WeekWatch

US markets rose through the second half of last week, after the US Senate approved a deal to extend the government’s debt ceiling.

The US government was at risk of running out of money by 18 October, after increased spending during the COVID-19 crisis saw government debt increase dramatically. These fears had weighed on investors in recent weeks, who worried Republicans would be able to block any vote on an extension via a filibuster. However, early on Thursday a deal between the two parties was made, which paved the way for a vote on extending the public borrowing limit by $480 billion – enough to keep the government funded until December.

If a compromise deal hadn’t been reached, the US risked a government shutdown, which would have left hundreds of thousands of workers without salaries, potentially curbing the economic recovery.

Now, though, the deal has bought the US government time to agree on a longer-term solution, and potentially make progress on Biden’s infrastructure bill.

It was therefore unsurprising that markets reacted well to the news that a deal had been reached. The S&P rose to within 3% of the record high it reached at the start of last month. The Nasdaq also responded well but remained further from its end-of-August record high.

It is worth noting, however, that the agreement only provides enough funding until December, so there is a chance the fears and volatility which have affected global equities in recent weeks could return before the end of the year.

Outside of the US, much of the world has been contending with rising energy prices – which has also caused other prices to increase alongside them. This, combined with already strained supply chains, presents a difficult economic situation.

However Adrian Frost from Artemis suggests that this trend could actually favour UK equities in the coming months: “A period has begun that is quite different from recent years, with companies facing higher costs and quite likely an end to the ultra-low cost of money. Much has been written about the demise of the UK market relative to other markets, mainly the US. The UK market has not been the land of tech, unicorns and wide-eyed valuations.”

“[However] that tailwind may become a headwind, and the balance may be tilted back to the more mundane but undervalued world of companies that make ‘stuff’ and make money today. In that respect, the UK should find greater favour with investors.”

The FTSE 100 ended the week up 1%, although it remains just under 2% below its 2021 high, recorded back in August.

The energy crisis is also affecting East Asia, where markets struggled over the past week – despite a late rally on the back of the US debt news. Aside from the energy problems, investors also remain nervous around the Chinese central government’s recent tough regulatory line.

However, speaking to St. James’s Place last week, Greg Lagasse of EdgePoint Wealth Management suggested that the market has now priced in some of the regime risks, and that this could present an opportunity for investors.

He said: “Alibaba is one of the businesses we are interested in currently. This is a business that effectively controls Chinese e-commerce, which is obviously an area with enormous potential. We’ve recently seen a lot of regulatory headwinds and the Chinese Communist Party’s five-year plan, which have weighed on Alibaba’s share price.”

“Because the market has focused on the negatives, you can currently buy the business, which is capable of growing at roughly 20% a year, for 14x last year’s cash flow. That is something you won’t find anywhere else in the world – a mega-cap technology business growing at that sort of rate, for that valuation.”

The Bank of England’s new Chief Economist, Huw Pill, has admitted that high levels of UK inflation could persist for longer than expected. In his first public statement since taking the job last month, he said that “the current strength of inflation looks set to prove more long-lasting than originally anticipated.”

The Bank of England said recently that it expects consumer price inflation to reach 4% later this year – which is far above its target of just 2%.

Higher inflation means you need your money to work harder for you, so you don’t lose purchasing power. It may pose a problem for those with large amounts in cash, so long as interest rates remain below inflation – although cash may still have a place in a portfolio thanks to its flexibility, liquidity and security.

For those with investments in equities, inflation isn’t necessarily a bad thing. On the one hand, it does mean you need your money to work a bit harder and earn slightly higher returns to generate a return above inflation. And for some companies, it might reduce profits if they are not able to pass on price increases to their customers.

On the other hand, higher inflation often helps to improve a company’s debt situation, and many companies are able to pass on increased costs straight to the consumer – for example in mobile phones, insurance and utilities.

This is one of the reasons why diversification is so important. No one sector will be the best-performing sector forever, and as inflation increases, some investments may perform better while others may require some adjustment.

The St. James’s Place Growth and Income Portfolios and InRetirement funds give investors access to a wide range of investment solutions. Each Portfolio contains a blend of several funds – giving investors exposure to different asset classes and, as a result, a diverse range of companies.

Our Balanced Portfolio, for example, invests in 11 different funds, which means if you use that Portfolio you will be investing in more than 3,800 companies in 75 countries around the world.

Investing in a broad range of assets and companies has the potential to offer protection against the damaging effects of inflation over the longer term.

Speak with a St. James’s Place Partner to learn more about this topic and how our fund managers can position your investments for the future.

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 therefore fall as well as rise. You may get back less than you invested.

An investment in equities does not provide the security of capital associated with a deposit account with a bank or building society, as the value and income may fall as well as rise.

“It finally feels like we are seeing light at the end of a very long tunnel.”

Sean Doyle, CEO of British Airways, on the UK’s decision to ease travel restrictions last week.

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