Active investment commentary & analysis

Why investors, faced with uncertainty, may need to look beyond cash

Should investors be concerned about current headlines; shortages, China, taxes and inflation? In less optimistic times, any single one of these would have rattled the stockmarket. Recently, bad news has simply been shrugged off. Optimism is understandable; most trading updates from companies have been positive, typically reporting an exceptional rebound. That could change rapidly, if central banks fail to act to control inflation, or if bond and currency markets really begin to question the power of those banks.

A little inflation is no bad thing, allowing some readjustment in the economy. Rising energy prices may even help to address climate change. And - initially at least - companies find that higher prices usually mean bigger profits. But a dislocated economy with real shortages is something different. It might have taken the petrol pumps to bring home this problem, but missing microchips are shutting down a lot of other activities, as are staff shortages. Many activities are running below normal capacity despite the short term boost of higher prices. It is important to monitor company trading and supply chain news. These disruptions may be the precursor to a slowdown, encouraging rotation back to growth businesses.

Added to the economic uncertainty will be its impact on politics. China faces a sharp slowdown that could disappoint a population that has for decades been motivated by a vision of increasing prosperity. Economic weakness could even undermine China’s ambitions to regional leadership. China may not have been a big factor in previous market sell-offs, but is now too big a part of the global economy to ignore.

Even in the UK, the government is being forced to change tack; responding on climate change and equality. There is potential for surprise. What is clear is that tax policy enjoys less consensus than usual, and the UK government must make some unpalatable moves.

Historically, faced with such uncertainty, investors have simply raised cash. This might be understandable in the current environment, when inflation has created asset bubbles in so many areas. Cash has other problems; timing of re-entry is always difficult and investors quickly feel a sense of regret if they sell before the peak. Instead, the best investor precaution may not be running for cash, but the psychological preparation of clearly understanding financial planning and the role a portfolio is playing in overall long term financial planning.