All in a Year

February 18th, 2010

Nearly a year since the announcement that the UK is officially in recession, it is interesting to reflect on the current financial position and consider how different aspects of the financial market such as interest rates, stock markets, currency exchange rates and gold have fared.

Interest Rates

Interest rates influence spending and saving in the economy and the prices paid for goods and services.

The current bank base rate is 0.5% and has been held at this rate since March 2009.  In November 2008, it had been reduced to 3% and twelve months before that in November 2007 it had been held at 5.75% (source: Bank of England).  From this, it can be seen that interest rates have been on a downward spiral – good news for some borrowers, but not so good news for those depending on the interest earned on their savings.

Although the bank base rate remains low, financial institutions are interested in attracting your money via savings and consequently it is worth shopping around to ensure you are receiving the best available rate on your savings.  You could currently receive over 3% gross p.a. if you are prepared to put your money in a notice account and over 5% gross p.a. if you place it in a long term (5 year) fixed rate bond (source: Moneyfacts 4th November 2009).
If you are contributing to a cash-ISA (Individual Savings Account), you may be able to find a better rate with another provider.  If so, it is possible to switch contributions from one cash-ISA to another during the same tax year, without invalidating the tax status of the second ISA, as long as the benefits built up under the current ISA are transferred to the new ISA before you contribute to it.
Where this is the case, the transfer need only relate to the contributions made in respect of the current tax year, but you must transfer the whole amount for the current tax year.

Stockmarkets

On the 13th November 2009 the FTSE 100 index closed at 5,296.38, which is a rise of 27% from the same date in 2008 however, this is not the whole story.  The FTSE had continued to fall after November 2008 until it reached its lowest point of 3,512.09 on 3rd March 2009, so the current value represents a rise of 50.8%.  It does however, remain 21.33% below the high of 6,732.40 reached on 11th June 2007.

Looking further afield, the Dow Jones index has followed a similar pattern showing a 16% rise between the same dates, but an approximate 57% rise since its lowest point on the 9th March 2009 (source: Financial Times November 2009).

Whilst the markets remain volatile, it can be seen that there has been growth during the recession.  Markets tend to react to economic data being published and the increase since March can be partly attributed to some better than expected profit announcements, a slight stabilising of the housing market and the hopes that some ‘green shoots of recovery’ are being seen. Anyone brave enough to invest back in March would have potentially seen a healthy return – unfortunately, the benefit of hindsight is a wonderful thing!

Currency Exchange Rates

Exchange rates have also seen fluctuations, on 6th November 2009 the pound was worth 1.66 US$ and 1.12 Euros, whereas twelve months ago the exchange rates stood at approximately 1.53 US$ and 1.20 Euros.  This means that during this period the US$ has risen by 8.5% against sterling but the Euro has fallen by 6.7%.  These figures compare to November 2007 when the pound was worth approximately 2.07 US$ and 1.41 Euros (source: Bank of England November 2009).

Changes in exchange rates not only impact on the level of holiday money you can obtain, but also on the value of any equities held on the worldwide markets as the value of these will depend on the exchange rates applying at any given time.

Gold

Gold is usually quoted in dollars and the price currently stands at $1,115.25 an ounce (source: Bank of England 11th November 2009).  On this basis, the price has seen an approximate 37% increase in the last twelve months (source: Bank of England November 2009).  This rise could partially be attributed to investors looking for a perceived safer haven for their money away from the fluctuations of equities, but it can also partially be attributed to the change in exchange rates with the value of the dollar falling against other key currencies.  If gold had been purchased in sterling the effective rise would be 31%.  Gold is also seen as a way of hedging against inflation.

One consequence of the increase in price is the number of companies advertising to purchase your unwanted gold jewellery.  This is one way to raise money when times are hard, but it is important to understand the value of gold and shop around to ensure a fair price is received in exchange.

Conclusion

When considering the figures it is interesting to see that it has not been all bad news during the recession as investors entering the market at the right time could well have seen a profit on their investment – and those diversifying into gold may be particularly pleased with their return.

As always, past performance is no guarantee of future performance and the value of your investments can go down as well as up – there is no guarantee that this growth will continue.  It is equally difficult to predict the top of the market as it is to predict the bottom and where the markets and economy will go from here is an unknown quantity.  Opinion is divided on this and when the UK will emerge from recession.