The breaking news headlines and unprecedented events of the past few years have created an economic roller-coaster. Just as the nation began to gain relief from the pandemic whirlwind, Russia invaded Ukraine causing shocks worldwide. The implications have rippled through international supply chains and oil imports, bolstered by recent sanctions against Russia.
The state of the economy
Inflation is the front runner of mounting economic challenges. In the 12 months to April 2022 inflation rose by 9% and is expected to continue rising.
We are now equating the threat of inflation to a cost-of-living crisis. It was already strained post-covid, but more recent pressures on supply chains have exacerbated the problem. Both Ukraine and Russia account for a large share of the world’s energy, industrial materials, and consumer goods exports. Shortages in these commodities have quickly driven prices up.
Shining a light on the journey ahead, the latest edition of KPMG’s Global Economic Outlook Report predicts that over the next two years, ‘world oil prices will be US$30 higher than their path prior to the escalation of the [conflict] crisis, while gas prices will be 50% higher across Europe. It also incorporates a 5% rise in global food prices.’
The rate of inflation has prompted many central banks to raise interest rates. The Bank of England has risen the rate during five consecutive meetings since December 2021.
Soaring prices and the squeeze on consumer income comes with a knock-on effect – data shows that the economy unexpectedly shrank, sparking concerns over a recession.
Impact on the stock market
As the stock market is based on companies’ future earnings, higher inflation has led to many share prices falling. The problem with inflation is that it can put pressure on businesses profits, reduces disposable consumer income, and their demand for assets.
Central banks tightening of monetary policy has also rocked markets amid fears of a recession. Rising interest rates could put a pause on business growth, incentivising investors to sell assets and lowering stock prices.
This month the S&P 500 – an index tracking 500 large US companies – slid into a bear market, dropping more than 20% below its peak since the start of the year. History shows that markets are cyclical and will likely recover, but how long it will take is unknown.
What are the safe haven options?
Many investors will be weighing up their options right now and thinking of ways to weather the storm. According to Jo Groves from the Forbes Adviser, one of the steps to protect your portfolio against a market downturn is to diversify into different assets and avoid ‘putting all your eggs in one basket’.
For those tempted to ‘sell on the fall’ of the market, there are some safe haven asset classes that may be an appealing alternative to stocks.
Gold is considered the ultimate safe haven for most investors, offering stability and significant diversification benefits. In times of heightened market stress, gold has been known to retain its value or sometimes even increase it. According to a report from the World Gold Council, demand for gold jumped 34% year over year to 1,234 tonnes in the first three months of 2022.
Another way to hedge against volatility is by investing in cash and savings accounts. During this time, investors might move their assets into cash to mitigate losses and prepare to buy when the time is right.
While interest rates are on the rise, a high-yield savings account could be considered an attractive option to grow funds and protect your cash against the ravages of inflation, whilst being protected for up to £85K by the FSCS compensation scheme. However holding too much cash can be risky during surging inflation – the Financial Times recommends holding three to six months of income in cash as a safety net.
Bonds have been a long-established middle ground when it comes to mitigating risk and are deemed more secure than stocks and shares. When you buy a government bond, you are essentially loaning them money in return for periodic interest payments before eventually being reimbursed in full. Investors tend to consider bonds as a safe haven because they know the return they’ll receive in advance.
If you would like to find out how you can use the Flagstone platform to help protect and manage your cash savings, speak to us today.
This article is not financial advice. If you are unsure about your personal investments, consider getting in touch with a financial adviser.