Stock Take

Several equity markets bounced last week on positive economic news from China and softer messaging from the European Central Bank (ECB).

Starting in Europe, on Thursday the ECB lifted central interest rates another 0.25%. This wasn’t a huge surprise though. Instead, it was the commentary that accompanied the changes which drove market direction.

In this case, ECB president Christine Lagarde explained that although inflation continues to decline, it remains too high. She noted: “Based on our current assessment, we consider that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target.”

Lagarde added that future decisions will be set at ‘sufficiently restrictive levels’ for as long as needed.

Interpreting this statement, Felipe Villarroel, Partner at TwentyFour Asset Management, explained: “Our take is that this is likely to be the ECB’s last rate hike for now. We see economic data for the remainder of the year continuing to weaken, albeit we do not expect a significant recession as we see growth being barely positive. In the meantime, inflation will be materially lower mostly due to the impact of past rate hikes and base effects. This is not an environment that’s conducive for further rate rises considering the monetary policy stance is already considered restrictive.”

Markets similarly took heart that European interest rates were likely to flatten for now. This helped European indices like the STOXX 600 and DAX 40 finish the week up.

It was also a good week for UK equities. The FTSE 100 finished the week up over 3%. The messaging from the ECB combined well with the successful listing of UK chip giant Arm Holdings Plc to create a feel-good factor for UK markets – even if Arm did end up listing on the NASDAQ as opposed to the FTSE.

A number of UK shares were also lifted as investors processed relatively positive news coming from China.

Last week, Chinese government figures reported that industrial output rose 4.5% in August compared to a year earlier, higher than the 3.7% increase reported in July. Towards the end of the week, the country also relaxed its rules around reserve requirements for banks by 0.25%, in a move designed to increase liquidity in the Chinese market (although such a move comes with its own risks).

The combination of these moves helped encourage optimism that China might be coming through the worst of its post-COVID-19 slump.

In less positive news, US inflation increased from 3.2% in July to 3.7% in August.

A jump in fuel prices was largely to blame for the increase. Oil prices have been steadily climbing since July. Brent crude is now priced at above $90 a barrel, compared to the $70-80 region it was trading at as recently as a few months ago. Oil prices have been especially politicised since Russia’s invasion of Ukraine, and recently Saudi Arabia announced plans to cut production through to the end of 2023, helping drive up prices.

For investors, the news will be a disappointing reminder that inflation might take longer to reduce and that interest rates might also remain higher for longer.

For example, Ian Shepherdson, Chief Economist at Pantheon Macroeconomics, said the new inflation figures: “raises the odds of a rate hike next week, but not by much; we expect the Fed to remain on hold, but to signal willingness to hike again depending on the data. Our take on the data over the period before the November meeting suggests the Fed won’t hike then, either. We think the chance of another hike is about 25%.”

Wealth Check

Selling a second property? Cashing in a share portfolio? When you sell an asset that’s gone up in value since you bought it, you may have to pay Capital Gains Tax (CGT) on your profits.

CGT is a tax on the profit you make when you sell something that has increased in value. It’s important to remember that it is not a tax on the whole amount, just on the profit you make – sometimes called a ‘chargeable gain’. You may need to pay CGT if you sell certain assets and the overall profit you make is over the annual CGT allowance.

One possible way of avoiding, or at least reducing this tax bill, is by giving an asset to your spouse or civil partner. Or you could split it with them. By doing this, both of you can use your individual CGT allowance (currently £6,000 in the UK) and reduce the amount of tax payable overall.

How much CGT you pay depends on your income and the asset you’re selling.

In the UK, if you pay the higher or additional rate of income tax and you’re selling residential property, you’ll pay 28% CGT on your gains above the annual CGT allowance. If you’re selling a different type of asset, such as investments or high value items, you’ll pay 20% CGT (this doesn’t apply to the main family residence).

If you pay basic-rate tax, then CGT is charged at 18% for residential property and 10% if you’re disposing of other assets. However, if your gains tip you into the higher-rate tax threshold, you may pay tax at both rates.

As well as splitting assets with your partner, you could stagger the sale of assets over several tax years and make the most of several years’ CGT allowance. You could sell part of a share portfolio on 3 April and the rest on 6 April to take advantage of two years’ CGT allowance.

You could also offset any losses you’ve made on other assets. So, if you have a share portfolio or family heirloom that sold at a loss, for example, you can use that to reduce the taxable gain on another asset you’re selling, such as property.

Over time, you can shelter more of your assets from tax by investing them in an ISA or pension. You might want to consider a Bed and ISA – this is where you sell shares (the Bed part) and buy them back within an ISA wrapper to shelter future gains.

The value of an investment with St. James’s Place 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 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.

In The Picture

You’re unlikely to find a bank account that offers interest rates above inflation – despite recent increases from the Bank of England. This article explains why we think investing is the best way to beat inflation.

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.

The Last Word

“Most of the early response to any big crisis like this is done by the local community… but we… the international community, we need to come in behind them and provide the support at scale that’s proportionate to these massive needs.”

Rick Brennan, the World Health Organization’s emergency director for the Eastern Mediterranean region, on the recent flooding in Libya.

TwentyFour Asset Management 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.

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 18/09/2023

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