Investors: never go shopping when you’re hungry!
First published on 14 of December 2016 • Updated 23 of January 2017
Dean Mullaly of Mark Dean Wealth Management on the pressures – and temptations – facing savers and investors as 2016 draws to a close.
We have all heard the old saying ‘Never go shopping when you’re hungry’. Well, the same motto certainly holds true in today’s low interest market. With worthwhile returns on cash savings so hard to come by, investors generally are being pushed further and further up the risk scale in search for half decent yields. The result is that those who have always previously kept their assets in cash are now dabbling in structured capital-at-risk products (SCARPs) or bonds (be they corporate or government) and possibly a bit of equity content (via some absolute return funds).
Meanwhile, those who have always been comfortable investing in bonds are now venturing into higher yield bonds (previously considered ‘junk’ bonds), while those who were previously at ease with equities… are still investing in equities, but now paying a higher starting price. And so it goes.
The fact is, we are now all ‘shopping while we’re hungry’. Savers and investors alike are hungry for better returns, and thus to some extent are starting to ignore the inconvenient truth that they are shouldering a higher burden of risk in pursuing them.
Are investors cruising for a bruising?
There’s another old saying that’s relevant at this point: ‘What goes up must come down.’ The forces of gravity will always win in the end. Quantitative easing policies by most central banks around the world have acted like steroids on their respective economies, serving to prolong the current market cycle, but – as with steroids – the performance these policies deliver is artificial and not an indicator of true strength.
So what does this mean for the investor? In our opinion, the performance-enhanced run of the economy will soon come to an end, and reality will hit like a punch in the face from Anthony Joshua. Central banks are virtually out of options, having already backed themselves into a corner with ultra-low interest rates that can drop no further – and they are even struggling to find government bonds to buy back.
Meanwhile, we predict that inflation will spike higher than anticipated; some commentators are even suggesting 5 per cent within the next 12, and I would not rule it out. Central banks will then be forced to raise interest rates, which will force consumers with mortgages or credit (i.e. most of them) to tighten their belts. It is then that the natural forces of gravity will come into play, and – without wanting to sound like a prophet of doom – I suspect that the next recession might turn out to be the longest we’ve ever seen.
Lost in the woods – what’s an investor to do?
Of course, it’s not all gloom. The UK could already be ahead of the curve when compared to other western economies, and Brexit will open new doors as we seek trade deals around the world, rather than being reliant on the EU. However, we might feel the forces of gravity a little harder than the US, as they are already on a path to raising interest rates gradually. We now have a weak currency, which means our exports are cheaper, and this could serve to lessen the hard landing.
Only time will tell if I am being pessimistic or realistic – but one thing is for certain: in the short term it is all about ‘return of capital’ as opposed to ‘return on capital’. And it’s never been more important to seek advice on planning for the future, from an independent financial adviser.
About the author
Dean Mullaly is an IFA and Managing Director of Mark Dean Wealth Management. As Independent International Advisers, Mark Dean Wealth Management offers clients advice on the broadest range of products and services, particularly specialising in clients from overseas coming to the UK to work or live, and clients moving overseas.