Introduction
Trade wars, Brexit and rising interest rates have contributed to a busy start to 2018. The FTSE100 has Fallen 8.4% since the start of the year, making it the worst performing major index.
Uncertainty about the UK’s long-term relationship with the European Union remains a dominant theme and as a result, the UK economy is expected to grow the slowest among the developed nations. There is also the possibility of an impending trade war between the United States of America and China which will result in losses as the price of goods will rise. If there are further falls in the stock market, it is an indication of economic weakness to come. The UK economy has been recovering for the past 6 years and at some point soon we are due a recession which would not be good for shares. The likelihood of rising interest rates is also of concern. There is always an element of distrust with stock markets, so even if there won’t be a crash, millions of investors expect one to happen and it is always on the horizon.
Recent Performance of the Stock Market.
It is said that when the US sneezes, the rest of the world catches a cold; and that is certainly being proved to be true recently as a fall in the US stock market triggered a global equity downturn.
The US remains the largest economy in the world, and so it is unsurprising a stock market blip across the pond will have a global impact.
The losses in Europe and Asia followed concerns that central banks will increase interest rates this year by more than expected in response to inflationary pressures from surging global economies.
Markets began taking a turn for the worse recently following strong US wage growth, which fuelled speculation that US interest rates might start to rise more quickly to cool inflation.
Global markets have enjoyed a record-breaking rally since the global recession and experts have been increasingly predicting that the bubble may soon come to an end.
Investors will need to brace for more volatile stock markets over the months ahead.
The Bank of England has also signalled that it expects to raise rates twice this year. Obdurate higher borrowing costs mean lower profits for companies and less spending by consumers which is why share prices have fallen.
Either raising interest rates too quickly or delaying monetary tightening in the world’s largest economy could worry investors and spark further market falls.
Factors that can lead to a fall in stock markets
BREXIT –
It’s a question that is currently on the minds of politicians, businesses and employees both inside and outside of the UK.
The first thing to note is that there has been increasing talk of preparations being made for ‘no deal’ when it comes to Brexit.
- Since the referendum in June 2016, UK GDP growth has fallen well behind the OECD and EU average.
- UK stocks have underperformed significantly by comparison.
- Labour productivity has fallen even further behind rivals.
- Inflation has risen and reduced ‘real incomes’.
- The fall in the pound after the vote has not yet boosted exports.
- Many of the least well-off parts of the UK rely heaviest on EU money.
- Many feel the sluggish GDP, UK stock performance, labour productivity, inflation, a weak pound and London reliance will only be exacerbated when the UK finally leaves the EU in 2019.
TRADE WARS – Global equity markets are increasingly sensitive to fears of a global trade war.
U.S. stocks are trading lower, with some of the pressure tied to expectations talks between Trump administration and Chinese officials. The market moves have fears that a U.S. trade war with China will spread to other potential U.S. targets in Asia.
Trade-war events have repeatedly triggered currency weakness against the dollar.
History shows us that trade conflicts are rarely good for markets.
WAR – Escalating tensions between the US and North Korea recently caused volatility in global markets, although the threat of conflict appears to have eased for now.
Looking at recent history, US involvement in Iraq in both the wars led to a fall in stocks of more than 10%.
During previous wars, the economy was more exposed to capital goods and natural resources, which experienced greater demand to feed the war. However, by the 1990s, the economy had shifted away from heavy industry and toward the current knowledge-based economy.
The stock market hates uncertainty, and there is plenty of uncertainty at the moment.
TERRORISM – International terrorism is a complex geopolitical issue that threatens to undermine the security of cities, countries and markets worldwide.
As a general rule, any development that casts doubt upon the viability of the economic status-quo has a tendency to send shock waves through both domestic and foreign markets. An act of terror serves to create uncertainty within the marketplace, which can lead to investor apprehension and many unforeseen financial consequences.
The impact that an act of terror has on the marketplace varies depending on the type of attack, locale and time in which it was committed. Some acts of terror cause only a regional disturbance spiking volatility in domestic markets, while others send shockwaves through the entire global financial system.
The UK has experienced several such incidents in recent times.
The economic fallout from the London attacks was largely regional and fleeting as the GBP saw the greatest shock during their aftermath. However, the mid-August vehicle attack on a popular tourist area in Barcelona, Spain had an international impact.
The unpredictability of a terror attack is the mechanism by which confusion is created within a specific financial market or group of markets. While it is largely impossible to account for an unknown future event ahead of time, it may be even more challenging to manage capital exposure and risk within a market during a period of unforeseen chaos.
INFLATION – Inflation is when the buying power of a currency falls over time.
For several weeks, economists and analysts have warned that inflation levels in major economies could increase this year beyond the 2% to 3% that central banks believe is good for developed countries.
Decades of flat wages should mean that increases expected in 2018 and possibly 2019 are too small to trigger a reaction from the central bank, but investors are betting rates will rise. As a consequence, stock market jitters could continue.
A falling stock market should not affect the economy immediately. Its main effect should be to limit the availability of shareholder funds for investment, affecting the long-term health of the economy. As a result, a big fall in share prices could damage the economy.
