WeekWatch

The ongoing fuel crisis, fears around inflation, slowing growth, worries around the Chinese property market and hardening language from central banks about their plans all combined over the past week to help push down global markets.

In the US, there was the added pressure caused by political uncertainty for much of the week. Having pumped billions of dollars into various support measures during COVID-19, the US government was rapidly approaching its debt ceiling. Failing to find some resolution would see a US government shutdown and a historic potential default on US debts – both of which would have severe effects on investors and bondholders, as well as the wider global economy. On Thursday, however, the government was able to pass a ‘continuing resolution’, effectively giving the government until 3 December to fund a more long-term solution.

The start of the week proved especially tough for equity investors, as markets were repositioned ahead of anticipated interest rate rises in the future. On Tuesday, for example, the S&P 500 suffered its worst day since May, falling 2%. It was joined by the likes of the Nasdaq and the STOXX Europe 600, which also both fell over 2% the same day.

Adrian Frost from Artemis (manager of the St. James’s Place UK Income and UK & International Income funds) noted that although it was not unusual for September to be a tough month for equities, there were a number of unusual factors causing such a steep decline this year: “The S&P 500 peaked at a record 4,536.95 on 2 September. It is now down 5% (though still up over 14% year-to-date). That’s consistent with September’s bad habit of being the meanest month of the year for equities. Fears about inflation, supply chains, COVID-19, tapering and China’s bubble in property explain the fall.”

For the past year, US markets have largely posted strong levels of growth; however, September’s poor performance is a good reminder that it is important to diversify an investment portfolio in order to help mitigate some cyclical risks.

For example, while equities haven fallen over the past week, bond investments have seen comparatively better performance. Mark Dowding, Chief Investment Officer of BlueBay (co-manager of the St. James’s Place Diversified Bond, Global High Yield Bond and Strategic Income funds) noted a building sense that inflation may not be quite as transitory as previously suspected. He added that recent improvements in bond returns represent a correction of an undershoot from the previous quarters. As central banks slow down their asset-purchase programmes in the coming months and years, he added, it is reasonable to look for these returns to continue to improve.

The UK has been grappling with rising gas prices and a shortage of HGV drivers, which – combined with a certain amount of panic from the general public – led to a shortage of petrol in forecourts around the country for much of the last week. The crisis started towards the end of the previous week, before becoming headline news over the weekend, and continuing during last week.

With the UK facing many of the same inflationary and interest rate rise fears as the US, it is unsurprising the FTSE also fell last week, albeit by a lower amount. It’s worth noting the FTSE had not rebounded as strongly as its US counterparts before this, and still remains below its pre-pandemic peak.

The EU is also facing inflationary pressure, with headline rates hitting 3.4% in September. Globally, there is a debate ongoing about the nature of this inflation. Central banks initially described it as transitory; however with supply chain issues chocking supply, and energy prices increasing, some are beginning to ask how long this transitory period will last.

Jack Allen-Reynolds, Senior Europe Economist at Capital Economics, said: “Looking ahead, further increases in inflation seem a near certainty. Admittedly, governments have taken steps to limit electricity and gas price rises, but that won’t stop energy inflation from accelerating. After all, double-digit energy price hikes kicked in today in Italy.

“What’s more, we expect to see the impact of high input costs, including shipping, feed through to core inflation. We now think that the headline rate will reach 4% by November – and even though it is likely to fall sharply next year, recent strong outputs raise the chance at the ECB’s December meeting that it will announce an end to the PEPP [Pandemic Emergency Purchase Programme] in March.”

He predicted that inflation will settle below 2% in 2023.

What should we expect from the government’s Autumn Budget and Spending Review on the 27th of this month?

This year has brought two sets of changes from the Treasury already. First was the last Budget (which was announced in spring this year, having been deferred from 2020 due to COVID-19), and then, last month, the government announced increases in National Insurance contributions as well as higher taxes on dividends.

However, even though there have been two major announcements this year, it might be complacent to assume that this month’s Budget will be lighter as a result.

“It’s always a bit dangerous to make those kinds of assumptions about an upcoming Budget,” notes Tony Wickenden, Director of Technical Connection.

As he points out, the government hasn’t yet made any fundamental change on capital taxes, after commissioning reports on Inheritance Tax and Capital Gains Tax earlier this year. The reports, produced by the Office of Tax Simplification, have made a range of proposals on both topics.

Similarly, adds Wickenden, you can’t rule out the possibility of changes to pension tax.

The potential for changes, however likely or unlikely they are, should serve as a reminder to make the most out of your annual tax allowances. Base your tax planning on the existing rules, and ensure that you regularly review your financial plans with your St. James’s Place Partner.

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

“At the start of this crisis I made a promise to do whatever it takes, and I’m ready to double down on that promise now as we come out of this crisis.”

Chancellor Rishi Sunak lays the ground for his speech today at the Conservative Party conference.

Artemis and BlueBay are fund managers for St. James’s Place.