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A plunging US stock market will hit British investors – here's how to fight back

·4-min read
Illo - Mark Magnaye
Illo - Mark Magnaye

Wall Street is on the brink of being in a “bear market”, where share prices are caught in a prolonged fall, which could wreak havoc on the Isas of British investors.

The world’s most important stock market index, America’s S&P 500, is nearing a 20pc decline since the start of the year – regarded as the technical beginning of a bear market.

British stocks have not suffered as much. The FTSE 100 index of the country’s largest listed companies has dropped by 3pc. Meanwhile, global shares have fallen by 7pc so far this year as investors worry about rampant inflation, rising interest rates and the impact of lockdowns in China on global growth.

Even professional investors have grown nervous. Global fund managers have built up their cash positions to the highest levels since the 9/11 terrorist attacks, according to a survey conducted by Bank of America. Professional investors are now holding more cash than during the global financial crisis or the pandemic. This means that they would rather see their money eroded by inflation than bet it on stocks.

Julian Howard of the investment manager GAM warned that the fate of the stock market relied primarily on global central banks.

Everything that is happening in the stock market at the moment is ultimately a response to inflation, which is at a 40-year high,” he said. “The central banks are mandated to combat inflation with higher interest rates. But this is an almost impossible balancing act.”

DIY investors face two scenarios, he said. The first is that interest rate rises spark a recession and corporate profits suffer. In this case, Neil Birrell of fund house Premier Miton Investors recommended turning to sectors that did not depend on the health of the economy.

“Investors should look at industries such as healthcare and telecoms, where revenues are not overly sensitive to the economy,” he said. “London has market leaders in this area such as GlaxoSmithKline and AstraZeneca. We own Spirent Communications, a telecommunications equipment provider.”

Dan Boardman-Weston of the wealth manager BRI recommended that investors allocate more of their portfolio to “real” assets in the event of an economic downturn.

He tipped Warehouse Reit, a real estate investment trust, which has returned 20pc in the past year. “This trust rents out warehouse space to online retailers such as Amazon,” he said. “Its shares have suffered recently because of fears of a slowdown in online shopping, but we think the shares are still cheap to buy.”

Mr Birrell said infrastructure was a compelling place to park money while the rest of the market was falling.

“There has been a proliferation of trusts in renewable energy and energy storage, solar and wind,” he said. “These areas are not overly sensitive to the economy and do not always follow the rest of the stock market.”

The largest renewable energy infrastructure trust is Greencoat UK Wind, which has more than £4bn in assets. It has returned 25pc in the past 12 months alone. Greencoat and Warehouse Reit both trade at a 4.6pc premium to the value of their assets.

But Mr Howard also argued that the long-term outlook for the stock market was not so bleak. The alternative scenario, he said, was that interest rate rises succeeded in cooling inflation and avoided tipping the global economy into a recession. This could quickly make shares attractive again.

“An inflation rate of 9pc in Britain sounds terrible,” he said. “But we have no evidence that it will remain this high. Energy prices, the driving force behind this inflation, could ease off if there were a resolution of the war in Ukraine or if the oil cartel Opec started increasing supply, for example.”

Savers who invest for the long term should view the market falls as an opportunity to top up their portfolio while shares are cheap, he said.

Even investors who are convinced that the bear market will continue should resist any urge to sell out of the market, Mr Howard added.

“You should try to stay invested,” he said. “Investors in the stock market will always experience falls over the long run. But selling out means you will crystallise your losses as well as make it harder to figure out a good time to buy back in.”

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