Navigating choppy waters

What an extraordinary few weeks. Massive energy subsidies, followed by massive unfunded tax cuts, followed by cratering gilt prices — followed by the defenestration of the Chancellor of the Exchequer, and an ensuing reversal of almost the whole lot.
 
As an email in my inbox pithily puts it, the bond markets are now in charge of government policy. The government certainly doesn’t seem to be.
 
You might think that we haven’t seen such chaos before.
 
But we have: the parallels to those extraordinary weeks in September and October 2008 are stark.

What to do? 

Granted, it’s a case of history rhyming, rather than repeating. The parallels are there, alright, but aren’t exact.
 
But markets are cratering, the Bank of England has been forced to intervene, the government is wobbling, the pound is slumping, and consumers are fearful. No one appears to be a master of their own destiny.
 
This time, it’s been pension funds that have been flirting with collapse, not banks. And interest rates are soaring upwards, rather than slumping to near-zero.
 
But yes: events are moving quickly, and the end destination is unclear.
 
What to do? For investors, how to navigate such waters?

Should I sell?

Some will be tempted to sell up, wholly or partially. Certainly, that was a popular strategy in 2008. Which is why the Footsie tanked, of course.
 
But with the stock market at a two-year low, that’s likely to involve taking some losses.
 
No problem, you say: I’ll buy back in at even lower prices.

It’s a great idea, certainly. But what I saw back then was that it was extraordinarily difficult to do in practice. When markets turned in February 2009, many investors were still determinedly sitting on the sidelines.

And some were still on the sidelines in mid-2010. When it was already far, far too late. Market timing is very, very tricky.

Keep your powder dry

So what would I do?
 
First, I’d stay invested. Markets will eventually recover.
 
Second, I’d build cash reserves — and for two reasons. One is that staying liquid right now seems sensible with household finances stretched by skyrocketing mortgage rates, soaring energy bills, and rising prices.
 
But the other reason for staying liquid is that a decent-sized war chest will be a handy way to fund the inevitable bargains that appear. And appear they will.
 
With the economy facing a pernicious cocktail of soaring inflation, rapidly rising interest rates, high energy prices, and recession — a combination that ought in theory to be almost impossible — bargains are beyond doubt.

Bargain — or basket case?

The trick will be to distinguish between genuine bargains, and businesses heading to the knacker’s yard.
 
Certainly, discretionary consumer spending will be under pressure: with paying essential bills being the priority, expenditure such as eating out, going to the pub, and much more besides will be slashed.
 
‘Big ticket’ expenditure will be deferred, or just stopped. New car? Long-haul holiday? New kitchen? No, no, no.
 
On the other hand, banks and energy companies look well placed. And traditional defensive shares — grocery retail, pharmaceuticals, and quite a few focused real-estate investment trusts — should find favour, too. House builders, too, will eventually recover.

Overseas allure

There’s one other, final, point that I’d make.
 
I’ve talked here before about international diversification. Okay, a lot of the Footsie’s earnings are from abroad. But the shares in the FTSE 100 are still London-listed shares, and still subject to the falling pound, poor market sentiment, and everything else.

Not so overseas. And pure-play overseas shares provide useful exposure to industries and sectors that we don’t have much of in the UK.

I’m not going to repeat myself: there are lots of ways of gaining foreign exposure. And right now, they’re looking increasingly appealing — if you can stomach the exchange rate, that is.