If you pay close attention to stock market movements, you may have noticed a certain amount of volatility since 2020.
The Covid-19 pandemic shocked markets, producing significant downturns. Even after the immediate threat of Covid seemed to lessen, other factors came into force that contributed to further ups and downs.
All this is likely to have had an impact on your own investments, including your pension. If you’re prone to worry, you could have felt some concern at seeing falling asset values in the past four years.
Fortunately, there is no need to panic at all.
Let’s zoom in on four factors that have affected global markets in 2023 – and make sure you keep reading to find out why these might not affect your long-term financial plan as much as you thought.
The rate of inflation reflects rising prices in various sectors in the UK.
In October 2022, the Office for National Statistics (ONS) reports inflation peaked at 11.1%, before falling again in 2023, landing at 4.6% as of October 2023.
This sharp rise and subsequent fall has to do with a return to full consumer activity after Covid-19 lockdowns limited spending, among other factors.
What’s more, inflation can have an effect on markets. When prices rise more quickly than the target inflation rate of around 2%, consumer spending often slows, which can dampen companies’ profit margins as well as their overall value. In turn, this can reflect poorly on a company’s overall financial resilience, spooking investors.
Plus, with inflation rising over the past three years, investors may have reduced disposable income – resulting in a lower appetite for risk and less of a willingness to invest in many cases.
2. Higher-for-longer interest rates
When inflation rises quickly and sharply, central banks tend to respond by increasing interest rates in order to slow consumer spending and curb rising prices.
The Bank of England (BoE) has done just this. Between December 2021 and August 2023, the BoE hiked its base interest rate from 0.1% to 5.25%, where it has remained at this level until December 2023.
This rise has been adopted by most mortgage providers and other lenders, making borrowing much more expensive as a result. Although the BoE may lower the base rate in line with falling inflation in 2024, this is not guaranteed, and interest rates could stay higher than their pre-pandemic levels for the foreseeable future.
Higher-for-longer interest rates have an impact on the stock market in several ways:
Bond values typically fall. Most bonds pay a fixed interest rate, meaning that when interest rates rise, these holdings seem less attractive to investors, and their value may fall. Conversely, when interest rates are low, bond values tend to go up. If you hold bonds as part of your investment portfolio, you may have noticed their value dip in the last few years.
Consumer confidence decreases. As with inflation, when interest rates rise, many consumers may feel less confident about exposing their wealth to risk in the stock market.
Business debt becomes more expensive. Large corporations often rely on borrowing to continue expanding their enterprise. When borrowing becomes more expensive, profit margins may fall, and as you read above, this can damage a company’s share price.
As such, it’s vital to understand that higher-for-longer interest rates might have affected your investment portfolio already, and may continue to do so in 2024.
3. Bank closures in the US and Europe
Earlier in 2023, a swathe of bank closures disrupted global markets.
First came Silicon Valley Bank, the 16th largest bank in the US, which was forced into administration in March. The reasons behind the collapse are complex, but in short, the bank relied on fixed-interest securities that could not keep up with rising interest rates, and as a result, was unable to pay the deposits its customers were taking out.
Just a week later, Signature Bank, a New York institution, followed suit after consumers became spooked by Silicon Valley Bank’s insolvency and began to withdraw large amounts from their accounts.
Days after this, Switzerland’s second largest bank, Credit Suisse, was bought out by UBS Group AG after failing to stay afloat for similar reasons, alongside allegations of corruption.
Understandably, these three major bank insolvencies sent ripples of worry through the global financial system, and many investors and consumers felt concerned about a repeat of the 2008 financial crisis.
However, these concerns were soon assuaged. As JP Morgan reports, broad markets recovered extremely quickly from the concern that these collapses caused, boosting investor confidence after the month of March was over.
4. Geopolitical tensions
When non-financial events happen around the world, these can still have a knock-on effect on markets.
This has been the case not just in 2023 but in 2022 as well, with Russia’s invasion of Ukraine causing volatility in the energy sector among other key industries. Tensions between the US and China, especially in the technology sector, have been ongoing this year too. Among this, the war in the Middle East has understandably held the world’s attention since October.
Of course, when such events occur, the financial ramifications are the last thing on anyone’s minds – instead, the impact on human life is the far more pressing concern.
None of these factors should prompt you to make rash investment decisions
After reading about all these factors that can affect your investment portfolio, you may be wondering: “How can I protect my investments from events outside of my control?”
While there is no way to entirely “fireproof” your investments, a robust financial plan takes these factors into account and, wherever possible, helps to protect your money from them.
Remember that short-term losses are entirely normal in a long-term investing strategy. Keeping calm and consulting an expert before acting on any dips in your portfolio could help you to ride out short periods of volatility.
Curating an investment strategy alongside a financial planner could help you to:
Diversify your portfolio according to your appetite for risk, preventing you from putting all your eggs in one basket
Design a portfolio that suits the time frame you desire
Understand the importance of long-term investing, perhaps preventing you from cashing in shares when something unexpected happens
Fit your portfolio into a wider financial plan, which covers cash, protection, pensions, and property
Set clear, measurable life goals that are backed up by a resilient portfolio of assets.
We’re here to talk through anything you have read in this article, or any other investment matter. Just email email@example.com or call us on 0208 882 2979 for more information.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.