Over the last couple of decades, central bankers around the world have mostly settled on 2 per cent per year as the optimal level of inflation that they aim for.
The important thing is arguably less the exact level of inflation and more that it is fairly stable over time. It is big swings that tend to be most disruptive, favouring either debtors (inflation) or creditors (deflation), and generally contributing to lack of faith in a country’s financial system.
The answer is more uncertain than you might think. The inflation rate is shaped by the amount of unused capacity in the economy, especially unemployment.
INTEREST RATES – Nothing has to actually happen to consumers or companies for the stock market to react to interest-rate changes. Rising or falling interest rates also affect investors’ psychology, and the markets are nothing if not psychological. When there is a hike in interest rates, both businesses and consumers will cut back on spending, which will cause earnings to fall and stock prices to drop, everyone thinks, and the market tumbles in anticipation.
It usually takes at least 12 months for any increase or decrease in interest rates to be felt in a widespread economic way, the market’s response to a change or news of a potential change is often more immediate.
The interest rate that moves markets in the UK is the LIBOR. This is the rate depository institutions are charged for borrowing money from other banks.
When the interest rate rises, it does not directly affect the stock market itself. The only truly direct effect is it becomes more expensive for banks to borrow money.
But businesses are affected in a more direct way as well because they also borrow money from banks to run and expand their operations. When the banks make borrowing more expensive, companies might not borrow as much and will pay higher rates of interest on their loans. Less business spending can slow the growth of a company. There might be a decrease in earnings as well, which, for a public company, usually means the stock price takes a hit.
If enough companies experience declines in their stock prices, the whole market will go down. With a lowered expectation in the growth and future cash flows of the company, investors will not get as much growth from stock price appreciation, making stock ownership less desirable. Furthermore, investing in equities can be viewed as too risky compared to other investments.
If the required risk premium decreases while the potential return remains the same or dips lower, investors might feel stocks have become too risky and will put their money elsewhere.
Although the relationship between interest rates and the stock market is fairly indirect, the two tend to move in opposite directions.
What are Alternative Investments?
The most common question by investors is whether there are other strategies to invest beside traditional stocks. This is where alternative Investments play a major role. They consist of hedge funds, investment in venture capital, private equity, exchange-traded funds, commodities, currencies, financial derivatives, investment in art, precious metal, gold and silver, in wine, etc., whereas traditional Investments consists of stocks bonds and cash. Alternative Investments can serve as an equity replacement by gaining the ability to share in potential higher growth and profit.
Alternative investments are not to be used to replace an investors entire portfolio, but rather to add diversification, by including strategies that are not entirely dependent on equity market performance. Alternative Investments potentially minimises the volatility of an investors portfolio through diversification.
Alternative Investments at perceived to behave differently from traditional investments and are not free for risk. Their returns may be correlated with other investments, especially in periods of financial crisis. There is a general feeling amongst industry experts that the markets are now turning in favour of alternative investment investors. Although alternative investment has always held the fascination of investors they seem to be gaining popularity in recent years as both individuals and institutions look for ways to change the volatility exposure.
The characteristics of alternative Investments is that they are illiquid, they are non-normal returns, they are opaque in terms of pricing and they are less accessible to investors. Alternative investments enhance the returns of the overall portfolio and provide additional diversification with low volatility. An important consideration when making an investment in alternative Investments is to ensure that the structure of the Investment vehicle matches the time horizon of investment and the characteristic of the asset class as many alternative Investments are long-term investments. In addition, many alternative Investments require regularly updated knowledge about the investment and its market.
An alternative is an asset that’s independent of the market and earns a solid return over time even when the market drops.
Most Common Types Of Alternative Investments.
1. Hedge Funds – Hedge funds are made up of a variety of different alternative investments, sometimes they invest in startups, sometimes they use borrowed money, and they’re designed to hedge against market volatility. Hedge funds pool investor funds and invest in a variety of sophisticated hedging strategies. Hedge managers bet against the performance of stocks and bonds or attempt to benefit from mergers by investing in companies that are being acquired or else invest in securities of distressed companies. Hedge funds commonly use derivatives, options and leverage with the objective of limiting downside risk and earning higher returns, or both. Hedge funds are available for a limited number of investors and generally require a huge amount of initial investment. Hedge funds are not regulated and promise to fetch a positive return even when the market is down.
Private equity – unlike public equity, are not traded in the country Stock Exchange there more private companies then public companies and many of the private companies taking in investors capital in exchange for equity ownership or higher total payouts and includes investments in startups such as venture capital the capital resources are very important for startups and early-stage companies which do not have access to more conventional financing due to stringent requirements by the traditional lending institutions.
Exchange traded funds are developed to check the activities and movements of commodities or currencies in the market investments in currencies exchange-traded funds are basically meant for short-term investment especially for in the investors who have liquidity constraints on the other hand commodity exchange-traded funds gives protection against The Rise and Fall of inflation index exchange rate funds are actively managed funds and have the advantages of transparency competitive fees and better liquidity.
