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How to profit from plunging stock markets

Money
Money

The British economy has descended into turmoil after the Government’s mini-Budget triggered a historic rout in the bond market – but some investment experts think this has created buying opportunity at rock-bottom prices.

An increasingly uncertain economic outlook offers little comfort to DIY investors, many of whom are already nursing losses from an unforgiving stock market this year.

Stocks and shares Isas have ­suffered, with the famed 60/40 strategy – a ­portfolio invested across stocks and bonds – stuck in its most prolonged decline since the financial crisis and its aftermath between 2007 and 2011, according to Bloomberg.

While early this year many pundits dismissed market falls as simply knocking off “excess froth” built up during the pandemic, there is evidence that markets are now caught in a broader sell‑off.

For example, while Scottish Mortgage, Britain’s biggest investment trust and a big pandemic winner, has fallen heavily since the start of the year, over the course of the past three months it has moved largely in line with the FTSE All-Share index. They have lost 3pc and 4pc respectively since late June.

James Yardley of Chelsea Financial Services, a broker, said: “Stock markets have been rocky because of persistent inflation. Rising costs are devastating for markets because they force central banks to turn off the easy money we have all been used to.”

Mr Yardley added that the environment was even more dangerous for investors because the bond market had been rocked by the Government’s new economic policies.

“This spooked the market and led to a massive sell-off in gilts. The extra stimulus is inflationary,” he said. “Why would you lock yourself into buying long-term gilts at 3pc when inflation is likely to be much higher?”

The sell-off in British bonds has been partly mirrored in the American market, where the yield on 10-year “Treasuries” – widely viewed as the highest-quality government debt – rose to 4pc this week, adding to fears that global central banks will need to raise rates faster to fight inflation and prevent their currencies from weakening further against the American dollar.

Mr Yardley said this environment was starkly different from and “in some ways worse” than in 2008, when government bonds performed well even as the stock market collapsed.

However, for brave investors there could be some buying opportunities amid the market chaos. David Henry of the wealth manager Quilter said the FTSE 250, which tracks medium-sized companies listed in London, could represent a buying opportunity as the pound was so weak.

Sterling sank to a record low against the American dollar this week, hitting $1.04. When the pound is weak, investors often buy the FTSE 100, London’s benchmark index, as its companies make much of their revenue in American ­dollars. When converted back into sterling, this flatters their earnings and can boost dividends.

“About 80pc of the FTSE 100’s revenues come from abroad,” Mr Henry said. “But many people do not realise that 60pc of the FTSE 250’s revenues also come from overseas.

This index is trading at cheaper levels than the FTSE 100 and could be an interesting opportunity for investors with a healthy appetite for risk.”

He recommended using a cheap tracker fund, such as the Vanguard FTSE 250 ETF, which charges just 0.11pc a year. He picked out the Mercantile investment trust as an actively managed alternative. Although it charges a higher annual fee of 1.2pc, it has outperformed the ETF by 12 percentage points over 10 years with a gain of 49pc.

However, even some of the ­highest-quality companies in the world have come under pressure. Shares in Apple, one of the largest businesses in the world, fell by 3pc on Wednesday after reports that it would ditch plans to boost production of its newest iPhone, released just last month.

Mr Henry warned that companies that relied on discretionary spending could suffer. Instead, he suggested investing in businesses that sold staple products.

“The industries that typically hold up the best during recessions are healthcare, utilities and consumer staples. Investors like utility stocks because they typically pay reliable dividends, although those divis are relatively less attractive now that bond yields are so high,” he said.

“We like businesses that specialise in healthcare and personal care, as this is where spending looks the most resilient.” Mr Henry highlighted Unilever, which owns brands such as Hellmann’s and Ben & Jerry’s ice cream, as well as Haleon, the business recently spun out of the pharmaceutical giant GlaxoSmithKline.

Haleon owns various consumer health brands such as Sensodyne toothpaste and Panadol pain relief. Shares in Unilever have risen by 15pc in the past six months, while Haleon has dropped by 12pc since it listed in July.

“Haleon still has a few overhanging issues from GlaxoSmithKline,” Mr Henry said. “But it has very strong brands that will help protect it from recessionary pressures.”

Rob Burgeman of the wealth manager Brewin Dolphin agreed that consumer staple stocks were a safe bet during periods of economic downturn.

He highlighted AstraZeneca, London’s second pharmaceutical giant. “It is at the cutting edge of medical research and derives the lion’s share of its earnings from its businesses outside Britain,” he said. “It also reports its profits and pays its dividends in US dollars.”

Mr Burgeman also picked out ­Diageo, which owns brands such as Guinness and Smirnoff, as well as Reckitt Benckiser, which owns Clearasil and Veet. Diageo has fallen by 2pc in the past six months, while Reckitt has gained 5pc.