Chapters Financial - Investment House View

December 2024

The festive season is now firmly upon us, shoppers are busy, and many will celebrate in their various ways over the coming week or so. However you enjoy the time ahead, we hope it offers you fun, along with some peace and time for reflection.

The New Year is just around the corner, and some may consider their resolutions for 2025. January will start with the...well, November 2024 started with the planned inauguration on 20 January 2025 of Donald Trump as the 47th US President.

Closer to home, the UK's Chancellor, Rachel Reeves MP, detailed her significant Budget plans on 30 October 2024. There was much speculation as to the plans for this year's Budget. Following Labour's estimates of a £22bn shortfall in the UK's finances, the estimated tax raise was £40bn in this Budget (the highest since the 1970s). Changes were expected in order to raise revenues, either by raising tax, or by reducing outgoings with efficiencies, as we saw recently with introduction of means-testing for the winter fuel payment.

Many might suggest that the Budget announcements set the overall fiscal tone for the term of this new government for the next few years, noting that it was a confident speech. Subsequently, many UK businesses are concerned by the planned National Insurance increases to be applied from April 2025, along with the increases in the minimum wage.

Changing of debt parameters

There were many leaks to the press of fiscal plans prior to the Budget, much to the displeasure of Sir Lindsay Hoyle, the Speaker of the House of Commons, a few days prior. The Speaker's fury focused particularly on the leaking of the plan to effectively redefine the way the UK's debt rules work going forward. The planned effect is to allow the Chancellor to borrow more money for the next five years. We are talking about up to £50bn extra to help pay for the planned spending ahead, such as infrastructure spending. The risk is that interest rates remain higher than expected, costing us more over time. It will be interesting to see how the markets react in the future.

More can be found on our recent blog here: https://www.chaptersfinancial.com/blog/30-october-2024-budget-the-headline-changes

We have now reached the halfway point of the current tax year (2024/2025), with various current annual allowances restored, or varied in some cases. In our experience, it was a busy start to the 2024/2025 tax year, with many clients wanting to use up their allowances early. Perhaps the thought of the elections focused the mind.

As we have noted before on this webpage, many equity markets have been buoyant over 2024 to date. Very welcome for most, although not a guarantee of future performance. To reference this, and as an example, the FTSE100 reached over 8,400 points on 22 May 2024 (and similar in late August 2024). Also, the US Dow Jones index reached above 45,000 points on 05 December, with buoyancy in US equity markets being seen following the US election results. This is of course not a guarantee of future performance.

Continuing in the month of December, particularly as Christmas starts to appear on the horizon, one topic that remains high on many UK household agendas (and political agendas) is the cost-of-living issues that persist. One high-cost swaps itself for another: as examples, high energy costs have reduced to be replaced by high variable rate borrowing costs and residential rental prices, the latter of these being 28% higher than February 2020 according to estate agency Hamptons.

Mid-November saw the ONS confirm that the Consumer Prices Index (CPI) hit 2.6% in the year to November 2024, continuing the recent rising trend. The Bank of England target for UK inflation remains unchanged at 2.0%, and inflation is now back above this level.

As a note, US inflation has risen slightly - consumer prices rose 2.7% over the 12 months to November 2024, a slight increase from the October figure of 2.6%.

The Bank of England held the base interest rate at 4.75% in December 2024. The US Federal Reserve reduced their base rate by 0.25% bringing it down to a range of 4.25-4.5% in December 2024 (the third cut in a row), however noting that even with a currently strong US economy, further rate reductions over 2025 may be slower to come through than first anticipated, with some economic factors remaining stubborn.

It should be noted that higher interest rates are good news for savers, and some savings accounts are offering 4.5% - 5.0% pa gross plus. Look out for AER rates pa (Annual Earnings Rates) which show the real rate of interest being provided. Of course, higher interest rates are not so good for variable rate borrowers, and the days of cheap borrowing for individuals and nations are over, certainly in the shorter term.

As you might anticipate, many financial thoughts will be UK focused; however, the world is now a small place and many of these economic factors are occurring globally, as we enter a new era of higher costs, inflation, interest rates and the like. Increasing numbers of global conflicts remain constant at this time.

We have looked at some of these points below.

GBP / US dollar

Many readers will know that exchange rates can vary for many economic reasons. For some, it may only become apparent when purchasing foreign currency for a holiday or visit abroad. The current indicated exchange rate is $1.27 at the time of writing (18 December 2024).

UK Net Public Sector Gross Domestic Debt v GDP

It is noteworthy that net public sector debt has consistently run over the last year at approximately 95%-100% of UK monthly GDP (gross domestic product) (source: ONS). 2024 has continued in a similar way with the statistics through to November 2024 showing the provisional estimate being 98.1% and remains at levels last seen in the early 1960s. Some will not want to see this level (and its associated interest costs) rise.

GDP growth in the UK in the third quarter of 2024 was 0.1% to September 2024

Markets factor in most things

Turning to the current market position, many individuals may refer to the value of their pension or ISA arrangements as a reference point to how markets are moving. We all know that the value of funds can fall as well as rise, and we have seen some volatility this year, although alongside positive returns from some global equity markets. Volatility is not uncommon, and this can be triggered by global economic events, or their continued effects.

The key point here is that if we think something is happening (such as the ongoing cost-of-living issues), the markets have usually factored in the effects. Looking at the markets on 12 December 2024, in comparison to a year ago, we find the following (approximate):

Market values can fall as well as rise and this is only a snapshot in time. As you can see, and as anticipated, some markets in this snapshot have performed better than others, although this is not a guarantee of future performance.

The tax year 2024/2025 starts its final approach to 05 April 2025

Checking and reviewing all your financial arrangements is always recommended, but perhaps more than ever this winter. There have been many political facets to this year, both in the UK and abroad, and being ready with your overall financial planning and household budgeting is likely to be a far better position than addressing financial issues at hand later. The recent UK Budget announcements, along with the change in political direction in America, will make changes as we look forward,

We look forward to working with you into the future and have a great festive season, however you celebrate!

Keith Churchouse FPFS
Director
CFP Chartered FCSI
Chartered Financial Planner

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