April has been a turbulent month for global economies and stock markets for lots of reasons. Some of the major factors include:
- reports of sticky inflation;
- decade-high interest rates; and
- geopolitical uncertainty.
The current economic landscape presents several challenges, including persistently high mortgage rates and rising household goods prices. These factors create a stifling effect on new economic activity, making it harder for consumers to purchase new items and impeding businesses’ ability to invest in growth.
Keep reading to find out how inflation can impact short-term volatility and why diversification is crucial in pensions.
How different economies have been reacting
Different economies around the world have been reacting in various ways to these challenges. Here’s a breakdown of how the major global players are reacting to these unfolding events.
US
The US is experiencing higher than expected inflation, leading the Federal Reserve to delay interest rate cuts. This means that borrowing will continue to be challenging, and interest payments will remain high for governments, businesses and consumers. The upcoming US presidential election, set to take place in November this year, adds to this uncertainty in the US economy.
The ‘Magnificent Seven’ companies
There are growing concerns about some of the top-performing companies in the US stock market, often referred to as the ‘Magnificent Seven’. The ‘Magnificent Seven’ comprises Apple, Microsoft, Amazon, Alphabet (Google’s parent company), Nvidia, Meta (Facebook’s parent company), and Tesla. Together, the ‘Magnificent Seven’ make up more than 29% of the S&P 500’s total valuation.
These companies have been very successful in the past year, with lots of excitement about a potential ‘Artificial Intelligence (AI) gold rush‘. However, investor sentiment has shifted in recent weeks as it appears this new technology will not revolutionise industries as fast or efficiently as originally speculated. As such, the value of their share prices has gradually dropped in the past month.
And how do pensions come into this? If you look at the top 10 holdings in your pension, you may find that you’re invested in these companies.
UK and Europe
In the UK and Europe, inflation seems to be decreasing at a faster rate raising hopes for earlier interest rate cuts. However, this decline in inflation is partly due to economic activity already being depressed and unemployment rates rising. The Bank of England, for example, has stated that inflation could fall to its 2% target in the next few months before rising slightly again.
Middle East
Geopolitical tensions in the Middle East are escalating, with reports of direct military action between Israel and Iran. These tensions, along with other concerns, have contributed to market volatility. It’s worth noting that the Middle East is responsible for producing a significant portion of the world’s crude oil. Stability in the region is crucial for maintaining a stable global oil market.
Why pension diversification matters
Right now there’s uncertainty about whether the current volatility in the market is temporary or will continue for a while. The main reason behind this volatility seems to be inflation, which refers to the general increase in prices of goods and services over time. One thing to note is that different countries are experiencing varying economic situations. Some are doing well while others are facing challenges. Because of this, it’s crucial to consider diversification.
Most pensions are already diversified, across a range of locations and asset types. This means your retirement savings could be invested in company shares, bonds, cash, property and other assets, across the globe, depending on the plan you’ve chosen. As a result, a decline in one type of asset or location can be offset by growth in the others, with the aim of achieving not only balance, but ultimately growth over the long term.
If you’re nearing retirement
It’s impossible to completely isolate your retirement savings from the wider economy - even investing in cash means you could lose real value due to inflation - but being invested in a pension plan that’s designed for those approaching retirement could reduce its risk of losing value.
PensionBee’s Tailored Plan is our default option. It’s a ‘target date fund‘ that invests your money differently as you go through life, moving your money into historically safer investments as you approach retirement. However, the choice is yours. You can easily switch between plans at any time.
For PensionBee customers nearing retirement, we have a couple of other plans that are designed to lower your exposure to market volatility.
- 4Plus Plan - Aims to achieve long-term growth of 4% per year above the cash rate, by managing your money actively across a range of investments.
- Preserve Plan - Makes short-term investments into creditworthy companies. This reduces risk and preserves your money.
When markets are down many people are tempted to withdraw from their investments under the assumption their money is safer in their pockets than in stock markets. Or even move their pension because they believe their provider is to blame for the losses caused by market volatility.
It’s easy to forget right now that investments go up, as well as down. So the more you withdraw, the less you’ll have invested to recover when markets rise in value. Withdrawing during a downturn guarantees a loss, whereas waiting for markets to bounce back gives you an opportunity to regain and grow your investments again.
Have a question? Get in touch!
Again, it’s important to try not to fixate on short-term balance fluctuations. Short-term fluctuations are normal and expected, and even the portion of your pension that remains invested after you retire should continue to recover over the long-term.
You can check out our Plans page to learn how your money is invested in different assets and locations. You can always send comments and questions to our team via engagement@pensionbee.com.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
