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Capital Markets Update: March 2023

NOVA Wealth1 April 2023

Market updates from March

In a Nutshell

In the UK, the government released the annual budget and outlined a series of major pension and tax reforms. In France, pension reforms were also announced - but have been met with widespread strikes and unrest. Trends in US bond yields may indicate a coming recession, particularly when coupled with continued Fed interest rate hikes. Chinese growth continues as the economy recovers from the last 6 months of downturn; while Japanese financial markets remain volatile.

Hunt unveils 2023 Budget

UK financial markets experienced a bit of a dip across March. Despite reaching a record-high in February, by mid-March the FTSE100 dropped around 7%, with the index suffering its worst day of trading since the start of 2020. However, it has shown some recovery in more recent weeks, with growth of around 6%.

Arguably the most significant development in the UK this month was the government’s unveiling of the 2023 Budget - and more specifically, the abolition of the lifetime allowance for pensions. Until now, individuals could build pension savings of up to £1.07 million, however there was a potential 55% tax on pension pots above this limit. This reform completely removes this lifetime cap, which Hunt argued would encourage valuable workers (particularly those in the NHS) to stay in employment longer. The annual cap on contributions will remain in place, but is being increased from £40k to £60k.

These pension changes are focused towards the highest earners in the country and encouraging them to stay in work longer - currently only around 8,000 people have accumulated more than £1m in their pensions in the UK, and only 1% of workers currently save £40k per year [1] . The reform is projected to cost the Treasury around £2.75bn over the next five years - although the Office for Budget Responsibility has said that there is “uncertainty” over what the final cost could be.

Individuals should seek advice before taking direct action on these changes - for example Labour have announced they will reinstate the Lifetime Allowance should they get in power so some of these changes may be short lived.

As part of the budget announcement, the government will also be extending the subsidy on household energy bills by three months, from April to June 2023. This is welcome news, considering the continued volatility of energy and gas prices as the Russia-Ukraine conflict continues.

French pension reforms met with widespread strikes

The French government has also recently announced a series of pension reforms. Foremost among these was Macron’s proposal to raise the legal retirement age from 62 to 64 by 2030.

This has proven a very unpopular move, and has led to widespread unrest across France. General strikes have resulted in mass disruption to air and rail travel, and many schools have been forced to close as teachers walk out. Major cities have been particularly affected by sanitation strikes and electricity outages as protesters block oil depots and LNG terminals.

This political turmoil has been reflected in the French financial market, with an initial significant drop in the CAC40 index - around 6% between the 1st and 15th of March. However, there was strong recovery in the latter half of the month, meaning that the overall performance of the index was fairly flat (averaged at 0.5% growth).

Bond yield inversion in US deepens

Inversion of long-term and short-term bond yields has continued in the US, with Treasury two-year yields now exceeding ten-year yields by a full percentage point. In early March, two-years sat at 5%; while ten-years were at just over 4%.

This inversion can sometimes be seen as an indicator for recession, as it suggests that investors are willing to accept lower yields in the long term because they anticipate an economic slowdown - and with it, falling interest rates and rising bond prices. It is important to note that a bond yield inversion does not necessarily mean there will be a recession - but alongside Fed interest rate hikes, it suggests that we may see continued turbulence in coming months.

Chinese growth is still strong as economy stabilises

Asia (ex Japan) equities continued to perform well, with China seeing a continuation of strong economic recovery (despite an initial dip in early March). In the last month, the Hang Seng index has grown 4%; and the S&P China 500 by 3.2%. Data released from the Chinese Bureau of Statistics also indicate that factory productivity growth grew at its fastest pace in a decade between January and March. Japanese equities fared less well, with the S&P Japan 500 showing a drop of nearly 7% between the start and middle of March. Since then, there has been some recovery - but growth remains volatile.

IMF predict a return to ultra-low interest rates

In a recent blog post , the IMF has predicted that interest rates will likely fall to pre-pandemic levels following the current “temporary” increases in borrowing costs. Specifically, they argue that once inflation has been brought under control, central banks are “likely to ease monetary policy and bring real interest rates back towards pre-pandemic levels."

The US-based agency have pointed to changes in the age distribution of the global population as one of the main reasons for this expected decline in interest rates. The general decline in birth rates in recent years has resulted in an ageing population, which in turn tends to result in lower spending and a deflationary economic environment. However, it is unclear when inflation will be brought under control - and in the meantime we can expect interest rates to remain high as central banks continue to combat rising prices.

Looking ahead

Despite some mixed performance in global markets, UK growth has been generally strong in recent months. There is some uncertainty around the exact impact these pension reforms will have in the long term - but sticking to a robust financial plan and diversifying investments can ensure you’re able to weather market volatility.

Important information

The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation.

[1] Independent. (2023) How Jeremy Hunt’s pension tax changes will affect you

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