Week Watch - 21 October 2024

Your 7-minute market update

Stock Take

With the US election just two weeks away, and the UK budget due next week, investors are facing greater uncertainty at the moment. However, this didn’t stop equity markets in either country from rising last week.

Starting with the UK, the FTSE 100 rose 1.27% on news that inflation continued to fall in September. According to the Office of National Statistics (ONS), headline CPI was just 1.7% last month, compared to 2.2% in August, and is notably below the Bank of England’s 2.0% target. This marked the first time CPI was below 2.0% since 2021.

According to the ONS, transport, including motor fuel and air fares, was the largest contributor to the falling inflation figure.

Core inflation, which doesn’t include energy, food, alcohol and tobacco, was 3.2% for the same period – down from 3.6%.

These figures support the view that the Bank of England will reduce rates when its Monetary Policy Committee meets on 7 November. But with the Budget taking place next week, one should be careful making too many assumptions on another rate cut.

Although the Budget isn’t until next week, the Government spent much of the past days laying the groundwork for what is expected to be a swathe of tough measures, with numerous tax rises being speculated about.

One such increase is a potential increase in National Insurance contributions from employers. Claire Trott, Divisional Director of Retirement & Holistic Planning commented: “It has been reported that a 2% raise in the rate could bring in nearly ￡17bn to the Treasury which would go a long way to address the fiscal challenges. However, the impact that it will have on businesses that are highly dependent on workers, such as the service industry, would mean that the hardest hit industries will reconsider future staffing levels or even pay rises come the new year.”

Within the EU, the European Central Bank enacted its second straight interest rate cut at last week’s policy meeting. With the key deposit rate reduced by 0.25% to 3.25%.

This followed an equivalent move last month with the Bank having now cut rates three times from their peak levels. The latest round followed a downgraded inflation figure for September, which was reduced to 1.7%, half a percentage point below the level recorded back in August.

Europe has been battling notable economic stagnation in many of its economies this year, with Germany being the largest economy amongst the group. Reducing interest rates makes borrowing money cheaper, and can spur higher levels of spending, and therefore economic growth.

Lower inflation combined with this economic slowdown meant that the rate cut was widely expected, and didn’t provoke a significant reaction from markets. The MSCI Europe ex UK index rose just 0.2% over the week.

In the US, all eyes remain firmly on the election at the start of November. Although polls remain close between the two Presidential candidates, recent betting odds have shifted in favour of Trump. Yet, with around two weeks to go, the race remains tight, and a lot could happen in the coming days.

As well as the Presidential election, there are also a number of seats in the Senate and Congress up for grabs. The ability of either Presidential candidate to push through their policies will depend on who controls the houses of Congress.

Despite the uncertainty around the election, US equities continued their recent advances, with the S&P 500 finishing the week up 1.2% - partly thanks to some strong company results.

Finally, Chinese shares were lifted, after the country’s central bank unveiled additional support measures for the country.

Wealth Check

Although inflation is now down to just under 2%, consumer prices remain high, and many households are still keeping a tight rein on finances. According to the Scottish Widows Retirement Report 2023, the number of those reducing their pension or savings contributions, has risen to 13%, up from the latest figures available in 2023.1

“We’re not out of the woods yet,” says Tony Clark, Senior Propositions Manager at SJP. “But if you’re looking at where you could make savings, pausing your pension should be one of your last resorts. You could lower your contribution, or look for other smaller economies you could make, before pressing pause on your pension completely.”

On the face of it, taking a break from paying into your pension can look tempting. After all, pension contributions aren’t mandatory in the UK, and it could be decades before you need to access your pension savings. So, when financial pressures are intense and you’re struggling to meet basic household costs, it is one of your options in the short term but it’s important to know all the facts.

While reducing the amount you pay in – or stopping altogether – might make it easier to meet certain short-term needs, it’s a choice that could significantly impact your standard of living later in life, when you have fewer other options open to you.

For one thing, it means that you no longer benefit from the tax relief that the government pays on those contributions. That relief is currently 20% for basic rate taxpayers, 40% for higher and 45% for additional taxpayers*. You may also be missing out on the top-up payments that many employers add to employee pension plans.

In addition, the money you contribute to a pension benefits from the power of compounding. This is the snowball effect that occurs when any growth in the investments held in your pension goes on to generate its own growth.

If you stop your contributions entirely, the value of your pension isn’t just affected by the loss of the money paid in, but also a potentially by the loss of any compounding growth from money that would have been paid in. So you may be losing out on more than you realise.

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.

*This is on the basis that any tax relief over the basic rate is claimed via your annual tax return.

Sources:

12023 Retirement Report, Scottish Widows, June 2023 (The survey included general questions on pensions and retirement planning and was carried out online by YouGov Plc: across a total of 5,072 adults aged 18+, weighted to be representative of the UK population.

The Last Word

“Unless you put Britain on a stable economic and financial path, we’re not going to be able to get that investment in. And that will mean some difficult decisions, including on taxation.”

UK Chancellor Rachel Reeves, gives further indication that the Budget will include a number of tax rises.

SJP Approved 21/10/2024