The State Of The UK Economy & How To Make Your Money Grow

The recovery in the UK and global economy has been pretty strong. This year, the UK economy is expected to grow by about 6% (after falling 9% last year) taking it back towards the levels seen in 2019 by the end of 2022 – which is ahead of what analysts expected. It’s what we call a cyclical recovery, and it’s fuelled by several factors, including pent-up consumer spending and the return of things like infrastructure projects and construction. House prices have also been on the rise, which often boosts people’s confidence. For now, too, while people can’t go abroad, most of their money will be spent on home turf, which should only fuel the recovery further. 

In the medium term, I’m confident about the economy. There are always risks in the financial markets and Covid-19 is still a big one, but the fundamentals which should keep equity prices resilient – interest rates for example – are low compared to history. It offers a decent backdrop for future growth and recovery. Interestingly, before this crisis, no forecaster saw a pandemic as having a significant impact on the global economy. But most analysts were using SARs or bird flu as similar models – both of which had less than a 1% impact on global growth. It’s turned out completely differently.

There are always risks which can impact stock markets. One is geopolitics (think trade wars, the Middle East conflict and rising oil prices) but in my opinion, the world has become more acclimatised to these shocks, which means they’re felt less intensely in the market. The other two are inflation and interest rates which are, of course, linked. Inflation has risen as a result of supply issues compounded by the pandemic, and if that continues, there’s a fear central banks could raise interest rates faster than expected. 

Interest rates are important because our economy runs more on credit these days. For example, if you’re someone with a £300,000 mortgage, borrowing at 1.5%, that costs you around £375 a month on an interest-only payment schedule. If interest rates move up – even to 5% – it can make a material difference, and it might become unaffordable for you – especially if your earnings remain stable. It’s the same as what happened during 2007/8, when people borrowed a lot of money to buy their houses, only to see interest rates shoot up. House prices collapsed and it’s what sparked the financial crisis thereafter. 

Houses prices are indicative of broad financial health. For many people, they’re your largest asset and you often have your largest liability attached to it, as well. Over the past year, many people have moved out of London into home counties – something that’s clearly backed up by statistics – and this has fuelled the market and thus prices, but there’s a limit to where house prices can go to. Everyone has an income that’s finite in some way or another, and most will have to borrow something to be able to buy a property. Affordability always has a ceiling or a cap.

Over the past year or two, house prices have been driven by the low cost of borrowing. From here, they’re likely to stabilise because affordability is now becoming an issue. Interest rates are unlikely to get cheaper than they are right now and they might even rise, but as long as the economy remains robust, then house prices should, too. 

Everyone should own their own home if they can. Timing any kind of market is so difficult and the housing market in particular is not worth speculating over – all homes can be difficult to sell, for many reasons – but history tells us that values tend to rise over time. Costs also rise and inflation is a natural part of the system, but one way to take advantage is to own your own home. If you’re young and able, buying a house is always a good future investment.  

There’s no specific asset class that looks especially attractive right now. Equities aren’t cheap and bonds are yielding less than inflation, not all your money can be held in gold and property is illiquid… it’s why you see people moving into alternatives like Bitcoin. But if you ask me, while we live in an economy that’s growing, then investing in stocks or equities has to be one of your best bets.

Global stock markets took a real hit last year. But they’ve recovered – the US stock market is riding at an all-time high and the FTSE 100 has come back strongly, too. It is a volatile animal, though, so my advice is to buy good-quality companies that can survive the economic cycle. The mistake many people make is that when the markets are down, they get overly nervous. It’s often a time when you can make money, but investors get very worried about the short-term ramifications. Over an extended period of time, the statistics show equities offer a 7-8% return per annum, on average. Even blue-chip companies, defined as the largest, most mature, reputable and financially-sound aren’t without their risks, but they’re usually in a better position to see themselves through economic recessions and often come through these periods of time in a better position. 

If you’re thinking about investing for the next 10 years, then the stock market is a good option. If you’re more focused on the next 10 months, then it’s not. If you do choose to invest, try not to look at the markets every day and don’t allow yourself to be driven by sentiment. Be wary to buy into sectors that are highly cyclical – for example airline stocks or construction, they do well in times of growth but struggle in recessions. Also, consider the things you most admire in a company – if you like what they do and how they do it, you’ll usually do well by investing in them.

If you’re looking for income, right now the only place you can go is the stock market – and specifically, big, blue-chip FTSE 100 stocks. If you like the idea of being a long-term saver, then the stock market is performing well ahead of other asset classes. Inflation erodes the value of money in the long term. If you like the idea of being a long-term saver, then the stock market provides the best returns historically compared to other asset classes. If you have short-term plan, then don’t put your money into the stock market.

It would be great if people understood equity markets more. It’s what will help them feel more confident about putting their money into them and saving it this way – be it through an active or passive fund. Stocks are used by some for speculation hoping for short term gains rather than as a tool for savings – by which I mean people using the stock market as a means of ‘going to the races’ and betting on elusive or rumoured prospects.

You don’t need a large amount of money to get started in the stock market. You need only invest a few hundred pounds at a time – and it’s not worth worrying about whether a particular stock is expensive or cheap, necessarily. It’s much more important to buy into quality companies that are destined to grow, do well and that you admire.

The stock market always presents an opportunity. Just make sure you diversify and never concentrate or limit yourself to one single asset class. Also, stick to investing in things you understand. It’s an old Warren Buffett adage, but it means that if or when a stock falls, you’ll know why and will be able to make a more rational decision about whether you want to get out or stick with it.

It’s never a bad idea to get some professional advice – although a degree of trust in yourself is also important here. Platforms like Hargreaves Lansdown offer advisory accounts or non-discretionary accounts, depending on the level of advice or fund manager involvement you’re looking for, and most accounts are easy to open these days. Robo-investing is another option – with platforms like Nutmeg – but it’s a less tried and tested method and therefore worthy of some caution. The best thing you can do is learn a bit about the markets yourself. Dip your toe in and only invest what you can afford to lose. When it comes to saving or growing your money, stick to the names with a long track record – and try not to panic.

For more information visit FrankInvestments.co.uk. 

*DISCLAIMER: Anything written by SheerLuxe is not intended to constitute financial advice. The views expressed in this article reflect the opinions of the individuals, not the company. Always consult with an independent financial advisor or expert before making an investment or personal finance decisions.