After a shaky shares week, 5 moves you need to make
Stock exchanges at home and abroad were in turmoil in recent days... what does the markets mayhem mean for your pocket?
Crash or correction? That was the big question stalking stock markets this week after the biggest fall since 2016 wiped $5tn off global share values. The turmoil continued all week as markets bounced back on Wednesday, only to plunge again on Thursday and end the week in a state of upheaval.
‘Monday registered the biggest one-day surge in stock market volatility on record amid the largest drop for the S&P [US shares index] in six years,’ said Simon Barry, Ulster Bank chief economist.
‘However, one way to view the recent price action in stocks is that a market which has been going up for almost nine years lost eight weeks of gains, leaving it still higher than where it was in mid-November. Further volatility would not be a surprise, though we think major economic impacts will be avoided.’
The stock exchange tension was exacerbated by new trigger-happy share dealing systems that react to volatility by selling, which makes it considerably worse.
Shares had risen to record highs because we appeared to have entered an era of lower interest rates, which will help companies grow faster and drive more money into shares as bank deposit rates dwindled to practically zilch.
Despite the market ructions, global economies are still forging ahead strongly and so too are company profits.
But shareholders got jumpy this week because they thought interest rate rises might come sooner than expected, further reining in profits, and wages also spiked in the US, which would have the same effect. A wage deal in Germany also saw annual pay hikes of 4% agreed for half a million German metal and electrical workers.
Wage increases also push up inflation, putting pressure on interest rates.
Yet in Europe, rates still aren’t expected to rise before 2019 and even after that the rise will be gradual over several years.
‘Interest rates could go up by 1%, maybe 1.5%. A lot depends on how things play out in the US,’ said Alan McQuaid, economist with Merrion Capital.
European Central Bank boss Mario Draghi and his team are due to retire towards the end of 2019, and rate increases may well be staved off until then, so that he can leave on a positive note, with an intact reputation for successfully stoking up the EU economy with cheap money.
Mr McQuaid said the EU economy remained strong despite the upheaval, and its prospects had been boosted by a new deal that has brought political stability to Germany.
In fact, even during the shares bloodbath, the ECB this week upgraded its growth forecasts for the eurozone once again.
So what does all this mayhem mean to our pockets? Here are five takeaways:
ASK FOR A PAY RISE
The shares slump was triggered by long-overdue wage rises as we reach full employment – that is, there’s some kind of work available for everyone who wants it.
Wages here are expected to rise by 2-3% this year, although some in-demand workers are likely to get as much as 8%.
If you’re one of them, don’t get left out in the cold. If you haven’t got a pay rise lined up already, draw up a good case why you should get one and pay a visit to the boss’s office.
FIX YOUR MORTGAGE
WE are at the end of the extraordinarily low interest rate cycle.
Brace yourself for rises totalling 1% to 1.5% over the next three years. That would add around €95 to €145 a month to the average
€190,000 mortgage (based on a 50%-80% loan-to-value rate).
It also makes fixing your mortgage look more appealing.
After a 1% rise in rates, even the cheapest variable mortgage would go up to 3.95% by 2021.
The lowest fixed rate loans are still around 3%, so at that level they look attractive.
Fixing your rate for three or more years brings peace of mind, but it is not a free ride. You’re locked in and if you break your contract, by moving home, for example, you’ll face a fine. So don’t fix lightly.
However, some lenders – such as Bank of Ireland – have better fixed rates than standard variable rates.
If you can’t afford to take a chance on rising rates – and remember, they could always go up by more than 1.5% – then fixing might be a good idea for you. Check out all rates on bonkers.ie.
BE CAREFUL OUT THERE
reason. Shares were valued at all-time highs and this year will be volatile.
A crash, defined as a drop of 30% or more, may not happen. So far, all we’ve had is a correction – which means a 10% drop.
Many commentators are still bullish about shares. But there could be more turmoil to come.
There’s no need to panic and sell everything. But if you’re a worried investor or have a pension fund nearing maturity, it might be time to look at switching into more conservative investments.
There are hundreds of managed funds to choose from with varying degrees of risk. Pick the one that suits your appetite for it.
PUT IT ON DEPOSIT
INTEREST rates aren’t going to go up by much, but bank deposit rates will get slightly less derisory, probably rising to around 1%-1.3%.
That’s hardly a mind-blowing return for our hard-earned savings.
And it’s a far cry from the heady returns of the stock market over the past eight to nine years, but at least your money is safe.
WHY WAIT? SPEND IT!
YOU don’t have to invest in shares to make money. If you have spare cash, look at other forms of sensible investment such as insulating your home, getting a more efficient boiler if you need one, or buy an electric car.
All of these purchases may be subsidised, are good for the planet, will increase your comfort and save you lots of money in the long run.
Or if you’ve made handsome gains on shares in the past few years, why not cash in some of your profits and treat yourself to something nice?
With inflation rising, whatever it is will only cost more next year.
And what’s the point in making money if you can’t spend it?