The current imbalance explains why house prices are still quite high. It’s an interesting situation here – interest rates are low, but the opportunity to borrow money at this kind of level isn’t likely to last that much longer. Rates will probably start to rise during the first quarter of 2022. Factor in strong demand for certain types of properties and cheap borrowing, and it’s no wonder house prices are soaring. It will probably reverse as things like higher interest rates and higher taxation come in.
It’s also feasible gas prices will stabilise. That said, it would be helpful if we didn’t have a massively cold winter this year. You’ve got to remember it doesn’t suit the Organization of the Petroleum Exporting Countries (OPEC) for commodity prices to go much higher than this – so the supply will inevitably increase. A lot of the reasons for the spike in gas prices appear to be temporary, too – a cold winter last year and some supply issues from Russia. They’re all likely to unwind, so the pressure should only be short-term.
The stock market is incredibly resilient. The FTSE is not far off its high from a year ago, the US-equivalent, S&P 500, is also up and global indexes – even bond markets – in general are still pretty strong. Investing in equities is still the way to go if you’re looking for maximum income i.e. to grow your money. The reason? The global drivers of the economy remain strong, and demand will still support moderate levels of growth over the next year or so. Nothing – even a rise in interest rates or inflation – will be dramatic enough to derail a recovery in the global economy.
When it comes to markets, I’m not overly bearish. During any period of economic growth or recovery, the stock market should remain well supported. Is now a good time to invest? There’s never a right time to invest – in theory, the ideal time is when markets are at a low, because that way you reap the most reward when they recover. But it’s not that perfect – in fact, it rarely is. And calling the ‘top’ or ‘bottom’ of any market is best left to psychics. Right now, at a global level, stocks look expensive, but so do most asset classes so returns are likely to be lower – but investing is ultimately the same as saving, so if you go into it with a long-term view, you’ll see your money grow over time.
Everyone who wants to start investing should read this book. We send it to all our clients. It basically explains that the longer you invest in stocks, the less risk you’re taking (because growth is more likely), whereas the longer you invest in the bond market, the more risk you’re taking (because you’re betting against inflation and your capital will likely be eroded over time).
You never want to be in the position of having to sell something at the bottom. If someone is forced to sell something for liquidity purposes i.e. because they need the money, but the market is weak, then that’s what costs people. Think ahead and specifically about what your income is relative to your capital needs. Also, inspect your savings and see how much liquidity is there. You never want to be forced to sell at the wrong point in the cycle, simply because you have no other choice.
There is a way to mitigate stock market risk right now. If you’re looking to put some money aside for the next five or ten years, then the stocks exposed to the recovery in global markets should see their share prices rise. Assuming they pay a dividend, you’ll basically be paid to own them. Just make sure you split your money across a wide range of quality companies – things like consumer stocks – which can react to and cope with things like rising inflation. It’s an age-old philosophy, but it’s the prudent way to invest.