Stock Take

If all the hotdogs eaten by Americans on Independence Day were put end to end, they would stretch from Washington DC to Los Angeles more than five times.

It was a quiet start to the week as Wall Street was closed for the 4 July celebrations, although global stocks hit a two-week peak on Monday, encouraged by signs that cooling inflation might temper central banks’ appetite to hike interest rates further. Japan’s Nikkei index hit a 33-year high. Unfortunately, that optimism didn’t last.

Wall Street edged higher ahead of the holiday, despite news that the slump in US manufacturing deepened in June, reaching levels last seen when the nation was reeling from the initial wave of the COVID-19 pandemic. It was the eighth straight month of contraction. In addition to exorbitant borrowing costs, manufacturing is also being undermined by spending shifting to services from goods.

Markets were discouraged in the middle of the week by fresh signs of China’s faltering economic recovery. The Chinese services sector has rebounded strongly since the lifting of COVID-19 restrictions, but lost steam in the second quarter. A survey released on Wednesday showed activity expanded at its slowest pace in five months in June. Business activity and new orders also expanded at notably slower rates last month. China will release its second-quarter GDP data in mid-July.

Investors were also disappointed by news that eurozone business activity slipped into contraction territory last month. The downturn was broad based across the region’s dominant services sector. A separate survey also showed manufacturing activity contracted faster than originally thought.

On a brighter note, data published on Wednesday showed eurozone producer prices fell for a fifth consecutive month in May. Producer prices are seen as an early indicator of trends in consumer prices and the news will have been welcomed by the European Central Bank, which has so far failed to get inflation anywhere near its 2% target, despite raising borrowing costs to their highest level in 22 years last month.

But the reality check for markets came on Thursday, when data from US payroll processing firm ADP indicated that 497,000 private sector jobs were added in June, more than twice the consensus estimate. The news stunned Wall Street. While the strength of the US labour market is likely to push out the likelihood of recession in the US, it also appears to nail on more aggressive interest rate rises by the Federal Reserve to combat what it termed “unacceptably high inflation” and quash any hopes of a rate cut during 2023.

Wall Street suffered its biggest one-day fall since May, while the FTSE 100 fell to its lowest closing level in eight months. The two-year US Treasury yield hit a 16-year high in response to the news.

On Friday, the official nonfarm US payrolls report revealed a healthy but somewhat softer picture. A total of 209,000 jobs were added in June, below expectations of 230,000. Other data also suggested early signs of a cooling jobs market, but for now, it remains healthy and supportive of consumption more broadly. This is likely to embolden the majority of Fed officials who feel further rate hikes are needed and can be absorbed by the economy without causing a major meltdown in employment. Traders are pricing in a 92% chance of a hike at the Fed’s meeting later this month.

However, there was warning from Pimco, the world’s largest active bond fund manager, which said that markets are being too optimistic about central banks’ ability to dodge a recession. Its Chief Investment Officer, Daniel Ivascyn, noted that when interest rates have risen in the past, a lag of five or six quarters before the impact is felt has been “the norm”. “The more tightening that people feel motivated to do, the more uncertainty around these lags and the greater risk to more extreme economic outlooks,” he claimed.

In the UK, amid chaotic trading on Thursday, investors were betting that stubborn inflation will force the Bank of England to raise interest rates to a 25-year high of 6.5% by December, pushing the yield on 10-year gilts to its most elevated level since 2008. BoE governor, Andrew Bailey, reiterated that the central bank was focused on getting inflation “all the way down” to its 2% target.

The UK’s bank chiefs were hauled in front of the regulator over concerns that interest rates on savings are too low. The gap between the average two-year fixed mortgage rate and the average easy access savings account is almost double what it was in December 2021, sparking criticism that lenders could be making excess profits.

The meeting came as the Halifax reported house prices have fallen at their fastest rate in 12 years, dropping 2.6% on an annual basis. As mortgage rates rise, the squeeze on affordability will act as a brake on demand. There is also the ticking timebomb of mortgage holders whose fixed-rate deals will end in the next 18-24 months. The proportion of UK mortgages on a fixed rate of two years or more has risen from 16% in 2012 to 63% now.

Wealth Check

Many people know that they can gift money to reduce the size of their estate, but not everyone is aware that workplace pensions and death-in-service benefits can also be shielded from IHT.

Your death-in-service benefit is where a nominated beneficiary receives a lump sum should you die while still working for your employer. That lump sum then becomes part of your beneficiary’s estate. When they die, IHT becomes payable.

Although intended to help your family financially after your death, a lump sum payment from a death-in-service benefit or a workplace pension pay out, can actually be a mixed blessing.

The more your estate is worth, the higher the amount of IHT your family may need to pay. And nobody wants the taxman to be their largest beneficiary.

The same applies if your workplace pension would be paid as a lump sum to your beneficiary when you die.

Currently, in the UK, IHT is charged at a rate of 40% on the portion of the estate over a £325,000 threshold, or up to £500,000 if it includes a family home worth at least £175,000 that is being passed on to children or grandchildren or another direct lineal descendant. However, transfers between spouses and civil partners are tax-free.

Trusts can play an important role in legacy planning. And a legacy preservation trust or LPT from St. James’s Place, does exactly what it says on the tin – preserves your legacy so more money can pass to the people you love.

An SJP Legacy Preservation Trust is designed to hold assets such as death-in-service and pension death benefits so that your beneficiaries can access the money if they need to. But the money itself sits outside your estate, protected from tax, including IHT.

An SJP financial adviser can easily set up a legacy preservation trust for you. You’ll need to choose two trustees who will be responsible for the distribution of your money after you have died. You also need to inform your employer of your arrangements with an ‘expression of wishes’ form from your pension provider, and your HR department may be able to help you do this. This ensures that the money is paid into the LPT rather than to an individual beneficiary.

The Legacy Preservation Trust is an advised SJP product, available through a St. James’s Place Partner.

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

Trusts are not regulated by the Financial Conduct Authority.

In The Picture

When thinking considering income from your investments, sometimes it might be worth considering more than just dividends and interest.

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 Last Word

“It’s officially the hottest June on record for the UK, for mean temperature as well as average maximum and minimum temperature.”

Mark McCarthy, the Met Office’s Climate Science Manager, on June’s unusually warm weather.

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.

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SJP Approved 10/07/2023