Weekwatch

Global stocks generally performed well last week, as markets reacted to improving economic conditions and some central bank moves in Europe. This proved enough to counter continued fears around inflationary danger, plus the news of a potential minimum global tax rate.

The minimum global tax rate came from the G7 meetings, which saw finance ministers from the present economies agree in principle to a global minimum tax rate of 15%, as part of a range of measures to bring the global tax regime more in line with the world many companies now operate in. Although the measures could see multinationals pay more tax, these discussions still have a long way to go before they become a reality.

In the US, the Bureau of Labor Statistics’ Consumer Price Index (CPI) figures released on Thursday showed a 5% increase in May 2021, compared with a year ago, the highest rise in almost 13 years. A surge in used car prices – up almost 30% year-on-year – helped explain some of the inflation. Core CPI, which does not include more volatile sectors such as food and energy, rose 3.8% in the same period – the highest amount since 1992. Despite this, the S&P 500 closed the day at a record high.

US Federal Reserve officials have played their part to prevent inflationary fears taking over, describing the CPI figures as “transitory”. That said, all eyes will be on the Federal Open Market Committee (FOMC) meeting this week for clues about the direction in which the US economy is heading.

“At the March FOMC, the Fed lifted its projection for PCE [personal consumption expenditure] inflation at end-2021 from 1.8% to 2.4%. However, another substantial revision towards 3% would seem merited, in our opinion. We believe that it remains too early to expect a change in rhetoric at the Federal Reserve meeting this week, but we may only be one or two decent job prints away from taper discussions coming to the fore,” said Mark Dowding of BlueBay Asset Management, co-manager of the St. James’s Place Strategic Income fund.

Central banks such as the Federal Reserve have kept asset prices stable through the pandemic with low interest rates and other forms of support. However, with economies around the world now recovering, most of them are now signalling that they may taper down this support in the future. This will help deal with rising inflation but is likely to have a negative effect on some asset prices.

Dowding added: “We continue to look for a debate to kick off in earnest at the August Jackson Hole meeting and a taper to be announced in September.”

The UK and EU also saw gains over the week. The STOXX Europe 600 Index hit a record high on Friday. This followed a European Central Bank (ECB) Governing Council meeting which decided to keep rates at their current lows, continue to conduct net asset purchases under the pandemic emergency purchase programme and provide liquidity through its refinancing operations.

At the same time, the FTSE 100 recovered from a slight midweek wobble to finish the week above its closing position the week before. UK shareholders could take heart from Office for National Statistics (ONS) figures released at the end of the week, which reported GDP growth for April hit 2.3% – the fastest rate of growth since July 2020.

News that house prices grew an average of 10.2% in the year to March is likely to have buoyed many UK home owners.¹

The rise was driven in part by the Stamp Duty freeze that will begin to taper down between July and October of this year. House prices may stabilise as the freeze lifts and demand calms to a more normal level.

What does the recent rise in house prices mean for the role of your residential property in your retirement strategy? It is not uncommon to hear people think of their property as their pension, given that it is often owned for several decades with the expectation that it will grow substantially in value over that time. After all, it’s often the biggest investment people make in their lifetimes.

But planning to use your home to fund your retirement carries several risks. It only takes a slowdown in the housing market, a rise in interest rates, or a change in personal circumstances to lower the financial returns you expect from your home when you eventually sell.

It is better to view property as one source of return within a diversified portfolio. That includes diversification within the asset class of property: income-generating property funds that invest in the commercial space can help spread risk and return across the sector. Spreading your assets across a range of wrappers (e.g. ISAs, unit trusts or pensions) is also a more tax-efficient way of using your investments when you come to retire.

Your Partner can help you manage the tax-efficiency of your investments as you move through retirement, and help make sure you’re on track to meet your goals and objectives. Property can be a good source of income and can form part of your retirement strategy – but to use it optimally and wisely, it’s best to receive financial advice.

The value of an investment with St. James’s Place 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 levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

¹ Source: Office for National Statistics, ‘UK House Price Index: March 2021’

“[We have agreed to] end the pandemic and prepare for the future by driving an intensified international effort, starting immediately, to vaccinate the world by getting as many safe vaccines to as many people as possible as fast as possible.”

G7 leaders agree to step up their vaccine supplies to lower-income countries.

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