Global equities have made gains between the beginning of 2021 and 12th March, despite some pullbacks with markets reacting to any adverse coronavirus developments, economic data and increases in bond yields. In Sterling terms, during this period the MSCI World index is up 2.93% and the FTSE 100 is up 5.51%. The data reflects the strong recovery of the UK market due to the well coordinated vaccine rollout and the removal of uncertainty now terms of trade with the EU are clear.
As vaccine roll-out continues there is the potential for economic recovery, coming out of a deep recession. The US and UK have vaccinated a significant proportion of their populations and the EU is catching up. A key risk is the emergence of a coronavirus strain for which existing vaccines are ineffective. Any re-production of vaccines and distribution could take 6 months and would delay the full re-opening of major economies so we are keeping a close eye on developments.
Monetary policy remains supportive for equities, with low interest rates expected to continue for some time. Additionally, the US economy is poised for a further $1.9 trillion in fiscal relief and large scale infrastructure spending; this should be supportive to the US economy and equity markets. Other reasons to be optimistic include the removal of uncertainty due to the Brexit deal and the €750 billion EU Recovery fund (although its deployment could be slow due to negotiations between member states).
Inflationary pressures are on the increase, with commodity prices, in particular oil and some foodstuffs increasing. We are monitoring inflation as this can be a headwind for bonds. This is because if inflation rates rise, the likelihood of higher interest rates to control inflation increases and in turn bond yields rise, which means bond prices fall. We continue to invest in several bond funds with diversification globally and we continue to favour corporate bonds over government bonds based on the potential for economic recovery.
We have recently added some UK mid and small cap exposure to our model portfolios to tap into the potential for economic recovery. Overall we continue not to take any big bets on particular investment styles and maintain a range of exposure to companies of all sizes, considering both cyclical and defensive equities via our carefully selected fund choices. The Investment Committee therefore remain comfortable with the current equity exposures within our model portfolios. Historically equities have been a good hedge against inflation over the long term, and the liquidity provided by central banks and governments, together with the potential for economic recovery are viewed as positive for equity markets.
UK Chancellor Rishi Sunak delivered his second budget earlier this month. There were no major changes to the personal taxation system and many rates and allowances were frozen, but we will be keeping an eye out for any future changes to Capital Gains Tax (CGT) and Inheritance Tax as these seem the most likely areas for future change. The CGT annual exemption will remain at £12,300 for individuals until April 2026. The Inheritance Tax nil rate band remains fixed at £325,000 until April 2026. Likewise, the residence nil rate band for inheritance tax will remain fixed at £175,000. The annual ISA limit is still £20,000, and the Junior ISA allowance remains at £9,000. The pension Lifetime Allowance has been frozen at £1,073,100 and will remain at that level until April 2026, with no inflation increases. The pension annual allowance remains unchanged at £40,000. Pension tax relief is also unchanged despite speculation that it would be reduced.
This article is for information purposes only. It does not constitute investment advice and is not a recommendation to invest. The value of investments and the income from them may go down as well as up and you may not get back your original investment. Past performance is not a guide to the future.
Date of publication: 16 March 2021
