Raging storm that’s rocked UK markets WON’T sink your portfolio
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Investors have had a few scorching days. The pound is at an all-time low against the US dollar, government borrowing costs have skyrocketed and stock markets are plagued by dramatic volatility.
Most investors will need a strong stomach this weekend to look at the value of their portfolio. (In fact, not looking might be a good plan.) An index of the UK’s 350 largest companies is down about 12 percent this year alone, while global stock markets are down nearly 25 percent.
Most investors have already taken losses this year, even before last week’s events took hold, thanks to the war in Ukraine, rising inflation and the ongoing global recovery from the pandemic.
Drifting: Most investors need a strong stomach to look at the value of their portfolio
But things got much worse in the wake of Chancellor Kwasi Kwarteng’s mini-budget and the Bank of England’s muted response to rising inflation. Things got so bad that the Bank of England had to step in to buy up to £65 billion in government bonds to restore financial stability.
So what should investors do – if at all? And is it really that bad?
The impact is bad – but not terrible
Most investors have a well-balanced, diversified portfolio. This means that severe turbulence in one country, currency or sector should generally not have a tipping effect.
For example, if you have a number of investments in UK companies that are priced in pounds sterling, the declines they have undergone will be partially offset by the gains made from investments in other companies that produce gains in US dollars.
Philip Dragoumis, director of Thera Wealth Management, explains: ‘British companies make up less than 4 percent of an index of the largest companies in the world. This means that 96 percent of an equity portfolio is automatically invested in other currencies and thus benefits from a possible decline in sterling.’
What about UK investment?
Many British investors have a so-called ‘home bias’, in other words a large proportion of the British companies in their portfolio.
Even for these investors, it’s not all bad news.
Smaller companies have suffered the most from the decline in sterling. That’s because they most likely buy materials from abroad in dollars and euros, but earn their profits in pounds. Therefore, their costs are higher, but their profits are lower.
The FTSE 250, an index of 250 small and medium-sized British listed companies, is down 29 percent so far this year. Companies like ASOS, TUI, Taylor Wimpey, Persimmon and Barratt Developments have seen particularly sharp declines in recent days.
However, the picture is a lot brighter for large British companies. The FTSE 100 index of UK’s largest companies fell just under two percent last week and is down about 8 percent so far this year. That’s because 71 percent of the revenue generated by these companies comes from outside the UK and is thus earned in dollars rather than pounds.
Victoria Scholar, head of investment at investment platform Interactive Investor, said: “We have seen painful volatility for investors in the pound, but the FTSE 100 has been relatively resilient.
“London-listed exporters such as Diageo and Coca-Cola enjoy a currency advantage when the pound sterling falls as British exports priced in pounds become cheaper and more competitive in the global market.”
Bad news for bonds as the declines continue
The value of bonds has fallen this year – and the declines have accelerated in recent days. Bonds are essentially debt issued by corporations or governments. Although interest rates were low, bonds with a yield of one or two percent seemed a reasonable value and investors were willing to pay for them. But as inflation has risen, this level of income has become less attractive and the value of bonds has fallen.
If investors think that the debt a company or government issues is as safe as houses, they are likely to lend them at low interest rates. But if there’s even a hint of doubt about their ability to pay the debt, the cost of borrowing goes up. This also contributed to rising bond yields. Yields move in the opposite direction to bond prices.
All of this is important to investors, as most diversified portfolios contain a combination of stocks and bonds. The theory is that they often behave differently so that if stocks start to fall, you have some protection in the form of bonds. That was not the case this year, however. Stocks are falling – and so are bonds.
James Norton, chief financial planners at fund manager Vanguard, said: ‘This is clearly very disturbing for investors, especially those approaching retirement, but more importantly, the fundamental diversification benefits of bonds over the long term still exist.
And it is very important that investors focus on the long term. There is no doubt that 2022 has been tough, but in 2020 and 2021, portfolios have appreciated in value for most investors. Perspective is essential.’
Norton adds that lower bond prices, on the upside, mean higher returns for investors.
“In simple terms, this means that bond yields are now likely to be higher than they were,” he says. “With returns likely to be closer to five percent than the one or two percent we’re used to, investors have a chance to recoup some of those losses faster.”
So what should investors do now?
It is likely that the best action is to take no action at all. You haven’t withheld any losses until you sell your investments – by which time they may have recovered well – especially if you have a long time horizon.
Daniel Jones, financial planner at DGS Chartered Financial Planners, says: “Keep your cool. Stick to your schedule. It’s time in the market that gives you positive long-term returns, not time the market.”
He adds that it’s human nature to be nervous when the value of your investments falls, but an emotional response can be costly.
Scholar of Interactive Investor adds that it is notoriously difficult to time the market. None of us really know if things will get better or worse.
“While this year has been extremely challenging for investors, in the longer term it is generally much better to stay invested rather than sell and then re-enter at the right time when you may be missing out on upside potential,” she says. . say.
On the plus side…there are bargains
When the markets fall, investors can buy up stocks and shares that are significantly cheaper than days or months before. Money coach Fanny Snaith says it’s a bit like selling season. “You don’t lose money until you sell,” she says. “If you can afford to buy, fine. However, keep in mind that things could get worse before they get better.”
Check whether your portfolio remains in balance
Make sure you have a balance of different types of assets in your portfolio and that you are not overweighted by any particular region or sector.
That should protect you from any future market declines. For most investors, this is probably the safest approach.
For those who can and are willing to take a little risk, some investment experts believe there are opportunities.
James Yardley, senior research analyst at fund research group FundCalibre, says: ‘British assets look cheap due to the pound’s decline.
“If you can find stocks that get a lot of their earnings from abroad — especially in dollars — but whose stocks have fallen, they could be an opportunity.”
He points to the City of London Investment Trust as an example of a fund that invests in larger British companies.
It has converted an investment of £1,000 into £1,070 in three years and has interests in BP and Shell – both UK-listed companies that make much of their revenues in dollars.
TB Evenlode Income owns large companies such as Diageo and Unilever, which could also benefit from a weaker pound. It has turned £1,000 into £1,021 in three years.
JOHCM UK Dynamic also owns large, multinational companies listed in the UK. It has made a loss of 4% over three years.
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