The UK stock market had the quickest, sharpest, deepest fall we have ever experienced at the start of the pandemic, but it is making a solid recovery and providing new opportunities for our clients to potentially gain handsome returns from their investments.
Since the start of Covid-19, the major stock markets around the world have, on the whole, outperformed the main FTSE 100 share index in the UK.
All of the stock markets have now recovered to higher levels than they were pre-pandemic, with the exception of the FTSE 100 (which has approximately 10% to make up). This is where an opportunity may lie when it comes to investing in UK shares; they are still the cheapest of all the major markets.
How does this impact our clients?
After we assess our clients’ objectives, their timeline, their attitude to risk, their capacity for loss, we carefully invest their money in a hand-picked portfolio that will (most of the time) give them the best results.
To reduce risk and increase diversification, we invest some of our clients’ money in overseas markets. Over the last 18 months, these have provided a more positive return than the FTSE 100 share index. These markets continue to do very well.
The American stock market has been particularly rewarding over the past year because the tech stock – such as Amazon, Apple, Netflix, Google, Tesla – has gone through the roof and provided positive return for our investors.
Having said that, the UK stock market is now considered to be one of the best to buy into at the moment; the economy grew by over 5% in the last quarter, which was higher than expected, and as we’ve come out of lockdown, it has shown continuous expansion.
This is good news for our UK funds, but we still need to take care when looking at the UK markets, because there are some new challenges that need to be considered.
In the UK, there is a headwind of higher inflation; it is likely to be around 5% in real terms (and will potentially last into the new year). This may have an effect on some of your returns, as prices rise to match inflation. (You can learn more about the impact inflation has on your investments in a previous blog.)
We are also experiencing supply chain and production issues ranging from a shortage of delivery drivers to Christmas turkeys, which we anticipate will have a drag on the UK economy (albeit fairly minimal). Even though there are supply chain issues, demand remains high, which is good news for the economy. We’ve been told that a major UK furniture supplier is currently unable to fulfil more than 12 months’ worth of orders because there’s a delay in getting products made or shipped over from Europe. However, all this means is that when supply can start moving again, we are likely to see things smooth out fairly quickly.
At Applewood Independent Ltd, we tend to diversify even within UK equities in order to increase the return on client investments.
For many years, we have been successfully investing in the FTSE 350 area of the stock market with smaller companies, rather than, for example, the big multinationals in the gas or pharmaceutical industries. We have made considerable gains for our clients because the smaller companies have provided a much higher return (some truly spectacular) since the start of the pandemic in comparison to the larger UK companies.
To date, this overseas diversification has given a positive return to all of our clients, but it’s important that people continue to pay attention to their assets.
Every penny sitting in cash form is losing value
Interest rates are unlikely to change and, if they do, we estimate it will be a very small increase. This means that any money in bank accounts, term accounts, national savings or cash ISAs is likely to continue to lose value in real terms because it is many times less than the rate of inflation. Over time, it will buy you less.
Address the issue
If you have substantial cash holdings, it’d be wise to consider alternatives for at least a proportion of your money.
Clients at Applewood Independent Ltd continue to receive 3.8–4.2% income on their portfolios and grow the capital value as well on top of that, which is (currently) considerably better than you will find in any bank or building society.
The bigger picture
Long term (as discussed in a previous blog), the best hedge against inflation is always going to be an equity investment.
As we have already learnt, when it comes to equity investments, it’s important not to stick to the big blue chip companies but to consider diversifying into smaller companies (here in the UK and overseas) in order to maximise on the opportunities in the marketplace.
The thing to remember is that everything in life is a circle: the economy has bad times and then tends to recover, and investments have bad years too. However, if managed correctly, over time these bad years quieten down and level out, and we are able to reap the rewards when that happens.
For example, over the last 18 months, we have had a big downturn in the economy, but that is starting to recover nicely as things like employment levels rise.
The furlough scheme has ended. The vast majority of people were not furloughed and there is demand for new employees. The economy is picking back up and some people have more money than they’ve ever had.
For example, lots of companies in the smaller FTSE 350 share range adapted during the pandemic and, as a result, have reduced their debt and increased their profitability. These companies actively want to employ more and more people.
The government wants a growing, vibrant economy (more people in employment paying national insurance and income tax, and companies paying corporation tax), which will lead to a vibrant stock market: if the economy is doing well, the shares are doing well, because they’re paying dividends – and when the shares continue to grow, there is demand for more.
The majority of people in the Western world are now double vaccinated against Covid-19; life looks a lot more normal.
The UK is the only stock market in the world that hasn’t returned to pre-pandemic levels, but that makes it the most value for money investment. We invest more into the UK now than we did two years ago because we can reallocate some of those profits from the overseas markets to rebalance the investment portfolios, which is every bit as important as choosing the right funds.
The views expressed in this article are those of the author and do not constitute financial advice. Applewood Independent Ltd is authorised and regulated by the Financial Conduct Authority. For financial advice designed for you and your specific circumstances, please contact the author using the contact details provided in this article or, alternatively, contact the Applewood Independent Ltd office on 01270 626555.
The value of your investment can go down as well as up, and you may not get back the full amount invested.
Past performance is not a guide to future performance.