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.

The preliminary economic data for the second quarter of 2020 are no prettier than forecast. Gross domestic product, a measure of all economic activity, was more than 20% lower between April and June than it was in the first three months of the year. Perhaps unsurprisingly, these are the worst GDP figures on record.

They are also considerably worse than those reported by our main European competitors and by the US. There are a couple of reasons for this. First, it is generally accepted that we went into lockdown late and so had to shut down the economy for longer than in countries that moved more quickly. Second, the parts of the economy most affected by lockdown (retail and hospitality) are more important to the British economy than, for example, in manufacturing-focused Germany.

The numbers are also heavily skewed by April, when lockdown was almost total. May and, particularly, June were much better, with activity up a higher-than-forecast 8.7% in the final month of the quarter. That augurs well for a continuing pick-up through the summer, although everyone is looking anxiously towards the unwinding of the furlough scheme, which has disguised the full extent of the pandemic’s economic damage.

Earlier this week, we saw how bad the jobs market has been even with the furlough scheme in operation. The loss of 750,000 jobs between March and July is devastating, not least because it hurts disproportionately those on the margins of the economy, in low paid, insecure jobs in the hardest hit areas. The jobless rate is twice what it was before the pandemic struck.

The quite reasonable fear is that rising unemployment will create a negative feedback loop of lower confidence and spending as people lose their jobs or simply worry that they could do so.

Some people might be surprised by the stock market’s reaction to this torrent of bad economic news. In keeping with other markets around the world, the UK’s FTSE 100 is becalmed during the summer lull, seemingly taking the gloomy news in its stride. But, for a couple of reasons, this might be a logical response.

First, stock markets aim to assess the value of all future cashflows. Even though the near term carries more weight in that calculation, it is not the whole story. If investors believe that economic growth can bounce back reasonably quickly, they will look through even apocalyptic numbers like today’s.

Second, the UK stock market has only a tentative link to the UK economy itself. The FTSE 100 is an international index and its constituent companies earn a high proportion of their profits overseas. What is happening in the rest of Europe, the US and Asia matters more than the state of the domestic economy.

This is a reasonable argument for not worrying too much about the latest GDP figures unless your portfolio is very heavily biased towards smaller, more domestic stocks that might be expected to suffer most from a UK recession of this scale. The FTSE 100 rose on the back of the latest data, perhaps taking its cue from speculation about more stimulus in the US as Donald Trump tries to get that economy humming again before November’s Presidential election.

But it is an even bigger argument for ensuring that your portfolio is well-diversified geographically, and by asset class. Despite its overseas focus, the UK market has underperformed other markets such as the US by a considerable margin during the pandemic. It fell at least as far and has lagged during the recovery. That’s because there is more to worry about in the UK, with the slow progress of Brexit negotiations, for example, adding to the pandemic worries.

If you have a greater exposure to the UK market than its relatively small contribution to the overall global economy, then you are a victim of ‘home bias’, the tendency for investors to have too much of their savings tied up in their domestic market (it’s not just we Brits that suffer from this, by the way). If your portfolio falls into this trap, you might want to consider creating a better balance while markets remain as benign as they are today.

Diversification and balance are key principles of the Select 50 list of our favourite funds. The list is categorised across six regions as well as bonds and alternative investments. That means it is easy to find a fund that has passed our rigorous due diligence, wherever in the markets you are looking.

We recently conducted our half-yearly update of the Select 50 and there are a few new funds to consider, so if you haven’t looked recently now might be a good time to do so.

Also, if you are focused on keeping the costs of investment down, you might want to consider the passive investments on our Select ETF list. This covers the same categories as the Select 50 but features lower-cost exchange-traded funds.

Finally, if you find even our concentrated Select 50 or Select ETF lists offer too much choice, a popular option is to let one of our most experienced multi-asset fund managers do the work for you. Ayesha Akbar manages the Fidelity Select 50 Balanced Fund, which uses the Select 50 as its starting point, creating a balanced portfolio predominantly selected from its constituent funds. It’s a kind of one-stop shop for investors who do not have the time or inclination to pick their own funds.

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. 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. Select 50 is not a personal recommendation to buy or sell a fund. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Topics Covered

Diversification; UK; Volatility

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