The UK is one of the fastest growing economies in the developed world, but here at Applewood Independent we anticipate two headwinds that will slow growth down (here and on a global scale) and require a redistribution of assets.
We regularly meet with UK fund managers who are eager to share their market insights on the economy, inflation and interest rates; based on our own experience and expertise, we use this information to rebalance our portfolios in line with our client objectives.
In some cases we recommend asset reallocation from growth stocks to value stocks (which offer lower returns, but are also lower risk).
We adjust our portfolios in line with two main factors that are having an impact on the UK economy:
- Supply chain issues
- Rate of inflation / interest rates
Supply chain issues
The chancellor recently announced in the budget that supply chain issues almost closed down some industries during the Covid-19 pandemic but, as a result, consumer demand is high. People have saved money and are ready to spend it on computers, phones, cars and white goods.
Supply chain issues have meant that there is a lack of staff to load and unload these goods (many of which are transported around the world on huge container ships), but whilst demand continues to outstrip supply, fund managers anticipate the situation will ease over time.
It’s also reassuring to recognise that many companies are stronger now than pre-pandemic; some have seen sales soar over the last 18 months and succeeded in paying off debt or shoring up their balance sheets by buying back shares from shareholders.
Rate of inflation
Inflation (in part created by consumer demand) is the second factor impacting the economy. We anticipate this being a short-term issue. The official rate of inflation is 3.1%. The Office for Budget Responsibility anticipates it will reach 4%, but here at Applewood Independent we (and most of the fund managers we speak to) think the real rate is much higher (between 5 and 6%).
The best hedge against inflation is equity exposure. When we consider that the stock market had the biggest, quickest, steepest fall in the history of the stock markets (spring 2020), the UK markets have recovered remarkably well, whilst those in America (mainly due to technology stock), Europe and Japan, for example, reached an all-time high. This tells us that the UK stock market offers good investment opportunities.
The Bank of England has indicated that they want to increase interest rates through the Monetary Policy Committee by up to 1% over the next 12 months. Fund managers suggest that’s unnecessary, and whilst inflation will remain with us for the rest of this year and into 2022, we have reasonable confidence that as the supply chain issue eases, more goods and more providers will be available. In turn, this will create competition and help stabilise the prices.
We take all of these factors into account when we assess our client portfolios.
Rebalancing the portfolios
The UK stock market offers good value to investors. The FTSE 100 hasn’t yet returned to where it was in January 2020, and the smaller companies, the FTSE 250 (including AIM stock market), are riding high.
Applewood Independent will rebalance a proportion of the profits from overseas funds and reinvest in UK funds. Whilst growth funds have offered the best performance over the past 18 months (higher risk, higher return), we will now add more value funds into our portfolios which tend to be a staple!
It’s a minor course correction that will offer greater protection to our clients whilst supporting ongoing growth (albeit at a slower rate) until the supply chain and rate of inflation stabilise.
Braving the headwind
Whilst the stock markets face supply chain issues and higher inflation rates, it’s crucial that we review portfolios and pensions on a regular basis; our clients here at Applewood Independent can trust that we are attentive to their financial objectives.
We are in ongoing dialogue with our fund managers and we use that knowledge to form part of our decision-making process when it comes to the transfer of funds from growth stock to value stock (or vice versa).
As independent financial advisers, we constantly review all our client portfolios and compare peer groups, anticipate challenges and put ourselves in the best possible position to respond accordingly. We monitor the stock market, how funds are performing, and review these in line with our clients’ objectives, attitude to risk and capacity for loss; we make individual decisions for each of our clients based on our findings.
The views expressed in this article are those of the author and do not constitute financial advice. Applewood Independent Ltd is authorised and regulated by the Financial Conduct Authority. For financial advice designed for you and your specific circumstances, please contact the author using the contact details provided in this article or, alternatively, contact the Applewood Independent Ltd office on 01270 626555.
The value of your investment can go down as well as up, and you may not get back the full amount invested.
Past performance is not a guide to future performance.