Eight positives savers and investors can take amid the financial gloom

 

Reasons not to be too fearful: Eight positives savers and investors can take amid the financial gloom

 

 

The cost-of-living crisis is dominating the headlines (along with the heatwave) and at the forefront of most households’ concerns. Many across the country are being gravely affected by it and suffering a depressed standard of living. For the worst-affected households, short-term government assistance is in place to help see them through to the other side, although many feel that more will be needed when energy bills soar again in October. And given the current situation in government, it’s likely that will arrive. 

 For households in less dire but still pressurised situations, it’s important to remember that nothing is permanent, and it can help to get a bit of perspective and to take a long-term view. There are some aspects of the economic situation that might not be as bad as they seem, and likewise there are some elements of personal finances that aren’t suffering.  

To alleviate some of the gloom, Adrian Lowery, financial analyst at leading wealth manager Evelyn Partners (formerly Tilney Smith & Williamson), identifies a few silver linings to our current economic and financial clouds.

 

 

1. UK jobs market is holding up pretty well, and recent growth data was better than expected  

 

 

While the UK economy is certainly facing some difficult headwinds, a recession is far from being a certainty, with official figures last week showing the UK economy rebounding in May after shrinking in April and March. The Office for National Statistics revealed the economy grew by 0.5% during the month, much higher than the flat growth that analysts polled by Reuters had expected – although this is set against an unexpected 0.3% contraction in April. New jobs data is due this week but last month’s showed that – although the unemployment rate rose slightly in April for the first time since late 2020 – the number of full-time employees hit a record high, redundancies were at record lows, and the number of unfilled jobs were at an all-time high of 1.3 million. The downside to all this for borrowers, both domestic and business, is that it makes it easier for the Bank of England to raise interest rates. 

 

 

2. High inflation might not be ‘transitory’ – but neither is it permanent 

 

 

There are lots of ‘known unknowns’ around the path for inflation at the moment, most notably how the Ukraine war pans out and how far and severely the energy crisis and other supply bottlenecks go on. Oil prices have abated from their peak of $127 a barrel of crude to around the $100 market, and it’s possible that slowing global growth could further dampen commodity prices. Another is whether salaries ratchet up to keep pace with and possibly fuel inflation. But analyst forecasts still see inflation coming down quite significantly from next spring. This might be scant comfort as it’s not as if average prices will be coming down – they will merely be increasing less quickly, particularly as year-on-year comparisons start to reflect the high price levels already obtained in the first half of this year. 

But the Bank of England still expects inflation to fall sharply next year, with Governor Andrew Bailey reiterating to the Treasury Select Committee recently that inflation is expected to be back to its 2% target in around two years’ time, after peaking at 11% in October. Keep an eye on the Bank’s updated forecasts that will be released with its next interest rate decision on 4 August. A caveat to all this is that one long-term effect of Russian aggression in Ukraine could be a reversion away from the trend towards more economic globalisation, which has been a disinflationary influence in recent decades. This could mean the base level for inflation in future years is slightly higher than the low levels in the decade and a half following the financial crisis. 

 

 

3. The UK stock market is proving relatively resilient, dividends are forecast to rise further, and British holders of US and global funds have been protected by dollar strength 

 

 

The MSCI World Index is down 22% year-to-date (capital return only) and about 21% on a total return basis (including dividends).[1] Meanwhile, the MSCI UK All Cap index is 6.7% down year-to-date (capital return only), and just 4.8% when dividends are factored in. This reflects the fact that many of the most resilient sectors this year – energy, mining, commodities, tobacco and aerospace and defence – are heavily represented in the London blue-chip market (unlike the worst-hit global sectors like technology). Also, the London market is the most international of the major bourses, with more than 70% of aggregate earnings of UK-listed stocks made overseas. This applies much more to the FTSE 100 index than the FTSE 250 and smaller cap firms, which are suffering more from the currently gloomy UK economic outlook.  

 Many UK investors and pension savers tend to have a home bias in their portfolios that, while it might not have served them so well in the post-financial crisis era, could be protecting them against the worst of the falls in US and technology stocks. Meanwhile, dividends continue to support returns from the UK market – as the figures above demonstrate. Recent research has revealed that shareholders in Britain’s top firms are set to pocket as much as £85bn in dividends this year as boardrooms pay out excess cash to investors. This expected payout from blue-chip companies will be up from £78.5bn in 2021 and just below the record payment of £85.2bn seen in 2018.[2] 

 

Finally, British holders of global and US funds are probably not seeing the bear market losses on their holdings that they are reading about in the headlines. Since the start of the year, the sharp appreciation in the US dollar versus other currencies has helped to cushion the full effect of steep losses on US shares and global equity funds when measured in sterling. If we look at the MSCI World index in sterling terms, it is down by ‘just’ 10.3% (capital return) and 9.2% (total return) rather than the 21-22% slide it has experienced in dollar terms. In other words, UK holders of sterling denominated funds could be experiencing drops less than half as great as indicated by some of the dollar benchmarks. 

