AS we enter the last two months of 2021 it is fair to say that this has been a year like no other.
We are still not out of the global pandemic, problems as a result of Brexit are still rumbling on and it seems that we are facing a more inflationary outlook than we have seen for a number of years.
Last week the Chancellor unveiled his autumn budget and spending plan which contained very few surprises as most changes had been well flagged. There was a change to the rate of tax on dividends, an increase across all the bands of 1.25 per cent from April next year and as we are all aware, national insurance is also to increase by 1.25 per cent from the same time – the “health and social care levy”. Despite speculation to the contrary, there were no changes to capital gains tax or inheritance tax.
The budget is now firmly overshadowed by the COP 26 conference which is taking place in Glasgow and there have already been many column inches dedicated to what should be done to tackle the thorny issue of climate change.
This is taking place against a backdrop of rising energy prices which seems likely to continue throughout the winter, according to industry experts. This has been a core contributor to the rise in inflation that we have been experiencing over recent months.
The current rate of inflation as measured by the consumer price index is 2.9 per cent, but the Office for Budget Responsibility (OBR) is forecasting a rise to 4.4 per cent by spring of next year and an average of 4 per cent for the year as a whole.
The official target remains at 2 per cent and the old measure of retail price index (RPI) is expected to rise to 5.4 per cent in January. This in turn implies that we must expect increases in the base rate.
We have enjoyed ultra-low interest rates for the past 12 or 13 years and many have come to regard this as the norm. There are predictions of a rise in interest rates (at least one) before the end of the year and the Bank of England’s announcement this week will be eagerly anticipated.
Add to this the on-going issues and uncertainty around Brexit and it is apparent that the UK is facing a lot of unknowns. Over the past few years, the FTSE 100 has underperformed other indices globally and last week proved to be no exception, with a rise of 0.46 per cent on the week compared with the S&P 500 up 1.33 per cent and the European markets up 1.47 per cent.
Once again US indices hit new highs, whereas the FTSE 100 is languishing at around 7270 at time of writing – a far cry from the heady days when it looked as though it was heading towards 8000.
Much is written about the UK being cheap but there is a lot to contend with: in addition to the worldwide issues of Covid, supply chain problems and rising energy prices, the uncertainty of Brexit is casting a long shadow.
:: Cathy Dixon is a partner at the Belfast office of Smith & Williamson Investment Management. This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise.
