Wealth Watch - 22 July

Stock Take

Politics have become strong drivers of markets in the last month, with the hung parliament in France, as well as mounting pressure on Joe Biden leading to his departure from the US presidential race are among the issues weighing on investors’ minds.

Prior to that, in the aftermath of Donald Trumps attempted assassination, investors were preoccupied with what a Trump victory would mean for the rest of the world. After starting the week positively, European stocks fell on concerns about the prospect of increased trade tensions with the United States. Chinese stocks also dipped following the appointment of JD Vance, known for his tough views on China, as Trump’s vice-presidential running mate.

Chinese equities had taken an earlier fall on news that the country’s economy grew much more slowly than expected in the second quarter. Retail sales growth also dropped to an 18-month low and new home prices fell at their fastest pace in nine years, adding to worries that China’s fragile recovery is already running out of steam.

Against an apparent worsening economic backdrop, the Communist Party Central Committee held its key policy meeting, known as the plenum, which takes place roughly every five years. Market hopes of a more radical shift in policy thinking were dashed, as the meeting closed on Thursday with a restatement of lofty economic goals without any detail on implementation plans.

Turning back to the US, a Bank of America survey of nearly 250 fun d managers revealed that geopolitical conflict had overtaken higher inflation as the biggest perceived risk to the investment outlook. More positively, 68% predicted a soft landing for the global economy, where growth and inflation gradually ease.

All of these political worries appeare d justified as global blue-chip stocks tumbled midweek. The catalyst was a report that the Biden administration could be set to further tighten restrictions on exports of semiconductor equipment to China. Worries were exacerbated by comments from Trump that Taiwan, the biggest producer of microchips, should pay for its own defence added to the concerns.

This concern over tech and AI based firms saw heavyweights such as Nvidia and ASML lead the falls, as the tech-selling mood crept into rest of the market as world stock indices went into reverse towards the end of the week. Investors were also rattled by the global IT outage that created havoc, with businesse s, banks, airlines and hospitals among the worst affected.

The market shift away from the tech sector was a key theme last week. The average year-to-date gain for the mega-tech companies – Amazon, Microsoft, Apple et al – is 37%, which has continued to drive the wider market in a repeat of the 2023 trend. But the tide turned noticeably last week as leadership rotated to cyclical sectors and small-cap stocks. In the US in particular, the prospect of easing Fed policy bodes well for these more economically sensitive areas.

Whether or not this broadening of market leadership continues, the shift underscores the importance of maintaining a well-diversified and balanced portfolio that has the scope to capture different sources of return.

In the UK, inflation defied expectations of a slight fall and held steady at 2% in June. Services inflation was a big factor and remained too hot for the Bank of England’s (BoE) liking, partly due to an increase in hotel prices caused by the tours of US popstar Taylor Swift.

The data prompted investors to pare back their bets on an August interest rate cut. That view was also supported by news that wages growth in the three months to May, whilst easing slightly, was still running at 5.7%, suggesting the labour market is cooling too slowly for the BoE to act as soon as next month.

Despite the fall in inflation, figures from the Office for National Statistics confirmed that the cooler, wetter weather had put off shoppers as retail sales dropped 1.2% after a 2.9% jump in May. The uncertainty in the period before the general election was also cited as a reason why sales fell further than expected.

As anticipated, the European Central Bank (ECB) also held off from a further interest rate cut, arguing that inflation would remain above its target well into next year, but said that its September meeting was “wide open” to the possibility of further easing. The lack of policy direction from the ECB and the tech shares sell-off contributed to Europe’s STOXX 600 index logging its biggest weekly decline this year.

Wealth Check

Many of us find it hard to think about ourselves or our parents needing help as we get older, and when we do start to think about it - perhaps in our 50s or 60s, the cost implications can make us wince.

The high cost of social care can quickly swallow up any inheritance that we planned to pass on to our children or grandchildren.

However with careful forward planning, you can mitigate the impact that care fees can have on your inheritance.

None of us can see into the future but you may need to cover social care costs for longer than you imagine. The longer you live, the more the bill goes up and the less money there is for the family.

Not only that but your children might have a long wait for their eventual inheritance. To counteract this, some older people are now choosing to skip a generation by passing their wealth directly to grandchildren, during their lifetime.

A multi-generational approach to financial advice keeps money flowing through families in the most tax-efficient way.

Discussing and planning for a range of scenarios earlier in life, when children are still living at home for example, makes good sense. It’s important for everyone’s peace of mind that everyone knows how social care would be funded, if and when it’s needed. It can come as an unwelcome surprise to discover that an expected inheritance has been swallowed up by care fees.

That said, talking to your children about your plans and your wishes for later life care can be easier said than done. Conversations about growing old and dying can be difficult for all sides. Emotions can run high too, especially between siblings, and a lot of feelings need to be considered. A financial adviser who’s one step removed can bring the parties together and find common ground and consensus.

Having these conversations early means everybody knows what to do, and is comfortable with it, should long-term care be needed.