In recent weeks there have been a number of high profile comments made about the UK’s economic outlook from prominent figures. Rishi Sunak, the Chancellor, has countered warnings of weakness in the pound with a statement backing the UK’s medium and long term prospects.
Bank of America released a report in late May that captured negative sentiment towards the pound, with the sharpest monthly fall in investor sentiment for a decade. Multiple factors including inflation, Brexit and the Northern Ireland Protocol have combined to weigh on the mind of investors.
Mr Sunak countered by placing the blame on global shocks for the majority of the impact, which he says are affecting all global economies.
The point is whether any of this speculation matters if you’re a long-term investor? You would expect the Chancellor to come out swinging to defend the UK economy and the likes of Bank of America will have trades set up to capitalise on a drop in the pound, so both sides have vested interests.
Sometimes, blocking out the noise is the best course of action for investors who have long-term horizons.
Keeping calm and staying in your seat
What the last three years have shown is that firstly, things change incredibly quickly, so it is unwise to attach too much sentiment to a single opinion. Global crises have sent stocks lower and higher in a shorter period of time than ever before and nobody could have foreseen those events happening in the way that they did, at the time that they did. Influential figures are usually answering questions posed by journalists using the best information available to them at the time so using them as a barometer for future sentiment is unwise.
Secondly, from an investment perspective when looking at the UK in particular, UK stocks and the pound tend to perform in opposite directions. As many of the top FTSE 100 firms derive their profits in foreign currency, it can work counterintuitively. So, when the pound drops, their value can increase through exchange rates. A good example of this was when the Brexit referendum vote was announced. Despite huge falls in the FTSE 100 the day after the referendum vote, it actually ended the week ahead of where it started the week, while the pound plummeted.
Gareth Hope, Wren Sterling’s Head of Research, added: “There are always plenty of opinions going around as to what lies ahead for the world economy; for our clients, the important factor is to understand their personal financial needs, and plan accordingly.
“For clients with longer-term objectives, while the ride may throw up some bumps, we would expect the market to recover as it has on previous occasions where we’ve lived through recessions.
“For clients with shorter-term objectives, or those drawing an income from their portfolio, then we always start from the point of recommending holding some money in cash to limit the need to sell from the portfolio during periods of market unrest. That means we’re not denying the client the opportunity to capitalise on growth in their portfolio value in the future.
“As always, a diversified investment portfolio will offer the best chance of benefiting from the global markets and defending from possible shocks.”
The value of your investment can go down as well as up and you may not get back the full amount invested. Capital is at risk.