Stock Take

Cooling but still too hot. The focus for markets last week was Wednesday’s release of the latest US inflation data, as investors looked for signs that the Federal Reserve might change tack with its interest rate policy.

At 5% for the 12 months ending in March, US inflation fell to its lowest level since May 2021. The one percentage point drop was the largest downward swing in more than eight years, although this was largely due to the big inflation spike last Spring. But under the surface, core inflation, which strips out volatile food and energy prices, accelerated to its highest rate in nearly two years as rental costs remained stubbornly high.

Wall Street and European markets rallied in response to the inflation news, but were later rattled by minutes from the Fed’s last policy meeting that indicated banking stress could tip the US economy into a “mild recession” later this year.

With inflation pressures still simmering, a further rate rise next month appears nailed on. “Barring another major bank failure, we expect policymakers to focus on inflation and raise rates by another 0.25% at their next meeting on 3 May,” commented Keith Wade, Chief Economist at Schroders. “Beyond this, if the recent softening in labour demand is sustained as we expect, then inflation should moderate more convincingly, reassuring the committee that further policy tightening is not required.”

Other central banks have already hit the pause button. Last week, Singapore joined economies such as Australia, India, South Korea, and Canada in halting its tightening policy, as concerns about global growth outweighed worries about persistent inflation.

Whilst there is widespread belief the Federal Reserve will pause its rate hikes imminently, there is little consensus on when the policy might be reversed. “We remain sceptical that inflation and growth will moderate enough to justify the rate cuts – of two 0.25% reductions by year-end – that are currently priced into market expectations from September,” suggested Mark Dowding of BlueBay Asset Management.

Colin Graham of Robeco, investment consultants for St. James’s Place, agrees. “Our core investment scenario is for tighter monetary policy to lead to much lower nominal economic growth later this year, though we believe that central banks do not have room to cut rates until inflation is defeated or economic growth slumps precipitously.”

The case for global inflation to ease further this year was boosted by data showing China’s consumer inflation has hit an 18-month low. Factory-gate price declines also sped up in March as demand remained weak. China’s retail and producer inflation has remained anaemic as the consumer and industrial sectors struggle to recover from their pandemic hit. Analysts now think consumer inflation could fall short of Beijing’s official targets this year.

Japan remains an outlier in the battle against soaring prices, as long-stagnant inflation and wage growth are only now showing early signs of change. Japanese stocks have had a strong start to the year and made more ground at the beginning of the week as markets welcomed the first public remarks of Kazuo Ueda, the new Governor of the Bank of Japan (BOJ), who vowed to maintain the central bank’s ultra-loose monetary policy.

On Wednesday, at his first Group of Seven (G7) meeting in Washington, Ueda stressed that the BOJ will continue its monetary easing until its 2% inflation target is met in a stable and sustainable fashion.

Office for National Statistics figures released on Thursday revealed the UK economy flatlined in February, with no growth in GDP, as industrial action and low energy consumption offset growth in areas such as construction. The data missed consensus expectations of 0.1% growth, although GDP in January was revised upwards to 0.4%.

The news came after the International Monetary Fund (IMF) projected the UK economy will shrink by 0.3% in 2023, making it the worst-performing major economy in the world this year. However, chancellor Jeremy Hunt insisted the economic outlook was “brighter than expected” and the UK was “set to avoid recession”.

The IMF now expects global growth to fall from 3.4% in 2022 to 2.8% this year, before rising slowly and settling at 3% in five years’ time. It also said it expects real interest rates – which take account of inflation – in major economies to fall to pre-pandemic levels due to low productivity and ageing populations, but gave no timescales.

Further evidence that the US economy may be losing steam came on Friday with news that US retail sales fell more than expected in March – the second straight monthly decrease following a surge in January. Wall Street’s benchmark indices lost ground on the news, having hit two-month highs the previous day, but jitters about the embattled banking sector were eased when quarterly results from the big US banks – JP Morgan Chase, Citigroup and Wells Fargo – came in ahead of estimates.

Wealth Check

Sarah Murphy, Chair of the Law Society’s Private Client Committee, answers some of the most common questions that lawyers encounter around estate planning when things aren’t straightforward:

What if I can’t decide who gets what?

Being unsure who to pass your wealth onto needn’t necessarily stop you making a Will. If you’re feeling uncertain, you can build a discretionary trust into your Will – then what happens to your assets after you die will be decided by its trustees, who are appointed by you. If you have trustees you can rely on, and leave a letter of wishes, they can use this as guidance on how to distribute the funds. Your letter of wishes can be amended as many times as you like in your lifetime without you having to keep going back to your lawyer.

However, it’s important to understand the purpose of a letter of wishes – and that it is just that and not legally binding. The trustees can act according to their discretion, as well as taking your intentions into account – for example, by looking at the relationship you had with the beneficiaries, their current circumstances, the current tax position and so on.

What if the people I want to inherit my estate are children or too young to manage the money responsibly?

In this scenario, it’s common to set up a trust for the children or young people. The trustees would be guided by you as to how to distribute the funds on their behalf – for example, by paying for their maintenance and education. Then you can state that they will receive the full estate at a certain age – for example, 21 or 25 – depending on what you think is right for the individual. In the meantime, you can rely on the trustees to make sensible decisions on your behalf.

What if my beneficiaries are vulnerable in some way?

If the beneficiary is disabled or has a long-term condition and will need someone to look after them after you die, you can set up a discretionary trust or a vulnerable person’s trust for them. The latter can be very tax efficient, and you can make sure the money is invested in the right way so that the beneficiary is looked after for the rest of their life.

Trusts are not regulated by the Financial conduct Authority.

In The Picture

Returns can be volatile when looking through a short-term lens. When viewed over a longer period, these fluctuations tend to smooth out.

Source: MSCI. Rolling daily discrete returns 2001-2023. Stock market represented by the MSCI World Index. Data as at 28 March 2023.

Past performance is not indicative of future performance. The value of an investment with St. James’sPlace will be directly linked to the performance of the funds you select, and the value can therefore go down as well as up. You may get back less than you invested.

The Last Word

“There’s also a strongly held view across all of our partners on the need for an immediate ceasefire and a return to talks. Talks that were very promising in putting Sudan on a path to a full transition to civilian-led government.”

US Secretary of State Anthony Blinken calls for a ceasefire after violence erupted in Sudan.

BlueBay and Schroders are a fund managers 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.

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.

© S&P Dow Jones LLC 2023; all rights reserved

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 17/04/2023

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