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UK Investment Markets: Weekly Update – March 25th 2019

There’s another week of political mayhem ahead of us in the UK as we still perch on the “will we, won’t we” fence just four days away from the Brexit deadline.

More than 1,000 days since the referendum, and with the clock ticking with increasing impatience down to 29 March, the path of Brexit quite unbelievably remains unclear.

Ahead of the 2016 vote, the Treasury warned that leaving could damage the economy.

And yet, for all the political turmoil and uncertainty, the economy continues to trundle along – and appears to be doing very well on some fronts. That said, there’s an element of smoke and mirrors going on, with economic indicators giving a blurred indication of the UK’s financial health.

Almost 30 years ago, US economist David Shulman introduced the phrase “Goldilocks economy” to describe one that’s neither blowing too hot nor cold but expanding at just the right pace, with good jobs growth.

But does that apply to the UK? And were those warnings from the Treasury merely “Project Fear” fairy tales in themselves?

What should we make of the ‘jobs miracle’?

Employment is at record highs, unemployment at its lowest for almost 45 years.

Wages are growing at their fastest rate for a decade, with pay rises typically outpacing the cost of living.

If the jobs market was a bowl of fairy tale porridge, it might be Daddy Bear’s blisteringly hot serving, steaming away with few signs of damage from the Brexit “fog”.

But hiring tends to lag behind changes in activity by between six and nine months on average, while firms determine whether changes in circumstances are permanent, and then recruitment (or redundancy) takes time.

After the financial crisis, firms opted to hang on to workers as they were relatively cheap compared with investing; the same could be happening again as they grapple with uncertainty.

And while real wages are rising, they have only resumed that growth in recent months; the average post-inflation wage is still £7 a week lower than it was a decade ago. Plus the fact, the figures always ignore the hundreds and thousands of workers on Zero-Hours contracts who are effectively not earning anywhere close to a living wage.

The real story is that there is a growing demographic of people in the UK known as the “working poor”. If things were so ticketyboo on the employment front, why are there endless queues at food banks? Why are almost 2.5 million children living in poverty? Why are there more evictions and repossessions taking place every day of the week than ever before?

What about GDP?

GDP growth is the Mummy Bear porridge bowl – disappointingly lukewarm. The economy expanded by 0.2% in the latest three months – and by 1.4% across 2018; steady but lacklustre.

As the Bank of England noted, expansion has been held back by a lack of business investment since the referendum – and also by a slowdown in our major trading partners, particularly China and the EU.

But it could have been better – various estimates suggest that the economy is up to 2% smaller post-referendum than it was previously expected.

And even with a deal, the Treasury, the Bank of England and the City are broadly agreed that the UK could be on track for the weakest growth this year in a decade.

How near are we to hitting the inflation target?

With prices rising by 1.9% in the year to February – within a whisker of the official target of 2% – inflation appears to be the Baby Bear bowl of the bunch: just right. Prices are rising sufficiently to signify there’s life in the economy but not so fast to be punitive or destabilising.

But that doesn’t mean inflation can be ignored, which brings me to…

Could an interest rate rise be on the way?

For over a decade, the base rates set by the Bank of England have been below 1%; great news for borrowers, less so for savers. In many ways we ought to be grateful that things aren’t the way they were before the BoE had this power and the government could set interest rates as they deemed fit.

One can only imagine what rates we would be paying on our borrowing which despite being good news for savers would cripple those already in poverty and drag the economy quickly into recession.

The Bank sets those rates to keep inflation close to its target in two years’ time – that’s how long it estimates it takes for interest rates to influence prices (largely via the spending and borrowing habits of households and businesses).

If the trend of faster real wage growth continues and a Brexit deal is swiftly agreed, with little disruption to the economy, some economists think there could be a small rate rise later this year.

CHOOSING THE SAFEST OPTIONS FOR YOUR INVESTMENTS AND SAVINGS

There is still no likelihood of any stability in the near future neither in the UK or the EU. With the focus on the UK, it is easy to ignore the mess that the EU is in economically and how the sudden withdrawal of Britain’s investment will impact it even more. From an investor’s point of view, it’s almost too risky looking for opportunities anywhere at the current time.

However, that can sometimes be a very narrow view to take as there are always anomalies when there’s economic uncertainty. In fact, when there’s market volatility, more millionaires are created than at other times in economic cycles. That said, it is definitely not a time to be greedy in terms of expecting high returns without any risk exposure. These opportunities seem to exist everywhere but they are absolutely worth avoiding, particularly if you are investing for a particular milestone such as buying a home, funding university or retirement.

At Investor Live, we are always looking for the kind of anomalies that represent safe and sound investments when there’s any kind of instability. From my point of view, it is important that the opportunity to cherry-pick exciting investments with a low-risk profile is not restricted only to those with bulging bank accounts. I represent the “normal” investor and on that basis, any recommendations I make are purely based on independent judgement.

Fixed income opportunities that are backed by tangible assets are the safest possible option for your investment strategy at the current time. You want to be sure you’ll be receiving a determined amount back for your investment and that there’s something underpinning it of significant value. One of the things to consider is not how much the asset you’re invested in is worth but how much of it is owned by the issuer behind the investment opportunity.

Investment over the short-term is always a better idea when markets are volatile and there are a few opportunities to enter the British hotel and hospitality sector for 1- to 2-year terms. One such opportunity comes from Liverpool-based hotelier Signature Living which has a proprietary investment vehicle called a Secured Partnership Investment (SPI). You can find out more about how to invest in this award-winning hotel brand that is rapidly expanding its portfolio of heritage hotels by contacting Investor Live.

About the Author

Amanda Wright is a former risk analyst at Bankers Trust, with specific experience of mergers & acquisitions and corporate finance. As a contributor to Investor Live, Amanda provides valuable insights into the technicalities of fundamental analysis in a way that is easy to understand, to provide retail investors with the tools to make considered investment choices.