Please note: this blog was published in September 2022 and its content is based on what was correct at the time of writing. As a result, some of the facts and opinions may no longer be current or relevant.
Global financial markets continue to be disrupted by high volatility, which has driven panic selling from investors, reinforcing the negative year for markets in 2022.
Apart from the FTSE 100, which at the time of writing was down just over 4% this year, most major global stock market indices, such as the US, have fallen by double-digit figures so far this year.
What are the latest concerns?
In recent months, we’ve covered many of the factors that have caused much of the market turbulence we’ve experienced in 2022. However, at the time of writing*, markets are reacting to the latest set of political and financial developments which we’ll do our best to decode for you below.
At the centre of the story is the US Federal Reserve (FED), which for a variety of reasons (such as the US dollar being the world’s reserve currency), generally leads other central banks.
Last week, the US Federal Reserve (the central bank of the United States) decided on a further 75 basis point rise in US interest rates. The increase itself was not alarming compared to the steep rate hikes that had been forecasted, however, what shook markets more were the comments from the FED Chair, Jay Powell, who vowed ‘to raise rates to fight inflation until the job is done’.
In short, the stock markets had not expected such an ongoing aggressive policy stance, and there was a sell-off in the aftermath, as the markets struggled to digest a prolonged period of higher interest rates to combat record high price increases. The old saying ‘when the US gets a cold, the rest of the world sneezes’ continues to hold true, resulting in the recent global market sell-off.
Closer to home, investor confidence towards the UK has fallen dramatically, following the release of the Government’s ‘mini-budget’ on Friday, 23rd September, which primarily focused on tax cuts.
This has led to Sterling and UK gilts being sold off in historic proportions. The market’s reaction is somewhat surprising, given that much of what was laid out by the Chancellor of the Exchequer, was known before the announcement. The sustained negative reaction seems to stem from how these tax cuts will affect UK government debt.
Lower taxes means that higher portions of the budget deficit will need to be funded by government borrowing, thereby increasing debt (and risk) for the UK.
Unfortunately, with increased borrowing on the horizon, markets demonstrated their unease with the direction of policy. As a result, the prices of UK government bonds plummeted as investors sought a higher level of yield (compensation) to reflect their state of unease. Sterling has since fallen against the dollar to a record low. 1
What does this mean for our investment plans?
Arguably the biggest unwelcome surprise in 2022 has been the performance of bonds. Within our Plans, bonds usually play an important role in reducing volatility while providing solid, stable returns. However, 2022 has proven that this is not always the case, as bonds have delivered sharply negative returns.
Soaring inflation, which has resulted in one of the most rapid increases in expected and actual interest rates, combined with ultra-low bond yields going into 2022, have caused this rather unprecedented fallout for bonds over such a short period.
Even the safer parts of the bond market, where we have most of our Plans’ exposure, have not been spared - and this is an unusual situation.
We have also moved in recent times to add new and alternative asset classes to your Plan, such as infrastructure, to further diversify our Plans.
There is no denying that markets are currently volatile, as they have been for since the start of 2022, and this may continue for some time. Owing to this, our Plans reflect a tentative outlook with higher than usual cash allocation and a lower than usual share allocation in our Investment Plans.
While our Plans are not immune to market-wide impacts, our focus is to limit downward movements for our customers as much as we possibly can despite this. At the same time, we are constantly seeking to ensure our Plans are built based on achieving the best possible performance over the long-term.
Although our Plans are in sterling, the underlying investments held are globally diversified, which helps to alleviate volatility to an extent and allows for a range of potential sources of returns from various assets and regions. Therefore, whilst it's important to be aware of what is happening in the UK, it is not the be-all and end-all if you invest with us.
What could you do?
In times of turbulence, you may want to focus on the long term and avoid making quick, emotional decisions, which could lead to permanent losses. If you sell while your investments are down, you’ll be cementing your losses and making them real without giving them time to potentially recover.
Thinking about the long-term when you invest could help your investments to recover from any dips you encounter along the way. After all, the longer you’re invested for, the more time you have for markets to recover.
We understand that market periods like these can be difficult to go through, but history has shown that they have always passed and waiting out dips could be beneficial in the long-run. Just as an example, Bloomberg data shows that those who invested in the FTSE 100 for any 10-year period since 1984 have had an 89% chance of making a positive return.
One thing to bear in mind is that it is consistency that can offer added value in these volatile times. One of the easiest ways of doing this is through pound cost averaging (where you invest little and often), as it removes the emotion from the decision-making process, and is as simple as setting up a direct debit into an investment plan, so that you are regularly buying investments at different prices. The strategy of pound cost averaging also gives you the opportunity to pick up potential investment bargains when stock prices are low, and this could help you to achieve larger gains in the future. However, please remember that with all investing your capital is at risk and you could get back less than you put in.
*Blog written on 26th September 2022