WeekWatch

Stock Take

Has the season to be jolly come a bit too early? Global markets ended November in an upbeat mood. The MSCI World index registered its best month in three years, climbing nearly 9%. A similar return for the S&P 500 index represented its seventh best single month of returns in the past 100 years.

Driving this optimism are three key beliefs: 2024 will see a soft landing for leading economies (or at worst, only mild recession); central banks will make interest rate cuts, and that these will happen despite inflation remaining above target.

Those hopes were boosted midweek after a US Federal Reserve official made fresh hints that rate cuts could begin in a matter of months, as long as inflation keeps easing.

Further encouragement came on Thursday, as the Fed’s favoured inflation gauge – the personal consumption expenditure index – rose 0.2% in October and 3.5% year-on-year, in line with expectations and the smallest rise since early 2021. Coupled with news that US consumer spending rose only slightly, there are growing signs of cooling demand as higher borrowing costs and depleted excess savings begin to bite. Weekly jobless claims also provided an indication of a softening job market.

Markets are pricing in a 95% likelihood that the Fed will leave interest rates unchanged later this month.

At the beginning of the week, ECB president Christine Lagarde reaffirmed that the central bank’s fight against inflation wasn’t over, citing persistent strong wage growth and the uncertain outlook.

That uncertainty was reinforced with news that consumer sentiment in Germany, Europe’s biggest economy, remains at a very low level heading into the holiday season, although it improved slightly after three months of declines. The data followed confirmation that the German economy shrank slightly by 0.1% in the third quarter, as high energy costs, weak global orders and higher interest rates have taken their toll. France also saw its economy contract by 0.1% in the third quarter.

However, the ECB’s narrative was challenged on Thursday with news that eurozone inflation tumbled more than expected in November, dropping to 2.4%. Markets have fully priced in a first interest rate cut in April, ignoring the ECB’s explicit guidance that rates would need to remain steady for several quarters, and reflecting the fact that the central bank’s own projections have a poor track record.

Bank of England (BoE) governor, Andrew Bailey, painted a gloomy picture of the UK economy in comments at the start of the week, saying that its potential to grow was “lower than it has been in much of my working life”. Bailey reiterated his warning that interest rates will not be cut in the foreseeable future and that lowering inflation further will be “hard work”.

Keith Wade, Chief Economist at Schroders, agrees. “Disinflation up to this point has in large part been due to fading commodity price effects (which may start to reverse in 2024) rather than a significant easing in underlying, core price pressures. The hard yards in getting inflation down are still to come.”

Dave Ramsden, the BoE’s deputy governor, also reaffirmed the need to keep monetary policy restrictive for some time to defeat inflation, suggesting it would be the end of 2025 before it returned to the target of 2%.

The Office for Budget Responsibility has cut its growth outlook to 0.7% in 2024 and 1.4% in 2025 – down from previous forecasts of 1.8% and 2.5%. Meanwhile, a survey by the Confederation of British Industry showed that UK retailers has turned slightly more optimistic about the outlook in coming months, although sales had continued to fall in November.

November’s bumper returns may have left investors feeling festive, but Mark Dowding of BlueBay Asset Management, whilst not wanting to be too much of a Christmas Grinch, warns that markets may give back some ground before the year is out. “We are struck by how difficult economic forecasters have found it to predict the trajectory of growth and inflation with any accuracy over the past couple of years. Although a hard landing in the US looks unlikely, who knows how this will look by spring next year. We feel that markets are currently more vulnerable to disappointment if economic data remains relatively upbeat, or if Fed comments fail to deviate much from prior Fed meetings.”

Wealth Check

We have been living with the cost-of-living crisis since late 2021. Those with young families, and young people in particular are cutting back wherever possible – a quarter of 18-34 year olds have reduced their rainy-day savings as price rises bite, according to TSB research¹.

Further research from TSB revealed that more than one third of parents are financially supporting their adult children. More than half of these said their children wouldn’t be able to cover essential bills without their help².

Families and young people may face another long, cold and dark winter. It’s not surprising that many parents are increasingly looking at practical ways they can support their adult children with day-to-day expenses.

Gifting money, either as a one-off cash advance, or a regular payment to help cover childcare, could make a world of difference to your loved ones. There are several allowances available in the UK that let you give gifts without incurring a tax bill. Gifts aren’t limited to money; you can gift other assets such as, jewellery, property, land or stocks and shares among the family. Although in practice you ought to be aware of the tax implications in doing so – as other taxes may apply to such gifts.

An individual can give £3,000 a year tax-free (£6,000 per couple) with a gift allowance called the annual exemption. You can split this between several people or give it all to the same person. If you don’t use all of your allowance one tax-year, you can carry it forward to the next. But you can only roll over your allowance for one year.

The small gift allowance lets you make as many gifts as you want of up to £250 per person, as long as you haven’t used another allowance in favour of the same person. You can also give a tax-free wedding or civil partnership gift – you’re allowed to give up to £5,000 to your child; £2,500 to a grandchild or great-grandchild; and £1,000 to anyone else. This is a lovely way to celebrate the big day as well as spread money among the family.

If you’d like to talk to us about using your wealth to help your family, just get in touch.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is generally dependent on individual circumstances.

Sources

¹Parents Risk Their Financial Security as Pressure Increases on the Bank of Mum and Dad, TSB, August 2022 (Based on a survey sample size of 5,812)

²Parents Risk Their Financial Security as Pressure Increases on the Bank of Mum and Dad, TSB, August 2022 (Based on a survey sample size of 2,003)

In The Picture

The dominance of emerging markets from 2000 to 2010 might have led some investors to believe that this trend could last forever. This proved to be a misconceived notion. It underscores the importance of maintaining an unbiased approach to investing.

The Last Word

“I remember the $0.05 hamburger and a $0.40-per-hour minimum wage, so I’ve seen a tremendous amount of inflation in my lifetime. Did it ruin the investment climate? I think not.”

Investment legend and former vice chairman of Berkshire Hathaway, Charlie Munger, who passed away last week.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2023. FTSE Russell is a trading name of certain of the LSE Group companies.

“FTSE Russell®” is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

SJP Approved 04/12/2023