Chancellor Rishi Sunak’s Winter Economy Plan may have brought the UK economy back from the cliff-edge. The UK economy faced the very real possibility of tumbling back into recession as the government’s furlough scheme ends in around a month’s time. But it has been replaced by a new jobs support scheme, hopefully in time. Income support for the self-employed has been extended too.
So far though, the markets aren’t impressed. At Thursday’s close (the day the plan was announced), the FTSE 100 index was down by 1.2% and it’s weak as I write on Friday afternoon too. It’s possible that investors may feel more confident by next week, when the full import of the scheme is absorbed. But this will be so only if they are positive on it. As I said, the scheme has received a tepid reception and experts expect that it will not stave off unemployment, only slow it down.
Recession avoided but slowdown imminent
Unemployment numbers have already been rising. For the May-July period, the UK’s unemployment rate was 4.1%, slightly higher than that during the year before. And this is despite the furlough scheme that helped during the lockdown and recession. With less government support available now, I think we should brace for even higher unemployment. This, in turn, will impact the remainder of the economy through lower consumer spending and lower economy-wide savings and investments.
Based on this, I think it safe to assume that the FTSE 100 index will show at least sideways movements for the remainder of 2020. At worst there could even be a stock market crash, considering how uncertain the present situation is. In fact, I think there are at least three triggers that could cause one, even with the jobs support scheme.
Risk and outlook to drive FTSE 100 investments
I think how we invest now is based on two things. One, our risk appetite and two, our outlook. For investors with a high risk appetite, battered stocks can make good investments. Some of the biggest FTSE 100 companies including financials, travel and hospitality firms have been beaten down by the recession and will remain weak in the near term. But if our medium-to-long-term outlook is still positive, we can still find value in them.
However, if sharp market movements aren’t our cup of tea, I think safer stocks are a better option. Defensives tend to perform quite well in recessionary conditions and indeed many FTSE 100 healthcare and consumer staple goods are testament to that. What’s even better is that they have good long-term prospects as well.
It is worth bearing in mind, though, that when the good times start rolling, their share price increases may not be as steep as those of some of their peers. Investors in cyclicals, including sectors that are downbeat right now, on the other hand could see a sharp upturn in fortunes. Still, the downside to defensives is limited. Given the deep uncertainty we are now facing, I like the idea of holding a mix of both kinds of stocks, with the ratio entirely dependent on an individual investor’s own comfort levels.
