Stock Take

As the UK enters the next phase of its lockdown easing today, it does so against the backdrop of a strong week for its FTSE 100 index of large public companies. As shops, gyms, and pub gardens re-open after a long hiatus, markets appear to be expecting the renewal of activity to help spur the economic recovery. For many people, the chance to go about their lives in a more normal way again will be a poignant moment.

US equities also enjoyed a good week, in what may be a sign of investor confidence in the country’s economic recovery. However, it was also a strong week for the European market, despite the fact that Europe is further behind with its vaccination programme. In fact, European stocks hit a record last week, with the Stoxx Europe 600 index reversing the losses that it has endured during the pandemic.

Inflation calculations

Last week, the International Monetary Fund said it thinks there will be little long-term economic damage from COVID-19, at least in advanced economies. Accepting that there will be a divergence in the future, it said it expects at least two years of fast growth – with the world economy growing by 6% in 2021 and 4.4% in 2022. Amid the discussions of the world’s recovery last week, the Federal Reserve (the US central bank) released the minutes of its March meeting at which it discussed the outlook for the US market. Most of the participants thought that the risk of unexpectedly high inflation was roughly the same as the risk of more subdued levels, creating a ‘broadly balanced’ outlook according to the release.

“It may be necessary to await data a little later in the quarter before the inflation dynamic becomes somewhat clearer,” wrote Mark Dowding of BlueBay Asset Management, co-manager of the St. James’s Place Strategic Income fund. He and his team are searching the data for evidence about its direction, he added.

Since vaccine programmes began last year, markets have been weighing up whether a rapid economic recovery could bring about a phase of higher inflation. If it grows too high, it might eventually cause governments and central banks to change their policies in response. These policies (such as low interest rates) have supported asset prices since the pandemic took hold last year.

There is a concern in some corners of the market that higher interest rates could be a challenge to the share prices of the companies that have seen their valuations soar over the past 12 months. Some large technology companies, for example, are trading at high valuations relative to their earnings.

This underlines the importance of maintaining a diversified portfolio of investments, wrote Ugo Montrucchio of Schroders, managers of the St. James’s Place Managed Growth fund. He suggests that talk of a ‘bubble’ in technology stocks is probably less relevant to the largest companies companies, which have a history of strong earnings, but could be relevant to ‘second tier’ technology stocks whose revenue projections are overambitious.

“A way to navigate through what may well turn out to be a bubble is to diversify your exposure and cast your investing net as wide as possible,” he added.

Earnings season

Looking ahead this week, investors will be scouring for clues about the health of public companies in their upcoming results releases. So-called ‘earnings season’ is a chance for companies to disclose details about their operations, and an important time for investors trying to assess their prospects.

In the US, many investors will be watching reports come in this week from large companies such as banks and airlines. Many companies will naturally report higher earnings over the last three months than during the first quarter of 2020 (which they are compared to). But perhaps more pertinently, they will include information about the extent of the damage caused by COVID-19, or by the computer chip shortages that have recently been causing headaches for manufacturers and technology companies. Surprising results in either direction can be expected to move markets this week and beyond.

Wealth Check

Those over the age of 66 will see their State Pension rise today, thanks to the ‘triple lock’ system which ensures pension payments keep up with rising prices and average earnings. This year will mark the first time since 2016 that the rise has been driven by the 2.5% floor instead of matching inflation or earnings growth – a sign of how the economy has struggled over the last 12 months.

However, with the exception of this year (2021-22), the new State Pension has been falling relative to the National Living Wage for the last five years.1 Over the same period, it’s flatlined at around a third of Average Weekly Earnings.2

Whilst it’s widely acknowledged that the size of the State Pension makes a private pension a necessity, these findings emphasize the importance of proper retirement planning in ensuring that you have enough money to live on in retirement.

After the State Pension has been taken into account, the average saver still needs a pension pot worth at least £599,667 to achieve a comfortable retirement.3

Once you do retire and start taking an income from your pension pot, financial advice can be invaluable in helping you navigate any changes to your circumstances, such as a rise in the State Pension age, or possible tax changes.

Whether you’re saving into a pension, are approaching retirement, or would like to know the role the State Pension should play in your plan, speak to your St. James’s Place Partner.

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.

1St. James’s Place analysis of Department for Work and Pensions data, April 2021

2St. James’s Place analysis of Department for Work and Pensions data, April 2021

3Retirement Living Standards, Pensions and Lifetime Savings Association, 2021

In The Picture

Over 32 million people in the UK have now received at least one dose of a COVID-19 vaccine, and case numbers have declined enough for lockdown restrictions to be eased. That may be why people are reporting feeling happier and less stressed, according to recent polling by YouGov. Businesses are hoping that the improved mood leads to higher spending that will help boost the economic recovery.

The Last Word

“My father, for I suppose the last 70 years, has given the most remarkable, devoted service to the Queen, to my family, and to the country and also to the whole of the Commonwealth.”

The Prince of Wales pays tribute to his father, the Duke of Edinburgh, who died at Windsor Castle on Friday, aged 99.

BlueBay 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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