On June 8, the general election resulted in a hung Parliament
Barclays' Chief Investment Officer Arne Hassell; Peter Gordon, Director - Government Relations; and Bill Krupsky, London FX Dealing Desk, share their views on the election result and how this may impact our view of the investment landscape. You can access a replay of the call using the details below:
Dial-in number: + 44 (0)121 260 4861*
Replay pin number: 3562698 followed by #
You’ll then be asked to leave your name and some other details which is optional. Simply press # to begin the recording.
How to prepare for stock market volatility
We discuss how investors can deal with volatility in changing markets, in an interview with Will Hobbs, our Head of Investment Strategy for Europe, and Dr. Peter Brooks our Head of Behavioural Finance.
Hide text version
CLARE FRANCIS: When it comes to investing, you have to accept that there is greater risk involved than if you'd just kept your money in a cash savings account, because stock markets go down as well as up. However, holding your nerve when the ride gets rocky is easier said than done, and we know from the contact we have with our customers that volatile stock markets can be a source of concern. But if you're investing for the longer term and able to sit tight through periods of instability, stock markets should produce better returns than you'd achieve if you kept all of your money in cash. And this is why millions of people choose to invest each year.
To help explain this in more detail and look at how you can best prepare for stock market volatility, I'm joined by two of Barclays' investments experts. Will Hobbs, Head of Investment Strategy, and Dr Peter Brookes, Head of behavioural finance. So Will, if we start with you, what is volatility?
WILL HOBBS: Clare, volatility is very simply the movement of prices of whatever asset you're talking about. In terms of shares, it's generally measured in daily volatility. People also in the industry tend to equate volatility with risk, i.e. the more volatile a share price is the more risky it is perceived to be.
CLARE FRANCIS: And why do we tend to see so much volatility within global stock markets?
WILL HOBBS: Well, stock markets are amongst, of the major asset classes they're the most liquid, and by that I mean generally if you want to sell or buy you can get a price every second, every nanosecond even in some stocks. So that tends to mean that it's very quickly assimilating new information. And so when that new information changes dramatically, as in the case of kind of big political changes or big economic changes, that means that you can see very extreme volatility.
CLARE FRANCIS: And, Peter, sort of instinctively from a behavioural aspect how do investors naturally react to periods of volatility?
PETER BROOKES: Volatility always has this sort of very initial reaction of fear almost. People dislike volatility: why would you want to see prices move around so much? So the first reaction is always this isn't a good thing.
CLARE FRANCIS: And so what are the tips to sort of ride it out, because I guess that we're trying to get people to think about is viewing investing as a long-term activity and not to panic too much with short-term spells of volatility?
PETER BROOKES: Yes, you're absolutely right investing is a long-term activity, but in order to meet your long-term plan, you have to hold your portfolio every single day to get there. And that's why volatility is so scary to many individuals because it does reflect the price movements you see on a daily basis. And once you think about that your initial strategy will be look less often. Keep your focus on the longer term or whatever it is you're trying to invest for. That will make a big difference. But also just look a little bit behind the headlines.
You know, often when you see volatile markets kick in, the news media, they talk an awful lot about stock markets. They don't talk about stock markets on the dull days when they're just creeping up, which tends to be the norm, and I'm sure Will can sort of allude to that a little bit more. So actually the volatile days are not the common days, but they are the days that grab the media attention. You will see the headlines hit the news but put it in context.
CLARE FRANCIS: So it's remembering why you're investing in the first place.
PETER BROOKES: Absolutely, remembering why you're investing is always key to that and holding that portfolio for that long time horizon despite the temptation that your volatility will produce for you to recheck things and to look too often to perceive more risk and perhaps to change your strategy along the way.
CLARE FRANCIS: And in terms of investing new money, can volatility throw up opportunity or again is that sort of trying to get into the habit of investing regularly?
WILL HOBBS: Yes, certainly, I mean sometimes people can see sort of big falls in share prices and think well I'm just getting something on sale. But you've got to remember that generally markets are reasonably efficient, you know, there's lots of people trying to do the same thing and that's trying to make money out of the stock market, out of assets in general. And that means that if a share price or a market is falling that means new information is being assimilated. So you've got to be very careful to work out that you know something that the rest of the market doesn't know.
