WeekWatch 19 August 2024

Stock Take

Worries around a potential US recession continued to fade last week, as a raft of positive economic data appeared to help build confidence in global markets.

Chief among these was UK GDP, which grew by 0.6% in the second quarter of 2024, compared to the first quarter.

The first quarter itself saw some strong growth. This means GDP has increased by 0.9% since the second quarter of last year despite the recession at the end of 2023.

For the Labour government the increase in GDP will be an encouraging sign, as it continues to lay out its economic plans. The Chancellor is expected to be planning a series of tax rises for the Autumn Budget in October, so any additional economic headroom will be appreciated.

However, Hetal Mehta, Head of Economic Research at St. James's Place, notes: “It's been an exceptionally strong first half of the year so a near-term reversion back to a more modest pace of growth would seem likely.”

It should also be noted there was no GDP growth in the month of June, partly as a result of businesses delaying purchases until after the General Election.

Inflation continues to provide an example of the ongoing challenge the UK faces. Although earlier this year it reached the Bank of England’s 2% target, the Office for National Statistics last week said it rose to 2.2% in July. The BoE expects it to increase to around 2.75% in the coming months, before gradually reducing back to 2% next year.

It should be noted that inflation had been expected to increase to 2.3% in the period, due to rising energy prices. Core inflation, which doesn’t include volatile food and energy prices, actually fell from 3.5% to 3.3%.

The inflation figures were received positively by markets and, together with the encouraging GDP figures, helped the FTSE 100 increase 1.75% last week.

That is not to say the UK isn’t facing headwinds. Economic growth is expected to slow in the second half of the year, and although the Bank of England has begun reducing interest rates, future decreases are expected to be rather gradual. Mehta also notes: “Interest rates are coming down, but many people will be refinancing mortgages on to higher rates. There is little scope for a big fiscal injection. That said, household savings have been building so there is scope for consumers to run down savings and spend more.”

Elsewhere, there was encouraging news in the US, where inflation fell for the fourth consecutive quarter to 2.9%. This means that US inflation is now at its lowest level since the first half of 2021.

Markets are increasingly expecting the Federal Reserve to make significant cuts to interest rates in the US this year. This view, however, is not universally shared. Mark Dowding, chief investment officer at Bluebay, notes: “Substantial Fed easing will occur if growth slows materially and, of course, this is a plausible scenario. However, in the short term, we are more inclined to believe that the economy can retain momentum, and this will mean that rates decline on a much more modest trajectory.”

The cooling inflation data was matched with stronger than expected US jobs and retail figures, which combined to help push recession fears well and truly into the background. As a result, US markets continued their recovery from their late July and early August falls. The S&P 500 rose by 2.89% over the week, while the technology heavy NASDAQ jumped 4.24%. The S&P 500 is now less than 2% from its July peak.

Japanese equities were the biggest losers from the recent market volatility, however, the Nikkei leapt 6.56% last week prompting hopes of a potential recovery. Despite this, the index remains nearly 10% below its July level as rapid Yen appreciation has reduced export income.

Wealth Check

After your early-stage business has made some sales, it’s tempting to look at your bank balance and think you’re in a great position. However, even with healthy customer numbers and revenue, in a small and growing enterprise, things can get bumpy quickly if you don’t implement sound financial management measures.

The key is to keep a continuous cash flow through those difficult early months and years until your business becomes more stable. Without such measures, many enterprises don’t make it to their second or third year.

One reason start-ups fail around years two and three is that they grow too fast and over-trade. These firms don’t have too few customers, they have too many, and lack the cash to fulfil orders and buffer the gap between orders shipped and payments received.

One of the biggest risks to start-ups is running out of cash while they wait for invoices to be paid. So, a key goal is to minimise days sales outstanding (DSO) – the time between shipping goods and receiving payment. You can do this in many ways, starting with prompt invoicing processes and a robust credit-collection function.

Limited companies: separate your personal and business finances

Limited-company owners must have a business account and a personal account. They can sometimes still blur the boundaries between their personal and business finances, but it’s a risky practice.

One temptation for a successful start-up owner is to take too much cash out of the business early on. This can weaken it; for example, if you receive a large tax or supplier bill and find you don’t have enough cash to pay it, which can then have knock-on effects that quickly spiral.

Another example of blurring the lines between business and personal finances is using your business account or credit card to pay for personal items. This may not seem like a big deal at the time, but if you don’t document and report this and handle the accounting properly through the director’s loan account, it could come back to haunt you, especially if it becomes a habit.

Any personal costs paid by the company that don’t go through the director’s loan account must be reported as taxable benefits. This ensures the director and the company pay any Income Tax or National Insurance due.

The levels and bases of taxation, and reliefs from taxation, can change at any time; The value of any tax relief is dependent on individual circumstances.

In The Picture

The recent market volatility over the past few weeks is another reminder that investments can fall as well as rise. Indeed, if we look back over the past 40 years, there have been some significant intra-year declines. However, it’s worth remembering that, over the long term, the stock market has been the best place to beat inflation and build for future growth.

Past performance is not indicative of future performance

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.

The Last Word

“I was going to sail around the globe in the world’s smallest ship but I bottled it.”

Comedian Mark Simmons' joke, which was voted the funniest joke at this year's Edinburgh Fringe Festival.

SJP Approved 19/08/2024