WeekWatch

Stock Take

Much of 2023 has been fairly bleak for those in the UK. Inflation has remained above its developed market peers, as the cost-of-living crisis has continued for longer than many hoped. At the same time, rising interest rates and weak equity performance have only added to these woes.

Last week, however, there was some good news for the country. One example of this was the progression of the England Women’s football team into the World Cup semi-final against Australia.

And there was also the news that the British economy grew by 0.2% in Q2.

This compared to consensus expectations of zero growth. This was also up from the 0.1% recorded in the previous three months. It was also the best quarterly reading in more than a year.

Although 0.2% isn’t exactly high by historical standards, it still demonstrates that the UK economy remains more resilient than many anticipated. Many economists had expected the extra bank holiday in May to have a larger impact on GDP, as similar additional public holidays had done so in the past. Economists were also caught by surprise by a strong 0.5% growth in June, helped by the warm weather.

The growth also gives the Bank of England a bit more wiggle room to increase interest rates. In its most recent meeting, the Bank agreed to increase rates by another 0.25%. Following both pieces of news, Azad Zangana, Senior European Economist and Strategist at Schroders noted: “The latest GDP figures suggest more monetary tightening is required to slow domestic demand, and to in turn ease domestic inflation pressures. Indeed, financial markets have responded to the latest figures. Gilts yields across the curve are higher, and the pound has strengthened against both the euro and US dollar.”

So far, the UK has outperformed the International Monetary Fund’s prediction at the start of the year that the British economy would perform the worst of all developed markets in 2023. The 0.2% was notably above the flat performance of the German economy and a 0.3% shrink in Italy.

These Italian figures added pressure on Giorgia Meloni, Italy’s Prime Minister. Her government’s initial response included a 40% windfall tax on Italian banks’ extra profits. As has been the case elsewhere, Italian banks have seen their profits rise as increasing interest rates allowed them to charge more when lending money. The Government said it intended to use some of these excess profits to help ease Italy’s own cost-of-living crisis.

The move had an immediate effect on markets, as the FTSE Italia All-Share Banks Index fell 7.6%. With European markets already somewhat jumpy, the damage spread beyond Italy, with the Euro Stoxx Banks Index, as well as many British banks also falling on the news.

In order to prevent a potential market route, the Government soon clarified that the levy would be capped at no more than 0.1% of a lender’s total assets. The update helped the banking sector to somewhat recover, although many remain well below the values they were trading at prior to the news.

There was better news for investors in the US, where Government statistics showed inflation in July was 3.2%. Although this was actually up slightly from the 3.0% recorded in June, economists were already expecting some rise due to soft data from 2022.

The news raised hopes that the Federal Reserve would not need to raise interest rates at the next meeting. Even if this was the case, Mark Dowding, Chief Financial Officer at Bluebay noted: “The trend in inflation continues to remain significantly above the Federal Reserve (Fed) target and with the labour market remaining tight and the growth backdrop broadly looking robust, it strikes us that we remain far from a point where we should be thinking about lower interest rates, even if the hiking cycle does now look largely done.”

Wealth Check

What are the chances that you’ll need some form of long-term care before the end of your life?

It’s a question that’s very hard to answer, and all too easy to avoid. But in terms of financial wellbeing, it’s the million-dollar question. Paying for social care, for as long as you need it, can make a huge hole in your finances. And it can make a big difference to the amount of money you can pass on to your family.

In 2021, the NHS estimated that 24% of men and 28% of women aged 65 and over needed help with at least one daily living task1, whether that need is met by paid carers, or unpaid. That’s around one in four. And over half of those over the age of eighty need some form of help or care.

The figure that comes up most often for needing some kind of social care is actually one in four. This was used by the Dilnot Commission, which investigated the reform of adult social care in 2011, and it’s still widely used as a reference point, for example, in a 2021 House of Lords private members’ bill aiming to reform the insurance market for elderly social care2.

Whichever set of figures you’re inclined to believe, one thing is certain: the cost of social care can be eye-wateringly expensive. The prudent way forward may be to plan for the worst – but hope for the best.

A week in a typical UK residential care home is currently estimated to be around £760, but if nursing care is also required that figure rises to £9603. Fees can be as much as £1,250 per week in some parts of the UK.

Paying for care doesn’t just impact the person receiving the care. A family member might decide to give up work to care for a parent. And of course, the more money goes on paying for social care, the less your estate will be worth.

“There’s a small group of people who actually have enough money to pay for whatever care they need, and they’ll be able to afford it without any problems,” says Tony Müdd, Divisional Director at St. James’s Place.

“And there’s a small minority whose assets are such that they will qualify for assistance from the state. However, there is a huge section in the middle for whom the state won’t provide, and they will have to self-fund – and, sadly, a lot of them may not have enough money.”

The most important thing, he stresses, is to seek professional financial advice, even if you’re only in your 50s and long-term care seems a dot on the horizon.

Sources:

NHS Digital, 16 May 2023 

Elderly Social Care (Insurance) Bill, House of Lords Library – accessed August 2023

3 Carehome, April 2023 – accessed August 2023

In The Picture

Although the UK economy managed some growth in Q2, and is proving more resilient than many feared, growth remains slow, and challenges remain.

Source: The Office for National Statistics.

The Last Word

“Tragedy that hits one of us is felt by all of us. These past few days, the resolve of our families, businesses and visitors have been tested like never before in our lifetime.”

Richard Bissen, mayor of Maui County comments on the recent wildfire that tore through Lahaina in Hawaii last week.

Bluebay and Schroders are fund managers for St. James’s Place.

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