Roddy Hogarth, Head of Distribution, RAW Capital Partners, looks at how investors are navigating a turbulent economic climate.
Navigating market volatility is critical to the success of any investor. However, recent years have been defined by particularly pronounced levels of economic and political turbulence, creating significant challenges for investors.
As we emerged from a global pandemic, a surge in inflation and a devastating cost-of-living crisis promptly followed. In response, central banks the world over acted to bring price rises under control, most notably through interest rate increases.
In the UK, the Bank of England took the base rate from a historic low of 0.1% in December 2021 and raised it to 5.25% by August 2023. It has since voted to keep the base rate at this level on seven consecutive occasions – the most recent being on 20 June 2024.
The two macroeconomic factors – high inflation and interest rates – have been common challenges for investors globally, posing new questions of how and where they invest.
So, how have they navigated this turbulent economic climate?
The impact of political and economic challenges
To delve into this topic in greater depth, RAW Capital Partners carried out an independent survey among 756 UK investors. At the time of the survey, all respondents had investment portfolios worth in excess of £25,000, not including pensions, savings or properties that are used as their primary residence.
The results show that economic turbulence – both domestically and internationally – has had, and continues to have, a significant impact on UK investors. For instance, RAW Capital Partners’ survey found that most (57%) UK investors believe the global political and economic landscape in 2024 to have been more turbulent than at any other time in the past decade.
Looking more specifically, 45% of respondents said that inflation has made it more challenging for them to manage their investments over the past two years, while 32% stated that the rise in interest rates has negatively impacted their investments over that same period.
Additionally, almost over a third (38%) of the investors quizzed said that geopolitical conflicts and instability have affected their investment decisions over the past 12 months.
The effects of such challenges can be seen in the past performance of UK investors’ portfolios, as well as their perceptions of future performance: less than half (47%) of respondents are happy with how their investments have performed over the past 12 months, and even fewer (40%) are confident about how they will perform over the coming 12 months.
Fortunately, however, the survey revealed that investors are taking a proactive approach to managing their investments. Indeed, diversification emerged as a common tactic, with 38% of UK investors saying that diversifying their investment portfolio is a priority at present so they can effectively manage market volatility. Interestingly, this tactic is particularly common among investors aged 18-34 (50%) compared to those over 55 (24%).
How can investors protect their portfolios?
With this in mind, it’s important that investors are aware of the assets and asset classes that they could consider in today’s investment landscape as they build a diversified portfolio.
Creating a portfolio that’s balanced with a range of uncorrelated assets , can decrease the risk of a negative portfolio performance in the event of a downturn in a certain asset class or sector. On the 25 July this year, for example, US equities suffered their worst day in two years as the tech-heavy Nasdaq Composite fell by 3.6% as a result of disappointing earning and spending numbers from major tech stocks like Tesla and Alphabet.
Investors e could look to a mix of traditional, safe haven and alternative assets – equity and debt – that are uncorrelated. In doing so, they couldavoid their portfolio’s performance being overly dependent on the fluctuations of any single market or economic condition. So, what assets or asset classes could they look to?
Investment options for the second half of the year
At present, gold appears to be a particularly intriguing option, and some analysts expect it to edge higher in the coming weeks. With U.S. stocks falling on the 25th, and the U.S. Dollar weakening in anticipation of a Federal Reserve rate cut in September, gold – which has an inverse relationship with the USD – is an option for global investors, especially those with holdings in other currencies.
Additionally, the recent election of the Labour Party in the UK, with its strong emphasis on green energy in its agenda, suggests that investments in renewable infrastructure could yield some decent returns in the medium to long term. The new Energy Secretary, Ed Miliband, announced plans to launch GB Energy, which aims to drive up investment in off-shore wind farms. As such, targeting stocks with exposure to renewables in the UK could be fruitful.
To balance against these options, private debt-based and alternative investments – such as real estate, peer-to-peer finance or investment funds – are useful tools in an investors toolbox to help diversify their portfolios.
Concluding briefly, it’s clear that the last few years have proven difficult for investors and their portfolios. However, as an encouraging number look towards diversification to battle the threat of market volatility, there are several options available to them that can help them weather economic uncertainty and protect recent gains.
Main image: susan-wilkinson-aK6DIjf53nA-unsplash
