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Investments can go up and down in value, so you could get back less than you invest.
0:10 Sarah Coles: Hello and welcome to Switch Your Money On from Hargreaves Lansdown with me, Sarah Coles, Head of Personal Finance.
0:14 Helen Morrissey: And me, Helen Morrissey, Head of Retirement Analysis.
0:17 Sarah Coles: So, it's been a really interesting couple of weeks, particularly interesting for me because I've been away from work. I don't think I can remember the last time I was away for a fortnight. The market's been doing pretty well, haven't they? They've done reasonably well and at the same time different economies across the world have actually really struggled.
0:30 Helen Morrissey: Yeah, and I do think that the UK economy has also been facing a fair few challenges, particularly I think since you've been away in sunny Australia, Sarah. And there has been more bad news emerging recently, so inflation remains way higher than that Bank of England 2% target. The most recent figures put it at 3.8%. We're expecting that to peak at 4% before it slowly makes its way down. But this stubborn inflation is having wider impacts. It's very much tying the Bank of England's hands when it comes to interest rates. So, we had a meeting very recently where they chose to hold it. This was widely expected. I think we can't expect any kind of relief any time soon. The expectation is that any further cuts that do come will only come very gradually.
1:18 Sarah Coles: And I suppose the impact of inflation on businesses is quite far-reaching. As you say, if it means that you can't see lower interest rates, then that's obviously gonna increase their borrowing costs but it feeds into so many different bits of the business, doesn't it?
1:30 Helen Morrissey: Absolutely. It really, really does and then added to this, we've got the budget looming on the horizon as well and this is kind of bringing all kinds of challenges too. You're seeing rumours and we always see rumours in the run-up to any budget but they're starting to circulate the Chancellor may look to heap more pain on businesses with further tax rises. So, we all remember the last budget where there was the increase in employer National Insurance contributions. We'd also seen the rise in the minimum wage as well and that would seem to have caused a lot of challenges for businesses in terms of their hiring strategies and costs and things like that.
2:10 Sarah Coles: It's definitely felt when we've been looking at company reports, that there's like almost a section now, it's like this is the bit where we talk about employers' National Insurance. It's kind of feeding into everybody's wage bills. It's obviously hitting performance.
2:20 Helen Morrissey: Absolutely and you know you are hearing companies saying that they are expecting it to have far-reaching consequences into next year and beyond because as you say it's pushing up their prices, that has impact on what they charge their customers, it has impact who they're hiring and what they pay them as well so there's big issues there.
2:39 Sarah Coles: So, the fun never ends when it comes to National Insurance. So, we've also had some research from KPMG, which estimates that the joblessness rate is expected to hit 4.9% in 2026. So that's a level that was last seen in actually early 2021, when of course we were right in the middle of the lockdown at that point.
2:54 Helen Morrissey: Yeah absolutely and you know again those issues that we talked about there from the previous budget do have a part to play in that and you mentioned there that 4.9% rate, it's very high, it's up from the current rate which is 4.7% and it's much higher than the 4.1% that we saw just in August last year so the job market is in a really tricky spot right now with plummeting vacancies.
3:17 Sarah Coles: There’s the things we know about, so we know that people's wage bills are going up and that's gonna be an impact. The things we don't know that much about yet is that impact of AI on hiring and on, you know, unemployment in general. So, it's hard to know whether this is a relatively one, two, three-year issue or whether this is a radical change. So, we could see more far-reaching impacts of things like AI on businesses.
3:38 Helen Morrissey: Absolutely, and that's an area that just seems to be evolving so quickly, doesn't it, Sarah? So, I know there's a lot of worries out there as to the impact of AI on the job market and you know those worries won't go anywhere anytime soon, I don't think.
3:50 Sarah Coles: There's plenty of jobs I would love AI to take from me. Cleaning my house, that would be great if AI could somehow magically do that. But yeah, no there’s obviously lots of people worried that it's coming for their jobs.
3:58 Helen Morrissey: Yeah, do you think it could do my ironing at some point?
4:01 Sarah Coles: That’d be doubtless. They could probably babysit for kids. I mean AI, you know, take all the difficult jobs off people, and leave the fun things. [laugh]
4:06 Helen Morrissey: Indeed, yeah, absolutely. And so, I mean, if we talk about kind of, you know, the impact on retail investors, they are also being affected by this less positive economic news, which is reflected in our latest investor confidence index, isn't it, Sarah?
4:21 Sarah Coles: Yes, so this is the survey we do of our clients monthly and it kind of takes the temperature really of how people are feeling about both markets around the world but also looking at sort of how they feel about economics in general. So, we've seen a real fall in retail investors' confidence here in the UK. It actually fell by 3% this month. Now almost all other sectors saw a decrease in investor confidence too, with the North American sector falling the most at 14%. And then of course there were problems in the European sector, so that dropped by 10%. Asia Pacific fell by 1% and confidence in the global emerging sector barely changed from last month. So, there's a real picture there of people sort of starting to get really concerned about growth within the investment world more generally. There's also when we take the temperature of how people feel about economics, particularly in the UK, that also fell so that's down 3%. So, there’s a sort of growing picture of unease. So, we have seen falls, this isn't the first of them, so we saw falls in August, we're seeing slightly smaller falls in September, but the direction of travel is really important as well. So, it's an interesting one, isn't it, because we have seen industries really do well. This drop in confidence is coming at a time when all the figures seem to indicate that, you know, lots of good things are happening at the same time.
