Recession? What Recession?

Today’s news that the UK has crept back into recession should be no surprise to anyone who has kept reasonably well informed about developing events connected to the global economic crisis.

A technical recession is triggered after two quarters of negative GDP (Gross Domestic Product) within our economy.

Stock Markets haven’t fallen today. Why not?
The economy is one thing but the stock market is another altogether. As I write this, the FTSE-100 Index is up by nearly 17 points to 5726.26 and the Dow Jones is up by over 90 points to 13092.60.

So why aren’t stock markets’ reacting negatively to today’s news? The answer is that stock markets’ look forward, while economic data looks backward. Markets aren’t a vote on the economy today, but where investors expect it to be in the next 12 to 18 months.

However, markets are not an infallible guide to the future. A weak economy isn’t necessarily bad news for shares, but a strong economy isn’t always good news. If the economy grows too rapidly, central bankers may be forced to raise interest rates to head off the threat of inflation. The higher cost of borrowing hits corporate profitability and consumer spending, and ultimately hurts the stock market.

So what does this mean for Investors?
The normal assumptions about investing in share (equity) and bond (fixed interest security) markets have been turned upside down by the developing debt crisis in Europe. As a result, making investment decisions is more difficult than ever.

It’s tempting to wait until times are more certain. But when have we ever lived in certain times?

On the one side, there is the gloomy outlook for the world economy and on the other you could argue that some asset classes look attractively valued. Markets have swung like a pendulum as investors respond to these opposing pressures. Inaction within developed economies has maintained choppy seas for investors and the volatility within markets has continued.

So it’s Europe’s Fault?
As European politicians have effectively increased their countries’ overdraft facilities, the crisis rumbles on and predicting the final outcome is likely to be very difficult. The pain is not yet over.

European politicians have treated this as a crisis of liquidity – a temporary shortage of cash – rather than one of solvency, where countries’ finances are unsustainable.

As a consequence, the woes of the single currency zone could take a heavy toll on world growth. If there is a recession in Europe, the UK will not be impervious from the knock-on effects.

What’s the Risk?
The economic crisis has resulted in a re-establishment of the different scales of risk. Cash and government bonds were typically seen as low risk and shares were considered higher risk.

However, in a world in which sovereign debt and the banking system are under such strain, cash and government bonds may not offer the comfort investors usually expect. Even supposed ‘safe havens’ may not be as safe or as low risk as they appear.

Bonds issued by the UK and the US governments, for example, are currently in heavy demand as investors see them as a harbour from Europe’s woes. However, current low yields on gilts give no protection against higher inflation and they don’t provide dividends.

It could be argued that shares of healthy multinational companies with strong balance sheets, good propositions and capable management that can maintain good dividends look more attractive.

However, shares are more volatile in the short term and quality is the key here. Using Fund Managers with a proven track record, a robust process for determining the investments that they hold within their funds, that can seek out high quality dividend paying stocks with attractive valuations and healthy dividend yields are the lifeblood of the equity component of efficient portfolios. Can you identify these managers? Dividend income is often seen as the compensation that investors receive for any short-term ups and downs in price.

Time is of the Essence
This is not a short-term play. Investment over the medium to long term (5 – 10 years) backed up with regular reviews of the underlying investment funds is key in helping investors achieve their objectives.

As ever, investors need to remain patient and invest their time as well as their funds. This is an essential prerequisite for investors looking to build their wealth over the long-term.

Big crises have a habit of creating big investment opportunities therefore, over time, we can expect to see some wonderful opportunities unfolding.

The Stock Market is not Your Financial Plan
One thing is certain. There has never been a more appropriate time to take professional financial advice in helping you formulate your financial plan.

There is no time to lose and to wait for a full economic recovery could have a negative effect on your long-term goals and objectives.

If you would like to understand how economic events impact upon your own circumstances and planning, please contact us with no obligation on 01626 833225.

The above comments do not constitute financial advice and you are advised to obtain appropriate professional advice before proceeding further.

The value of your investment and the income from it can go up and down and you may get back less than you invested. Past Performance is not a guarantee of future returns.