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.

NEWS that the UK economy grew above its pre-pandemic levels for the first time in November should be cause for celebration after a run of depressing statistics. However, as Downing Street should have asked, is it time to party just yet? The most recent figures only run to November and a lot has happened since then.

The output of the economy rose 0.9% between October and November,1 having been almost stagnant in the previous month. In fact, growth had been disappointing from around May onwards. There had been expectations that the economy would rocket out of the blocks as pandemic restrictions were lifted, but in practice UK economic growth has been slowed by higher inflation and by the ongoing adjustment to Brexit.

It would be nice to think this latest boost, with strength across all segments of the economy, would usher in a new era, but December’s figures are likely to take a hit from the emergence of the Omicron variant. Equally, there are potential problems looming in 2022. Tax rises are scheduled for the new tax year in April, including the National Insurance Contributions rise and a freeze on personal allowances. The energy price cap could rise by 50% in April, bringing higher bills for many households. This is part of broader inflationary pressures that are seeing a cost of living squeeze. This puts a dent in consumers’ ability to spend and may exert a drag on growth.

The looming bogeyman is stagflation – where high inflation collides with a decline in economic growth. Once established, stagflation is difficult to shake off and would be bad news for UK citizens and businesses alike. The missing factor at the moment is high unemployment. While the employment rate remains below pre-pandemic levels, wages are rising and vacancy rates are high.2

However, investors would do well to prepare for the possibility. While economists still suggest stagflation is an outside possibility, the odds are shifting towards it. The top performers during periods of stagflation have tended to be ‘real assets’ – areas such as gold, commodities or real estate.3 This would suggest Select 50 funds such as the FP Foresight UK Infrastructure Income Fund, the iShares Global Property Securities Equity Index Fund or Ninety One Global Gold Fund could have a place in a portfolio.

Conventional stock market investments do less well in this type of environment, but the right fund can still make progress. For equity funds, investors should consider funds with flexibility to adapt to changing situations, to target companies with pricing power and a strong asset base. ‘Special situations’ funds often have this approach – the Jupiter UK Special Situations Fund or Fidelity Special Situations Fund are both options on Fidelity’s Select 50 list. Another idea is to target those economies with stronger structural growth dynamics – Asia perhaps, through the Stewart Investors Asia Pacific Leaders Sustainability Fund.

It is generally a horrible environment for bonds. If you are going to hold bonds – and there are sound diversification reasons to doing so – strategic bond funds have the most flexibility – the Fidelity Strategic Bond Fund, for example. Stagflation may remain an outside possibility, but the past two years have shown the importance of preparing for a range of eventualities.

Source:

1    Financial Times, 14 January 2022
2    Office for National Statistics, December 2021
3    Wealth Briefing, 16 December 2021

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Due to the greater possibility of default an investment in a corporate bond is generally less secure than an investment in government bonds. Select 50 is not a personal recommendation to buy or sell a fund. 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 one of Fidelity’s advisers or an authorised financial adviser of your choice.

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