WEEKWATCH 22 March 2021

Stock Take

The major US stock indices were choppy again last week, led up and down by the same themes that have been driving markets over the past few weeks.

As the world economy prepares to reopen thanks to vaccine successes, financial markets are weighing up what the investing landscape will look like months from now. The expectations are that a resurgence of economic activity will bring higher inflation, eventually causing governments and central banks to reverse the policies that have supported asset prices – and which have gone into overdrive since the pandemic took hold last year.

Forecasters are predicting that higher inflation will return once the economy begins to reopen, raising the prospect of higher interest rates. The Federal Reserve (which sets US rates) said last week that it doesn’t expect to raise interest rates until 2023, which appeared to soothe concerns in the immediate aftermath of the announcement – with US stocks closing higher.

On Thursday, there was another sell-off in the US government bond market. This appears to have caused some investors to exit their positions in high-growth and technology stocks – contributing to a 3% slide in the technology-heavy Nasdaq index on the day.

By the end of the week, however, technology shares had settled for the time being. They rose on Friday while the wider US stock market fell slightly.

How long will UK rates stay low?

Growth, inflation, and interest rates were also being discussed by UK policymakers last week. The Bank of England upgraded its UK economic outlook, but also said that it won’t raise its historically low interest rates in the near future.

The Monetary Policy Committee, which sets interest rates, said that it wouldn’t change either the main base rate or the volume of quantitative easing. It stressed that rates won’t go up until it sees inflation staying above 2%.

Futures markets are predicting a modest rate increase next year, although Capital Economics believes it won’t happen until later than that.

“We think the markets have gone too far in expecting interest rate hikes from mid-2022. We think that rates won’t rise above their current rate of +0.10% until 2026,” wrote Ruth Gregory, Senior UK Economist.

For savers in the UK, this means that returns on cash are unlikely to improve much for the foreseeable future. Indeed, in the 12 months since the two emergency base rate cuts at the start of the pandemic, average savings rates across all accounts have continued to fall. With the probability that the era of record- low interest rates will stretch well into this decade, those who are overly reliant on cash savings face a real threat to their long-term financial security.

When the chips are down

Meanwhile, officials from China and the US met last week for the first high-level discussions between the two powers since Joe Biden took office. The meeting was tense, with both sides using their public opening remarks to criticise the other.

The meeting highlights how the relationship between China and the US will remain a driving force of markets for years to come.

While COVID-19 has been the most urgent problem for governments since last year, and has been the single biggest factor affecting markets, it’s likely that US–China tussles over trade, technology and politics will become centre stage in the not-too-distant future.

One of these flashpoints may be over the island of Taiwan. The small East Asian nation is seen by China as a breakaway province that will one day be reunited with the mainland again. It is also the world’s leading producer of semiconductors, which are an important feature of microchips (and therefore lots of different technological devices).

Last week, Samsung Electronics warned that there is a “serious imbalance” in the world’s semiconductor industry. The Korean company, which is the world’s largest computer chip manufacturer, said that the shortage is affecting its operations.

The news has renewed concern around the world about chip shortages, which have already affected car manufacturers this year and could cause problems for many others.

“Semiconductors have become the new oil,” said Ajay Krishnan from Wasatch Advisors, manager of the St. James's Place Emerging Markets Equity fund, adding: “They are the key factor of production for the modern economy. Everything grinds to a halt if you don’t have access to them.”

For active managers, however, he believes that the unknowns surrounding these supply issues could be a good thing.

“It isn’t completely clear how all this will play out, but we think it presents opportunities as well as challenges.”

Wealth Check

There are just two weeks left to take advantage of this year’s tax-saving pension and ISA allowances.

There were 22 mentions of pensions in the Red Book documents that accompanied this month’s Budget.1 That might sound a lot, but it’s the lowest number in any Budget since pension freedoms were introduced in 2015.

So, are further pension reforms still on the government’s agenda? The freeze of the lifetime allowance was not unexpected, but rumours of cuts to pensions tax relief again proved wide of the mark. Tax consultations which will be published tomorrow by the government may provide more clues about the future direction of pensions taxation.

But given the Treasury’s need to begin balancing the books, it seems certain that the personal tax exemptions, allowances and reliefs available now will not become more generous. The chancellor’s decision to also freeze Income Tax and Capital Gains Tax allowances underlines the value of tax shelters such as ISAs and pensions, and the importance of ensuring that the maximum appropriate use is made of opportunities to invest before the end of this tax year.

Both options offer important advantages for retirement savers, so a flexible and tax-efficient retirement plan will normally involve a combination of savings vehicles. Advice is critical to ensuring the right balance.

Effective tax planning can add real value to our wealth over the long term. As the tax burden looks set to rise to its highest level for 50 years2, it will become even more important.

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

The favourable tax treatment of ISAs may not be maintained in the future and is subject to changes in legislation.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

1 FTAdviser, March 2021

2 Office for Budget Responsibility, March 2021

The Last Word

"Today I am monumentally fed up with the idea of writing. I haven’t actually written anything for two days, and that makes me fed up as well."

A newly-unearthed archive reveals that Douglas Adams, one of Britain's best-loved science fiction writers, suffered from the occasional spell of writer's block.

Columbia Threadneedle and Wasatch Advisors are fund managers 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