June- July 2022 Update: The Information You Need On The Latest Financial Market Developments
By Alex Pritchard
We’re definitely riding the financial roller coaster this year, and the same word keeps being repeated over and over again: recession, recession, recession.
While there has been volatility, and some losses and gains, I’m still not sure the UK is that close to recession in the market sense.
From a value perspective, America is far closer to those calls of recession, in my opinion, than the UK. If you look at price/earning (or P/E) ratios, FTSE 100 P/E ratio of circa 14x the US market before and its recent fall, sort of 36x.
(For reference: the P/E ratio is a statistic that helps to measure the value of stocks. The larger the number, the more expensive and valued something is; the smaller the number, the more cheap and undervalued. A par value for P/E ratios is 14x.)
For the UK, the last technical recession wasn’t in the Covid-19 lockdown (though you might have felt it should have been); it was during the 2008 credit crunch. Back then, the UK stock market was at an incredibly expensive 38x P/E ratio – then it took a real hit, going down to earnings. So, whilst the UK has suffered some losses recently, from an investment point of view our portfolios have been insulated from further losses.
Stock market and equities
Recently, we’ve been backing UK domestic equities more and more, particularly FTSE 100 large caps. This means that any losses in the portfolio year have been less than they would have been by two times, if not two and a half times, than if our portfolios were more akin to 2015/2016, when we had a lot more overseas money.
As of 28 June 2022, the FTSE was only 2.3% down from where it started in January. However, in the American market, the Dow Jones was actually down 14%. So there’s been a big difference between the overseas funds that we keep an eye on and the FTSE 100 funds that are making up the majority of our portfolios at the moment. The UK stock market is currently the best value and the best setup to actually bring returns. Even if that return is an investment that loses less, you’ve still adopted a good strategy. If you’ve bought the least-falling investment, that value is there.
In comparison to the North American market, the UK stock market’s value has been very good and the funds that we invest in have followed suit. They still look well placed to make money – though it may be in a day’s time or in a week’s time, or even a year or two years down the line – and we feel there’s value out there to be holding stock.
Therefore, we’re very happy with the strategy that we have put in place. It has shown itself to be the right strategy with regard to staving off considerable losses, and we feel it’s well placed for those longer-term gains.
Fixed interest holdings
There are only four places in which to put your money: cash, property, fixed interest holdings and equities. For equities, we’ve talked about how we’ve backed the UK, which has been the right choice and helped with the losses. Regarding our fixed interest holdings, we’ve slightly reduced our UK holdings over the last few years, which again has been the right decision.
Capital values are hurt by interest rates going up, which is guaranteed to continue happening until inflation has been beaten away. What helps protect against this is that the fixed interest that we’re currently holding is still paying very good rates of interest. If the capital value falls 5% but it pays a 5% interest, you’ve lost nothing. This also offsets some of the risk of the equities.
In other blogs, we’ve talked about the BMO UK property fund, which is the one property fund that we hold across all our portfolios now.
Its current 12-month performance is plus 20%, which has really helped the equities that have struggled this year. While it is a traditionally unloved asset class, its performance being very low at 2–5% per annum on average, it shows its value when the market struggles.
If a portfolio is falling, it helps because it doesn’t care and just does its own thing; and if everything is going up, then even better.
So protection from the current market volatility has been helped with other investments in the portfolio, some of which have made good money this year.
This volatility probably isn’t going to go anywhere for a little while. The market seems to lose 5% and make 5%, but not move too much, and our portfolios are doing the same.
So I think that we need to keep the strategy that we’ve got. It’s working, and we were right in the first place to back the UK equities.
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.