Investing in unusual times

These are strange times in the investment world, and not just because of the unfolding Greek tragedy before us.

On 27 April this year, the FTSE 100 closed at a new record high of 7103.98, having reached a new intra-day high earlier in the day of 7122.74. The long-standing record, which had been held since the end of the last millennium, was finally surpassed on 24 February this year, when the market closed on 6949.63. The markets then continued to rise until late April, since when they have fallen back, mainly due to the Greek situation. The FTSE100 closed on Friday down at 6,585.78, over 7.5% off the April market high.

The Greek situation is certainly a timely reminder that these are unusual times. Up until recently, you would have been forgiven for thinking that all was rosy in the global economic world, given the overall performance of equity markets so far this year.

Yet there are a couple of major reasons why things are far from usual. Firstly, we still have record low interest rates. Bank of England figures show that in its first 300 years, base rate averaged 4.8% and never went below 2%. However, interest rates have now been at 0.5% for over 6 years – distinctly unusual!

Then there is the controversial policy of quantitative easing (QE), which we had in the UK and US and now continues in Europe and Japan. This has arguably led to inflated asset prices without a corresponding real improvement in the underlying economic infrastructure. As QE is likely to continue for some time yet, this is not an immediate issue but it does mean that some equities and sectors are possibly overvalued.

As a counter-balance, we now have the Greek referendum as well as the Greek ‘game of chicken’ with the ECB and IMF. Here, however, it could be argued that the markets have overdone the negative impact of a potential ‘Grexit’.

In reality, Greece is not a major player on the world stage and whilst its creditors will feel the pain of their default, they are big enough to absorb the loss, particularly their main creditor, Germany. For Greece – and the markets – a clear-cut decision either way would be the best for the way forward, ending a potential prolonged period of uncertainty.

So low interest rates and QE have inflated market values, whilst the Greek situation has maybe been overdone by the markets. For investors, this is all fascinating – and for some of you possibly worrying - stuff.

However, the key as always with your financial planning is to take the long-term view. Short-term there are always highs and lows along the way but staying focused on your long-term goals, plus getting sound financial advice, should help you through the process.

To discuss your financial planning, talk to Kellands today.

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