We seem to have reached the point in the economic cycle where opinion is divided as to whether the dreaded ‘R’ word becomes a reality.
That is, are we heading for recession or are we approaching the bottom of the cycle and that the next phase will be one of recovery?
The danger for us, is talking ourselves into a recession. From an investment point of view, a recession in the UK is less likely to impact on savings as most funds are now globally diversified – or at least they should be.
We should have learned the lesson to not overinvest in UK equity markets as the London stock market no longer dominates the global stage.
I understand how the economists define recession, but I wonder how the ordinary working family would view this? Does it mean eating out in a restaurant only once a week, or perhaps only to go into the pub a couple of nights a week instead of most nights?
We have been spoiled by high disposable income over the last ten years or so and have got used to enjoying this lifestyle but it does no harm to occasionally have to pull in one’s horns.
Maybe a good dose of recession would do us no harm. We constantly read about the obesity problem; what better way to tackle this than the price of diesel at 135p per litre. A full tank of diesel in a 4x4 could easily set you back £100 whereas I am sure you could pick up a decent bicycle for this.
Not only will it help the environment if we all cycled or heaven forbid, walked, but it would also be good for our health. Perhaps we could cycle to the pub and back instead!
I note that Travelodge are intending to build 50 new hotels in British seaside resorts to cater for the increased number of people holidaying in this country because of the poor exchange rate with the euro and the cost of airline surcharges.
It seems that budget holidays are back in favour and business is brisk at Butlins and Pontins as people “cut their cloth”. Perhaps more businesses should learn from this and position themselves to deal with this part of the economic cycle. The basic supermarkets such as Aldi and Lidl are increasing market share against their more traditional and “upmarket” rivals.
There seems little light at the end of the tunnel for our beloved housing market as house prices continue to fall. However, if you bought your house as a home with a long-term view then this should not present any problems, as long as you can afford the mortgage.
Whilst mortgage interest rates have climbed over the last six to nine months, there are signs that some lenders are starting to reverse this trend. There is talk that the Bank of England base rate may be reduced from the current level of five per cent to four per cent by the end of the year, which would help borrowers with sizeable commitments.
I note that we have not heard of horror stories of negative equity and people handing in their keys to the building society, which we encountered in the last housing collapse of the early 1990s. So perhaps things are not so bad after all.
While no one likes to see the value of a property they have recently bought drop in value, it is worth remembering that sharp falls in property values are nothing new. Between 1989 and 1996, the absolute level of house prices fell by 13 per cent in Britain as a whole, and by 29 per cent in London. But the pendulum in recent years has swung sharply the other way,
It is also worth remembering a fall in the value of house prices is not bad news for everyone. Remember all those media stories appearing not so long ago with dire warnings first-time buyers were being priced out of the market? Young people seeking a home of their own won’t be too upset house prices are going down rather than shooting up every year.
Although world equity markets have suffered some serious declines, people saving for their future and retirement should continue to do so.
The best way to do this in a downturn is to invest on a monthly basis into either your pension or ISA, so that you are buying more units with your monthly saving as unit prices fall and as they gradually recover you will have accumulated far more units.
This is a better strategy than stopping altogether and trying to time your entry to the market with a lump sum later on as you will invariably miss the bottom of the market.
Fortune favours the brave in the investment world. The last bottom for the UK stock market was in 2003 at the start of the Iraq War. Things looked bleak then but improved sharply and investors who had the courage to enter the market at that time were rewarded handsomely.
It does take courage to invest when everything around looks bleak but it is of course the right time.
So, rather than be all gloom and doom and talk about recession, we should position ourselves to take advantage of a recovery as and when it happens.
But in the meantime, do the basics of financial prudence, and remember that we are still enormously privileged. We could all do with a little belt tightening in more ways than one!
* Trevor Law is a director with Montpelier Group (Europe) Ltd, the privately-owned independent financial advisers at Barston, near Solihull. E mail: TILaw@montpeliergroup.com