Financial markets made their feelings known about the Chancellor’s Mini Budget on the 23rd of September. After a dramatic response that forced the pound to its lowest level against the dollar for decades, and intervention by the Bank of England to buy £60bn of Government bonds and Kwasi Kwarteng rowing back on his commitment to drop the 45p rate of tax for high earners, things might just settle down a bit.
Anyone that says they can tell you what’s going to happen next though is a charlatan.
As we said in our initial response to the Mini Budget, a line in the sand has been drawn around how the Government plans to manage the country’s finances. Mr Kwarteng’s u-turn has been forced in this instance, but we should not expect a leopard to change his spots and pursuing a high-growth low-tax strategy is clearly his plan.
This appears likely to butt up against the Bank of England’s approach to try and take heat out of the economy to quell inflation. Which strategy will prevail? We don’t know. The impact on the long-term future of the UK economy or UK stocks is unclear.
What we do know is that over the long-term, using historical data, the long-term trend is up because financial markets tend to perform, but they do require the government to be viewed as credible, which it wasn’t last week. There will be bumps along the way and this is certainly a bump.
Block out the noise
You might have looked at all the activity and prophecies of doom from some journalists and market commentators and considered your overall investment strategy. You might still be doing that. The message right now is to stay calm and block out the noise.
If we consider other times recently when there was hysteria about the state of the economy and predictions of falling stocks, such as Covid-19 in March 2020 or Brexit in June 2016, the common theme is that where there was a dip, there was also a recovery. Had you sold investments at the lowest point when the noise was loudest, you would have missed out on the recoveries that happened – crystallised your losses, to use investment parlance.
Focus on the long term
When you create an investment plan, or pay into your workplace or personal pension, you’re doing it for the long-term. You want your future self to be financially comfortable and the performance of investments and financial markets is key to that. Try to remember what you are doing it for and resist the urge to stop paying in or withdraw what you have, as you will be making a mistake.
The longer you are invested in the market, the more chance you have to benefit from rising values. The same is true of falling values of course, but remember, the long-term trend is upwards.
If your portfolio has been created by a Wren Sterling adviser, or you’re invested in a workplace pension default fund, you will also benefit from diversification. This means all your eggs are not in the same basket and where some investments have suffered a lot in the last few days, others will not have done. The total number of investment units you own will remain the same, so as and when valuations increase, your investment unit values will increase with it.
Is this time different?
The environment right now is certainly challenging, as we’ve made reference to in recent articles. Inflation at these levels (around 10 per cent) makes it very difficult for investments to keep pace, so many of us are seeing the true value of our money eroded, especially money held in cash or savings accounts. However, inflation at these levels will cease at a point in the future as spending and therefore demand recedes.
The bond markets have traditionally provided a counter-weight to equity markets, yet they have been hit hard by inflation. That will take time to heal and will depend on central bank policies to set it right and give investors confidence again.
Understandably, inflation is hitting everyday budgets hard and there will be pain along the way as people have to make difficult choices. One of the easier choices might be to stop paying into pensions or investments now to make life easier in the short-term. However, this will create pain in the long-term, so if you’re considering this, please speak to your financial planner!
IMPORTANT: Past performance is not a guide to future investment returns and you may get back less than your original investment.