But I think to Pete's point is interesting. I mean when you look at volatility in the short term, it's incredibly uncomfortable. But, however, history tells us that over the longer term, the rewards to just being invested, diversified, it gives you a much smoother investment trajectory, and that's really because over time the world tends to grow. We invent new stuff. We get better at using that new stuff and the population gets a little bit larger. That means that corporate profits tend to grow as well. And so over time just being invested, just showing up and diversifying your assets, tends to mean that you get that much smoother trajectory in terms of investor returns, much less unnerving.
CLARE FRANCIS: And when we're talking about the time horizon, what sort of time are we talking sort of minimum of?
WILL HOBBS: Well I think the longer you can look, the better it is. Generally, I mean if you think that a sort of an economic cycle can be anywhere between five, ten years, generally the sort of the beginnings and the ends of those economic cycles can be fairly tumultuous affairs. But I mean none of us can afford to look at a 90-year time horizon, but certainly if you look at the returns from markets over that time, it tends to be in the region of sort of 5 to 7%. Now over shorter times you can find that you get better years, less good years, but generally that's been the experience.
CLARE FRANCIS: So the key tip for investors then Peter are, you know, don't check your investment portfolio too frequently and don't get distracted by news headlines and just remember that you're there for the long term.
PETER BROOKES: Absolutely, and I'd probably add one more to link in with what Will was saying that volatility is about movements in prices. That's not the only source of return you're getting from your investments; don't forget that you're also getting dividends or coupons and you're getting that income flow as well from your portfolio. And that is a lot less variable than the price on a day-to-day basis. So actually just look again at the total of the return that you're getting, because again that'll probably be a more comforting experience than just looking at the day-to-day movements of your portfolio.
WILL HOBBS: A compound interest is the eighth wonder of the world according to Einstein.
PETER BROOKES: Possibly misquoted but we'll go with it!
CLARE FRANCIS: Great thank you both very much, thank you.
And lastly, it's important to remember that investments can fall as well as rise and you may get back less than you invested. Past performance is not a reliable indicator of future performance. And if you're unsure seek independent financial advice.
If you'd like more information on how to prepare for stock market volatility, please visit our website.
What a hung Parliament means for your investments
After weeks of wrangling, there was no outright winner of the general election, with both the Conservatives and the Labour party failing to secure a majority.
Commentators suggested that Prime Minister Theresa May called an election back on 18 April to achieve a stronger negotiating position as Britain leaves the EU, with polls generally suggesting that the Conservative government was to gain more seats and remain in power.
The unexpected result has a number of implications, including what this means for Brexit negotiations, and whether a hung Parliament may result in a ‘softer’ Brexit than markets had been anticipating. Given the amount of uncertainty that remains, further volatility for investors is, perhaps, likely.
Here, we assess what the election result could mean for your investments, and how you can protect your portfolio from being rattled by political events.
As with other recent geopolitical events that resulted in an unexpected outcome, there is some inevitable volatility for currency and stock markets. The FTSE 100 index of Britain’s biggest companies jumped in the wake of the election result, but the pound fell in value.1
Sterling fell, amid heightened political uncertainty, in turn pushing up share prices. Falls in sterling have typically supported Britain’s biggest stock market, which holds a large proportion of multinational companies that earn much of their revenues overseas. The exchange rate can have a marked impact on earnings when these are converted back into sterling.
Despite the surprise outcome, the result of the general election should not generally prompt you to change your investment strategy over the long term.
The UK’s economic growth forecast remains positive over the long-term. The Bank of England has lowered its economic growth forecast from 2.0% to 1.9% for 2017, but has increased forecasts for 2018 and 2019 to 1.7% and 1.8% respectively, provided there is a “smooth” transition to Brexit and some salary growth over this period.2
During the years ahead, investors would generally be wise to remain focused on their long-term goals, particularly given there are potentially further political headwinds on the horizon. These include Germany’s federal election in September. At present polls suggest current Chancellor Angela Merkel’s centre-right Christian Democrats (CDU) will win a majority, but there are no guarantees she will win a fourth term in office.3
Political turmoil in the US also has the potential to affect markets, with political controversy surrounding President Trump’s ability to deliver his fiscal stimulus and infrastructure plans.
