The lockdowns have weakened the UK economy. Along with most other countries, we now face a recession because GDP plummeted. But I reckon now’s a good time to invest in FTSE shares.
We may not feel like investing now, though. After all, ongoing social distancing measures are making it hard for some companies to build up their revenues again as the lockdowns ease. Particularly in the retailing sector, higher costs and lower revenues — because of restricted footfall — are squeezing profits.
Resourceful businesses back FTSE shares
But businesses are resourceful. Anecdotally, I’d observe that some retailers are raising selling prices to fight profit attrition. But the over-riding factor that keeps me confident about investing in FTSE shares for the long haul is the way the government seems determined to fight economic weakness. Right now, I can see 100 billion reasons to get involved! Let me explain…
On Wednesday 17 June, the Bank of England’s Monetary Policy Committee (MPC) voted to continue its programme of quantitative easing. That sounds technical, but it just means pumping new money into the economy to keep things moving. In other words, the government is doing everything it can to stop the economy crashing. And, in the short term, that’s good for shares.
Indeed, the central bank will continue the existing £200bn programme of UK government bond and sterling non-financial investment-grade corporate bond purchases. But, on top of that, the MPC voted to increase the programme with an additional £100bn. And, to me, that’s a 100 billion good reasons to keep on investing in FTSE shares!
The target for UK government bond purchases is an eye-popping £745bn now. And the Bank of England will finance it by issuing central bank reserves. I love that little word ‘issuing’. It essentially means ‘printing money’ and if we could all do that when we feel like it our personal finances might be in better shape – at least for a while.
A good place to be
The central bank explains the process of quantitative easing as “a tool that central banks, like us, can use to inject money directly into the economy.” Sounds great! The bank goes on to say, “Quantitative easing involves us creating digital money. We then use it to buy things like government debt in the form of bonds.”
However, as neat as it sounds, like all ‘medicines’ there are side effects. For example, it stokes up inflation. And all the extra money sloshing about can create asset bubbles. On top of that, it can exaggerate boom-and-bust business cycles, among other things.
But, as I mentioned earlier, businesses are resourceful. And holding FTSE shares may be a good place to be if inflation gathers pace. That’s because underlying businesses can raise selling prices to maintain their profitability. On top of that, shares are one of the asset classes that could benefit from the upward pressure quantitative easing tends to place on assets. In a positive note, the Bank of England reckons it’s seeing improvements in the economy and has slowed the pace of asset purchases from where they were in the spring.
The outlook for the economy remains uncertain, but I’d much rather be holding shares right now than I would cash savings.