By Giles Coghlan, Chief Currency Analyst, HYCM
It’s clear that many economies are grappling with a global downturn, which makes the current moment a critical period for the British economy and its investors. With inflation reaching 10.1%, a 0% growth forecast for 2023, and rising household bills creating havoc in the markets, the Bank of England’s Monetary Policy Committee recently voted by 8 votes to 1 to raise interest rates by 0.5 percentage points. Thus, the base rate currently sits at 1.75%, matching the actions that other policymakers have taken in the Federal Reserve and the European Central Bank.
With recent revisions to economic forecasts suggesting that GDP is set to fall by more than 2%, the US and Eurozone is expected to grow by 1.5% and 1.7% respectively, reflecting that investors in the UK should expect a particularly challenging period ahead.
Causes of the downturn
Inflation, which has been fuelled by rising household bills in the UK, is playing a major role in the economy’s march towards a recession. Driven in part by crumbling supply chains, which are still recovering from the impact of the pandemic, the conflict in Ukraine has only made matters worse. Consequently, it costs more to transport fuel and food, which is driving prices up. Thus, consumers and businesses alike are losing spending power, less money is circulating, effectively stalling the economy.
As a result, central banks have been forced to take action. Since the start of the year, for example, the Bank of England has commenced an interest rate hiking cycle to squash inflation. However, it appears that half (50%) of investors are worried that these measures won’t be enough to curb inflation, and could actually limit economic growth, according to a recent survey commissioned by HYCM. Indeed, this could have the greatest impact on their portfolios, so this statistic is hardly surprising.
Elsewhere, there are also political influences on the long-term economy that investors and traders should be monitoring. In the last couple of months, very little monetary or economic policy has been created to tackle the current economic climate due to Boris Johnson’s resignation and the subsequent leadership contest. Therefore, Britain’s economic outlook and future will be defined by the plans of the incoming prime minister.
On this note, investors appear to show a small preference for Rishi Sunak, with 36% of respondents putting their faith in the former chancellor to be the next prime minister. A smaller percentage support Liz Truss (31%) according to the aforementioned HYCM survey, whilst over a third (33%) don’t have a preference at all. Indeed, Truss has promised to reassess the Bank of England’s mandate, arguing that the current approach to tackling inflation will limit growth too much. Conversely, Sunak believes that the Bank of England’s mandate should remain in place, so investors who are keen to maintain the current status quo seem to be leaning in his direction.
How are investors reacting to the looming recession?
Certainly, economic policy has come to define the Tory leadership contest between Truss and Sunak. However, despite some clear support for both sides, 62% believe that a recession will occur in 2022 regardless of the outcome of the leadership contest. As such, it’s clear that there is little investor confidence in the economy or any immediate changes that a new prime minister could do to change course and avoid the downturn.
Supporting this, a further 56% of investors admitted that they were ‘risk-averse’ when asked about how they were managing their portfolios. Theoretically, inflation has reduced investor spending power, so many will be looking to mitigate risk in the months to come. Consequently, it is likely that investors will look to safe haven assets like gold for security and avoid speculative risk assets or investments with low liquidity.
For instance, cryptocurrencies have fallen in popularity amongst investors since Q1, with 33% of investors admitting that they plan to decrease their holdings in this asset class. In Q1, this figure was just 11%. Indeed, with recent market crashes and the extremely volatile nature of crypto markets in mind, this was to be expected as investors try to reduce risk. That said, it shows that crypto, which was once thought to be a worthy rival to gold as a hedge against inflation, may not offer investors the security they want.
Elsewhere, investors are looking away from luxury assets like classic cars, with 44% planning to reduce their investments when compared to the start of the year. Indeed, during the cost-of-living crisis, liquidating these kinds of assets may help with day-to-day expenses. Similarly, investors are turning away from private equity firms in a further bid to reduce their risk, with 35% saying that they will reduce their holdings – a significant increase on Q1s figure of 11%.
Interestingly, despite the negative effect that decreased consumer spending can have on company profits, 19% of investors intend to invest in stocks and shares in the next year – making them the most popular asset. This is an increase of 5% since Q1 and reflects the fact that many investors may be looking to ‘buy the dip’ and benefit from the recovery of currently weakened financial markets.
Clearly, safe-haven investments also remain attractive. These investments, such as real estate and precious metals, are frequently used by investors during a recession because they are recognised for low volatility and reliable returns. In the coming year, 14% of investors expect to increase their real estate holdings, while another 12% want to shift their investments to gold and other precious metals as these assets typically retain or improve in value.
Predicting what’s to come
Even though it is difficult to foresee exactly how the coming months may turn out, investors will no doubt be greatly concerned by reports of an impending recession. While there are still opportunities in the current economic climate, investors must remember that mitigating risk will be essential in the months to come. Therefore, investors should make decisions based on their unique circumstances and create a strategy that is most suitable for them.
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Giles Coghlan is Chief Currency Analyst, HYCM – an online provider of forex and Contracts for Difference (CFDs) trading services for both retail and institutional traders. HYCM is regulated by the internationally recognized financial regulator FCA. HYCM is a global brand name of the HYCM Capital Markets Group. The Group via its relevant subsidiaries has representations in Hong Kong, United Kingdom, Dubai, and Cyprus.
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