Chaos in the markets, the cost of living crisis, and central bank interventions bring more anxiety for households and businesses and deliver a robust reminder for investors, says the CEO of one of the world’s largest independent financial advisory, asset management and fintech organisations.
Nigel Green of deVere Group’s commentary comes as the UK’s CPI inflation has jumped to 10.1% in September, the same as July’s 40-year high.
He says: “The scale and scope of Britain’s cost of living crisis have been revealed in painful terms again today as inflation, driven by soaring food prices and the energy crisis, hits double digits once more.
“The figures will cause yet more stress and worry to households and businesses across the country.
“The 10.1% inflation rate will help decide how dramatically the Bank of England raises interest rates next month.
“We now expect the Bank to hike the rate by a full percentage point”. This would take it from 2.25% to 3.25%.
“A rate rise would mean higher borrowing costs for property owners on variable rate mortgages. Lenders will also increase the rates they charge on personal and business loans at a time when families and firms are facing a shocking cost of living crisis.”
The significant rate hike, he adds, can also be expected to make the recession in Britain’s consumer-driven economy worse and last for longer.
The Bank of England’s expected interest rate rise next month, following the latest inflation figures, will act as a robust reminder for investors.
“Not only do higher interest rates increase borrowing costs for all businesses, but they also make firms’ projected profits worth less in investors’ valuation models. This is exacerbated for tech and other growth stocks whose peak earnings are not expected for years to come.
“As such, investors are likely to be keener to consider the value sectors of energy, industrials, materials and financials, and increase their exposure to them.
“However, sensibly, they will not be dumping all growth stocks either, aware of the advancement of fundamental trends, such as online shopping, remote working and gaming.”
In short, says Nigel Green, the Bank’s expected move on interest rates is a siren call to investors to remember a fundamental investment truism: the best way to mitigate risk and position yourself for opportunities is to be diversified.
A diversified portfolio is a collection of different investments that combine to reduce an investor's overall risk profile. Diversification includes owning stocks from several different industries, regions, and risk profiles, as well as other investments such as bonds, commodities, and currencies.
Nigel Green concludes: “This highly unusual financial and economic situation is a reminder that financial history teaches investors to review their portfolios regularly, remain diversified and don’t try and ‘time the market’.”