So here’s a question: following the general election, who knows what’s going on?
Politicians, economists, analysts, the markets, and experts of all stripes – none of them knows the answer. Neither are savers and investors any the wiser; so what looks likely and how might the 8th June election pan out for them?
What we do know is that the Bank of England is unlikely to raise interest rates unless it has to. And even then, if the US Federal Reserve provides a template, increments would likely be very small. Consequently, cash savings rates are likely to remain low for the foreseeable future.
There is one fly in the ointment however – inflation. Already, due to the fall in the value of sterling – it’s at 1.27 to the US dollar and 1.13 against the euro as I write – the cost of anything we buy that comes from overseas which is not originally priced in sterling will cost us more.
The latest CPIH inflation figure from the Office for National Statistics for May put the rate at 2.7 per cent.
To appreciate how serious this could be, just think about how many things that you eat, wear, drive, use to fuel your home or to read this article on, are made abroad and are likely to be priced in either of the two major world currencies.
Our cash will not buy as much and the only minor silver lining might be if the Bank raises rates to quell inflation and savers eventually, get more on their savings. Let’s not hold our breaths, they’ve been at rock bottom for nine years, since the financial crisis.
Flight to Safety – Cash is King
Another thing we know is that the price of gold has been steadily rising since it bottomed out at USD1,059 an ounce in December 2015. Today it’s at USD1,262. That’s an increase of almost 20 per cent.
Although this is unlikely to have been much affected by the UK election result, it may indicate a general, global uncertainty about such things as the escalating instability of the Middle East, the unpredictability of the US President’s actions and generally poor real economic performance among the major economies – hence the flight to a so-called safe haven, buying gold.
There’s a message here. Nowhere is the western world is the economic future as uncertain as in the UK right now.
Latest figures from credit card firm Visa say that consumer spending is now falling. In May it was almost one per cent lower than a year ago, the first year-on-year fall since 2013. In times of uncertainty, stashing the cash rather than spending it makes horse sense.
Beware Mr. Market
Another thing we know, is that the major stock market indices are at or near their all time highs. The FTSE100 big company index is at around the 7,500 mark. The US S&P500 is at over 2,400.
Here are some questions: how much further can they go? Are we due for what pundits call a “correction” – that’s finance speak for a fall. And the people who lose when markets fall are often small investors who bought in too late.
Strong and Stable
The Prime Minister’s “strong and stable” election mantra now looks out-dated. No, I mean absurd. The UK is facing great political and economic uncertainty – as I said, no one knows where all this is leading.
This does have a couple of positive effects.
One is that the challenge that sterling is facing is producing great earnings for multinationals whose income is in, say, dollars and which account in sterling. This could lead to higher dividend payouts for shareholders, especially as big businesses may prefer to pay out profits in dividends rather than retain them to invest in the their businesses when the outlook is so uncertain.
The second effect is volatility. Markets, like those in stocks and currencies, tend to be volatile in times of uncertainty. Look at the immediate aftermath of the 23rd June Brexit vote last year – when the FTSE100 took a 300 point dive followed by a rapid 600-point recovery over the following couple of weeks.
Sterling dived ten per cent or so immediately and has been bumping along the bottom ever since. A similar pattern, though not as extreme, played out around the 8th June election.
We are seeing febrile, feverish markets at play at the moment. Volatility produces short term trading opportunities for those who bet the right way and risk for those who can’t.
So, given all the things that we do know – and that is not a lot – about the future of this government and for the UK economy or the global political and economic outlook – we can say:
- Cash, as ever, is king
- The major stock markets are hotter than they’ve ever been
- Risk is everywhere. As Mrs. May knows, there’s no such thing as business as usual
- For those with the cash, the courage and the acumen, volatile markets spell opportunity but not certainty
- For those with limited income and resources conservatism (with a small c) appears the prudent way to go but…
- For those with huge resources, perhaps from overseas with, dollars to spend, the general election result could produce another opportunity to pick up UK business an property assets on the cheap… But that’s another story.