WeekWatch

Iran strikes and the ripple effect 

Coordinated strikes by the US and Israel on Iran over the weekend sharply raised uncertainty in global markets. Investors had braced themselves for the strong possibility of such action ever since last summer’s pre-emptive strikes on Iran’s nuclear facilities. The recent, well-publicised deployment of US military resources to the region had already raised the likelihood of “when, not if” the US would act. 

The weekend’s events have already moved beyond Iran, with retaliatory strikes by the regime across the region spreading concern as to the scope of the conflict.

From an economic standpoint, Iran also has the ability to influence the global economy due to its effective control over the Strait of Hormuz. This narrow waterway sees approximately 20% of the world’s oil and 90% of the oil destined for Asian markets pass through. 

Hetal Mehta, SJP’s Chief Economist flagged that there could be some pass through to petrol prices and eventually UK inflation should oil prices remain elevated for more than a few days. In a potential worst case illustration where oil prices rise to over $120, inflation could rise from 3% to over 4%. “For every 1% increase in inflation, consumer spending would be affected and in turn this could take 0.2% to 0.3% off UK growth”. However, Hetal also points out that an abrupt change in domestic energy prices will come too late to impact the OBR's forecasts to be published on Tuesday 3 March alongside the Chancellor's Spring Statement. 

Market predictability so far

Global markets reacted with a degree of predictability on 2 March. Stock markets are lower, while so called “safe haven” assets, such as government bonds, gold and the US dollar have risen. The oil price rose by over 10% early on Monday but drifted back through the day. It remains higher than at the end of last week. OPEC (an organisation enabling the co-operation of leading oil-producing and oil-dependent countries) has agreed to a modest increase in production to help stabilise the market. Economists may be more concerned if the disruption persists as this could drive oil prices higher, feeding into higher inflation and have consequences for global GDP. 

Watch and see? 

Joe Wiggins, Director of Investment Research, notes that it is much easier to be disciplined when markets are going up. Yet it is precisely in the current environment of stress and uncertainty that investors need to be at their most disciplined. Joe advises investors ask themselves five questions whenever there are market shocks: 

1. Do I have confidence in predicting the outcome of the current situation?
2. Can I reliably anticipate the financial market implications?
3. Are any of these potential market impacts likely to be material over my investment horizon?
4. Have my investment objectives changed in any way?
5. Is my portfolio appropriately diversified for a range of possible outcomes?

Joe also highlighted a study which looked at the coverage of different topics in the New York Times going back 160 years and what implications this had on future stock market returns.¹ This showed that the topic which was the strongest predictor of higher stock market returns over the next 1-36 months was “War”. 

Initially this may be completely at odds with what should be expected but the explanation is as simple as it is sensible. The instinctive reaction for some investors and traders in this environment is to sell, unnerved by the near-term uncertainty. 

Yet lower prices make valuations more attractive and in turn push up future expected returns, rewarding those investors who stayed the course or took the opportunity to purchase when prices were lower. As Joe says, “that’s by no means a prediction of what will happen, but it reflects that our gut reaction to such events are often wrong”.  

Robin Ellis, SJP’s Director of Portfolio Management, reinforced this messaging reflecting the importance of diversification, discipline and a long-term mindset. Robin highlighted that it’s more often the preparation, ensuing portfolios are diversified before bouts of market volatility that are more important than reactive moves taken during a crisis.  Market events like this are highly uncertain, evolve quickly and cause significant market fluctuations. Whilst tempting, trying to predict how these will unfold so often destroys value over the long term. Looking through the noise, remaining invested and allowing returns to compound over the long term is usually the best strategy in building long term wealth.

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Rachel Reeves urged to scrap salary sacrifice pension cap

St. James's Place, along with other major pension and wealth management companies, has added its weight to the campaign to urge the Chancellor, Rachel Reeves, to reverse her plan to cap the tax relief on salary sacrifice pension arrangements ahead of her Spring Statement on 3 March.

In her Autumn Budget last year, Reeves announced that from April 2029 the amount of salary sacrifice pension contributions exempt from national insurance contributions (NICs) for employees and employers will be capped at £2,000 per year.

But experts, including pension ministers, are worried that limiting the NIC tax relief in this way will have a negative long-term effect on pension saving. Concerns have been raised that the UK population is already not paying enough into retirement savings. As the cost of living continues to make it harder for people to keep up with their retirement contributions, they believe this will further hinder efforts to save. 

Critics have also said that the changes risk affecting the nation’s confidence in saving into a pension.

In a pensions salary sacrifice scheme, an employee’s contract is amended to reduce their salary in exchange for increased contributions made by the employer into a pension. This results in relief on income tax for the employee, as well as savings on NICs for both the employee and employer.

St. James's Place has played an active role in supporting the reversal of the raid on salary sacrifice.

This campaign emerged after analysis conducted by the Office for Budget Responsibility (OBR) suggested the impact of the salary sacrifice cap would affect more people than expected – not just those in higher tax rate bands.

The measure is estimated to bring in £4.7 billion in revenue for the government in the 2029/30 tax year, according to the OBR.2

The OBR has said introducing the cap on tax-free contributions to a pension via salary sacrifice could lead to a “highly uncertain” behavioural response. This could extend beyond the 4.3 million people estimated to be affected by the measure.

FCA calls for improvements to the insurance market

Improving insurance claims handling and increasing consumer access to cover will be at the heart of the Financial Conduct Authority’s strategic market plans.

In its latest report on the insurance sector, the UK’s financial regulator said it wants to help consumers better navigate the insurance market. It has called on insurers to find new ways to improve access to products and services, highlighting that some of the most vulnerable people in society do not have access to insurance.

The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is dependent on individual circumstances.

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The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.