Stock Take

After disappointing inflationary figures for most of the first half of the year, a notable reduction in June helped lift optimism among UK investors.

Headline CPI inflation fell from 8.7% in May to 7.9% in June. This was well below market expectations, although it remains significantly higher than many of the UK’s economic peers.

The significant fall will give the Bank of England some wiggle room when it next meets to discuss interest rates. Previously the Bank was expected to lift interest rates by 0.50%. However, with inflation falling faster than previously expected, it may now choose a smaller, 0.25% increase.

Following the news, Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, predicted inflation may fall quickly in the coming months, and average about 7% in the third quarter. This is partly based on the oil and gas price cap falling in July and likely in October as well, while food price inflation should also ease as economic data starts to move past the initial shock of Russia’s invasion of Ukraine in 2022.

“Accordingly, we continue to think that the worst is over for UK households and that the MPC will not need to raise Bank Rate all the way to 6.25%, as markets priced-in yesterday. We still think that the Committee will hike Bank Rate by 0.25% next month and by a further 0.25% in September, before then standing pat with Bank Rate at 5.50% in the final two meetings of this year,” Tombs concluded.

This optimism was mirrored in stock markets, as the FTSE 100 and FTSE 250 spiked by 3.1% and 3.4% respectively.

Even with these gains, UK shares remain cheap compared to their EU and especially US competitors. Investors have been weary of the UK market for some time. However, in its quarterly review of the UK market, Schroders noted this could provide a long-term opportunity: “If there is a source of short-term frustration, it is that the UK market remains ignored by investors. Even when companies do well (beating consensus estimates) their share prices are not moving significantly. 150 years of stock market history tells us that this cannot last forever, and that undervaluation is the only reliable catalyst for outperformance in the long run.”

An example of one sector that has underperformed is UK banking. For years, bank values have suffered as low interest rates have made it harder for them to make money. Now that interest rates have risen, their values are being stunted by fears the higher interest rates could cause widescale customer defaults or a potential mortgage collapse.

While this is still possible, the most recent Bank of England stress test of UK banks reached a reassuring conclusion: “The results of the 2022/23 annual cyclical scenario stress test indicate that the major UK banks would be resilient to a severe stress scenario that incorporated persistently higher advanced-economy inflation, increasing global interest rates, deep and simultaneous recessions in the UK and global economies with materially higher unemployment, and sharp falls in asset prices.”

Outside the UK, market performance was more mixed. In the US, the S&P 500 added 0.7% although the technology-dominated NASDAQ fell by 0.6% with value stocks outperforming last week. Results from technology giants Netflix and Tesla didn’t provide the spark investors were hoping for. The coming days will see quarterly results from a large number of US companies, including other large tech companies, which will likely affect the overall performance of US markets.

European markets advanced modestly, the MSCI Europe ex UK Index rising by 0.6% with German and French equities making steady gains. This came despite economic data showing the eurozone continues to face economic challenges, and an uncertain Spanish election over the weekend. In the end, conservative Popular Party leader Alberto Núñez Feijóo won the most seats. However even with the support of more right-wing parties, he will lack a majority in Parliament, making another election more likely in the near future.

Wealth Check

Arranging social care in later life can burn through money. The cost of residential care now stands at just over £46,000 per year¹ – and that’s without nursing costs. In cities such as London and Brighton, the annual figure is over £50,000.¹

In the UK, anyone who has assets above a certain level and doesn’t qualify for NHS support will usually have to pay for some or all of the care themselves. Different thresholds apply for funding care at home.

Many people are under the impression that, if you can reduce the amount of your assets by giving away money, property or income, the state will step in and pick up more of the bill. Gifting money to reduce your overall estate is a common part of legacy planning – and in theory it could help you qualify for state-funded care in later life.

But beware! There are very strict guidelines on giving away property and assets. A financial adviser can help you understand what these are and help make sure that you don’t fall foul of the ‘Deprivation of Assets’ rule.

The Deprivation of Assets rule says that if you reduce your assets so they won’t be included in your needs assessment, you may be intentionally trying to avoid self-funding your social care.

The key word is ‘intentionally’. If your local council decides you have deliberately reduced your assets to avoid paying care home fees, they may calculate your fees as if you still owned the assets. It will be as if you had never given them away. This can be emotionally distressing for individuals and their families. Moving into a care home can be very unsettling and the last thing you want is to be worried about money, or whether that money will last as long as you need it to.

Arranging social care, whether for yourself or your parents, can be confusing and stressful. Early advice from a financial adviser is crucial before transferring ownership of assets to someone else. Just to help make sure your best intentions don’t backfire.

Having a long-term financial adviser who knows your family and your own personal life goals can lend emotional as well as practical support in these decisions.

Source: UK Care Guide – The data is based on a survey of care homes between December 2022 and February 2023. Each care home had a minimum of 25 beds. The costs provided are for those residents privately funding all their care.

In The Picture

So far this year, the influence of the mega-cap stocks has been undeniable. The top 10 companies in the MSCI World Index have accounted for more than half of all returns (54%). Notably, companies like Alphabet, Amazon, and Tesla are amongst the key contributors, underlining the growing significance of big tech in the investment landscape.

You might be wondering if this dominance has made US companies expensive. While it’s true that US stocks are now considered expensive by some measures, it’s essential to remember that valuations alone do not determine future performance. It’s prudent to assess the fundamentals of a company and evaluate its growth prospects, profitability, and market position before making investment decisions.

Our fund managers continue to identify pockets of value and consider sectors that may currently be undervalued or overlooked. These can be opportunities where attractive investments may reside.

To learn more about what’s driving markets, view our mid-year outlook document here.

The Last Word

“It’s so exciting. Every minute of that game was fun, and the crowd was amazing, and I think it was a good place to start in this tournament.”

US footballer Sophia Smith celebrates after the US begin their defence of the Women’s World Cup with a victory over Vietnam.

Schroders is a fund manager for St. James’s Place.

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.

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SJP Approved 24/07/2023