As we enter the autumn months, we are seeing even more encouraging data around inflation, indicating that decisions around monetary policy are starting to work, albeit slowly.
Other topics on the agenda include the continuing rise of artificial intelligence (AI) (and its place in the financial market) and a potential overhaul to the Inheritance Tax (IHT) regime.
Is Inflation Starting to Return to Normal?
While we are still experiencing the effects of the cost-of-living crisis, we are starting to see signs of inflation slowing down.
The Consumer Price Index increased by 6.7% in the 12 months to August 2023, lower than the 7% predicted by economists. This was despite an increase in the price of crude oil, which has a knock-on effect on the cost of fuel and energy. The main driver behind the lower-than-expected rate seems to be down to a slowing of consumer spending.
The Bank of England has elected not to increase interest rates this month, bringing a pause to almost two years of steady increases.
The pattern of rate changes, as well as the impact of this on investors’ predictions, can create potential uncertainty in the markets. Gilt yields and the value of Sterling have both declined following the new data, while the property market has reacted positively, as indicated by property developers’ share prices. Equity prices have also increased, particularly among larger companies.
Of course, just because inflation is slowing does not mean that prices are dropping, only that the rate of increase is gradually returning to more manageable levels. UK households and businesses are likely to face pressure for some time yet, even if we do manage to avoid a full recession.
Could AI Help You Manage Your Finances?
The uses for artificial intelligence (AI) are growing by the day as systems become more capable and widely used. AI programmes have become established in certain industries, for example, to produce written content, create artwork, or to develop ‘chatbots’ for customer service.
AI has entered the financial services industry, with a number of tools now available to help consumers manage their money, track spending, and invest in the market. Apps are capable of analysing data from a customer’s bank account to identify trends and offer personalised guidance.
Financial literacy in the UK certainly has room for improvement, and AI could create opportunities for people who may not otherwise engage with financial services to make their money work harder.
Of course, there are risks involved. AI is designed to learn and evolve, but it is only as useful as the data it draws from. If the information ‘fed’ to the AI system is incorrect, biased, or out of date, this will impact the results.
Additionally, AI can add to the risk of data leaks and fraud. Deepfake technology means that criminals are better equipped than ever to steal customers’ identities.
AI has a lot of potential in the financial industry, but organisations need to balance progress with managing the risks.
Is it Time to Overhaul Inheritance Tax?
Inheritance Tax (IHT) has been the subject of debate for some time. As the nil rate band has been frozen since 2009, more and more estates have become liable for taxation.
Changes to the regime have been under discussion this month in advance of the general election due next year. Options suggested include cutting the rate or even abolishing the tax altogether.
IHT receipts reached a record high of £5.76 billion in the 2020/2021 tax year. However, this is a tiny proportion (less than 1%) of the total amount of tax raised. Abolishing the tax would be neither here nor there in terms of public finances, but may gain support amongst certain voters.
Of course, any reduction in the tax rate would disproportionately benefit the wealthiest households. If there is room in the budget for a tax cut, it is questionable whether this is the best use of the money during a cost-of-living crisis.
The UK Market
The UK has seen reasonable growth this month, with the FTSE 100 returning 2.2% and the All Companies sector increasing by 1.4%[1]. This follows encouraging data on slowing inflation and the Bank of Engand’s decision not to increase interest rates.
The leading UK companies this month include car retailer Pendragon, waste management company Renewi, and construction firm Kier Group.
The lowest performing companies include chemical developer Synthomer, Metro Bank, and video technology company Vivendum.
The Global Outlook
After an encouraging rally since the start of 2023, the North American sector has dipped by 0.8% this month. 10-year Treasury yields are now at their highest rate since 2007, and indications are that the Fed is unlikely to reduce interest rates in the short term. It still remains to be seen whether the US economy will avoid a full recession, although economists have indicated that any recession is likely to be shorter and shallower than initially feared.
The US is in the midst of another challenge, as arguments around extending the debt ceiling have the potential to trigger a government shutdown. This would involve a drastic reduction in public services and could result in workers going without pay. According to Goldman Sachs, a shutdown could reduce GDP by 0.2% for each week it continues.
European markets have had a difficult month, with this sector dropping by around 2% in September. However, the inflation rate has now reached 4.3%, its lowest point in two years, and below economists’ expectations. This is likely to have a positive effect on the market as indicated by the slight upturn in the last few days of the month.
Most of the Asian markets have remained stable this month. Japan, on the other hand, has had a strong month, returning around 2% across the sector. The main indices, the Topix and the Nikkei 225 have seen an exceptional year, returning around 20% so far in 2023. Unlike many other developed economies, the Japanese central bank has not increased interest rates, and instead encouraged unhindered growth. This has negatively affected the value of the yen, but boosted economic activity and exports.
Please don’t hesitate to contact a member of the team for more information on any of the topics covered.
The value of investments can fall as well as rise and is not guaranteed. Past performance is not a guide to future performance.
The content in this article was correct on 03/10/2023.
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