September 2022

With rising inflation, the cost of living crisis and talk of recession, there’s not much good news around at the moment. The difficult financial environment and uncertainty about what lies ahead can be particularly worrying for investors. So what is driving the current market conditions, and what can you do to protect your investments? 

Inflation, the rate that prices rise over a set period, hit a 40-year high in both the US and the UK in June. Economists expect it to climb into double figures later in 20221 and for the spike to continue into 2023. 

Prices are being driven up primarily by the impact of the conflict in Ukraine, which has sent the cost of oil, wheat and other commodities soaring. It’s estimated that Russia’s invasion of Ukraine accounts for more than a third of the US inflation spike2. Inflation is also being pushed up by the ongoing supply chain challenges arising from the Covid-19 pandemic, with demand for goods increasing rapidly during the lockdowns at a time when manufacturing and distribution faced serious disruption.  

To curb inflation, the Bank of England raised interest rates to a 13-year high of 1.25%3 in June. The US Federal Reserve increased interest rates by 0.75 percentage points in June, the biggest increase since 1994 and in July, the European Central Bank raised key interest rates for the first time since 20114. Further upwards moves are forecast over the coming months as central banks across the world seek to counter inflationary pressures5.

Market movements  

Those pressures have been reflected in stock market movements, although volatility has been more noticeable in some markets than others.  

While the UK’s FTSE100 was down just 2.9% year-to-date by 30 June – albeit via plenty of turbulence – US indices had suffered steeper falls, with the Dow more than 15% lower, the Nasdaq Composite index (which houses most of the big global tech names) down 29.2% by 30 June and the S&P 500 by around 20%6

Some sectors and companies often perform well when inflation is rising, such as those involved in ‘non-discretionary’ services and products that are always in demand (such as basic household cleaning products) and which can therefore pass on higher prices to consumers while maintaining sales levels.  

But the broader effect of inflation is to eat into consumer confidence – down to a record low in the UK7 – and pull company profits down. Interest rate hikes aggravate this by dragging on company earnings and share prices. 

All of this has undoubtedly left many investors feeling spooked. With the ability these days to review portfolios and receive market updates every minute of every day, it can be easy to get sucked into the market ‘noise’. You may be tempted to move money out of stock market-related investments to avoid further damage to portfolios, particularly as the outlook is far from rosy.  

History shows, however, that if you’re investing for the long term, sitting tight is a better response. Your adviser will ensure that your portfolio suits your objectives, risk appetite and short-, medium- and long-term needs and is well diversified to weather temporary volatility.  

Knee-jerk reactions to market movements rarely pay dividends. A good example of this was provided by the global financial crisis of 2007-09, when large numbers of investors sold out in fear of a long bear market. In fact, stock markets went the opposite way, embarking on a bull market that was to last until the Covid-19 pandemic in early 20208

Investors who remained patient were handsomely rewarded during that long bull market, while those that attempted to ‘time the market’ by selling out and buying back in again later on missed out on significant gains. For instance, as the financial crisis unfolded between May 2008 and February 2009, the MSCI World Index plummeted by over 30%. Investors who exited in that period crystallised those heavy losses. But by the end of 2009, the index had already bounced back by over 40%, more than rewarding those that resisted the urge to bail out9

Minor adjustments 

All of that is not to say that you should bury your head in the sand entirely. While checking your portfolio every hour of every day isn’t advisable, ignoring them entirely isn’t either. 

When conditions change there is always a case for reviewing portfolios and checking if anything needs to be tweaked, rebalanced or replaced to keep them in line with your objectives and risk appetite. This is something we do as part of our ongoing advice and we’re happy to talk to you about it at any time. 

Checking that you are on track is particularly important if you are investing for income, especially in or near retirement. As portfolio values shrink, maintaining the same income withdrawals runs the risk of ‘pound-cost ravaging’, which refers to the impact on the capital in a fund when income continues to be taken from it even as it loses value to market volatility.  

Fluctuating capital isn’t such a problem if the investments in the portfolio generate a steady stable income and there’s time to make up any capital losses, but those in retirement rarely have that luxury. Meanwhile, with inflation rising sharply, the chances of getting a dividend yield that keeps pace with rising prices are distinctly slim. 

There are ways of dealing with those challenges, however, such as increasing exposure to dividend-producing equities, income funds and/or ‘real assets’ such as infrastructure and property, as well as government and corporate bonds. It may also be worth exploring with your adviser the extent to which the level of income taken from investments can be reduced, temporarily or otherwise. 

Next steps 

We discuss all your investment options at your regular review, but we’re also here to help if you have any concerns in the meantime. Please get in touch if you are worried about your investments in the current markets. Or if your circumstances have changed, speak to us about reviewing your portfolio now, rather than waiting for your next annual meeting.