Stock Take

US and world stocks hit new highs at various points last week as investor optimism carried markets through another week of gains.

Hopes are growing that the world will enjoy a strong economic recovery this year. President Biden’s team has made progress with its economic stimulus package, while vaccine programmes have also led to a market rally during the opening of the year. One sign of the optimism was that record amounts of money flowed into equity funds during the week – $58 billion, according to data from Bank of America.

However, there are still concerns in the background. These include the high valuations of many stocks, stubbornly high COVID-19 infection levels, new variants of the virus, and vaccination delays in some countries.

On Friday, the UK woke to news that its economy shrank almost 10% last year – the largest drop in 300 years. The data served as a sobering reminder of the economic damage caused by COVID-19.

Needles away

Last week, Jay Powell, the head of the Federal Reserve (the US central bank), pledged to continue supporting the world’s largest economy until it is on firmer ground.

The announcement reassured some investors, because support from central banks around the world was crucial to lifting markets out of their lows last year. Measures like low interest rates and asset-purchasing schemes have kept investors confident throughout the turbulence created by the pandemic. However, there are fears that an economic recovery this year could cause higher inflation, which would pressure central banks to pull back support to keep it in check.

Investors are cautious about what will happen when support is eventually tapered back, but comments like Powell’s last week mean that outcome is unlikely for now, noted Johanna Kyrklund, Chief Investment Officer at Schroders and manager of the St. James’s Place Managed Growth fund.

“Markets feel bubbly, but bubbles tend to get pricked by higher rates,” she said, adding: “For now, the central bankers are keeping their needles safely tucked away.”

Locking horns in the Year of the Ox

President Biden wished his Chinese counterpart Xi Jinping a happy new year in their first telephone call last week. Coincidentally, some of the largest Asian markets were closed on Friday to mark the Lunar New Year, which signals the beginning of the Year of the Ox in China.

Among other things, the two leaders discussed how to deal with COVID-19, climate change, and weapons proliferation, according to a statement by the White House.

However, the conversation also covered thornier topics. The White House said the president raised concerns about Beijing’s “coercive and unfair economic practices, crackdown in Hong Kong, human rights abuses in Xinjiang, and increasingly assertive actions in the region, including toward Taiwan”.

As the world’s recovery against COVID-19 speeds up this year, the Sino–American relationship will become a more influential force in markets. The pandemic has been the focus for governments around the world since it took hold last year. But as life returns to normal, investors can expect the relationship between the two largest economies to take centre stage once more.

How green is Bitcoin?

Cryptocurrencies hit the headlines again last week as Bitcoin reached an all-time high of more than $48,000. The rise seemed to have been prompted by news that Tesla has invested $1.5 billion of its own funds into the token – and will soon accept it as payment for its cars.

The news renewed the debate around whether cryptocurrencies can work as proper currencies, given the regular and extreme swings in their value.

“Currencies should be pretty stable. They shouldn’t go up and down 200% in a year,” said Hamish Douglass, co-founder of Magellan, which manages the St. James’s Place International Equity fund.

He added: “It’s something we would pass on. But if you’re going to do it, treat it as a punt at the races.”

One part of the story has been overlooked by many commentators. The process of creating the currency, called ‘mining’, burns lots of electricity.

“It’s estimated that the electricity consumption from digitally mining Bitcoin is already greater than the total electricity consumption of Argentina, even before the latest spike in prices,” wrote Mark Dowding of BlueBay Asset Management, co-manager of the St. James’s Place Strategic Income fund.

As the debate about cryptocurrency continues this year, its proponents will have to grapple with that fact; especially now that environmental, social, and governance (ESG) concerns are front of mind for the world’s leading businesses and investors.

Wealth Check

There are 16 days to go until Chancellor Rishi Sunak delivers his first Budget statement since March 2020. The Autumn Budget was scrapped as the UK grappled with the impending threat of a second COVID-19 wave. Six months on, Sunak still faces a huge challenge – how and when to begin the task of recouping the massive cost of the government’s pandemic support, without stifling economic recovery in the spring and beyond.

It’s unlikely, therefore, that we will see any tax hikes that might jeopardise economic activity, which would seem to rule out significant changes to Income Tax, National Insurance and VAT. Tax increases here would also mean breaking the government’s ‘triple lock’ manifesto pledge – a risk it is unlikely to take.

The chancellor has reportedly ruled out the idea of a one-off wealth tax, but speculation continues over the broader issue of capital taxes. We have yet to see any changes resulting from the reviews of Capital Gains Tax and Inheritance Tax conducted for the government by the Office of Tax Simplification.

It may be that next month’s Budget will instead see the chancellor lay out a road map for future tax plans, which means we might need to wait until the Autumn Budget for more sweeping changes. What seems certain is that the tax burden on individuals and businesses will have to increase, underlining the importance of maximising current tax reliefs and allowances. Indeed, with so many unknowns, it might make sense to bring forward planning for the end of the tax year and take steps before the Budget.

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

In the Picture

Although things will remain challenging in the short term, the longer-term picture is much brighter thanks to vaccination programmes. The world’s economic recovery can begin in earnest this year, says John Goetz from Pzena Investment Management.

The Last Word

“We should spend the next decade focusing on the technologies, policies and market structures that will put us on the path to eliminating greenhouse gases by 2050.”

Bill Gates, founder of Microsoft, says the best response to a “miserable” 2020 is to focus on the future.

BlueBay, Magellan, Pzena and Schroders are fund managers 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.

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