How to protect your wealth from economic uncertainty

Aug

23

Rising food costs and soaring energy bills pushed UK inflation to 10.1% in July. The Bank of England voted to increase the base rate to 1.75% on 4 August in a bid to tackle the problem, while warning that a year-long recession and 13% inflation could be on the cards in autumn. 

But the UK isn’t the only place experiencing a rising cost of living. Europe, the US, Canada, Australia and other nations are feeling the squeeze too.

No matter where you are in the world, you’ve probably seen a rise in costs from the supermarket checkout to the petrol pump. It’ll be more expensive to heat and air condition your home; your broadband, phone contract and insurance providers may be increasing costs too. 

Let’s see how the rising cost of living might affect you, and explore how you can protect your wealth from economic uncertainty.

How the rising cost of living might affect you

Travel

The cost of travel is increasing in many parts of the world, with flights, hotels and insurance becoming more expensive than it was pre-pandemic.

The cost of flights has risen 20.2% over the last year. With many airlines offering fewer flights than before, there’s greater demand too. 

Delays, cancellations and other complications have added roughly 40% to insurance policies for a single trip, rising from £35 to £50 on average. Multi-trip policies have risen an estimated 15%.

Transport

Rising fuel costs are putting strain on people’s finances across the globe. 

In June, the average price of petrol reached €2.67 per litre in Norway, €2.55 in Denmark, €2.36 in Greece, and €2.12 in France. 

The average petrol price in the US is now $5 a gallon and in Canada it’s $2.06 per litre. Some countries are imposing strict rules to avoid shortages. 

In Hungary, most service stations prohibit motorists from buying more than 50 litres of gas a day. 

Energy

Energy prices continue to rise to unprecedented highs in many parts of the world. 

The energy price cap is predicted to rise to £3,359 in October and to £4,203 in January. 

Food

In May, the price of food and non-alcoholic beverages increased by 11% in Spain – the country’s highest increase since 1994. The biggest increases weren’t seen in luxury items but in household staples such as olive oil (35.5%), pasta (27.9%), flour (25.5%) and eggs (25.3%). 

Food inflation is on the rise in France, too. It increased 5.80% in June. In Portugal, inflation climbed to 9.1% in July, up from 8.7% in June. 

House Prices

Globally, house prices rose by 10.3% in 2021. A study of 150 cities worldwide suggests city house prices have risen at their fastest rate in almost 17 years. 

Of the 150 cities monitored, 93% saw prices rise over a 12-month period and 44% experienced a growth of more than 10%.

Cities in New Zealand, the US, Canada and Australia are seeing the biggest growth, with Wellington (33.5%), Phoenix (33.1%), Halifax (31.7% and Hobart (30.9%) leading the way.  After seven years of negative price growth, Dubai experienced a marked shift with annual price growth reaching 6.1% in September last year, up from -4.4% in June. The UAE’s handling of the pandemic, high standard of living, tax advantages and visa initiatives are proving popular with expats. 

How to protect your wealth

So how can you protect your wealth from inflation and interest rate rises? Here are a few considerations.

Debt

With interest rates on the rise, credit cards, personal loans and other debts are about to become more expensive. 

You may see an increase in the cost of your repayments and this could make borrowing far less affordable than it was previously. 

Paying off your most expensive debts first can save you money and help you avoid spending more than necessary on interest.

Property

If you still have a home in the UK, it’s a good time to run some calculations to determine whether it’s still financially beneficial to keep it. 

If you’re renting it out, you may experience a rise in the cost of repairs and maintenance.

If it’s mortgaged, interest rate rises could see your repayments increase if they haven’t already. 

If your property’s standing empty, renting it out could provide you with an extra source of income. You’ll need to work out whether this is something you’d like to manage yourself or outsource to others. 

Whether you rent or own the home you currently live in, paying for two properties and only making the most of one of them might not be cost effective. However, rising house prices could help to offset short-term increases in costs and make it a worthwhile investment in the long run.

Savings

Interest rate rises should technically be good news for savers. The most rewarding rates tend to be found through notice or fixed term deposit accounts, and as rates track upwards it is definitely worth seeking out the best offers in what has, until recently, been a relatively inert market.

However, you’re still unlikely to find many easy-access options offering more than 2%, and interest rates continue to lag significantly behind the rising rate of inflation. So whilst holding cash remains important, to meet your liquidity needs and for near term purchases, hoarding too much cash during times of high inflation can see the value of your savings quickly eroded in real terms. 

Investments

Whereas cash savings rates continue to lag behind the increasing rate of inflation, long term investments remain the shrewdest way to mitigate against the pernicious effect of inflation on your wealth. 

And whilst volatility and equity bear markets make all the usual challenges of being a long-term investor that much more difficult, it’s at times like these that it’s valuable to remind oneself that it’s ’time in the market, rather than timing the market that counts’.  The key is to ensure you hold a well-diversified portfolio, containing well thought-out asset allocations that reflect your risk profile. In this way you can mitigate the impact of market volatility by not being too exposed to any asset class and remain in an ideal position to benefit from recovery, in whatever form it takes. 

A picture speaks…

History shows that despite fluctuations caused by socio-political and macro-economic events, investing in diversified assets such as equities, bonds and property has continued to deliver growth and has outperformed inflation over the long term.  

Source: Bloomberg/Financial Express. Data from 1 January 1987 to 31 December 2021. All figures are calculated on a total return basis which includes the reinvestment of income. Equities are represented by the FTSE All Share Index. Bonds are represented by the FTSE Gilts All Stocks Index. Cash is represented by the Bank of England Base Rate. Property is represented by the MSCI UK Monthly Benchmark. lnflation is measured by the Retail Prices Index. Only cash deposited with a bank or building society can provide the security of the capital invested. Please be aware that past performance is not indicative of future performance.

At Forth Capital we’re always here for you, to provide expert advice and ongoing support to help you plan for the future, no matter where you are in the world.

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The Author

Stephen Kiggins

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