The Chancellor’s reputation is staked on his deficit reduction plan, but he has little room to manoeuvre: the UK is teetering on the edge of a triple-dip recession; its coveted AAA rating is slipping away; and growth forecasts are endlessly slashed.
All of which sound like reasons to worry about investment returns, but is this really the time for investors to worry about the UK economy? Here are two reasons why not, despite the outcome of this year’s budget.
Firstly remember that, in an internationally diversified portfolio, the impact of any one country is reduced. UK-based investors are feeling the pain of the recovery in many ways, but if your portfolio is internationally diversified, you are exposed to other economies at different stages of their cycle.
Secondly, consider just how much (or little) influence any Chancellor actually has over market returns. Even though the post is one of the most influential finance ministers in the world, the decisions each incumbent makes in a short tenure at Number 11 might not make that much difference to an investor with a sensibly long-term investment horizon.
Clearly, tax and spending decisions have a huge impact on individuals, but with a long-term outlook, investors should put their faith in capitalism more than the Chancellor.
Investors can take a leaf out of Warren Buffett’s book. Whatever you think of the world’s best-known investor, you cannot knock his faith in capitalism. He pointed out recently how strongly the odds are stacked in investors’ favour over the long-term; how short-term distress should not cloud long-term vision; and how futile it is to try to time entry and exit points in the market. Sound familiar?
The stock market vs. the economy?
Furthermore, the stock market and economy do not always move in tandem. In 2011 American growth was a modest 1.7%, while the US stock market scraped a positive return. In contrast, China—the supposed engine room of global growth—returned (–22%) on the stock market, with robust economic growth of 9.3%.
Research has concluded that high levels of national debt can damage economic growth, but that low economic growth is not necessarily connected to poor stock market returns. In fact between 1971 and 2008 the average market return from high-growth countries was practically the same as from low-growth countries.
In the UK, the Budget might reveal some new information that alters the course of the economy or the consensus view, but the economy itself does not predict the direction of the market or returns from it.
The Budget remains a big event in the political calendar, but should do nothing to alter the course of your long-term investment strategy.