Volatility can generate opportunity

The majority in Scotland didn’t vote for it but Brexit is a reality. Jon Drysdale looks at how your pensions and investments might be affected

29 September, 2016 / management
 Jon Drysdale  

With the downgrading of NHS pensions, including the retirement age now being linked to state pension age, dentists will need to seek alternative sources of income in retirement. The long-term nature of retirement savings opens the door to a risk-based approach to investing. Often would-be investors are spooked by the impact major political events have on the stock market. Should short- term events really dictate your retirement plans?

Good news for your pension?

‘It’s the economy, stupid’ is the (often misquoted) line that politicians ignore at their peril during election time. Major political events such as Brexit or a general election tend to mean either good news or bad news for the stock market and other major financial barometers such as interest rates, the price of government debt (gilts) and currency.

Like it or not, such events will affect the value of your pension, ISAs, shares portfolio and cash in the bank but perhaps not in the way you think. So why is a decision that is widely accepted to be terrible news for the UK economy (Brexit), good news for your pension?

Triple crown

In simple terms, your pension and investments will probably have benefited from the FTSE 100 hitting a 14-month high in recent weeks. Perhaps the economic impact of Brexit isn’t as bad as anticipated? Or perhaps the economic impact of Brexit is yet to play out? In any event, three things immediately gave reassurance to the markets following the referendum result.

1. The Prime Minister resigned straight away and was quickly replaced. Cabinet appointments, especially Philip Hammond as Chancellor, have been well received.
2. The Governor of the Bank of England, Mark Carney, reassured us that plans were in place to support the financial system should they be needed.
3. The Bank of England reduced interest rates and extended quantitative easing (QE) – a clear sign that the ‘shot in the arm’ monetary stimulus of the economy endures.

Still in the woods?

While the value of Sterling fell, the much anticipated 8 per cent fall in stock market values didn’t happen. In fact, the numerous markets are enjoying a period of resurgence buoyed by the Brexit aftermath being not quite as bad as first feared. However, there remain concerns that we aren’t out of the woods yet. Some commercial property funds moved into ‘lock down’ fairly swiftly to protect investors from large outflows. We haven’t seen that measure imposed since 2008. So are things worse than we think?

Job data and other economic indicators haven’t yet reflected the impact of the UK leaving the EU, largely because the UK hasn’t yet left the EU. Trade agreements etc. will surely follow but there is a real danger that the economy starts to falter if EU companies restrict investment in the UK. We may be starting to see this with the boss of Nissan, Carlos Ghosn, saying future decisions about its Sunderland car plant will depend on the outcome of Brexit negotiations and Siemens postponing new wind power investment plans in the UK. It is probably more accurate to describe the current economic situation as on hold, with much anticipation and little action. For the time being the markets are comfortable with this, especially when the Bank of England dishes out ‘gifts’ such as the recent cut in interest rates.

Taking the long view

So where does this leave your pension pot and other investments? Continuing volatility is likely to mean values will carry on rising and falling. The US election is the next big event on the calendar as the US dollar is key to the performance of the global economy. In summary, more uncertainty will follow – which is nothing new.

As ever with investments, it is worth looking at the long view. Knee-jerk reactions are the enemy of sensible investment and cash remains a poor long-term option for growth or income. Inflation and cash-beating returns are still to be had – just make sure your adviser has your portfolio well diversified and reviews it regularly.

Short-term volatility due to major events is nothing new and the history of investing is littered with these. Markets recover and long-term investment returns have consistently beaten lower risk alternatives. Don’t let the headlines get in the way of your retirement plans as volatility often generates opportunity.

About the author

Jon Drysdale is a director with PFM Dental which offers an independent Chartered Financial Planning service and wealth management advice exclusively for dentists.

The value of investments can fall and you may get back less than you invested. Past performance is no indication or guarantee of future returns.

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