Last week saw global equities post some of their worst returns since the COVID-19 pandemic started, as fears of recession grew, and Central Banks continued to increase interest rates.
The US Federal Reserve led the way, raising rates by 0.75%, its most significant move since 1994. This is unlikely to be the end of the hikes, as the Fed warned it “anticipates that ongoing increases in the target range will be appropriate.”
The move came just a few days after official figures revealed US inflation had reached a four-decade high of 8.6% – a long way above the Fed’s 2% target.
The magnitude of the Fed move rippled across financial markets as investor fears of recession intensified, with the S&P500 slumping by -5.8%, its worst weekly performance since the first half of 2020.
Markets will watch tentatively this week when Fed Chairman Jerome Powell testifies to the upper and lower chambers of Congress.
The US was not alone in increasing interest rates. Notably, the Swiss National Bank surprised the market with its first rate increase since 2007. This opening Swiss salvo was a 0.5% increase, and it warned more increases may be likely in the future.
For its fifth meeting in a row, the Bank of England (BoE) raised rates by 0.25%. In light of the Fed’s acceleration, questions are now being asked about whether the BoE might begin to follow suit and begin increasing the rate by larger amounts. AXA’s Adegbembo Modupe said: “We see a .5% move in August as firmly on the table, but for now continue to expect .25% increases in August, September, and November as our base case.”
A number of factors could affect this – commodity and energy markets are volatile and will likely remain volatile so long as the war in Ukraine persists. As has been seen over recent weeks, this will have knock on effects on inflation, and the ongoing inflation expectations will have an effect themselves. However, Modupe called out the labour market as also key to the BoEs assessment of medium-term inflation pressures and remains tight.
Modupe said: “Signs of further labour market tightening would likely steer the Committee towards a sharper move next month – particularly if wage growth continues at the high monthly rate posted in April. For now, we remain of the view that Bank Rate will rise to 2.00% by November and will close the year at this level – far short of current market expectations.”
Over the week, both of the FTSE100 and 250 retreated sharply, falling by -4.1% and -3.8% respectively. It was a similar story across Europe with the MSCI Europe ex. UK declining by -4.5%.
The issue facing Central Banks is attempting to balance the need for growth with attempts to control inflation. Raising interest rates helps reduce inflation, but also can slow economic growth (by making it more expensive to borrow). With growth already struggling, many fear too sharp of an increase in rates could push economies into a recession.
For investors, the debate of increasing rate rises will likely continue to have a direct impact on their returns. Alexander Robinson, Associate – Global Assets at leading investment consultancy Redington suggests: “At the moment, Central appear to have embarked on a rapid tightening of monetary conditions, with interest rate hikes accompanying balance sheet reduction (otherwise known as Quantitative Tightening). If they hold to this path, it seems unlikely that equity markets can move meaningfully higher unless valuations become much more attractive. If inflation does, belatedly, prove somewhat transitory and economies are starting to weaken, then it is likely that Central Banks will need to change tack, and in turn this would be more positive for equity markets.”
Since they launched in 1999, Cash ISAs have remained hugely popular. In the 2019/20 tax year, Cash ISAs accounted for 75% of all accounts, with savers paying into 9.7 million plans, 1.2 million more than the previous year1.
Cash ISAs are certainly convenient – your money is easily accessible, so you have funds on hand in the event of an emergency, and it’s sheltered from tax.
But that doesn’t necessarily mean it’s the right home for all your savings. By ploughing too much money into cash accounts, savers could miss out on potential growth opportunities that will not only help shield them from the rising costs of living, but also go a long way in helping them achieve their financial goals.
Even after the recent increases, interest rates remain far below the rate of inflation. This means money saved in a cash ISA is currently going to lose purchasing power over time.
One alternative to consider is investing in a stocks and shares ISA. This is higher risk, in so far as the value of your savings will dip when markets fall; however, over time, you have the potential to earn more than if you’d only kept your money in cash. And, of course, you still won’t pay tax on the gains within your pot.
Increasing your exposure to the stock market can be daunting. But this is where advice can really help. By talking to your adviser about your short, medium and long-term financial goals, they can help you work out how much you need to keep in easy-to-access cash accounts and how much you can afford to invest in stocks and shares to help you achieve your longer-term goals.
They can also help you find investments that match your risk profile and investment horizon, to ensure your portfolio doesn’t keep you awake at night.
The value of an ISA 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 you invested.
An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA.
The favourable tax treatment of ISAs may not be maintained in the future and is subject to changes in legislation.
1 Commentary for annual savings statistics: June 2021, gov.uk, 15 June 2021
“This culture of compromise is one we will have to adopt but we must do so around clear values, ideas and political projects for France.”
Bruno Le Maire, French Finance Minister reacts to the French Parliamentary election, in which president’ Macon’s party failed to win a majority.
AXA is a fund manager for St. James’ Place.
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