WeekWatch

US markets continued to struggle last week, as members of the Federal Reserve signalled they were willing to move faster to combat rising inflation.

On Tuesday, Federal Reserve Governor Lael Brainard said “Today, inflation is very high, particularly for food and gasoline. All Americans are confronting higher prices, but the burden is particularly great for households with more limited resources. That is why getting inflation down is our most important task, while sustaining a recovery that includes everyone,” said Brainard.

Brainard outlined two key methods the Fed will use to bring inflation down: a series of interest rate rises, and by starting to reduce the balance sheet at a rapid pace, starting as soon as next month.

In the US, the tech-heavy S&P 500 dipped following the news, as investors sold stocks in companies whose balance sheets are most vulnerable to short-term rate rises.

However, “some areas of equity markets manage quite well in an inflationary environment,” noted Stephanie Butcher, Chief Investment Officer at Invesco, co-managers of the St. James’s Place Corporate Bond fund. “What will really determine the extent to which the equity markets too can stay at these sorts of levels and where they move from here is going to be earnings delivery.”

Butcher adds that it is increasingly important to for investors to hold portfolios with a blend of assets and sectors. This is because diversification between different asset classes and different fund managers leads to improved client outcomes: it’s important have exposure to areas of that market that respond differently to inflationary environments to help you achieve smooth and consistent returns.

According to Mark Dowding, Chief Investment Officer from Bluebay, we are at a moment of maximum stress for central banks.

Turning to the UK, GDP growth for February was 0.1%, below market expectations of a 0.2% rise. Cost of living challenges and the economic headwinds caused by the war in Ukraine are both acting as drags on economic growth. Given that both issues have continued into April, some commentators are predicting this economic slowdown may continue for coming months.

Adegbembo Modupe, Economist at AXA Investment Managers said: “We expect growth to begin to slow materially as the real income squeeze impacts households; some measures point to the worst real income fall on record. It will also hit firms as they deal with rising costs. Both look set to weigh on activity, further impacted by falling confidence, tighter financial conditions and weaker external demand.”

In mainland Europe, a late surge in the popularity of French Presidential candidate Marine La Pen meant that an air of uncertainty surrounds the EU’s second largest economy at the start of Monday. The race between Le Pen and incumbent President Macron is a re-run of the 2017 Presidential election, which Macron ended up winning by a comfortable margin.

Although Macron won the first round of voting, polling suggests the second round could still go either way. A Macron victory would very much be a continuation vote, while a Le Pen win could cause some worries among EU policy makers, creating additional pressure on markets. Unpredictable political cycles are part and parcel of long-term investing. A diversified portfolio and strategic asset allocation can help smooth out some of this volatility and will ultimately drive returns.

As the new tax year starts, here is a reminder of the main tax exemptions and allowances, and what has – or hasn’t – changed for this year.

Income Tax and National Insurance

The personal allowance – the amount of income you don’t have to pay tax on – remains £12,570. The basic rate is still 20%, and the higher-rate threshold, at which you start paying 40%, is £50,270.

National Insurance contributions (NICs) are rising by 1.25% this tax year as a Health and Social Care Levy. Most employees will pay National Insurance at 13.25%, taking the total tax from their salaries, including 20% basic rate, to 33.25%.

However, Sunak has also raised the NIC threshold by £3,000 from July 2022, aligning it to the personal income tax allowance at £12,570. He said this would mean around 70% of NIC payers will pay less, despite the Levy.

Dividend and savings income

Through the Personal Savings Allowance, basic-rate taxpayers can continue to earn £1,000 interest on savings before paying tax in 2022/23. For higher-rate taxpayers, the allowance remains at £500, and for additional-rate taxpayers, it’s zero. The dividend allowance has also remained unchanged at £2,000.

The government has also increased Dividend Tax by 1.25%, which means investors and company directors owning shares in their business will have to pay more on their earnings.

Personal pensions

Despite all the speculation about potential reductions in pensions allowances, they have been left unscathed for this tax year.

Most people can get tax relief on pension contributions up to £40,000 a tax year, or 100% of relevant earnings, if less.

That annual allowance continues to taper down for individuals with an adjusted income above £240,000 and threshold income over £200,000. The minimum reduced annual allowance this year is £4,000.

The lifetime allowance – the most you are allowed in your pension pot before triggering an extra tax charge stays at £1,073,100 for 2022/23 and will stay frozen until 2026.

ISAs and Junior ISAs

The ISA subscription allowance remains at £20,000 for 2022/23, including for Stocks & Shares ISAs and Cash ISAs.

The Junior ISA annual allowance also remains unchanged at £9,000. Alongside children’s pensions, Junior ISAs are a great opportunity to help give children a financial head start. Yet 61% of the £971 million subscribed to Junior ISA accounts in 2019/20 was in cash.¹

Parents should reconsider these cash positions given current ultra-low interest rates, especially if it will be several years before your children turn 18 and can access the funds.

Inheritance Tax and CGT

The Inheritance Tax (IHT) nil-rate band for 2022/23 remains at £325,000 but has been frozen until 2026. The additional residence nil-rate band, where residences pass to direct descendants, stays at £175,000.

Sunak has frozen the annual Capital Gains Tax (CGT) exempt amount for individuals at £12,300 until 2026. Effective and repeated use of your CGT annual exempt amount is a great way to transfer assets into ISAs or pensions to shelter from any future tax liability on income or gains.

The value of an investment with St. James’s Place will link directly to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA or a deposit with a bank or building society.

The bases, levels and reliefs from taxation can change at any time and depend on individual circumstances.

¹ Commentary for annual savings statistics, Gov.uk, June 2021

“Following the bounce at the start of the year, it’s no surprise that economic growth slowed in February. Near-term challenges to the outlook have ramped up since, with a growing cost-of-living crunch set to weigh on growth.”

Alpesh Paleja, lead economist at the CBI

AXA Investment Managers, Bluebay and Invesco are fund managers for St. James’s Place.