 

 

4. Annuity rates are at eight-year highs 

 

 

Annuities have been the Cinderella option – compared to tax-free lumps sums and drawdown – for those accessing their pensions pots since freedoms were introduced in 2015. That has largely been due to rock-bottom gilt yields, as these have kept annuity rates at unattractive levels. But gilt yields are now on their way back up, so annuity rates are rising rapidly and hit their highest level in eight years in June. Annuities allow you to exchange a lump sum from your pension pot for a guaranteed income for life. In truth, buying an annuity or going into pension drawdown is not an either/or decision. One sensible strategy is to use part of a pension pot to buy an annuity income level that will cover – alongside the state pension – basic living expenses. The remaining funds in the pension pot could then be kept in drawdown to take advantage of investment growth. A lump sum can now buy you an annuity that will pay as much as 25% more income now than it would have done a year ago. 

 

 

5. Pensioners are in line for a big state pension increase 

 

 

Thanks to the reinstatement of the state pension triple-lock, the next financial year’s full state pension will go up by this September’s rate of consumer prices index inflation. With CPI inflation at 9.1% in May, and forecast to top 11% in October, that should make for a very substantial increase.  There are not many other sources of income so tightly tethered to the cost of living. 

 

 

6. Lower asset prices are not all bad for regular investors and pension savers with a longer-term view  

 

 

As long as you do not need to access your investments before asset prices recover, and you are buying into the market at regular intervals, then falling markets are not a wholly bad thing. Those early in their pension saving or investing phase will be picking up more shares than they were even a few months ago, and if asset prices fall further this will be accentuated. Evidence is emerging that some, especially younger, pension savers are cutting their contributions as their finances come under ever greater pressure this year. Keeping up payments, if it can be done, will take advantage of lower asset prices and the compounding power of early savings. 

Those considering but anxious about entering the market for the first time might take some comfort from the Buffet maxim about being greedy while others are fearful. That’s not to say new investors need to hope that we are at the bottom of the market. If you start to drip-feed into the market now and do not need to realise any of your investments for at least five years, you will be picking up more competitively priced investments if markets fall further in the coming year or two. 

 

 

7. Interest rates on savings accounts are rising  

 

 

Albeit from a very low level. The top easy access rate is now about 1.5% and you can get about 2.7% on a one-year fix. These rates are being swamped by current levels of inflation but everyone needs to hold some savings in cash, and it’s better that it’s earning a visible amount of interest rather than the near-zero levels that had become the norm until recently. Savers might want to think before fixing their rate for more than a year at the moment, however, as the UK’s benchmark interest rate will rise further this year, and savings providers should hopefully follow suit. 

 

 

8. Bonds might start to become more relevant again 

 

 

A long period of ultra-low interest rates and money printing have kept yields on bonds incredibly low meaning investors, both institutional and private have been stuck between a rock and a hard place, and left scratching around to stabilise portfolios with alternative diversifying and income generating assets to complement volatile equities. Bond yields are rising after recent falls. The Bloomberg Global Aggregate Bond index, the global benchmark, delivered a total return of –14% over the first six months of the year and US Treasuries suffered first-half losses this year of 11%, setting them on course for the worst year on record.[3] Bond yields – which go in the opposite direction to prices – are on the rise, but that should eventually start to make them more attractive to investors.

 

Medium-dated US Treasuries and UK Gilts are now yielding about 3% and 2% respectively, suggesting that predictable returns are making a comeback. It is early days yet to call the bottom of the bond market – just as it is the equity market – but as rates go up and inflation comes down, bonds will start to become more attractive again to income seekers and those looking to balance portfolios. 

 

 

Finally…

 

 

Younger and middle-aged pension savers and early-stage investors who have been jolted by the experience of this year in the markets can take some comfort in that they have time for their portfolios to recover, to absorb some of the lessons and maybe make some adjustments to their investment strategy. Those lessons being that: inflation has not gone away; near-zero is not a sustainable long-term level for interest rates; high-risk assets like growth stocks are prone to big corrections especially when they have been inflated by monetary policy; the monetary authorities cannot always come to the rescue of markets; and portfolios need to be diversified and balanced to make them resilient in volatile periods. 
 

_NOTES 

_{[1] Index performance data: Evelyn Partners / Lipper, 31/12/2021 To 14/07/2022.}  

_{[2] Dividend Dashboard report from AJ Bell, July 2022.} 

_{[3] Reuters quoting ICE BofA index tracking seven- to 10-year Treasuries since 1973.}