3 Mins
The investment journey so far in 2022 has been challenging with regular comments that a recession will happen. You’ll likely have also been reviewing the outcomes of the, modestly described, ‘Mini Budget’ statement by Chancellor Kwasi Kwarteng and his subsequent U-turn. The event sent a shockwave through financial markets as he announced a series of tax cuts and higher borrowing that challenged economy, and will long be remembered by economists and political observers alike.
The announcement was followed by a 3% fall in the value of the pound compared to the US dollar, a 2% fall in share prices on the London Stock Exchange, and a sharp rise in the interest rate that the UK pays on longer term borrowings. All due to the view that the government borrowing to fund its tax cuts are unsustainable. All of this has created uncertainty which in turn has led to the volatility in investment markets.
It’s clear the sharp price movements we’ve witnessed in investment markets have changed the landscape for investors. First, we should note that the UK stockmarket is very different from the UK economy. Over 75% of the revenues of the largest 100 companies listed on the London Stock Exchange are derived from overseas. In many cases these profits will be boosted by the decline in the value of the pound. This combination of higher profits and lower share prices improves the attractiveness of UK shares and should lead to higher long term returns. Equally, the rise in the interest rate on government bonds increases the return that investors receive when lending money to the UK government and companies. It is therefore a better time to own long term assets than before Mr Kwarteng budget statement. However, not everyone may view the situation in this way, preferring instead to focus on the immediate fall in prices.
Behaviorally, this is an important time to navigate the short-term noise and make good decisions aligned to your goals. Looking ahead, we continue to believe investments are still beneficial to help people reach their goals. Further, following recent losses to investments, underlying asset valuations have improved which is a broad positive that will help investors in the next chapter of their investment journey.
It’s really important during periods of market volatility that you don’t overreact, that you don’t sell out of your investment at a low point. Research shows that those that sell out at times like these and then buy back in when they feel more comfortable, do much worse than those that stay invested. We think the most important thing is to stick to your original plan.
We can look back at the recent events in 2020 as a result of the COVID pandemic where investment markets fell heavily but soon recovered within a short space of time. Even further back than this was the financial crisis in 2008, where investments again suffered falls but were able to recover from this and still provide strong, long term returns.
Market volatility can be seen as an investment opportunity. So, generally when prices fall, it means you’re able to buy investments, at better prices. We view this as a positive, not a negative as this can help to grow your money and achieve your long term financial goals.
We don’t yet know how markets will react to the change to the 45% tax rate, and in the short term, they may continue to move around but it’s very important to take a long-term approach to investing. Our view is that when we have periods of market volatility or where prices fall, it’s often a time where you should be adding more to your investments rather than taking them away.
We would also re-iterate our advice and the importance of holding a diversified portfolio of investments that contains both UK and overseas assets, managed by experienced professional investors. This helps to reduce risk and navigate through volatile times.
As always if you have any queries or wish to discuss your investments in more detail, please contact us.
Jonathan McDowall
Director
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Henderson Loggie Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority.
Past performance is not indicative of future results and no representation is made that results where stated, will be replicated. Investment values rise and fall and the value of them is not guaranteed. On encashment, you may not get back the amount invested.