Stock Take

Japan’s asset price bubble of the late 1980s was a heady mixture of exuberant equity markets and skyrocketing real estate prices. The ground underneath the Imperial Palace was once said to be more valuable than the entire state of California.

The subsequent crash in asset prices represented one of the biggest destructions of shareholder capital in stock market history and condemned the country to two decades of low growth and falling prices.

On Friday, as G7 leaders gathered in Hiroshima, the benchmark Nikkei 225 index rallied to its highest level since 1990, after smashing through 30,000 earlier in the week. Japan’s stock rally has been powered by strong corporate results, a weaker yen and an economy that is starting to show signs of rebounding consumer spending after the pandemic.

Optimism was boosted by news that the world’s third-largest economy grew at an annualised rate of 1.6% in the first quarter of the year, twice as fast as expected, lifting the country out of recession after two straight quarters of contraction in the second half of 2022.

Whether it lasts will be a tug-of-war between robust domestic demand and sluggish exports, which slumped 4.2% between January and March. Mounting signs of a slowdown in US, European and Chinese growth do cloud the outlook for Japan’s export-reliant economy. There are also concerns that the Bank of Japan could be too slow in normalising its ultra-accommodative policy and risk inflation overshooting further. In April, Japan’s overall consumer prices, as measured by the Consumer Price Index (CPI), experienced a notable acceleration, reaching 3.5%, which exceeded expectations by a significant margin.

Concerns about China’s wobbly post-COVID recovery were heightened by data showing industrial output, retail sales and property investment all losing steam at the beginning of the second quarter. As expected, China’s central bank kept interest rates on hold on Monday, but markets expect monetary easing may be inevitable on the coming months to support the economic recovery.

However, official figures showed that China became the world’s biggest exporter of cars after overtaking Japan in the first three months of the year. China exported 1.07 million vehicles in the period, up 58% compared to the first quarter of 2022. Last year, China overtook Germany to become the world’s second-largest exporter.

The demand for electric vehicles has boosted China’s motor industry, but it has also been a major beneficiary of trade sanctions imposed on Moscow by Western countries. Its market share in Russia has surged after rivals including Volkswagen and Toyota quit the country.

Further sanctions on Russia were a major discussion point at the G7 summit and their impact was apparent in data confirming that eurozone economic growth advanced 1.3% year-on-year in the January-March period. Due to the European Union’s decision to halt most of its energy purchases from Moscow following the Ukraine invasion, imports of Russian oil and gas to the region decreased by 72% compared to the previous year. As a result, the net trade balance of the region shifted to a surplus.

The EU’s trade deficit with China, the bloc’s second-largest trading partner after the US, also fell in the first quarter as it seeks to reduce its dependence on Beijing.

Meanwhile, as inflation continues to run well over three times its 2% target, a Reuters poll of economists forecast the European Central Bank will hike interest rates by 0.25% at each of its next two meetings.

A similar poll suggested the US Federal Reserve will hold its key interest rate steady this year despite an expected recession. Solid retail sales figures for April boosted hopes that consumer spending will continue to support the economy as the delayed effects of the Fed’s policy tightening broaden out. It seems the Fed views a mild recession as an acceptable price for bringing inflation back down to target.

Wall Street stocks hit their highest level in nine months midweek, and global shares hit a one-month high as markets reflected increased hopes of a deal over the US debt ceiling. But US equities ended the week on a soft note as talks between the Democrats and Republicans broke down again, with no additional meeting set. Wrangling between the two political parties could take negotiations down to the wire or to a stop-gap agreement that kicks the can down the road until September.

“For now, financial markets remain relatively sanguine about the upcoming debt ceiling. It appears there is a widespread acknowledgement that, when all is said and done, the US Administration won’t possibly allow itself to default on its debts and wreak havoc on the global financial system,” commented Mark Dowding of BlueBay Asset Management. “In a sense, having witnessed past skirmishes related to the debt ceiling, there is a sense of the story of the boy who cried wolf too many times.”

Wealth Check

You’ll always remember those life-changing moments: meeting your partner, the birth of your children, collecting the keys to your first home.

How about when you finally pay off your mortgage? Will you remember that?

Completing the repayments on your mortgage is a major personal achievement; you may have spent 25 years or more setting aside income, considering interest rates and calculating mortgage deals. And while this landmark may be less romantic than that first date, in many ways it’s no less life changing.

Not only will you own outright what is probably your biggest asset, you also will have access to a sizeable sum each month that previously was earmarked for your lender. And while it might be tempting to use this newfound cash on a holiday, a car, or a home extension, it’s a golden opportunity to talk to an adviser to review your current budget, savings and retirement plans to see if you’re using it most effectively.

As with all financial planning, it’s never too early to start thinking about how to balance paying off your mortgage with saving for retirement.

If, for example, you pay off your mortgage at 57 and work until you’re 66, you will have nine years of monthly savings to contribute towards your retirement.

And if that retirement is the long one to which we all aspire, those additional funds may be vital. If you are a 50-year-old man of average health today, the Office for National Statistics’ life expectancy calculator suggests you will live until the age of 84; if you are a 50-year-old woman with the same reasonable health, you are forecast to live until 87.

That would mean there are many years after retirement that will need to be funded – whether you’re just taking life a little easier, starting a brand-new business, or fulfilling ambitions for travel, your family or other personal passions.

Now consider how the money freed up by paying off your mortgage can have an impact: if you save £500 per month after a mortgage term has expired, this will add up to £60,000 over 10 years. If could be worth more if you choose to invest it, and allowing for any tax relief on your contributions. If you do choose to invest, you could get back more or less than this.

The value of an investment 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 the amount invested.

In The Picture

When investing over the long term, it’s important to ensure your investments remain aligned to your risk profile and objectives.

The Last Word

“Our world is vast, but we are all in it together. And this is our shared cause – peace.”

Volodymyr Zelenskyy speaks at the G7 summit in Hiroshima.

BlueBay are 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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© 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 22/05/2023

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