With a UK recession predicted, Lowes consultant, Craig Moffat looks at how investors and savers can take action to help protect their wealth and invest for the future in more turbulent times.

The perfect storm of rapidly rising inflation, higher interest rates and the prospect of an economic recession is currently facing UK households and investors as we head towards the end of 2022. The Bank of England (BoE) now believes the rapidly rising inflation rate will reach 11% rather than an earlier prediction of 13% (due to the Government’s recently announced cap on energy bills) but others predict it could go higher.

The Bank is trying to counter inflationary pressures by increasing interest rates, a strategy which aims to reduce consumer spending in the short term and so bring prices down. But in August, the BoE predicted that the UK could face a recession from Q4 2022 to the end of 2023.

A recession is a temporary period when the performance of an economy falls for several months in a row. This is usually indicated by a contraction in the Gross Domestic Product (GDP) of a country, higher unemployment rates and lower consumer spending. The technical definition of a recession is when a country’s GDP has fallen for two successive quarters.

At its September meeting, the BoE’s Monetary Policy Committee (MPC) said it expects the UK’s GDP to have declined by 0.1% in Q4, which will mean the UK will be in a recession, although at the time of writing the BoE has not said officially that is the case.

So, what does this mean for us as investors and savers?

No one can accurately predict the length or severity of a recession. But if we look at the length of recent recessions since the 1980s, this has been roughly 1.25 years or five quarters, as the Bank of England has suggested will happen this time around.

Lowes clients have the advantage of having received advice from an Independent Financial Adviser, with over 50 years’ experience of guiding clients through recessions and stock market volatility, as well as a dedicated, award-winning investment team. Staying on top of your finances through prudent planning in the knowledge that economies and markets go through good times and bad – and we can expect the odd curved ball like the pandemic – will help enable you to weather all conditions.

Retirement income which depends on investment performance can suffer in turbulent periods. Drawing more income than is being produced through investments can deplete the capital required to keep on generating income in the future. Clearly, this is something to be avoided and it is this kind of situation where keeping some of your wealth for everyday spending and in an emergency cash fund can be of benefit. Lowes clients will be

holding different levels of emergency cash, but this fund can help supplement income where needed and so protect retirement pot capital.

With interest rates rising, it is worth also looking at whether you can improve the interest rate on your cash fund by switching accounts. Remember, you’ll need to ensure you can access your cash if you need to draw on it and without incurring a penalty. This may mean you can’t get the top rate of interest on your money, nevertheless, it will be worth shopping around.

Investment in a recession

It is in turbulent periods like this, that we believe active fund managers show their metal.

During recessions, businesses suffer, particularly those reliant on consumer spending. With the recessions well flagged in advance, active managers will have been adjusting their portfolios accordingly. As well as weighting towards more resilient companies within their investment remit, they will be looking for businesses which have sound fundamentals but whose share price may be discounted because of short-term investor sentiment.

Indeed, recessions can be one of the best times to put your faith in professionals whose day job is investment and who have the knowledge, experience, and resources to spot the opportunities in the markets.

It is never wise nor particularly successful to try to time the markets. Long-term thinking and diversifying your investment portfolio are key to help protect and grow your wealth. The simple equity and bond combination isn’t currently working as an investment strategy because both are reacting to markets in the same way, i.e. their performance is correlated.

Professional investors are now looking to widen their portfolios to include investments such as structured products.

As clients will know, Lowes has specialised in using structured products to both successfully diversify and generate returns in portfolios for some 25 years. Using structured products can work well in these types of uncertain economic periods.

Simply put, a structured product will pay a pre-defined amount if at a stated monitoring point, the underlying (typically an index) is at or above a set target point.

For example, let’s take a structured product, which will generate a defined annual return of say 10% a year, paying out from year two if the FTSE 100 is at or above 6,900.

No matter what happens to the equity markets in the meantime, if at the monitoring point in year two, the index is above 6,900 the investment will pay 20%. If the index is still below that point, the payment rolls over until the monitoring point the following year when 30% is returned. Should the index still be down, the same happens until either the product matures, or the end point of the investment is reached. At that stage capital can be lost if the index is still down by set percentage – typically 30-40%. But as structured products typically run for between five and 10 years, using the right structured product, we would hope to both protect the capital within the investment and to see a positive return for investors along the way.

Over the length of a recession we may have to cut our cloth to meet our needs but through financial planning, the impact can be reduced and where appropriate, prudent investment can be made to take advantage of the post-recession recovery.

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The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.