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Soft landing, hard landing, or no landing at all. Markets are still having a tough time figuring out which economic outlook to believe.
A soft landing is the scenario policymakers and markets would most like to see, where inflation is brought down without creating a recession. Worst case scenario is a hard landing, where rising interest rates push economies into recession. No landing would see economies continue to grow and inflation stay high.
Nobody knows, and increasing uncertainty saw global equities fall 2.5% in February, halting the progress made by markets since October and a sharp contrast to the 7.0% gain seen in January. The optimism that had driven shares up and global bond yields down has ebbed as data during the month suggested economies and labour markets are not feeling too much strain from high inflation.
European equities have significantly outperformed US equities since October last year, and it was the only region to post positive returns in February, climbing 1.6% on the back of strong consumer consumption figures and signs of slowing inflation.
But those hopes faltered as the new month began with figures showing European inflation remaining stubbornly high. Consumer price inflation eased to 8.5% in February, a barely noticeable change on the previous month and above the consensus forecast of 8.2%. The news fuelled expectations that the European Central Bank (ECB) will hike interest rates by another 50 basis points later this month.
However, on Friday investors were encouraged by news of continued recovery in eurozone business activity, particularly in the dominant services industry. It provided the latest sign suggesting that the region will avoid a recession, but also that the ECB will be emboldened into more aggressive monetary policy tightening. Another 0.5% increase in the ECB’s deposit rate this month is seen as a done deal by economists.
The more sobering rate outlook has seen government bond yields at their highest for years. Bond yields rise as prices fall. Two-year German bond yields hit their highest level since October 2008, while two-year UK gilts saw their biggest February rise since 2005. The two-year US Treasury yield also approached decade highs.
Losses for US equities in February mirrored those for global markets, but Wall Street ended another volatile week in positive territory, boosted by news that the US services sector grew at a steady rate last month.
Investors interpreted the data as signalling healthy growth with slowing prices, adding to hopes that the economy – and corporate profits – can withstand a higher-for-longer interest rate path. The publication of the latest US employment data on Friday will be a key indicator of the economy’s strength and the likely next move of the Federal Reserve.
Asian markets declined nearly 6% in February but bounced off a two-month low to record their best day in seven weeks on Wednesday, as data showed Chinese manufacturing activity had expanded at its fastest pace in over a decade.
The better-than-expected performance reflects the surge in activity following the easing of the country’s zero-COVID policy (ZCP) and added to speculation over whether China’s recovery will boost the rest of the world by raising growth or cause a resurge in inflation.
David Rees, Senior Emerging Markets Economist at Schroders, doesn’t believe China’s re-opening will benefit the global economy much, if at all. “China’s services sector was most hampered by ZCP and is likely to experience the same release of pent-up consumer demand. However, unlike other economies – certainly developed markets – Chinese households are not sitting on a huge stock of savings that can fund a prolonged period of rampant consumption.”
Schroders expects above-trend growth in 2023, but that the “sugar high” recovery will fade into 2024 as pent-up demand is exhausted. Rees believes the recovery will be skewed towards services, not manufacturing. “Prior strong investment and soft external demand means the recovery is unlikely to spur a renewed investment cycle in manufacturing that sucks in imports from Europe and the rest of the world,” he says.
UK stocks ended the week showing marginal gains. House prices saw their biggest annual fall in over a decade in the year to February, according to Nationwide. The building society suggested that the economic headwinds of a weakening labour market and higher borrowing costs would make it hard for the market to regain momentum in the near term.
The challenge for borrowers was underlined by comments on Wednesday by Bank of England governor, Andrew Bailey, suggesting that interest rates may need to go up again to slow down the cost of living. “I would caution against suggesting either that we are done with increasing the Bank Rate, or that we will inevitably need to do more,” he said.
Wealth Check
Whether you’ve got 20 years before you retire or just a few, it’s important to have an idea of just how much money you’ll need for a comfortable standard of living once you’ve finished working.
Helpfully, the Pension and Lifetime Savings Association publishes figures (based on independent research by Loughborough University) show approximately how much individuals and couples will need to have a comfortable, moderate or minimum standard of living in retirement.
For a minimum standard of living (with a weekly food budget of £54 and one week and weekend away in the UK each year), its latest numbers show that a single person now needs £12,800 a year (up by £1,900 since last year), while a couple needs £19,900 (up by £3,200).1
Meanwhile, individuals need £23,300 a year (a £2,500 increase) for a moderate standard of living, while couples need £34,000 (up by £3,800). A moderate standard of living stretches to £74 a week on food, with two weeks in Europe and one long weekend in the UK every year.
For a comfortable standard of living (which includes three weeks in Europe each year and a more generous budget of £144 for food each week), a single person needs £37,300 a year (up by £3,700), while a couple needs £54,500 (an increase of £4,800). All figures are for the UK, excluding London, and you can find out more about the differences between the three bands here.
Advice can be invaluable here. In addition to looking at your cash flow and helping you work out how much you’ll need to live on, an adviser can help your retirement plans remain on track.
For those who are likely to retire relatively soon, the cost-of-living crisis and the stock-market volatility that has accompanied it will have been a major cause for concern.
“For some people, this will mean rethinking their retirement plans to a degree,” says Tony Clark, Senior Propositions Manager at St. James’s Place. “Delaying retirement can be an easy solution, but a more palatable one might be a phased retirement, winding down from work over a period of years, rather than a hard stop.”
Even if you’re not overly concerned, it’s still worth having a regular check-in with your adviser. We can help you build a retirement plan that will give you a bit more flexibility.
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.
Source
1 Rising Prices Add Almost 20% to the Cost of Retirement, Pensions and Lifetime Savings Association, January 2023
In The Picture
If you can afford to pay a little more into your pension before the end of the tax year, it’s a tax-efficient way to save for the future.
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. The value of any tax relief depends on individual circumstances.
The Last Word
“2023 has continued in much the same way that 2022 ended, but we remain encouraged to see indicators that UK inflation may have peaked and that there are some signs of optimism for the direction of economies and investment markets worldwide.”
SJP CEO Andrew Croft provides a positive outlook around our annual results.
Schroders is a fund manager 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 2023. FTSE Russell is a trading name of certain of the LSE Group companies.
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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 06/03/2023
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