The UK is embroiled in its first recession in more than a decade. Interactive investor explains what it means for investors.
The UK is currently embroiled in its first recession in over a decade and the nation’s economic outlook appears bleak, with whispers from Whitehall of tax rises to foot the cost of the Covid-19 relief measures.
But what does this mean for investors, and what is the best way to manage investment portfolios against economic uncertainty?
Myron Jobson, Personal Finance Campaigner, interactive investor, says: “It is normal for stock prices to fall during a recession to reflect the additional pressure on companies’ finances. A recession often triggers an uptick in unemployment which pushes consumer spending down and often translates to lower earnings for companies. Put simply, fewer people have cash in their pocket to spend on the non-essentials.
“However, there can be a disconnect between stock market performance and the state of the economy. We’ve seen this across the Atlantic in the US where all the major US indices are now in positive territory since the beginning of the year against a backdrop of rising unemployment and coronavirus related fiscal pressures.
“The sheer amount of uncertainty poses a dilemma for investors. Investors often flock to perceived ‘stable’ assets, such as bonds and gold, in times like these. ETFs investing in gold, most notably, has risen in popularity among interactive investor customers, with iShares Physical Gold ETC (LSE:IGLN) and WisdomTree Physical Gold (LSE:PHGP) ranking in second and seventh positions on the list of most purchased ETFs/ETC in August.
“However, amid the shroud of economic uncertainty can await opportunity for those that haven’t battened down the hatches – especially if you take a long-term view. But whilst it can be rewarding to be a contrarian, there are never any certainties in life – as this year has reminded us.
“It is clear to see that some companies have done well during the Covid-19 triggered uncertainty. The unprecedented government enforced lockdown measures have played into the hands of the likes of Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) which are among a number of US tech stocks to have surged to all-time highs this year - powering the astonishing bull run in US markets despite remaining uncertainties over the virus.
“The next steps when it comes to portfolio management is wholly dependent on your attitude to risk and investment time horizon and perhaps now is not the time to be taking speculative bets.
“Rather than trying to time the market, the better option for investors is to ensure they have a portfolio that can withstand an economic recession. A basket of investments that is diversified across different assets and regions is usually the most efficient way to protect capital. Drip feeding cash into investments every month can help remove some of the worry about market timing.”
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