WEEKWATCH - 24/05/2021

Stock Take

Equity markets followed a familiar pattern last week to the past few months. Investors were focused on news about rising inflation, and prices were slightly more volatile in response to evidence that it is growing as successful vaccination programmes allow economies to re-open. Stock markets in the US and UK ended the week slightly lower, although the US S&P 500 Index remains close to its all-time high.

The prospect of higher inflation has been generating more headlines in recent weeks. UK inflation more than doubled to 1.5% in the 12 months to April, according to recently released data (see In the Picture below). Meanwhile, consumer prices in the US rose 4.2% over the same period. The prices of certain commodities, such as lumber, have risen in recent months as the world economy has begun to re-open and demand has surged.

One of the most pressing questions on investors’ minds right now is whether the higher inflation that is currently taking place will be short-lived, or whether it will keep rising to the point that it prompts central banks around the world to lift interest rates. Low interest rates, plus other forms of support from central banks, have been positive for asset prices since the pandemic took hold and have helped to support markets since they were stepped up last year.

“We don’t have a crystal ball as to what’s around the corner, but as investors we just need to assess the range of probabilities. And it’s clear that there has been a shift in the balance of probabilities compared to when the positive vaccine news emerged in November. Since then, both the MSCI World and S&P 500 have risen,” wrote Johanna Kyrklund, Chief Investment Officer at Schroders and manager of the St. James's Place Managed Growth fund.

She added: “So, the potential upside remaining has probably shrunk, while the potential downside has grown. The odds aren’t as attractive now, but it’s too early to be overly defensive. There is no recession on the horizon; you need to stay invested and you can’t sit in cash.”

On Wednesday last week, the Federal Reserve published the minutes of its most recent meeting on the subject. According to the release, its members believe that the bank should soon discuss “a plan for adjusting the pace of asset purchases”. That announcement appeared to act as reassurance that the US central bank is in no hurry to immediately cut back its support.

Of course, when fund managers are building their portfolios, they take into account a wide range of future possibilities. A period of higher inflation is just one of the potential scenarios that they weigh up when selecting which investments to make. For example, Hamish Douglass, co-founder of Magellan, which manages the St. James's Place International Equity fund, believes that his portfolio is well-placed to deal with a new investing environment.

He expects inflation to be a drag on the share prices of ‘cyclical’ businesses, which tend to perform well in times of economic growth. It may also be a drag on the more speculative stocks (such as innovative technology businesses) whose share prices have soared over the past year.

“Around 50% of our portfolio in invested in defensive, high quality assets. That could be businesses like Nestle and PepsiCo, or it could be McDonald’s. Those assets tend to do very well when markets get scared. It’s why, when markets go down, our strategy tends to protect people’s capital so well. It hasn’t been the best place to be in the past four months, but I’ve got a lot of confidence that the structure of our portfolio will give a lot of resilience,” he added.

Wealth Check

How much you should save for retirement is a popular topic, and rightly so – it’s often the largest pot of money we will accumulate in our lifetimes.

Less has been said, however, about when we should save for retirement. It’s a challenge that is unique to individuals, as our circumstances and levels of income tend to be broad ranging, but one that can be mitigated through thoughtful planning.

New research from the Institute for Fiscal Studies (IFS)1 reveals that there are good reasons why individuals should not save for retirement at a constant rate throughout their entire working lives. They argue that, just as our incomes and spending needs fluctuate throughout life, so should our pension contributions.

Those who are approaching peak earnings but are also planning to start a family should consider how their pension contributions may need to flex to accommodate the higher household spending that comes between the years that a child is born and leaves home, says the IFS1.

“Most parents aiming to smooth their living standards over their lifetime should save relatively more for retirement before their children arrive, and/or after they have left home,” they recommend.

They also suggest that graduates who are repaying their student loans should consider increasing their pension contributions by the amount of their repayments once their loans are repaid or written off.

Your retirement savings strategy will work best when it is tailored to you and your circumstances. Ensuring that you’re saving what you need to for the retirement you have in mind is part of the process – making this adaptable to your present day life is also important. This is where financial advice can make a real difference.

For more on this topic, speak to 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 selected and may fall as well as rise. You may get back less than the amount invested.

1Source: Institute for Fiscal Studies, ‘When should individuals save for retirement?’, May 2021

In The Picture

UK inflation has risen in the past month. It rose due to higher oil prices, rising household bills, and after shops re-opened when lockdown restrictions were eased in April, according to the Office of National Statistics. The sharp increase also reflects the fact that prices were low at the start of the pandemic.

Even with last month's rise the rate of inflation is still below the Bank of England’s target of 2%. Whether it continues rising in the coming months will be influenced by how much UK households spend of the savings they have accumulated since the pandemic began.

The prospect of increased living costs can be concerning for some people, especially those in retirement. Your St. James's Place Partner can help you design and review a financial plan that gives you the best chance of keeping up with inflation.

The Last Word

“Our mission, our purpose is not going to change. It is the opposite. With scale we can have a greater positive impact on the planet.”

Toni Petersson, CEO of oat milk producer Oatly, which went public last week for $1.4 billion.

Magellan and Schroders are fund mangers 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