Performance 

Markets generally remained firm during the last quarter. The main driver was data showing inflation coming under control, leading to the expectation that interest rates in the US, UK and EU can be lowered later in the year. 

EU

The European Central Bank reduced interest rates by 0.25% in June. Rather than this being purely to do with getting inflation under control, the ECB said this was due to private demand in the EU being very low which may lead to a weaker recovery than had been expected. 

US

Although inflation has fallen back to 3.3%, job figures continue to point to a strong but cooling labour market and, as a result, the Fed has held interest rates at 5.25%. Similarly in the UK, where inflation fell back to 2%, the Bank of England kept interest rates steady at 5.25%. The markets currently estimate there is a 60% chance the Bank of England will cut interest rates to 5% on 1st August and further trimmed to 4.75% in November or December 2024. This will ease the pressure on household spending although a recent report did show that 3 million homeowners are still to remortgage following the interest rate rises of recent years. 

Activity

During the quarter, we have been increasing our holdings in defence-related businesses as we think that governments will continue to increase spending in this sector. There are a number of stock market listed specialist defence related businesses in the UK, several of which we have been buying. Another area of interest is Insurance firms. Insurance premiums have risen considerably in recent years leading to bumper numbers for some of the listed Insurance under writers including the like of Beazley. Lastly, Technology continues to perform, noticeably around Artificial Intelligence (Ai). There are a number of very good funds which can be used to gain exposure to this space including Polar Capital Technology, where we have been adding to our existing holdings. 

General Election

Stock markets and some commentators welcomed a strong majority over a situation of indecision, with the incoming administration saying they will prioritize growth. On the back of that, gains were seen in house builders and infrastructure businesses and for funds focused on Wind and Solar.

Personal Finances 

On the personal finance front, the incoming government has said they will set a budget before the summer recess that will be in the autumn. There is speculation that tax rises may occur in the areas of Pensions, possibly a reduction on the tax relief on contributions or on the amount of tax-free cash. Another area considered at risk is changes or increases in inheritance tax. Changes to the tax-free cash rate would be retrospective and most of the time taxes are not changed in this way. Perhaps it is more likely tax relief on contributions will be reduced. We have seen an increase in clients taking some tax-free cash now to hedge against future risks. Capital Gains tax is also an area mentioned by some of the press as an area where the government may be looking to increase tax. Capital gains tax is currently levied at 10 or 20%, while income tax is at 20, 40 or 45% and some think that capital gains may be increased to 40%. Unfortunately, in recent years the previous government reduced the capital gains tax free allowance from £12,500 to £3,000 for this year and kept the ISA annual allowance at £20,000. Such actions have already curtailed the incentive to save and so it is hoped that the new government resists any temptation to reduce this further.

The full commentary is available in the CFM Quarterly Newsletter sent out to our clients. If you would like more information on this and becoming a client please contact support@capitalfinancialmarkets.co.uk

All articles on this website are for information only and should not be seen as advice or a recommendation to take action. Please note that investments go down as well as up, you might not get back the original capital invested. Past performance is not a guide to any future.