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5 September, 2022

Giles Coghlan

How are investors handling their portfolios as recession threatens the UK?

The UK stands on the brink of recession, leading investors in the country to revert to their safe-haven assets.

The next few months will be critical to the UK’s economy as countries around the world begin to experience the impact of a global economic slowdown. As a result, the Monetary Policy Committee of the Bank of England recently voted by eight to one to raise interest rates by 0.5 percentage points to tackle inflation, which is currently at 10.1%, despite a forecast for 2023 of 0% growth, and a rising cost of living.

Recent revisions to economic projections indicate that the UK faces an extremely challenging future. The country’s GDP is expected to decline by more than 2% later in 2022, according to current policy predictions. Meanwhile, in 2023, the US and the eurozone can look forward to respective projected growth of 1.5% and 1.7%.

Causes of the UK’s economic slowdown

The UK’s rising household costs are a big contributor to inflation, which is accelerating the economy’s slide into a recession. The crisis in Ukraine has only made things worse, partly due to supply systems that are collapsing from the effects of the Covid-19 pandemic. As a result, it is more expensive to transport fuel and food, which elevates their prices. As a result, both consumers and businesses have less purchasing power, reducing the flow of money and effectively stalling the economy.

As a result, central banks have been compelled to act decisively, hence the Bank of England’s record rise of interest rates at the beginning of 2022 – a desperate bid to combat inflation. According to a recent study conducted on behalf of HYCM, however, it seems that half of investors are concerned that these steps won’t be sufficient in reducing inflation and might even impede economic recovery. As these steps are likely to have the greatest impact on their portfolios, this response from investors is not unexpected.

Investors and traders are also keeping an eye on the political factors that may have an impact on the long-term health of the economy. Due to Prime Minister Boris Johnson’s departure and the accompanying Tory leadership campaign, virtually no monetary or economic policy has been developed in the past few months to address the current financial environment. Therefore, the policies of the new prime minister, Liz Truss, will determine the economic outlook and future of the UK.

In this regard, investors appear to have had a slight preference for the defeated Rishi Sunak, with 36% of those surveyed stating that they had hoped he would become the next prime minister. According to the aforementioned HYCM survey, fewer people (31%) supported the victorious Truss, while more than one-third (33%) were undecided. Truss has pledged to review the Bank of England’s mandate, contending that the existing strategy for combatting inflation will severely restrict growth. Thus, investors who are eager to maintain the current status quo appeared to be leaning in Sunak’s direction, as he felt that the Bank of England’s mandate should remain in place.

The response from investors so far

Economic policy undoubtedly characterised the Truss versus Sunak debate among Tory members and the general public. In spite of some obvious support for each side, a recession will happen in 2022, according to 62% of respondents, regardless of the winner of the leadership race. As a result, it is obvious that investors have little faith in the economy or the ability of a new prime minister to reverse direction and avert the slump.

To corroborate this assessment, when asked about how they were managing their portfolios, an additional 56% of investors acknowledged that they were ‘risk-averse’. Indeed, since investors’ purchasing power has theoretically decreased due to inflation, many will be looking to reduce risk in the coming months. As a result, it is likely that investors will steer clear of speculative risk assets or investments with little liquidity and instead pivot to safe-haven assets such as gold for protection.

For example, investors’ interest in cryptocurrencies has decreased since the first quarter of the year, with 33% of respondents saying that they intend to reduce their holdings. This percentage was only 11% in the first three months of 2022. Yet, when recent market crashes and the extraordinarily unpredictable character of the crypto markets are taken into consideration, this is largely unsurprising. This demonstrates that cryptocurrency, despite previously being viewed as a viable alternative to gold as a hedge against inflation, may not provide investors with the protection they desire.

At the same time, compared with Q1’s figures, 44% more investors aim to cut back on their investments into luxury assets such as classic vehicles. Certainly, selling off these kinds of assets amid the cost of living crisis could help with ongoing bills. Moreover, investors are avoiding private equity businesses in an effort to lower their risk, with 35% stating that they will cut their shares, a big increase from Q1’s figure of 11%.

By contrast, almost one in five (19%) investors are looking to increase their investments into stocks and shares in the coming year, making them the most popular asset despite the negative impact that decreasing consumer spending may have on many companies’ profitability. This is a 5% increase on Q1 and illustrates the fact that many investors are attempting to ‘buy the dip’ and profit from the future recovery of the markets.

Certainly, safe-haven investments continue to be desirable. Due to their reputation for low volatility and consistent returns, these investments, like real estate and precious metals, are typically employed by investors during a recession. Thus, 14% of investors anticipate that they will strengthen their real estate holdings in the coming year, while another 12% wish to switch their holdings to gold and other precious metals due to their proficiency for holding or growing in value.

Investors will undoubtedly be alarmed by warnings of an imminent recession, despite the fact that it is difficult to predict exactly how the coming months may play out. Even if the current economic situation still offers some opportunities, investors must keep in mind that reducing risk will be crucial for the rest of 2022 and probably well into 2023. To prepare for further downturn, investors should develop a plan that is best suited to their own portfolio circumstances.

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