The UK economy saw a 2.2% contraction between Q4 2019 and Q1 2020 followed by a 20.4% contraction between Q1 and Q2.  This is in spite of 8.7% growth in June when businesses deemed non-essential began to reopen.  These figures may not come as a surprise to many people.  They are, however, still grim reading and open questions about how investors should respond.

Cash is unlikely to be the answer

If you thought interest rates were as low as they could go, the Bank of England may be about to prove you wrong.  It will be very interesting to see if the BoE really will take the jump into the unknown and implement negative interest rates.  Even if it doesn’t, it’s hard to see how interest rates will reach the sorts of levels that would justify extensive cash deposits.

In theory, if inflation breaks the BoE’s target of 2% (with a 1% margin of error either way), the BoE would effectively be forced to raise interest rates.  In practice, the BoE could ask the government to increase or waive the inflation target to avoid them having to do so.  This would hurt savers and probably some businesses, but it would be a relief to those in debt and that’s a lot of people (and businesses).

Property may be the answer or part of it

Property can generate good returns in any market, however, investors need to be sure they know what they are doing.  The residential buy-to-let market may benefit from high demand, but it’s currently subject to high regulation. 

What’s more, those rules are set to get tighter soon with the elimination of “no-faults evictions”.  If public pressure is strong enough, they could be tightened again, further down the line.  This doesn’t mean that residential buy-to-let is a bad choice.  It does, however, mean that investors should go into it with their eyes open.

Commercial property may be an attractive alternative.  It’s much less regulated and can offer solid yields.  Again, however, it’s important to look at the bigger picture and think about what the future might bring.  For example, short-term rentals in cities have been very profitable, but city authorities have now started clamping down on them.  This means that investors might want to pivot either to city hotels or short-term lets outside of cities.

The stock market could reward those with a strong stomach

Anyone invested in the stock market right now should be very aware of the fact that their capital is at risk.  Stock markets can drop, sometimes they plummet.  Individual companies can drop, sometimes precipitously.  In fact, individual companies can go bankrupt, taking your capital with them.

That’s the bad news.  The good news is that over the long term, good companies will rise to the top and will reward investors who keep faith with them.  The challenge, as always, will be to identify the companies with real potential into the future.

In addition to undertaking standard analysis on companies, investors will need to think about how a company is likely to cope with the realities of both COVID19 and Brexit.  Even if the former is temporary (as is very much to be hoped), it is likely to have a long-term impact. 

Nobody is going to want to see a return of the lockdowns which set lives into limbo and decimated the global economy.  It’s therefore probably a safe assumption that both lifestyles and working practices are going to change to reflect this.  The only question is how?

At present, it looks like there’s likely to be a reduction in both office use and business travel (both of which were expensive anyway) and an increase in remote working and videoconferencing.  Now could therefore be a good time to pay attention to any company which could facilitate either of these.