5:31 Helen Morrissey: Yeah, and bringing it back to the UK economy for a minute that is stagnating according to the latest economic snapshot with zero growth in July, we talked a bit about the budget, but you know, there is a growing sense of unease because over and above the potential business consequences and potential business tax rises there, there are a lot of issues around people's personal finances and taxation that we will be talking about in another podcast. That is gonna have a real toll on confidence as well, isn't it, really?
6:00 Sarah Coles: Yes and of course, while we talk about the UK quite a lot, there is a huge impact from what's happening in the States. It's one of those things when the US sneezes, the world catches a cold. So, one of the things that's been really interesting is the sort of signs of a slowdown that's coming out of the US with the weaker than expected labour market. So, at the same time, the indices are doing really well. Actually, US stocks rose to record highs. The other big news affecting markets was the rate cut from the Federal Reserve. That's from 4.25% to 4%. Now what was notable was that in the comments after the announcement, the Fed chair Jerome H Powell focused on jobs rather than inflation. So that was positioned as something of mitigating a risk further down the line, rather than necessarily something that's happening right now, but it is a really important thing to note.
Given how widely this was expected, the markets actually, the response was fairly muted. So, there weren't big dramatic movements. It didn't come as a surprise to anyone. But the big part of the announcement is always about where Fed expects rates to go next. So, the answer was a resounding we don't know [laugh] so Powell actually admitted it wasn't incredibly obvious what to do next, and this fed into the fact that the second vote, you know, it was the second vote that wasn't unanimous. And also seven of the 19 policymakers suggested fewer cuts this year, so there may be more divided decisions on the way.
7:12 Helen Morrissey: Yeah, and I think part of the problem is the inflation, it does remain very sticky, doesn't it? And the jobs market is weakening. So, employers added just 22,000 jobs in August, and then the July figures were revised down too. So that's showing that the jobs market is weaker than had been thought. Meanwhile, inflation rose from 2.7% to 2.9% in August. Now, these two data points typically have an opposite impact on rate predictions. So, the policy response to stubborn inflation is to keep rates high, where poor job status suggests a troubled economy, to which a sensible response would be to lower rates to boost growth. As for what to expect from equities, typically growth stocks do best following a rate cut and value underperforms. Investors should be mindful of portfolio concentration and ensure that they have broad exposure across the US market cap and not just AI tech megacaps.
8:11 Sarah Coles: Yeah, that's something we talk about a lot, isn't it because they make up such a big part of the index that if you're not sort of paying attention to it, you can be holding a lot more of them than you know about.
8:18 Helen Morrissey: Absolutely, absolutely.
8:19 Sarah Coles: It has been a busy time and we are expecting more drama in the weeks to come, but I think now is probably a good time to alleviate all the drama and do our fabulous news quiz of the week. So, there's been lots of talk about the AI megacaps and there are some people who are doing particularly well out of this and this is the richest men in the world. So, I'm gonna ask you who do you think are the richest men in tech? And I'd like you to pick two of them.
8:45 Helen Morrissey: Okay, well, I mean, you have to say Elon Musk, don't you? He's got to be there. All of the news, I've seen news reports recently about his potential pay packages, so I've gotta put him there.
8:58 Sarah Coles: Largest in history, largest in history.
8:59 Helen Morrissey: Is he? Well, I think I might have one right there. And then, I'm not too sure. The guy from Oracle, quite potentially.
9:08 Sarah Coles: Oh, that's very good. I thought I was gonna get you to say Bill Gates or Mark Zuckerberg, but you're absolutely right. Yes, it's Larry Ellison from Oracle. Well done.
9:17 Helen Morrissey: Thank you.
9:18 Sarah Coles: I'm gonna make them harder next time.
9:18 Helen Morrissey: Gold star for Helen.
9:20 Sarah Coles: [laugh] So before we go, we should say this was recorded on the 23rd of September and all information was correct at the time of recording.
9:26 Helen Morrissey: Nothing in this podcast is personal advice. You should seek advice if you're not sure what's right for you. Investments and any income they produce can rise and fall in value, so you could get back less than you invest and past performance is not a guide to the future.
9:40 Sarah Coles: Yes, this is not advice or a recommendation to buy, sell or hold any investment, no view is given on the present or future value or price of any investment and investors should form their own view on any proposed investment.
9:50 Helen Morrissey: So, all that's left is for me to thank our wonderful producer, Elizabeth Hodson, for working her usual magic and for Sarah Coles for letting me sit in the hot seat again this week. Thank you very much, Sarah.
10:02 Sarah Coles: Oh, always a pleasure. And of course, thank you very much for listening. We'll be back again soon. Goodbye.
10:06 Helen Morrissey: Goodbye.