We wouldn’t blame you if by now you are feeling a little hopeless after absorbing what feels like negative socio-economic news day-in-day-out.
Against a backdrop of controversial leadership changes, July through to September saw the sad passing of the United Kingdom’s longest-reigning monarch Queen Elizabeth II, and a mini-budget that made headlines around the world – all while the cost of living crisis continues and citizens worry for the winter ahead.
As always, here at OpenMoney we hope to offer calm amongst the chaos, to guide you through what has felt like another quarter of being dragged down, and address the concerns investors are facing, to reassure that a long-term outlook is key when things aren’t smooth sailing. So the saying goes… “This too shall pass."
Interest rates and inflation
Continuing from the last quarter, the central banks have again increased interest rates to support the economy and attempt to put a lid on borrowing. At the end of September, the Bank of England’s (BoE) interest rate was 2.25%. The next rate rise decision is set to be decided on 3 November 2022, after the government lays out its economic plans. The Consumer Price Index (CPI) which is an index based on the average market basket of consumer goods and services purchased by households was sitting at 9.7%.
The Consumer Price Index is the official measure of inflation of consumer prices of the United Kingdom.
The BoE persists in its drive to take control of inflation and as previously commented, will not think twice about hiking up the interest rate. However, despite the Bank’s efforts to reduce inflationary pressure, inflation ended the quarter at 10.1% as the economy reeled with fallout from the mini-budget.
Over in the United States, the picture is very much the same, with the Federal Reserve already boosting its federal fund rate five times, taking the rate to just over 3% in Q3 2022 and projecting to be well over 4% by the end of the year. What this will mean is that the interest rates that banks are being charged to borrow from other banks is increasing, and therefore becoming more expensive to borrow, this will then have a knock-on effect for everyday consumers.
In the United States the federal funds rate (also known as overnight rate) refers to the interest rate at which commercial banks borrow and lend their excess reserves to each other overnight.
UK leadership and the mini-budget
As Liz Truss entered her second full week as Prime Minister, she hoped that her Chancellor of the Exchequer, Kwasi Kwarteng’s delivery of the mini-budget on 23 September would incentivise the British economy and drive improved productivity and a stronger economic growth.
Unfortunately, the global market had clear concerns at how the British government was going to fund a fiscal support package worth close to £300 billion and essentially lost confidence in the value of the pound, resulting in the third worst daily performance of Sterling against the Dollar since Black Wednesday in 1992.
At the time of writing this commentary, a new Chancellor of the Exchequer, Jeremy Hunt has been appointed, and in a surprising U-turn, the government has scrapped most of the key elements of its mini-budget. Truss has also resigned after just 44 days in office making her the UK’s shortest-serving Prime Minister in history. Rishi Sunak is the new leader of the Conservative Party.
Looking ahead to Q4 2022, you do not have to be John Maynard Keynes to realise that from now until the end of the year, some serious economic decisions need to be made to start the process of redressing the market turmoil.
What does it all mean for investors?
With interest rates and inflation where they stand, all the same concerns from our Q2 2022 commentary remain. Although value stocks have not been immune from turmoil, global value stocks are still leading the performance charts with a negative return of 1.8% for the year, as opposed to global growth shares which have declined by 17.7% year to date.
Value stocks vs Growth stocks. Value investing and growth investing are two different investing styles. Usually, value stocks present an opportunity to buy shares below their actual value, and growth stocks exhibit above-average revenue and earnings growth potential. (Source: The Motely Fool, 2022).
OpenMoney portfolios are diversified to include a mix of value and growth stocks across four asset classes which helps to reduce risk and maximise returns by investing in independent areas that react differently to changes in market conditions.
Emotions are inevitably running high and panicked investors are feeling the pinch. A recent survey conducted by Equiniti found that around 44% of DIY investors sold shares to free up cash to cope with soaring inflation and household bills.
As expert advisers, we’re here to help you assess your investments and circumstances and remind you that accessing your investments early should be a last resort when restructuring your finances and pulling back on your budget. Sticking to your investment strategy while the boat is rocking is one of the most difficult things about long-term investing, but consistency is key.
Tips for long-term investing
OpenMoney advice does not waiver; hold tight, remain calm and take the long view of the market and your investment. Market history continues to tell us ‘We have been here before’ and turmoil will return to exuberant times again. This of course can be difficult to remind yourself as the cost-of-living crunches, so we’ve outlined tips to keeping on track to your long-term investing.
- Re-evaluate incomings and outgoings. It’s a simple task but taking stock of your assets and debts regularly will help you in setting up an achievable budgeting plan that keeps up with the fluctuations and how much you can regularly top-up your emergency fund.
- Big picture thinking. Typically, long-term investing is five years or more (that’s what we recommend here at OpenMoney), however the time horizon is different for everyone. Reminding yourself of your goals, the time horizon you set for yourself and understanding why you started investing and when you originally planned to withdraw your investments, will help you to refocus on the bigger picture.
- Invest little, but often. If you need to reduce your investment contributions due to the cost-of-living, that is perfectly reasonable. The key is to stay consistent by drip-feeding whatever you can afford so your investments don’t lose momentum. This way, your portfolio keeps getting fed, giving your potential returns a chance to compound faster.
- When in doubt, zoom out. Historically speaking, market data spanning from the 1920’s to 2020’s shows that the market has always recovered, and that different asset types continue to trend upwards over time, despite many major market disruptions – including wars, pandemics and recessions.
- Ask for help. At OpenMoney our team of expert financial advisers are available to help you on your investment journey – sometimes that just means a phone-call to chat things through and get some perspective from a professional. Either email, call or message us on Live Chat and we can put you in touch with one of our financial advisers directly.
OpenMoney's cumulative portfolio performance as of 30 September 2022.
Whenever you invest, your capital is at risk and there’s a chance you may get back less than you put in.
Source: Timeline Portfolios (formerly Betafolio Ltd), 2022.