Financial derivatives are the most complex form of alternative Investments the most common types of derivatives are futures and options investment in derivatives is more like placing a bet determining the movement of the market in the near future it is a contact contract between parties and can be used as a financial asset and they are traded over the counter human error lack of clarity and lack of professional advice can be major drawbacks involved with investment in derivatives.
Hedge Funds ideally earn a return even when the market plummets, which keeps your portfolio balanced.
2. Real Estate & Real Estate Investment Trusts (REITs):
Real estate is a broad category that includes publicly traded and non traded real estate investment trust as well as private partnerships investing in different types of real estate. Real estate investing investment is more reliable because of its this investment strategy capital gain and the hedging of inflation
BTL – With the volatility of the stock market, low-interest rates, residential property is still regarded as a safe haven for both domestic and overseas investors.
Growth within the private rental sector and better availability of BTL finance over recent years has propelled it into the national consciousness and proved a very popular investment option.
The UK government has introduced taxation specific to second home buyers and individual landlords by removing some of the tax advantages previously available to private landlords. Despite these measures, the prospect of a regular rental income coupled with reliable long-term capital appreciation has ensured that Buy-to-Let remains a hugely significant component of the property market.
Real estate can be a decent alternative, and you don’t have to buy property to invest in it. REIT, or Real Estate Investment Trusts, are a way of developing property within an investment portfolio without directly investing as a traditional property investor. It offers diversity within the portfolio and can deliver significant returns for the investor.
REITs are essentially companies or groups of companies that manage a portfolio of property to earn profits for shareholders, and their special tax status means that they pay no corporation tax on the profits of their rental business, but they need to comply with a number of conditions set out in tax law.
Publicly traded REITs are ideal for investors of all budgets and offer a low-cost exposure to real estate without the hassles of owning property.
Unlike owning real estate, REITs are liquid and are easily bought or sold. Money managers may buy these securities as alternatives to using leverage.
This allows you to earn passive income in the form of monthly or quarterly dividends.
International REITs give you access to global real estate markets that are otherwise not available. Investing in real estate overseas is made difficult by currency conversions and restriction on foreign property ownership, among other challenges.
REITs are traded like stocks on the market, and are property-related assets and can include a mix of investments across residential, industrial, commercial and agricultural property units.
Direct investments can be riskier, more concentrated, management intensive and less cost-efficient. REITs are a better option for some investors, as they are less risky, diverse, and cost-efficient. Their comparatively low correlation with other assets also makes them an excellent portfolio diversifier that can help reduce overall portfolio risk and increase returns.
3. Precious Metals
You could also invest in commodities, like gold or silver.
The nations that suffer from pressures of inflation are mostly dependent on gold investment and gold has been perfect and safe for investors. Investment in gold can be done by gold exchange-traded funds gold futures options and gold stocks.
Many investors turn to gold as a store of value during troubled economic times.
During periods of weak currencies or high inflation, gold investments can be a valuable hedge. Since changes to economic indicators are difficult to predict, holding a small portion of your portfolio in gold-related investments may be appropriate.
There are several convenient ways to buy gold. You can buy gold bullion as hard asset that helps preserves purchasing power. For greater liquidity, consider gold mutual funds or shares of mining and exploration companies.
Hard assets often move in different directions from the broader market. Either as securities or in physical form, volatile asset classes can reduce your portfolio risk. Overall, it’s about making sure your portfolio is balanced in something other than stocks and bonds.
4. Wine investment and wine is fast growing as an alternative investment investment and wine can be very rewarding however the Investment requires a lot of time to realise the returns A very good knowledge of the market is a key factor that Returns on the Investment are determined by what it will be sell for at a later date taking the cost of preserving the wine into account.
5. Bonds & Gilts – Corporate bonds and gilts
A bond is a form of debt issued by companies or the government to raise money. Corporate bonds are issued by corporations and gilts are bonds issued specifically by the British government.
If you buy a bond you are, in effect, lending money to the issuer. In return, the issuer promises to pay you a set rate of interest each year (this payment is known as a coupon) and to repay your capital at a set date in the future, known as the redemption date.
There are different types of gilts, but the majority are conventional gilts. These normally pay a fixed coupon twice a year and mature on a set, fixed date in the future. You can also buy index-linked gilts, where both the coupon payment and the value of the bond change according to the Retail Price Index (RPI) or you can buy undated gilts, where there is no fixed redemption date.
Gilts typically pay coupons twice a year, whereas corporate bonds are more likely to pay coupons annually. They both offer a source of fixed income and investment options; the opportunity for capital growth is modest.
There are also investment bonds, which are not actually the same as a bond, rather a fund that allows you to make a return on a single unit or with-profits fund and withdraw up to 5% from your original investment each year. These types of bonds are often seen as an income-producing investment.
You can invest in a spread of government and corporate bonds through a bond fund. This effectively lowers your risk because if one bond fails to meet its payments you only have a small proportion of your fund invested in it, rather than possibly all of your money.
When interest rates are raised, newly offered government securities, such Treasury bills and bonds, are often viewed as the safest investments and will usually experience a corresponding increase in interest rates
27.6.2018