble. The Nikkei index saw a leap to 6.56% last week, which fed the hope of a recovery, but the index remains nearly 10% below its July level due to the rapid yen appreciation reducing export income.

Wealth Check

Starting your own business! What could possibly go wrong?…

Picture this: you’re in the early stages of your business, you’ve started to make some sales, you think you’re in a great position and the temptation to look at your bank balance is strong… Even with good customer numbers and healthy revenue in a small growing business, things can go south quickly if comprehensive financial management measures aren’t put in.

Keeping a continuous cash flow through the challenging starter months and years is key until the business is more stable. Without extensive planning in place, many businesses don’t make it to their second or third year.

Too much, too quickly

One of the main reasons why many businesses fail at the two/three-year mark is because of rapid growth and overtrading. Having too many customers sounds like a dream, but too soon presents the issue of not having enough cash to fulfil orders and bridge the financial gap between orders being shipped out and payments received.

A huge risk in start-up businesses is running out of money while awaiting invoice payment. One of the key goals has to be minimising days sales outstanding (DSO) – this is the time between shipping out goods and receiving the payment. There are many ways to do this; one of the best ways to start is to implement an issue invoice process quickly with a sturdy credit-collection function in place.

Our advice:

• Limited companies should separate their personal and business finances.
• Limited company owners need to have a business and a personal account. Although some may choose to, it’s a risky practice to blur the boundaries between the two types of finances.

Blurring the lines – it’s never a good idea

One of the biggest temptations for a start-up business owner is to take too much money out of the business in the early days – this can significantly weaken the business. For example, if a large tax or supplier bill lands in your lap and you find yourself without the funds to pay it off, the effects can spiral out of control quickly and have big repercussions.

Another way in which business and personal finances get blurred is by using business money – directly from the account or on a credit card – to purchase personal items. In the moment, it may not seem like a big deal, but if it doesn’t get recorded and processed properly through accounting and properly through the director’s loan account, this could come back to impact you significantly, particularly if it becomes habitual.

Any personal costs covered by the company that aren’t processed through the director’s loan account must be reported as taxable benefits. By doing this, the director and company pay any Income Tax or National Insurance that are due.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is dependent on individual circumstances.

In The Picture

After witnessing a lot of instability in the markets over the last few weeks, it serves as a reminder that investments have big falls as well as large increases. Taking a look over the last 40 years, there’s been some noteworthy intra-year declines. However, it’s always worth remembering that over the long term, the stock market has always been the best place to battle inflation and be the source of future growth.

Past performance is not indicative of future performance.

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

The Last Word

“I was going to sail around the globe in the world’s smallest ship, but I bottled it.”

– Mark Simmons, Comedian, whose joke was voted the funniest at this year’s Edinburgh Fringe Festival.

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 2024. FTSE Russell is a trading name of certain of the LSE Group companies.

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© S&P Dow Jones LLC 2024; 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 19/08/2024