Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

THE first week of September has officially passed. But summer wasn’t quite done. Up and down the country people dug out their flipflops and basked in the sunshine. And thank goodness for this last hurrah, as this week’s charts weren’t quite as sunny - with oil, US valuations and pensions grabbing our attention.  

Enjoy what feels like the last of the good weather over the weekend. Until next week.

1. The oil price is rising and investors are really worried

The oil price has risen above $90 a barrel for the first time this year after Saudi Arabia and Russia extended production cuts that have reduced the daily supply of crude by 1.3 million barrels a day. Both said the reductions would continue until the end of 2023.

The oil price is a key driver of inflation. As the chart shows, there is a strong and almost immediate link between changes in the cost of crude and the consumer prices index.

 Stock markets fell after the announcement by Saudi and Russia because investors fear that if a rising oil price feeds into higher inflation, then central banks may have less freedom to reduce interest rates next year.

Stock markets are focused on interest rate expectations as central bankers like Andrew Bailey at the Bank of England begin to hint that the monetary tightening cycle of the past couple of years is close to ending.

Bailey told MPs this week that it was possible that UK interest rates may not have to rise any further, contrary to market expectations of another couple of quarter point rate hikes before the end of the year.

The oil price and inflation

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Source: LSEG DataStream and Fathom Consulting. 

2. The UK may be chronically under saving in workplace pensions

The UK is a country of pension haves and have nots - and nothing shows that better than this chart, produced by the New Financial think-tank this week.

It shows the equivalent percentage of salary being contributed to workplace pensions for people in different part of the labour market. It then breaks down how much comes from individuals themselves, and how much from their employer.

The biggest contributions come in the public sector - for those in the NHS and Local Government Pensions Scheme (LGPS). These are, of course, ‘defined benefit’ (DB) schemes where retirement income is guaranteed and worked out as a proportion of earnings.

They look very generous indeed when compared to the average private sector scheme, most of which are ‘defined contribution’ (DC), where income depends on what’s paid in and what investment return is achieved.

Bottom of the pile is those contributing the minimum in auto-enrolment (AE) schemes, the default for workers if their employers doesn’t choose to offer them a more generous scheme.

This isn’t a story about overgenerosity to the public sector (who may well complain a big pension is scant compensation for lower regular pay). It’s a story of chronic under-saving elsewhere. 

Selected pension contribution rates in the UK

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Source: New Financial research, IFS, PPI and OECD, September 2023.

3. How cheap is the US stock market vs the rest of the world?

Timing the market - going in and coming out - is notoriously difficult and not to be recommended. Stay and invested and think long-term, is the much-repeated mantra.

However, for investors who like to tinker it is worth watching valuations, gauging which markets are regarded as cheap - and which are not.

This chart from asset manager Schroders shows how expensive the US stock market has become over the past decade versus the rest of the world. The data is based, now bear with me, on the cyclically-adjusted price-to-earnings ratio. It is a more sophisticated way of considering price to earnings ratio, which is a comparison of profits and share prices.

With “CAPE” the numbers are averaged over 15 years to smooth out distortions. As with the p/e ratio, a lower number represents better value.

As you can see, the US has become far more expensive than elsewhere, driven higher by the tech titans like Tesla and Google-owner Alphabet.

That may continue for some time but the very long timeline of history suggests that higher returns are more likely to follow times when CAPE is very low. Perhaps worthy of a conversation with your adviser. Our retirement calculators can help you plan, save and withdraw with more confidence. 

Relative valuations: US vs Rest of World

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Source: DataStream Refinitiv, MSCI and Schroders Strategic Research Unit. Data to 31 July 2023.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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