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.
UK shares have opened the week in solid fashion despite confirmation of a new, tough nationwide lockdown and expectations of a big drop in GDP.
England's second lockdown of the pandemic is due to begin on Thursday, with a parliamentary vote expected to confirm the measure before then. The FTSE 100 is trading slightly higher this morning, up 0.6% at time of writing, while the more domestic-focussed FTSE 250 index of medium-sized companies was slightly down, falling 0.5%.
Investor resilience is being helped by expectations that the Bank of England will on Thursday announce a new round of asset buying, known as Quantitative Easing (QE), worth £100bn. QE is assumed to be supportive of share prices.
The FTSE 100 - the index for the stock market’s largest companies - may also be being helped by weakness in the pound since the new lockdown was announced. Many of the largest companies earn their money in overseas currencies, meaning profits are amplified in sterling terms if the pound falls in value and the shares become cheaper for foreign buyers.
A closer look at company performance revealed that beneath the headline index level showed that even those companies expected to be directly affected by the lockdown were resisting large falls, with IAG - the airline group that contains British Airways - down around just 1%.
Also helping sentiment for shares across the globe is better-than-expected earnings in the US. The Financial Times reported, based on data from FactSet, that earnings for American companies have come in around a fifth higher than feared a few weeks ago. Hopes of a decisive result in the US election, which could lead to a larger relief stimulus being passed, may also be helping.
Can the optimism hold? There’s no doubt that a new lockdown - the UK is among several European countries having to restrict activity - will hurt economic activity and it now looks certain that the recovery since the initial falls at the start of the pandemic will be reversed to some extent. That means the hoped-for V-shaped recovery will become W-shaped as growth dives again. Economists, however, at least predict that the fall will be more shallow than experienced in the first lockdown because those companies worst affected have already taken a hit, and because many companies have better plans in place to do some trading in lockdown.
It remains, though, a time for investors to look through short-term noise and focus on their long-term financial goals. Volatility in markets look certain to continue as news on Covid-19 develop. A big test will come in early December when the new lockdown is due to end. Not to mention the US election and potential messy aftermath, and Brexit.
It’s the time to ensure your portfolio correctly reflects your risk-appetite, with an appropriate mix of assets so that you’re are not over-exposed in one area. The UK stock market has - understandably - been the place where UK investors have looked first for returns, but having exposure to global assets is necessary to ensure that short-term factors in any one market - such as the new lockdown this week - do not derail your plans.
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. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. 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.
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