This is the third in a series of articles looking at some of the key issues for successful cross-border investing and helping international investors secure their financial future.
In August, we published an article about why embracing market volatility is one of the best ways to achieve long-term investment success.
Then, last month, we discussed why the key to long-term investment success is staying invested rather than trying to time the market.
This month, we’re diving into two big macroeconomic factors – inflation and recession – and how your response to them can shape your financial future.
This article draws on data and insights from Dimensional, a globally respected investment firm and one of our trusted fund management partners, whose strategies many of our clients invest in.
High inflation and an economic recession can both be causes for concern
Former US President, Ronald Reagan, described inflation as being “as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man.”
While dramatic, it’s true that high inflation can impact your finances — especially if you’re a cross-border investor.
Increased prices reduce the purchasing power of your money, which means that unless your income goes up by the same amount, you will be financially worse off.
From a macroeconomic perspective, inflation can also affect the wider economy, with rising costs potentially inhibiting business confidence and discouraging investment. For Australian expats, inflation adds another layer of complexity. Currency fluctuations and differing tax regimes between Australia and the UK mean your investment strategy needs to be robust and flexible.
An extended period of negative economic growth, known as a recession, can have the same effect. The term can conjure up emotive images of businesses closing and people looking for work.
Given how important your investment portfolio is to your long-term wealth, it’s understandable if you have concerns as to how the twin threats of inflation and recession could affect your investments, such as your retirement fund.
However, in this article you’ll find two charts that can help allay some of those concerns.
Before you start reading, take a look at this very short video, which confirms that in the long run, stocks have delivered rewarding returns even after adjusting for the effect of inflation.
Chart 1 – Will inflation hurt stock returns? Not necessarily
Source: Dimensional
This chart shows FTSE 100 real returns since 1994 as the green bars. The red dots are the annual UK inflation rates.
As an investor, you may wonder whether stock returns will suffer if inflation increases to the levels we saw in the UK in 2022. However, historical equity performance over the past three decades does not show any reliable correlation between periods of high (or low) inflation and UK stock returns.
Stock returns can be strong, weak, or in between when inflation is high.
For example, returns were relatively strong in 2021 but poor in 2022. Furthermore, in 20 of the past 30 years, we enjoyed positive stock returns even after taking into account the impact of inflation.
Indeed, over the period charted, the FTSE 100 posted an annualised return of 4% after adjusting for inflation.
History shows that stocks tend to outpace inflation over time – a valuable reminder if you are concerned about rising prices.
Chart 2 – As a long-term investor, you should not let a recession alarm you
Source: Dimensional
You may be tempted to abandon equities when there is a heightened risk of a recession.
But research has shown that stock prices incorporate these expectations and generally fall in value before a recession even begins.
The chart shows a hypothetical £10,000 investment at the start of each of the 10 technical recessions in the UK over the past seven decades. As you can see, stock returns were positive two years after the recession began on all but one occasion.
Indeed, the average annualised return two years after the onset of these 10 recessions was 17.2%.
A history of positive average performance following a recession can be a comfort if you have concerns about staying invested during an economic downturn.
Get in touch
Expert advice and regular reviews of your long-term investment strategy can help ensure that you are best positioned to achieve your long-term goals.
At bdhSterling, we specialise in helping clients navigate the complexities of cross-border financial planning between Australia and the UK. Whether you’re managing assets in multiple countries or planning a move abroad, our expert advisers can help you build a resilient, long-term investment strategy.
If you would like to discuss your own investments, please get in touch with us today.
Please note
This article is for information only, it does not take into account your personal objectives, financial situation, or needs.
Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
All contents are based on our understanding of HMRC and ATO legislation, which is subject to change.