Stock Take

Over the last century, investors have frequently been concerned about the possibility of the United States defaulting on its debt, as the country has repeatedly faced political challenges in raising its debt ceiling.

In the United States, there are legal limits on the amount of debt the country can accumulate. When the debt reaches these limits, lawmakers must either agree to increase the debt ceiling or the US would be forced to inform its lenders that it cannot repay them.

The US has raised its debt ceiling 78 times since 1960, with 20 of those increases occurring since 2001.

With America continuing to borrow, the US Government must once again look to increase its debt ceiling. With a deadline for raising the ceiling or else running out of money rapidly approaching, investors were once again forced to ponder what would happen if the US were unable to fulfil its debt obligations, adding uncertainty to global markets last week.

In the UK, concerns regarding the US situation and unexpectedly high inflation data led to a decline in the markets last week. The FTSE 100 and FTSE 250 indices declined 1.7% and 2.6% respectively over the week.

Aside from concerns from across the Atlantic, the primary factor contributing to this decline were inflation figures announced by the Office for National Statistics. In April, the annual CPI inflation rate dropped to 8.7% from 10.1% in March. However, this decrease was largely due to the expiration of the comparison period that included the surge in energy prices resulting from the conflict in Ukraine at the same point last year. Core inflation, which excludes volatile energy, food, alcohol, and tobacco prices, reached a 21-year high of 6.8%, up from 6.2%.

This raised market expectations of a 13th consecutive interest rate hike by the Bank of England in June. Rising interest rates concern equity investors as they make it more expensive for businesses to borrow for improvements or to service existing loans.

On a positive note, the International Monetary Fund (IMF) revised its forecast for the UK economy. It is now predicting a 0.4% growth in 2023. This revision is an improvement from their previous projection in April, when the IMF said it anticipated a 0.3% contraction in the UK economy. The IMF attributed the more positive outlook to resilient demand and falling energy costs, improving investor sentiment.

In the United States, concerns about the debt ceiling negotiations also impacted the stock market.

On Tuesday, the S&P 500 Index experienced a 1.1% drop, the largest fall in May. Reports indicated that some Republicans in the House of Representatives questioned the urgency of the deadline set by US Treasury Secretary Janet Yellen, known as the ‘x-date’, regarding the government’s ability to meet its financial obligations.

President Joe Biden’s return from Japan marked the resumption of these negotiations, and a deal was only agreed between Biden and Republican House Speaker Kevin McCarthy at the end of the week. The Bill still needs to pass Congress at the time of writing.

Historically, Congress has managed to reach a debt-ceiling deal in the ‘last hour’ many times before, usually with concessions from both sides. Despite progress over the weekend, pressure remains on the US Government to get the deal over the line.

Looking ahead, the US Federal Reserve is due to meet on June 14. In recent weeks, several Fed officials have re-emphasised their focus on combating inflation, which remains at elevated levels despite recent falls. Although headline inflation showed some improvement, the Personal Consumption Expenditures price index (PCE) inflation data increased last week, and services inflation continues to persist due to a robust labour market and high wage growth. Additionally, the US GDP growth for the first quarter was moderately revised upward to 1.3% annualised giving policymakers more room to increase interest rates.

Wealth Check

Capital Gains Tax (CGT) is a complicated area of tax-planning and can trip many of us up. It’s wise to get your head around CGT and take financial advice, so you don’t end up paying more than you need to.

CGT is a tax on the profit when you sell something that has increased in value. CGT applies only to the gain you make, not the amount of money you receive for the asset. So, if you bought some shares for £10,000 and sold them for £15,000, your capital gain or profit is £5,000. That’s the amount assessed for CGT.

Every tax year you have a personal CGT allowance. In the UK for 2023/24 it’s £6,000 reducing to £3,000 from April 2024 for individuals. This means you can currently realise gains of up to £6,000 (after taking away any losses and applying any reliefs) and pay no CGT. If you don’t use your allowance in a tax year, you can’t carry it forward like some other tax allowances.

Gains from almost any kind of personal possessions can be liable to CGT, including shares and investments, buy-to-let properties, second homes, and other possessions like art. A financial adviser can help work out how much you will pay.

It’s important to remember you don’t have to pay CGT if all your gains in one tax year are below your tax-free exemption.

There are certain assets you don’t have to pay CGT on, such as assets held in a pension or ISA. Nor do you have to pay CGT if you sell your car, or the home you live in. But if you have used the property for a business, or let it out, or it’s your second home, then you’ll have to pay CGT.

You don’t have to pay CGT on assets you give away to charity. However, you could be liable if you sell an asset to charity for more than you paid for it, or less than its market value.

A few ways you could reduce your CGT bill include:

• Gifting assets to a spouse or partner
• Increasing your pension contributions
• Making full use of the annual CGT allowance
• Maintaining or improving your assets (for example, you can write off costs for improving a holiday home against tax).

Taking good advice from a financial adviser can help you feel confident about your decisions, and comfortable that you are in control of your financial affairs. Just get in touch to talk it through.

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.

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

In The Picture

Tax planning isn’t just something to think about at the end of the tax year – it’s worth keeping in mind whenever you make a financial decision.

https://sjp.getmediamanager.com/video/6475b38f3f064f3cf808d422/53c4e5f5150ba09b0f8b4594?mute=false&autoplay=false&downloadable=false&pageurl=https%3A%2F%2Fpartnership.sjp.co.uk%2Fbarrywells%2Farticle%2Fdetail%2Fsjpp%2Fweekwatch-30-05-2023.html

The Last Word

We should come together in unity and solidarity. We call for this with all our heart.

Turkish President Erdoğan celebrates winning another term after last week’s election.

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 2023. 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 2023; 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 30/05/2023