Bank of England pulls the emergency alarm on the UK economy

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

The Bank of England has left interest rates on hold for another month. No surprise there. What’s more concerning is its view of the wider economy and the state of the UK.

Such is the uncertainty over Brexit and the ramifications for the wider economy that the Governor of the Bank of England, Mark Carney, and his fellow members of the Monetary Policy Committee have issued a forecast which suggests we will see the slowest rate of growth since the financial crisis in 2009.

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Cutting its forecast for UK growth this year from 1.7% to 1.2%, this was also one of the largest forecast revisions by the Bank of England since the EU referendum.

Demonstrating a dramatic turnaround from previous stated plans for multiple interest rate rises, which were clearly aimed to soothe fears and smooth economic wobbles, the message this time was clear - the UK faces a one in four chance of heading into a recession in the next six months even in the event of a smooth Brexit process.

Of course the UK’s central bank is not alone. The US Federal Reserve, which just six weeks ago was talking about further rate rises after pushing through a quarter-point increase, this week made a dramatic volte-face by putting further interest rate rises on hold.

Jay Powell’s talk of “cross-currents” clouding the economic picture and his general “wait and see” stance prompted other central banks to do the same. Since then all the leading central banks have now put plans on hold to tighten policy until there are signs of a global pick-up.

Yesterday the Reserve Bank of India cut its main interest rate by a quarter point, while earlier this week the Reserve Bank of Australia changed its guidance to say the next move in rates was as likely to be down as it was up and the Bank of Canada has talked of the factors temporarily curbing Canadian economic performance.

The Bank of England’s forecasts are though now broadly in line with the European Commission’s latest economic predictions. On the back of anticipated “weaker momentum” in 2019, the Commission has already cut its forecast for eurozone growth from 1.9% to 1.3%.

As an investor, knowing where to turn can immediately feel, not surprisingly, daunting. Especially when the prospect of recession and a global downturn is looking more like a risk than a threat.

We for one thing are back into the “lower for longer” scenario. This means that if you’ve got money sitting in cash you might want to think about investing some of that in the stock market to potentially get yourself a better return.

But are there bargains to be had in Brexit Britain?

In a word, yes. In his latest Investment Outlook, where he looks at the world’s stock markets and gives his views on the runners and rides, Fidelity’s Investment Director Tom Stevenson, put his money on UK Plc in 2019.

As he explained, one of the best indicators of value in the stock market is the dividend income that companies pay out to their investors.

“If dividends are high relative to share prices then, all other things being equal, the market or an individual share can be viewed as cheap.

“Today, the average member of the FTSE 100 index offers investors a 4.5% yield. That is higher than it has been for many years and is attractive when compared with the income available from other investments like cash or bonds. It is one of the key reasons that I have turned positive on the UK stock market in my quarterly Investment Outlook.”

The way to assess value is to calculate the dividend yield. To do this you simply divide the dividend by the share price and multiply by 100. So, a company whose share price is 200p and which is paying a 10p per share dividend has a 5% dividend yield (10/200 x 100 = 5).

It’s a very easy way to judge whether a share is going cheap or is trading at a cut-price for a reason.

If individual stock-picking or even actively-managed funds are a step too far in this new world of economic uncertainty, then ETFs offer another way to gain exposure, without taking you out of your comfort zone.

ETFs, or exchange traded funds, are similar to funds in that they pool the returns of underlying assets - such as shares or bonds - into one product. They differ from funds however, in that they are themselves traded on the stock exchange, like a share. This means they can be bought and sold easily and potentially at lower cost.

The Fidelity Select ETF is a highly concentrated list of ETFs selected based on research by Fidelity’s investment experts within its ETF and Multi-Asset teams.

The ETFs on the list have been selected to offer exposure to mainstream stock market regions of the world - including the UK, Europe, US, Asia and emerging markets - as well as fixed income assets like bonds and alternatives like commodities. Fidelity’s experts have aimed to select just the very best ETFs in each category and only include more than one choice only when a product is offering something different, such as smaller company shares or a focus on generating an income.

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Please note that Select ETF is not a personal recommendation to buy ETFs. Equally, if an ETF you already own is not on the list, we’re not recommending you sell it. You must ensure that any investment you choose to invest in is suitable for your own personal circumstances. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.