WEEKWATCH, 10 May 2021

Stock Take

Last week brought mixed news for investors in one of the world’s largest stock market indices. On the one hand, the S&P 500 Index of large US companies hit record highs. On the other, a monthly release of unemployment numbers tempered investor enthusiasm by demonstrating the ongoing economic damage caused by COVID-19.

The numbers showed that job creation in the US declined last month, falling below the figures expected by many analysts and economists. Around 266,000 new jobs appeared on company payrolls in April, which, despite heading in the right direction, was a considerable way off the million that were expected by some analysts and economists. Despite the improvement in employment in recent months, there were still over eight million fewer Americans working last month compared with February 2020. The news appeared to focus minds on the length of the road to recovery ahead.

As a result, last week’s market discussions had a familiar tone. Investors and forecasters were looking ahead to what the latest figures suggest about the health of the global economy due to COVID-19, what they suggest about the prospect of higher inflation, and what the policies of the world’s governments and central banks will need to look like in response.

Last week, the US Secretary of the Treasury, Janet Yellen, gave a talk at a conference that generated some headlines. Talking at an event hosted by The Atlantic magazine, she said that interest rates might need to rise in order to stop the US economy from ‘over-heating’ as its recovery begins in earnest over the summer. “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat”, she remarked. She dialled back her comments later in the day, but the statement did appear to unnerve some in the audience.

Since vaccine rollouts began picking up pace at the end of last year, investors have been trying to assess whether the speed of the expected economic recovery could lead to a phase of higher inflation. Some are concerned that it might eventually cause governments and central banks to make policy changes such as increasing interest rates, which were lowered last year to help keep the cost of borrowing down and help the market recovery.

Higher interest rates could be a challenge to the share prices of the companies that have seen their valuations soar over the past 12 months. Some large technology companies, for example, are trading at high valuations relative to their earnings. This is partly due to the way that low interest rates boost the share prices of fast-growing companies. Since November, the share prices of such companies have underperformed the share prices of those that were worst affected by the pandemic last year.

Investors are naturally focussed on the signals being given out by policymakers. However, while remarks such as Janet Yellen’s last week do generate headlines, they can also be seen as the responsible thing to do in an uncertain environment. Rather than hoisting up interest rates with no warning, it’s arguably better to give an insight into how policymakers are thinking in order to cause less disruption in the long-term, wrote Mark Dowding of BlueBay Asset Management, co-manager of the St. James's Place Strategic Income fund.

“It can be viewed that Yellen is just laying the groundwork, so that the nation and financial markets are prepared for rates to rise as the economy bounces back and returns to full employment in the months to come,” he wrote.

When deciding on their investment strategy, fund managers think carefully about the future investing environment. This includes topics such as inflation and interest rates, as well as the underlying prospects of the companies (or other types of investments) in their fund. For example, if it looks like inflation is going to return in the future, funds can be adjusted so that they’re better prepared for that possibility (see In the Picture). The best way to deal with uncertainty is to invest for the long-term with a well-diversified set of investments. If your funds are invested across a wide range of assets, then their performance won’t be overly reliant on any one outcome.

Wealth Check

Ultra-low interest rates in the UK have tempted retirees to consider making higher risk investments in the hope of achieving better returns, according to the Financial Services Compensation Scheme (FSCS).1

Only 12% of retirees took financial advice when investing in higher risk areas, the research shows. This has led some people to purchase products without FSCS protection, which potentially jeopardises the security of their life savings.2

Whilst it’s common for your pension fund to remain invested while you’re in retirement, it’s important that the level of investment risk is carefully managed.

Your adviser can help you to think about how your drawdown funds should be invested. This is because you are asking your pension fund to work a lot harder, to provide an income but also maintain your capital and hopefully continue to grow.

“You really need an adviser at this point, because it can be complicated,” says Danni Brotherston, Head of Advice Policy and Development at St. James's Place.

Your retirement strategy – the kind of lifestyle you would like to lead, the income that you need to achieve this, and how long you expect to live – needs to be factored into your drawdown plans.

“Advisers play a big part in helping you understand what you need to know, the different types of risks, how these may change over time, and what can be done to mitigate them.”

To start a conversation about your risk tolerance in retirement, get in touch with your St. James's Place Partner.

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 deposit account with a bank or building society.

1 Source: OnePoll on behalf of FSCS, 2000 retirees aged 55-75, February 2021

In The Picture

Over the past few months there’s been plenty of talk about whether inflation will return as the world’s recovery speeds up. But what does it mean for investors? As Clyde Roussow, a fund manager for Ninety One explains, carefully selecting the companies you invest in can act as protection.

The Last Word

"Over the last 27 years, we have raised three incredible children and built a foundation that works all over the world to enable all people to lead healthy, productive lives. We continue to share a belief in that mission and will continue our work together at the foundation, but we no longer believe we can grow together as a couple in the next phase of our lives."

Philanthropists Bill and Melinda Gates announcing the end of their marriage last week.

BlueBay 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.

Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ?LSE Group 2020. FTSE Russell is a trading name of certain of the LSE Group companies.

“FTSE Russell?” is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

? S&P Dow Jones LLC 2021; all rights reserved