June Market Update

The latest media obsession is the return of inflation in the US. Here in the UK, inflation has just breached the Bank of England’s target for the first time in two years.

An increase in the cost of living is no small matter, but to us advisers it is not a foreign concept. On the contrary, it’s the cornerstone of our planning. Many of us know the numbers, over the last 30 years – the length of an average retirement – the cost of living has increased by 84%. 

An item costing £1 in 1991, costs £1.84 today. Inflation is the number one enemy of the long-term investor. It’s worth noting that this has been historically a lower-inflationary few decades. It’s also worth mentioning here that inflation can be very different for different groups of people, depending on what stage of life they are at. Retired people tend to spend more on lifestyle, travel, socialising, entertainment, which have a very different rate of inflation to day-to-day products, so it may be that we need to factor in a higher rate of inflation to financial plans? 

Luckily, we have the antidote. It starts by reminding ourselves and our clients, that the only returns that matter are real returns. That is, returns in excess of inflation. By framing all returns this way, we lay the foundation for people to understand the past behaviour of different asset classes and help them to make more informed decisions about how best to invest their own money. When comparing only real returns, we observe the incredible power of investing in the great businesses of the world over long periods. £1 invested in the UK stock market in 1991 is worth £3.36 today. You choose which risk you wish to dance with, the overt risk of market volatility (it’s easy to scream about) or the covert risk of inflation (the silent, invisible risk to short term thinkers). The final risk in our trifecta of doom is permanent loss of capital. 

A bold statement but us advisers work with all three of these risks and navigate you from financial darkness to the light. In short, we invest in inflation beating assets that never completely blow up. Welcome to the world of mainstream global equities. Inflation is often a silent killer, but the recent spotlight on its existence will hopefully help more investors to grasp its dangers. 

Almost halfway into the year and equity markets have performed reasonably well with the FTSE 100 up around 9%, the S&P 500 up around 14% and the Euro Stoxx 50 up 15%. The main reason for the lag in performance of the FTSE 100 is that it is heavily laden with Oil & Gas, Banking and Travel stocks. These sectors are taking much longer to recover from the pandemic than other sectors but look well placed to enjoy more of a recovery later this year and in to next. 

The continued success of the vaccination programme here in the UK and in some other parts of the world mean we can look forward to a continued economic recovery from the pandemic shock of last year. Just last month the UK saw an extra £2.3bn of VAT and £1.3bn of Fuel Duty collected compared to May last year, a good sign that people are spending again. 

We’re here to talk through any of the points covered in this article. If you would like to speak to a member of our team here at gpfm, please don’t hesitate to get in touch over email at enquiries@gpfm.co.uk or call 01992500261. 

This article is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions. Investments can go down as well as up and you may get back less than you invested. 

About gpfm 

gpfm are an independent financial planning company dedicated to the provision of personal, professional, and objective-driven advice for our clients. We have been awarded the Chartered Financial Planners title by the Chartered Insurance Institute for offering high quality, independent and informed advice that meets the needs of our clients.