Week Watch - 25 March 2024

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Stock Take

The Japanese revere the country’s spectacular cherry blossom season as a symbol of new beginnings. In ending eight years of negative interest rates, the Bank of Japan (BoJ) is hoping its decision heralds a new era for the country’s stagnating economy.

Investors had to navigate a minefield of central bank meetings last week. On Tuesday, the BoJ was the first of no fewer than 11 to announce their latest interest rate decisions. In a widely expected move, it increased interest rates from -0.1% to a range of 0%-0.1%; the first time in 17 years that the cost of borrowing has been raised.

The theory behind negative rates is that, faced with paying to deposit money in a bank, people will instead be encouraged to spend it. Most policymakers accept they didn’t work as well as planned, and Japan’s move means there are no longer any countries with negative rates.

The BoJ also abandoned its yield curve control policy, under which it has bought Japanese government bonds to control interest rates. Strong wage growth, and core consumer inflation holding at the bank’s 2% target, finally prompted it to act, although it signaled that further rate hikes were unlikely for now.

“Given the situation with wages and consumer inflation, the BoJ might have been expected to go further with rate hikes; but the elephant in the room is that Japan’s sovereign debt to GDP ratio is so high that it can’t afford to,” warned Martin Hennecke, SJP Asia’s Head of Investment Advisory and Communications. “However, persistent negative real rates should continue to encourage Japanese retail investors into the market.”

Elsewhere, central bank announcements were largely a copy and paste of their most recent statements. As anticipated, the US Federal Reserve (Fed) held rates steady, but indicated that it expected to reduce them by three-quarters of a percentage point with three cuts by the end of the year. This is despite the Fed expecting stodgier progress towards its 2% inflation target.

"We want to be careful and, fortunately, with the economy growing, the labour market strong and inflation coming down, we can be”, said chairman Jerome Powell at a press conference after the Fed's meeting. The resilience of the jobs market was underlined by news that the number of new claims for unemployment benefits unexpectedly fell in the previous week.

Policymakers expect the US economy to grow 2.1% this year, a significantly punchier outlook than the 1.4% they anticipated in December. Renewed optimism over a US rate cut in June prompted Japan’s Nikkei 225 index and Wall Street to notch new record highs.

There was one central bank surprise, as the Swiss National Bank dropped its main interest rate by 25 basis points to 1.50%, making Switzerland the first developed economy to cut rates in this cycle.

Investors were cheered by the narrative that, despite residual inflation concerns, central banks are in a relatively comfortable place and that global rate cuts are coming soon. Benchmark share indices in both the US and Europe extended their record highs. The S&P 500 posted its biggest weekly gain of 2024.

There was some better news for the UK economy, as official data showed inflation slowed in February to 3.4% from 4%, the weakest pace of price rises since September 2021. However, the UK still has the highest rate of headline inflation among the G7 advance economies, while consumer prices have increased by more than 21% since the end of 2020.

The Bank of England (BoE) was the final central bank to show its hand last week. Although encouraged by the news on inflation, the Monetary Policy Committee held interest rates at 5.25% for the fifth time in a row, voting by a majority of 8-1 to keep rates unchanged.

The BoE suggested the UK’s short-lived recession might already be over and that the economy would return to growth in the first quarter, citing improving consumer confidence. However, BoE chief Andrew Bailey said that, while “things are moving in the right direction”, it was “not yet” the time to begin cutting rates. That uncertainty was underlined on Friday by news that UK retail sales flatlined in February, as wet weather and cost-of-living pressures kept shoppers at home. The news didn’t prevent the FTSE 100 drawing close to its all-time high by the end of the week.

Diminishing recession fears and growing rate cut hopes have seen risk assets deliver some bumper returns as of late, but Mark Dowding of BlueBay Asset Management urges caution. “Policymakers are feeding the markets greed, and history tells us that markets can often be most vulnerable when risk attitudes become complacent. Greed has consequences, and it rarely ends well. Investors need to remain vigilant and disciplined.”

Wealth Check

Asking ourselves those searching questions – how do I see my older self and what life am I leading? – is something that many of us struggle with. It has a direct impact on how we save, and our long-term financial planning.

Self-visualisation helps you set your goals, but money makes them happen. Knowing your goal motivates you to start making smart, practical financial steps towards the future you imagine.

A good starting point is to put aside a regular sum of money in an easily accessible account or Cash ISA for emergencies. You can save another regular monthly amount in other tax-efficient ISAs, or your pension for medium-and long-term goals.

You have plenty of options about where to save – from Stocks & Shares ISAs, Cash ISAs or other investments, and pensions. Each has different tax advantages, pros, and cons, so taking expert advice will help you feel confident about your choice.

A workplace pension can add a real boost to your savings – so if you have one, check how much your employer is currently contributing. Under an employee scheme, the more you put in, the more many employers will match. And if you’re self-employed or a business owner, the sooner you start a private pension the better.

In general, the longer you’re investing, the more your money benefits from compounding – essentially ‘interest on interest.’ If you’re investing for 20, even 30 years, this growth accelerates the longer your money stays invested. Starting early is the key.

It can be tempting to opt out of a workplace scheme, especially if money is tight. Or, if you’re in charge of your own pension you may think that skipping the odd contribution – or even pausing for a few months – won’t make a difference.

But pausing regular contributions can have a long-term impact on the power of compounding, and the size of your pension pot when you’re older.

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.

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

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.

St. James's Place does not offer Cash ISAs.

In The Picture

Unfortunately, in today’s world, fraud is a real risk everyone faces. Here are some simple steps you can take to protect yourself:

The Last Word

“But I'm glad that I kind of did it for women worldwide as well - not just runners - but any woman that wants to take on a challenge and maybe doesn't have the confidence.”

Runner Jasmin Paris on becoming the first woman to complete the Barkley Marathons. She is one of only 20 people to have done so since 1989, when it reached its current length.

BlueBay is a fund manager for St. James's Place.

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? S&P Dow Jones LLC 2024; 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 25/03/2024