Week Watch - 18 March 2024

Your 7-minute update on the markets

Stock Take

A small increase in US inflation last week hurt American markets, although there was better news in Europe.

Starting with the US, CPI Inflation in February was 3.2%, compared to 3.1% in January. ‘Core’ inflation – which doesn’t include food and energy prices – did fall slightly (from 3.9% to 3.8%) but was higher than had been forecast.

With an election due later this year, stubborn inflation could well become a political battleground in the near future. For investors, the news also meant that the Federal Reserve was likely to move slower in reducing interest rates this year.

The Federal Reserve is due to meet on Wednesday and discuss interest rates. Although few will be expecting any actual movement in rates, the market is likely to react, based on what is said during and after the meeting. The general expectation is still for interest rates to fall this year. The question is, by how much? When news comes out that suggests interest rates will fall more slowly, generally this causes a short-term fluctuation in the market.

This was evidenced by the fall in US equities. The S&P 500, whose large technology companies such as Nvidia and Microsoft have driven much of the positive growth since the start of 2023, ended the week down very slightly, partly as a result of the inflation news.

These fluctuations should act as a reminder of the dangers of trying to time the market.

There was slightly better news in other countries. In Norway, for example, inflation fell by more than expected to 4.9% in February (compared to an expected 5.3%). The country last raised its interest rates in December, and the news led to questions around how long before they’ll be cut. Finance Minister Trygve Slagsvold Vedum said the lower inflation was good for consumers and the wider economy, adding: “We are on the right track.”

In the UK, there was also some positive news, as it was revealed the economy grew by an estimated 0.2% in January. The country entered a recession in the second half of last year, however January’s figures, combined with the extra leap year day in February, means the UK is likely to return to growth for the first Quarter of 2024. The news helped the FTSE 100 increase by 0.9%.

It is important to note, however, that the January figure is just an estimate, and could change (for good or bad) in a later revision.

Part of the issue the British economy has faced over recent years is that productivity has grown extremely slowly since the financial crisis 15 years ago. However, David Miles, a member of the Office for Budget Responsibility, told MPs last week this might change in the coming years, thanks to technologies like A.I. He said: “The last 15 years have been so bad that, more likely than not, things will be a bit better over the next five to 10 years,” although he also warned that this was no more than an educated guess.

Moving to Asia, Japanese equities lost some momentum with the Nikkei 225 retreating by 2.5% (local currency). That reflected growing expectations that the Bank of Japan will move away from its negative interest rate policy over the coming months. As for China, the Shanghai Composite added 0.3% on growing investor confidence despite the challenging economic backdrop.

Improving Chinese returns is one of the areas Brian Christiansen, Executive Managing Director at Sands Capital, sees as helping emerging market equities in the coming years. He notes: “Over the past five years, several headwinds put pressure on emerging market equities. Looking ahead, we’re optimistic that those pressures, ranging from a strong US dollar to Chinese equities’ drag on returns, will decrease and that significant growth drivers have the potential to propel select emerging markets equities and our Emerging Markets Growth strategy to generate attractive returns.”

Wealth Check

Downsizing. It could be the solution to a house that’s become too big or costly to maintain. Or the way to release money to live your retirement to the full, or even help out your children. It could mark the beginning of a brand-new single life, if you’re starting over.

Family homes often come with high maintenance and running costs, especially energy bills. Downsizing in these circumstances is often the right move. If you downsize, you may be able to pay off any remaining mortgage and release a significant lump sum at the same time.

Paul Johnson is SJP’s Head of Mortgages, Development and Technical Consultancy. He’s seeing a new trend in the market – older people looking to downsize joining forces with their children who have outgrown their current property.

“There’s a rise in older people selling up and moving in with their children, especially in the last 18 months.”

"It’s mutually beneficial – the children upsize, with the help of money from their parents. And the parents downsize."

There are some tax implications involved in this option, so you should always talk to your financial adviser as a family, before starting to look for the perfect family home with an annexe.

Then there’s the cost of downsizing, which can quickly add up. Paul’s key advice for anyone downsizing is ‘sell before you buy.’

"They want to downsize too but can’t sell their current one, so they take out a bridging loan. Used correctly, they’re a good way to bridge the gap between one property and the other.”

"But bridging loans can be more expensive than standard mortgages, and there may be hidden charges when you repay the loan. These can be punitive."

“If you can rent, or stay with family whilst you look, you won’t feel rushed into a costly decision. You’ll be a cash buyer too, giving you a head start in the market."

Whatever your situation or reasons for considering a downsize, always take financial advice well ahead. We can help guide you through this major life change.

Your home may be repossessed if you do not keep up repayments on your mortgage.

In The Picture

Despite a flat economy, UK wage growth has remained relatively high compared to the rest of Europe and the US.

The Last Word

"To be consistently at your best is probably impossible, but that is what we're going after, like I keep on saying."

Andy Farrell, Head Coach of Ireland’s National Rugby Team, celebrates winning the Six Nations over the weekend.

Sands Capital 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.

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SJP Approved 18/03/2024