Wealth Watch - 10 June

Stock Take

In a week that commemorated the beginning of its liberation by Allied forces 80 years ago, Europe was also the focus for markets, as investors geared up for the European Central Bank’s (ECB) latest interest rate decision.

Earlier in the week, in emerging markets, investors were rattled when early voting showed that Indian Prime Minister Modi’s BJP-led alliance was not headed for its predicted landslide win in the country’s election; a victory that had been expected to be positive for its financial markets.

India’s benchmark Nifty 50 Share Index closed down 6%, its biggest fall in four years. But the following session saw Indian stocks register the biggest daily rise in more than three years as it became clear that Modi was set to remain in power for a third term.

Before the ECB announcement, there were signs that the long-running downturn in eurozone manufacturing could be turning a corner. Business confidence improved as data showed the slowest decline in new orders for two years. Falling production costs, which enabled manufacturers to reduce their prices, also signalled more potential wriggle room for the ECB to reduce rates.

This was followed by news that eurozone business activity expanded at its quickest rate in a year in May. The region’s dominant services industry came to the rescue, as growth in that area outpaced the contraction in manufacturing. Services firms increased headcount at the fastest pace in 11 months. The news added to expectations that the eurozone economy will maintain positive growth in the second quarter.

It was a similar story in the US. After a short-lived contraction the month before, the US services sector bounced back to growth in May, as business activity registered its biggest monthly rise since March 2021. But data released earlier in the week showed that manufacturing activity in the world’s largest economy slowed for the second consecutive month, as new goods orders dropped by the most in nearly two years.

Construction spending also fell unexpectedly for a second month in April, while the number of job openings per jobseeker fell to its lowest in nearly three years, adding to signs of sluggishness in the economy as the second quarter began.

Equity markets weren’t sure how to take the news. On one hand, the figures suggested the US Federal Reserve was winning the fight against inflation, hastening potential interest rate cuts. But it also raised worrying questions about corporate profits further down the line.

There were certainly no worries about the fortunes of artificial intelligence chipmaker giant Nvidia, which on Wednesday overtook Apple to become the world’s second most valuable company. Its share price surge of 147% has alone accounted for around a third of the S&P 500’s total return this year.

Both the S&P 500 and tech-heavy Nasdaq index hit new record highs. Inevitably, there are concerns about the continued concentration of gains in a handful of big-tech companies, whilst others believe their performance is deserved given their robust earnings, dominant competitive positions, and scope to capitalise on the AI revolution.

Global shares were driven to the brink of an all-time high on Thursday on the back of AI-mania and expectations that the ECB would deliver its first rate cut in nearly five years. Ahead of its announcement, Canada became the first G7 country to reduce borrowing costs, as its central bank dropped rates to 4.75% from 5%.

The ECB duly confirmed a well-telegraphed cut in its main interest rate from an all-time high of 4% to 3.75%, despite a slight uptick in inflation in May. But markets backpedalled after the central bank said it did not expect inflation to fall back to target until 2026.

ECB President Christine Lagarde said the cut was not a one-off, but rather the start of a dialling back process. Markets are expecting one to two further rate cuts this year and a total of four before the end of next year. Policymakers suggested that September was the next possible window.

The final event of the week was the release of the crucial US jobs monthly jobs data. Employers added 272,000 jobs last month, blowing past economists’ predictions of a 180,000 rise. The figure confounded any belief that cracks were appearing in the US labour market. Global stocks ended the week in retreat as Fed rate cut probabilities were cut. The chance of a rate cut in September fell from 81% to 57%, according to market pricing, and Treasury bond yields surged as the higher-for-longer realisation hit home.

Wealth Check

The cost of private education has soared in recent years. The average cost per child is now ￡6,944 a term for day pupils, and ￡12,344 a term for boarders.1

There are big regional variations too. And with the cost of living still rising, private schools have had little choice but to pass energy and food costs on to parents.

There is also the possibility that Labour, if successful as predicted at the next general election, could introduce VAT on private school fees, adding a further 20% to the annual costs.

You need to factor in a 5% fee increase per year, plus school trips, uniform, and travel if your children will be day pupils. A good rule of thumb is to build in 10% per year.

Paying for private schooling – income, inheritance, or investment?

In general, parents looking to fund school fees fall into three camps. Those who have a lump sum to invest – perhaps an inheritance; those who can pay from their income, so long as they remain in their job and parents who are planning ahead and want to set up a regular savings plan.

Should I use a Cash ISA, or Stocks and Shares to save for school fees?

Saving into any tax efficient ISA, either Cash or Stocks and Shares, means you can use your full annual ISA allowance of ￡20,000 a year before tax – ￡40,000 for a couple.

Your annual ISA allowance may increase by a further ￡5,000 per year if the government’s proposal to introduce a new British Stocks and Shares ISA goes ahead.

However, if you’re going to afford this scale of school fees, putting money into a cash savings account, or a cash ISA, is unlikely to give you the best returns.

Investing in stocks and shares within a Stocks and Shares ISA has greater potential to outperform cash holdings in the mid- or long-term. But it does carry more risk since your investments can fall in value as well as increase.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.

An investment in equities does not provide the security of capital associated with a deposit account with a bank, building society or a Cash ISA.

The favourable tax treatment given to ISAs may not be maintained in the future, as they are subject to changes in legislation.

Please note that St. James's Place does not offer Cash ISAs.

Source:

1 Schoolguide, accessed April 2024.

In The Picture

The European Parliamentary election saw far right parties make gains, although central parties continued to hold the majority.

The Last Word

"I have confidence in the ability of the French people to make the fairest choice for themselves and for future generations.”

French President Macron calls a snap election, following the European Parliamentary election.