Markets in a Minute with CST Wealth

“Overall, we remain in a very supportive environment for equities. Interest rates remain at historical lows, the US stimulus packages are the largest in history & the vaccine rollout is well on track and showing positive signs of allowing economic activity to return to normal. This could in turn release a large amount of pent-up demand as consumers are released from their households. There is also a lack of opportunity cost to holding equities at present with cash and fixed interest returns remaining depressed.

 There are however growing concerns in the market. Firstly, inflationary pressures are growing. We know inflation figures will be higher this year as they are compared with depressed figures taken during the peak of the pandemic last year. This holds particularly true in energy prices. However, with the large amount of stimulus being pumped into the global economy, there is the potential for inflation to pick up in the medium term which would require higher interest rates. With valuations looking stretched in certain interest rate sensitive parts of the market we could see further volatility over the coming months. Geopolitics will also continue to create headline as western economies take a harder stance on China.   

 With all this in mind, we remain positive on risk assets, particularly equities. We do however recognise that markets have had a particularly good start to the year and it is likely we see a pick up in volatility as the year progresses. There is a chance the old adage ‘Sell in May and go away’ might prove true this year, however in the medium to long term we still believe equities have the most attractive outlook.”

You may have read in the press that rising commodities prices and survey evidence showing inflation is on the march in the US have been major themes of recent weeks’ trading. Stock market investors fear that, if it gets out of hand, the Federal Reserve will have no choice but to accelerate plans to tighten its super-easy monetary policy and raise interest rates or taper its asset buying programme. Both strategies would increase the cost of credit for businesses and potentially hit their share prices.

The Bank of England’s Monetary Policy Committee (“MPC”) has voted unanimously to hold its key interest rate at 0.1%, with the central bank now forecasting a stronger outlook for GDP growth and inflation. The 12 month CPI inflation rose from 0.4% in February to 0.7% in March. CPI inflation is forecasted to rise temporarily above the 2% target towards the end of 2021, owing mainly to growth in energy prices.

In the May meeting the MPC concluded:

“The MPC will continue to monitor the situation closely and will take whatever action is necessary to achieve its remit. The Committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.

However, it is really pleasing to see the world reopening and given that there is a lot of unspent cash it is not surprising that this should lead to increased consumer demand that will force up short term inflation. In my opinion, the outlook in the medium to long term still looks positive and our recommendation continues to be to retain the holding of a global and diversified investment portfolio with sufficient cash resources held in lower-risk assets, so that you are able to fund your lifestyle without crystallising long-term assets.

Our cash flow modelling will continue to forecast a 3.5% annual growth rate (after fees) and a 2.5% inflation rate on your spending. We feel that tax planning is important to reduce your liability within HMRC rules and this will continue to be a focus as well as a discussion on securing low-interest rates for medium-term debt together with a review of life cover to protect your family.

My colleague, James Burnett, and I look forward to seeing you over the next few months to review your financial affairs. James is also a chartered accountant and a qualified IFA advisor and has worked with me in the business for the last 20 years.

Kind regards