However, the impact of politics on investments can be particularly unpredictable, as demonstrated by events during 2016. The FTSE 100 has reached record highs since the Brexit vote, despite expectations by many of a market meltdown. Nobody knows where the index will go next with any certainty, even if the UK’s exit from the EU fails to go smoothly.
No one can predict for definite which way any currency or stock market index will move next, whatever form the next government takes. Besides which, aside from politics, there are many factors that may affect market movements. These may include inflation, monetary policy, and specific company events.
Maintaining your strategy
Investors who are worried about the impact of the election result may want to review their portfolio, and ensure their investments are spread across a range of assets, including cash, bonds and equities, alongside different industry sectors and geographical regions. This may help reduce any volatility that may result from UK economy jitters, if investors fear Brexit could lead to a recession over the next few years.
Ensuring your investment portfolio is well diversified should mean the assets that perform well help to offset the performance of those that are the weakest, smoothing returns over time. However, all investments can fall as well as rise, and you might still get back less than you put in.
Maintaining a long-term view is also important, and focusing on your particular goals, instead of getting caught up in the short-term impact that a particular event may have on performance.
The longer you stay invested in the stock market, the greater the potential for positive returns.
If you are anxious about where the market may move next, regular investing may help to take the emotion out of your investment decisions. This means you buy more shares when prices are low, and fewer when they are high. However, there are no guarantees that investing regularly will leave you better off. You could still end up with a loss.
Bear in mind that this article is for information purposes only and is not personal advice. It is not a recommendation to act. Investment decisions need to be taken with regard to your individual circumstances If you’re unsure, seek independent financial advice.
1 BBC, Election 2017: Pound falls sharply but UK shares rise (June, 2017)
2 Sky, Bank of England cuts growth forecast (May, 2017)
3 Reuters, Nearly half of young Germans back Merkel (April, 2017)
Want to learn more?
If you'd like to learn more about coping with market volatility and the tools available to help you review the market and feel more confident when making investment decisions.
Investing during market volatility
Education and insight
Our articles below offer education and insight to help guide your investment decisions when markets are volatile.
Should you buy more shares when the price is falling?
When a company's shares tumble, existing investors are often tempted to add to their holdings. But that may be a bad strategy.
Should you buy more shares?
5 lessons for investors in turbulent markets
When markets are volatile, they have the potential to spook investors. What should investors do in the face of all this possible turbulence? Here are five key points to bear in mind.
Managing risk and investing efficiently
It isn't possible to avoid all the risks you'll be exposing your money to over the course of your investing life, but there are many ways you can reduce and manage them.
Six expert strategies on how to invest
Over the years many of the world's best-known investors have offered nuggets of wisdom in a bid to try and help individuals become smarter investors. We look at some of their quotes and what we can learn from them.
Guide to building a balanced portfolio
Market volatility is always unnerving for investors, but building a balanced portfolio can help protect you from stock market storms.
Reviewing your existing portfolio
Successful investing isn't just a question of allocating your savings to various assets and then sitting back to wait for the profits to roll in. If only it were that simple.
Reviewing your potfolio
Market review and analysis
If you're interested in reading more about how political events and fiscal policy can affect investors, our articles below offer additional analysis and insight.
Fifteen years of the euro: Where next for Europe's currency?
Euro notes and coins began to circulate in Europe at the beginning of 2002. Since then, the currency has endured somewhat of a rollercoaster ride, but arguably faces some of its greatest challenges yet.
Fifteen years of the Euro
FTSE 100 Index reaches record high
The FTSE 100 reached a new record high recently, but can its winning streak continue? We examine the outlook for the Index.
FTSE 100 Index reaches record high
2017: The year of the Trump trade?
Staying focused on economic fundamentals is important against the rise of protectionist policies and a noisy political backdrop.
- The value of your investments can fall as well as rise and you may get back less than you initially invested
- Investing is not for everyone, if you are unsure please seek independent advice.