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Global equity markets, particularly those containing small and medium sized companies, rallied strongly last week as optimism that central banks had reached the end of their tightening cycle, gathered momentum.

The question is, what comes next?

In the UK, interest rates were kept at a steady 5.25%. However, messaging from the Bank of England (BoE) added to the current ‘higher for longer’ narrative that has been spreading recently.

On Thursday, the Bank revealed its Monetary Policy Committee (MPC) had voted 6-3 to keep interest rates where they were. Notably, the three other votes were to increase the rate.

In its release notes, the Bank stressed rates would need to remain high for a sufficiently long time in order to return inflation to its 2% target sustainably. It noted: “The MPC’s latest projections indicate that monetary policy is likely to need to be restrictive for an extended period of time. Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.”

According to Azad Zangana, Senior European Economist and Strategist at Schroders, “Despite the obvious weakness in the economy’s current performance, inflation remains far too high. The BoE forecasts the consumer price index (CPI) inflation rate to drop towards 5% by the end of the year, before falling back towards target in two years’ time and beyond.

“Most of the fall in the near term is expected to be driven by declining household energy bills, along with moderating food price inflation. However, the outlook for 2024 is more difficult, and requires spare capacity in the economy to lower both goods price inflation and services inflation.”

Even with these caveats, the news that we’re potentially at the end of the cycle in the UK was enough to lift markets. The FTSE 250 jumped 6.6% over the week. The FTSE 100 saw a more modest increase of 1.6%, as a stronger UK currency left the bulk of its companies exposed to overseas earnings.

There was similar optimism in the US, after the Federal Reserve (Fed) also paused its interest rate increases.

This helped the S&P 500 record its best one-day performance in six months, and overall end the week 5.9% higher. Growth companies, notably those in the technology sector enjoyed strong gains although advances were seen across most sectors.

However, just like the UK, those in the Fed were keen to stress decisions were ‘proceeding carefully’. Speaking at a press conference after the release, Fed Chairman Jerome Powel said the question the Fed was asking itself was “Should we hike more?”

European equities also bounced last week, with the MSCI Europe ex. UK Index up 3.6%, partly thanks to the pause from the BoE and the Fed. The EU’s own European Central Bank (ECB) paused rates earlier in October, after 10 consecutive lifts.

While markets may have bounced on the news that interest rates could have reached their peak, both the BoE and the Fed have been clear there is the potential for a further rate rise. This is an important reminder that there remain significant uncertainties in the market, and that we may see some volatility in the short term.

Elsewhere, the Nikkei 225 in Japan rose by 3.1%, as investors reacted positively to Central Bank decisions elsewhere. However, Mark Dowding, Chief Investment Officer at BlueBay, notes there remain some risks in the country: “Economic activity is being supported by stimulative monetary and fiscal policy. Meanwhile inflation continues to print above forecasts, causing policymakers to scramble to revise projections higher. In this light, it has appeared that the Bank of Japan has been making a policy mistake by keeping policy too accommodative for too long.”

Wealth Check

They say you can’t put a price on family, but just how much does it cost to raise a child? Raising a child from birth until they reached the age of 18 in 2022, including household and childcare costs, stood at £157,562 for a couple and £208,735 for a lone parent1. Children are expensive, but seeing them grow and achieve their ambitions is often our greatest pleasure.

With the general costs a child brings, as well as the increased cost of living, many parents feel squeezed to make ends meet, let alone think about funding future costs like a car, university, or a deposit for a house. But building a nest egg for your kids doesn’t need to break the bank and could make a huge difference to their future, and their financial wellbeing.

Andrina Nisbet, Head of Development and Consultancy at SJP, says: “Start saving little and often – and early if you don’t want it to affect your standard of living when you are older. Allocating your money into different pots can really help create discipline.”

Melloney Underhill, Head of Marketing Insights at SJP, highlights another benefit: “We want our children to grow up with positive money habits. Research regularly proves that these formative years have a significant impact in later life. Introducing the benefits of saving and investing for the long term from an early age is also a great way to encourage smart money habits.

“If they know how to save and budget, they’ll grow up more financially capable – and secure.”

One option to consider for children might be saving into a pension for them.

Starting a pension for a child, while they’re still decades away from their retirement, might sound like an odd thing to do, but can make a big difference. Even investing small amounts over decades could grow into a substantial pot over time. As a rule, you should put away as much as you feel comfortable with – even £100 a month will make a difference.

Children can have a pension as soon as they are born. Setting one up can bring significant tax advantages. In the UK, you can put up to £2,880 a year into their pension, and the 20% pension tax relief bumps this up to £3,600. The pension must be set up by a parent or legal guardian but after that anyone can contribute.

Talking to a financial adviser will help you decide on the smartest ways to save for your children. If you’d like to talk family finances and saving with a financial adviser, do get in touch today.

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.


1 Moneyfarm, 2023

In The Picture

Major central banks paused interest rates recently, helping lift equity markets. The question now is, what comes next?

The Last Word

“We will have for the first time something that is smarter than the smartest human… there will come a point where no job is needed. You can have a job if you wanted to have a job for personal satisfaction. But AI will be able to do everything.”

Elon Musk explains his view on the potential for Artificial Intelligence (AI).

Bluebay and Schroders 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.

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SJP Approved 06/11/2023