What unpredictable times we now live in.
Who would have thought at the beginning of this year that the runaway inflation of 2023, combined with rising interest rates, might not be tamed after all. That all the financial pain we have had to suffer to get the economy back in shape – higher taxes, bigger energy and mortgage bills – could now be extended well into this year as yet more geopolitical turmoil threatens to disrupt our recovery.
Certainly not me. It’s all rather scary and all rather depressing – and rather bad news for the government as it seeks to go into the next general election on a platform of tax cuts and economic recovery.
While tax cuts may still be in the offing (politics is a cynical game and Chancellor of the Exchequer Jeremy Hunt was talking a good tax game in Davos a few days ago), the fate of the UK economy is largely outside the hands of politicians. The global economy has put paid to that, and geopolitical events out East will have a big part to play in determining whether we limp along, go into recession, or stumble into growth mode.
Does all this uncertainty weaken the case for equity investing? On one level, probably, especially if higher interest rates linger for longer and inflation is not conquered after all.
The surprising jump in inflation – from 3.9% to 4% in December – was not welcomed by the UK stock market, although a barrage of economists was quick to say it was no more than a blip – and that inflation could be down to 2% by April (I’ll believe that when I see it). Interest rate cuts, they added, would follow, but maybe not until the summer. What stock markets don’t like is uncertainty – and the uncertainties are beginning to pile up at the country’s front door.
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On another level, there are still many companies – both here in the UK and overseas – which are doing fantastic things. They might not all be shooting the lights out when it comes to stock market returns - UK-listed companies especially - but they continue to perform well against a difficult backdrop. At some stage, their business strength will be reflected in their share prices.
Financial giant Goldman Sachs thinks so. It believes that UK equities will deliver returns of 9% this year, and an average of 6% per annum over the next five years.
Fund managers, eternal optimists, are also talking up the UK market. Gervais Williams, head of equites at investment house Premier Miton, says he is more bullish about the UK equity market than he has been for 30 years.
It’s a view that long-standing fund manager Nick Train also opined when he recently updated investors about the performance of Finsbury Growth & Income (LSE:FGT) , a stock market listed investment trust that he has run for more than 20 years.
The £1.6 billion fund, invested primarily in UK equities, has delivered little in the way of performance over the past year or five years – much to the frustration of shareholders and Mr Train himself. But the manager is convinced that he has built a portfolio that at some stage will deliver stellar investment returns.
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Mr Train says that companies such as analytics specialist RELX (LSE:REL) and London Stock Exchange Group (LSE:LSEG) - key holdings, accounting for nearly 25% of the trust’s assets – will come good as investments at some stage. Both, he contends, are underpinned by strong artificial intelligence (AI) credentials, a “key” investment theme “for the foreseeable future”.
He is also a big backer of strong consumer companies focused on luxury brands - the likes of Burberry Group (LSE:BRBY) and drinks giant Diageo (LSE:DGE) - and businesses involved in computer software such as Sage Group (LSE:SGE). “Contrary to common perception,” he adds, “the UK stock market provides a number of world-class businesses that offer full participation to the themes of AI, software and luxury and premium-brand consumption. It is around these companies that we have built your portfolio and where we have the highest hopes for future share price gains.”
For investors. Mr Train’s comments make for enticing reading – and I am sure UK-focused Finsbury Growth & Income will come good over the long term. But I wouldn’t simply plunge into the UK stock market on the back of what he says.
With uncertainty in the air for many weeks and months to come. I think it’s the right time to drip money into stock markets rather than plunge in all guns blazing – with the dripping preferably done through a tax-friendly ISA, using this tax year’s £20,000 allowance and next year’s £20,000 as well.
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Funds and investment trusts must be the best way forward (because of their diverse holdings) – and I would be looking to further diversify by investing across a broad church of well-run UK and global funds.
Not just funds with a strong AI investment theme (the likes of Allianz Technology Trust (LSE:ATT), WS Blue Whale Growth, Finsbury Growth & Income, Polar Capital Technology (LSE:PCT) and Scottish Mortgage (LSE:SMT)), but counterbalancing funds which provide a mix of income and capital growth. The likes of investment trusts Alliance Trust (LSE:ATST), Bankers (LSE:BNKR), JPMorgan Global Growth & Income (LSE:JGGI) and Law Debenture (LSE:LWDB). For the record, many of these funds appear on the best fund lists of City analyst Peel Hunt.
Such investments may not come good straightaway, but they could prove robust long-term pillars of an ISA focused on protecting your financial future.
Jeff Prestridge is group wealth and personal finance editor of DMGT.
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