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The last two years have been highly eventful for investors. The COVID-19 pandemic and brief market crash in 2020; faltering global supply chains in 2021 (partly due to lockdowns); Russia’s invasion of Ukraine in February 2022 and a subsequent wave of high inflation across the world due to rising energy and food prices. Then there was the Truss-Kwarteng budget of September 2022, sending bond markets into panic and the Bank of England intervening to stabilise things. The end of the year brought a new UK government under Prime Minister Rishi Sunak and Chancellor Jeremy Hunt, together with an Autumn Statement which will usher in a range of tax changes in April 2023. In this article, our financial planners at Cedar House outline some of the factors likely to play a key role in the market over the coming months. We hope this is helpful to you. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
Downward pressure on the housing market
In many ways, the UK property market remains strong. Demand continues to outstrip supply by far each year, and unemployment remains low (meaning tenants can largely keep paying the rent). However, forecasts widely expect property prices to fall in 2023 – possibly by over 5%, although certain areas of the country may continue to see growth. This is partly due to lenders putting up their interest rates on variable mortgages and new fixed-rate deals, as the Bank Rate rises in an attempt to curb inflation. Another reason may be landlords (e.g. in the buy to let sector) seeking to sell up quickly before April 2023, when the new tax year will usher in a lower tax-free capital gains tax allowance (£6,000 per year instead of £12,300).
High inflation likely to continue
The Bank of England (BoE) has predicted that UK inflation – currently at 11.1% (a 40-year high) – will start to fall around summertime in 2023, barring any further escalations in the conflict between Russia and Ukraine. However, the Consumer Price Index (CPI) may not arrive back at the Bank’s 2% for another few years. If so, this could have a range of repercussions. One is that interest rates may not fall back to the low levels seen before December 2021. For homeowners, this could mean a more expensive mortgage in the years ahead unless, say, you downsize or you remortgage at a higher loan-to-value (LTV) ratio. High inflation could also apply downward pressure to stock prices as companies face higher input costs and customers increasingly looking to “tighten their belts”.
A greater tax burden
The “Truss experiment” to lower taxes in September 2022 (e.g. by abolishing the 45% additional rate) was unsuccessful. Instead, a new Conservative government arrived and announced that the threshold for the 45% rate would fall to £125,140 in April 2023, from £150,000. Income tax bands would remain frozen, potentially bringing over 1m more UK workers into the 40% higher rate by 2026 as average wages rise. Tax-free allowances for capital gains and dividends will be gradually tapered down, to £3,000 and £500 per year by 2024, respectively. Not only will investors need to work hard for their returns to beat higher inflation, but also possibly mitigate erosion from more taxes. Working with a financial planner is likely to become more pressing for many people to help address these factors.
A strange recession
Writing in January 2023, the UK could already officially be in recession – or, it is likely to enter one soon. This means two consecutive quarters of negative GDP growth and is generally seen as bad, since the overall risks of default, business failure, and bankruptcy in an economy go up. Yet this could be a “strange” event, since recessions tend to accompany rapidly rising rates of unemployment – something which has not transpired, and is not expected to. Indeed, the key problem facing many UK businesses is not an inability to keep workers due to low profits, but a shortage of labour to service customers and expand.
Implications for investors
The picture above suggests that individuals will need to be extra prudent when crafting their financial and investment plans in 2023. Whilst the UK – and the world – certainly face many challenges, there are still opportunities to be found if you look carefully with a financial planner. Investors would do well to take full advantage of their tax-free allowances for the 2022-23 tax year now, before these start to reduce in April 2023. Pensions and ISAs remain useful tools for many to mitigate needless taxes and preserve investors’ hard-earned wealth. For those worried about whether to remain in the market, remember that it is rarely a good idea to try and “time the market”. Instead, continuing your portfolio contributions (e.g. on a monthly basis) can help you take advantage of “down periods” to buy investments for “cheaper”. Take care not to simply retreat your wealth into cash, since interest rates do not beat inflation and will likely result in a disproportionate loss in real-terms wealth.
Conclusion
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk