What an extraordinary few weeks. Massive energy subsidies, followed by massive unfunded tax cuts, followed by cratering gilt prices — followed by the defenestration of the Chancellor of the Exchequer, and an ensuing reversal of almost the whole lot.
 
As an email in my inbox pithily puts it, the bond markets are now in charge of government policy. The government certainly doesn’t seem to be.
 
You might think that we haven’t seen such chaos before.
 
But we have: the parallels to those extraordinary weeks in September and October 2008 are stark.

What to do? 

Granted, it’s a case of history rhyming, rather than repeating. The parallels are there, alright, but aren’t exact.
 
But markets are cratering, the Bank of England has been forced to intervene, the government is wobbling, the pound is slumping, and consumers are fearful. No one appears to be a master of their own destiny.
 
This time, it’s been pension funds that have been flirting with collapse, not banks. And interest rates are soaring upwards, rather than slumping to near-zero.
 
But yes: events are moving quickly, and the end destination is unclear.
 
What to do? For investors, how to navigate such waters?

Should I sell?

Some will be tempted to sell up, wholly or partially. Certainly, that was a popular strategy in 2008. Which is why the Footsie tanked, of course.
 
But with the stock market at a two-year low, that’s likely to involve taking some losses.
 
No problem, you say: I’ll buy back in at even lower prices.

It’s a great idea, certainly. But what I saw back then was that it was extraordinarily difficult to do in practice. When markets turned in February 2009, many investors were still determinedly sitting on the sidelines.

And some were still on the sidelines in mid-2010. When it was already far, far too late. Market timing is very, very tricky.

Keep your powder dry

So what would I do?
 
First, I’d stay invested. Markets will eventually recover.
 
Second, I’d build cash reserves — and for two reasons. One is that staying liquid right now seems sensible with household finances stretched by skyrocketing mortgage rates, soaring energy bills, and rising prices.
 
But the other reason for staying liquid is that a decent-sized war chest will be a handy way to fund the inevitable bargains that appear. And appear they will.
 
With the economy facing a pernicious cocktail of soaring inflation, rapidly rising interest rates, high energy prices, and recession — a combination that ought in theory to be almost impossible — bargains are beyond doubt.

Bargain — or basket case?

The trick will be to distinguish between genuine bargains, and businesses heading to the knacker’s yard.
 
Certainly, discretionary consumer spending will be under pressure: with paying essential bills being the priority, expenditure such as eating out, going to the pub, and much more besides will be slashed.
 
‘Big ticket’ expenditure will be deferred, or just stopped. New car? Long-haul holiday? New kitchen? No, no, no.
 
On the other hand, banks and energy companies look well placed. And traditional defensive shares — grocery retail, pharmaceuticals, and quite a few focused real-estate investment trusts — should find favour, too. House builders, too, will eventually recover.

Overseas allure

There’s one other, final, point that I’d make.
 
I’ve talked here before about international diversification. Okay, a lot of the Footsie’s earnings are from abroad. But the shares in the FTSE 100 are still London-listed shares, and still subject to the falling pound, poor market sentiment, and everything else.

Not so overseas. And pure-play overseas shares provide useful exposure to industries and sectors that we don’t have much of in the UK.

I’m not going to repeat myself: there are lots of ways of gaining foreign exposure. And right now, they’re looking increasingly appealing — if you can stomach the exchange rate, that is.

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For investors, these are — quite simply — extraordinary times.

Take City of London Investment Trust (LSE: CTY), a higher-yielding investment trust often regarded as a proxy for UK plc. I’ve owned a chunk of it for years. Stolid and steady, it’s had the same manager — Job Curtis — since 1991.
 
But in the bond market rout of late September, the yield on 10-year government gilts came within spitting distance of what a stake in City of London would earn you.
 
And that, my friends, is simply crazy.

Risk premium

There’s a hierarchy in these things.
 
Equities — shares in companies — have a higher yield than bonds, to compensate for the higher risk.
 
Bonds — loan to companies, in effect — have, in turn, a higher yield than gilts (which are bonds issued by the UK government (and judged safer than bonds issued by companies. They’re called ‘gilts’ because back in the day, the certificates were gilt-edged.
 
Only in banana republics would one expect loans to the government to be regarded as risky enough to be on a par with equities.
 
But that, it seems, is where we are.

Crisis? What crisis?

I’m looking at a 40-year chart of 10-year gilt yields. At the start of that period, gilt yields oscillated in the 10–15% range.
 
Britain, you’ll recall, was ‘the sick man of Europe’. Strikes were endemic, the ‘Winter of Discontent’ still a raw, fresh memory, and prime minister James Callaghan’s custody of the economy yielded the immortal headline ‘Crisis? What crisis?’ — although Callaghan himself apparently never uttered those words.
The markets’ reaction to Liz Truss’s inaugural mini-budget would have been all too familiar to Callaghan: soaring gilt yields, rising interest rates, and plunging share prices.

Sure enough, at the other end of that 40-year chart — the last two weeks, in other words — the ten-year gilt yield chart rockets skywards like something built by Elon Musk’s SpaceX.

As recently as January, the 10-year gilt yield was 1%. Now, it’s hovering around 4%.

Bargain — or falling knife?

What should investors do?
 
Now, gilt yields rise because gilt prices have fallen. And sure enough, gilt investors have suffered heavy losses.
 
And I’m sure some investors are thinking of buying into that dip — although ‘crash’ is a better word than ‘dip’ in this case. Nor is it difficult: just about every fund supermarket will have funds offering exposure to gilts.
 
But I’m not so sure that this would be a good idea.

Despite the U-turn on the higher-rate tax cuts, the public finances are still wobbly. The other unfunded tax cuts remain. Government borrowing costs have been driven up, just when Liz Truss has announced a huge splurge of further debt to fund subsidised energy for households and businesses, stamp duty cuts, and a reversal of higher corporation taxes.
 
Investors may need to wait a long time for gilt markets to recover back to yields of 1% or so. And in the meantime, the yield they’re getting is running at around half the level of inflation — and with holding to redemption the safest strategy, the capital risk in real terms could be significant.
 
And unlike dividends — which can rise — gilt (and bond) yields are locked in at the time of purchase. What you buy is what you get.

Equity upside

Equities, to my mind, remain the better bet.

Which equities? Me, I’m tempted to throw a little more money at City of London Investment Trust — where the dividend has risen without a break for 56 years.

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Malcolm owns shares in City of London Investment Trust. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

When you reach retirement age, then you retire, right? Er, no.
 
According to a fascinating release from the Office for National Statistics, published on September 12, record numbers of the over-65s are in employment.
 
And that word ‘record’ isn’t to be taken lightly: not only did the number of over-65s in employment reach a record level (1,468,000 people) in the three months ending June 30, but the quarter-on-quarter increase of 173,000 was also the highest on record.

Old age isn’t what it was

Now, we’re all living longer these days — and staying healthier for longer. 65 and over, you might think, is not what it was. Consequently, these days the state pension kicks in a little later, in acknowledgement of these trends.

So compared to — say — 20 or 30 years ago, some element of working past 65 might be expected.

But that doesn’t explain the current rocketing increase in the number of over-65s in employment. Or why the number should have hit a record high this particular quarter.

We’ll perhaps know a little more at the end of September, when the Office for National Statistics publishes the second phase of an over-50s lifestyle study, part of which probes people’s motivation for leaving the workforce, or re-joining it.

Are we seeing the cost-of-living crisis at work?

Commentators, however, have their own take on things. And it’s a viewpoint that I find persuasive. Very persuasive.
 
The reality is that for huge numbers of people, retiring early has been a long-held dream. It’s what people work towards.

In my social circle, a significant proportion of people have done precisely that. Yours too, most likely. So why on earth head back to work?
 
Perhaps it’s because some people, I know, are starting to feel the pinch.
 
And many more will probably do so, perhaps, when the cost-of-living crisis begins to really bite. Recession or not, I’m expecting the numbers of over-65s in employment to continue to climb — and I’m not alone in that view.
 
Not least because, in an era of labour shortages, employers are making it ever easier for older employees to join the workforce.

Every little helps

And as it happens, confirmation of this hypothesis is readily seen in the Office for National Statistics’ figures.
 
In which sectors of the workforce is the increase in over-65s in employment greatest? The answer: part-time employment, and part-time self-employment — and often in those industries and occupations that make it easier for part-time work to be a practical proposition.
 
Which provides a form of corroboration for the cost-of-living hypothesis: it’s not people returning to work full-time — it’s people doing some part-time work to top up their earnings, because their pensions no longer stretch quite far enough.

Which is quite a different picture from the image conjured up by all those over-65s that we see in all those stock photographs in newspapers and magazines, where prosperous-looking silver-haired couples stroll hand-in-hand along tropical beaches.
 
The reality might more likely be shelf-stacking in your local supermarket.

The champagne lifestyle — or the homebrew one?

What to do?
 
For a start, dig out your latest pension projection — or if you’re in an occupational pension where these are only sent out infrequently, request one, or log on and look at the numbers in real time.
 
Usefully, such projections tend to provide estimates of future pension income expressed in terms of 2022 pounds. So seeing how far your money will stretch is fairly straightforward.
 
Naturally, don’t forget to add to your projected income any state pension that you’ll receive. Again, getting a projection of this is just a matter of requesting it.
 
Throw the numbers in a spreadsheet, knock together a basic budget, and see what your future looks like.
 
Is it champagne — or homebrew?

Penury isn’t pleasant

Does that future look appealing? Great, if so.
 
But not so great if the prospect of working past 65 doesn’t appeal — particularly so if your personal circumstances mean that your normal line of work isn’t an option.
 
Shelf-stacking — or something similar — might then beckon.
 
Extreme, I know. But I’m willing to bet that among those 1,468,000 over-65s in the workforce, examples of this could be readily found.

Build a second income stream

Again, what to do? Saving more, to build up a cash buffer, might be one way forward. But in the last year, we’ve seen how quickly inflation can rocket upwards, destroying the purchasing power of cash savings.

Investing more, on the other hand, makes a lot of sense — and to me, even more sense if you do it in the form of a Self-Invested Personal Pension (SIPP) or ISA, where the investment objective is building up an income flow, rather than capital growth.

Set your investments to deliver an income stream, and watch the month-by-month impact that you’re having on your future lifestyle.

There’s nothing wrong with homebrew — I enjoy a glass myself. But you can’t beat the taste of knowing that you can actually afford the champagne option, should you want to.

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In parallel, fund managers and pension funds touted their own ESG credentials, proudly owning up to selling old-fashioned polluting businesses that they might have held for decades, and buying shares emblematic of a greener, brighter future.
 
It was remarkable demonstration of how — in a few short years — the attitude to what has become known as ESG issues (short for ‘environmental, social, and governance’) has changed the investment landscape.

Green is good. But warm is better.

Perennial Footsie stalwarts Shell (LSE: SHEL) and BP (LSE: BP), for instance, had come to be regarded as some sort of living dead: their balance sheets might be loaded with oil and gas fields, certainly, but these were surely assets in name only — full of oil and gas that would never be extracted. ‘Stranded assets’ was the term in use.
 
Turn the clock forward to today, and the picture is a little different. And you don’t need me to tell you why.
 
Oil and gas fields that companies were selling off have been retained. Shell has reversed its decision not to develop its Jackdaw gas field in the North Sea. It may yet change its mind regarding the as-yet undeveloped Cambo field off Shetland.
 
It’s the same all over Europe. Germany — which had planned to phase out the production of electricity from coal by 2030 — is now bringing mothballed coal-powered power stations back on-stream.
Those COP26 pledges? Keeping homes warm — and factories working — trumps greenery, it seems.

Unloved shares bounce back

Shares in Shell were changing hands at around 1,600p at the time of the COP26 summit. BP, 340p. Today, Shell shares are priced at 2,350p, and BP shares priced at 450p.
 
Even perennially unloved Centrica (owner of British Gas) is in on the action, with its shares up 50% in a year.
 
‘Stranded assets’? I don’t think so. Nor do I think that we’ll see a return of that phrase any time soon. The ESG activists will hate it, but governments know that energy security is vital. There’ll be green energy projects aplenty — but the lesson has been learned: fossil fuels are a handy backstop.
 
And, obviously, the shares of green power providers have benefited too — Greencoat UK Wind is up almost 25% since COP26, for instance.
 
But — critically — they weren’t mispriced due to ESG concerns in the first place.
 
All those fund managers and pension trustees must be feeling pretty sheepish.

Play it again, Sam

We’ve seen this movie before, of course — and with some of the same stocks. Back in 2016, resources stocks in general came under the hammer: mining stocks, oil and gas stocks, and the engineering and support companies that supply such businesses.

The reason? Slowing China demand, which could possibly be permanent. Prices crashed.

But — as I’ve written before — the whole sector soon seemed massively over-sold, and I loaded up.

I bought into BHP at 596p, Shell at 1,295p, IMI at 773p, and Weir at 777p, for instance.

Current prices? At the time of writing, 2,230p, 2,345p, 1089p, and 1,4421p — and that’s in today’s fairly-awful market. IMI’s high point for the last year is 1,878p, for instance.

The moral: when a sector is mispriced, bargains abound — for those adroit enough to spot them.

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Malcolm owns shares in Shell, BP, Centrica, Greencoat UK Wind, BHP, IMI, and Weir. The Motley Fool UK has recommended Greencoat UK Wind, IMI, and Weir. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

In March 2003, as coalition troops entered Iraq to bring the first Gulf War to an end, I was scraping together every spare pound that I could get my hands on, and stuffing it into my ISA before the end of the tax year.
 
There were two reasons. First, having hit a (then) all-time high of 6,930 at the end of December 1999, just before the dotcom crash, the Footsie had sunk to 3,287 on 12 March 2003, just before the Iraq invasion. Equities were on the floor, in other words – and bargains beckoned.

And second, I was all too aware how my pension and ISA savings had suffered in the stuttering economy of the early 2000s. For me, the 1990s had been fairly generous — but the early 2000s, coupled to the collapse of troubled insurer Equitable Life, in which my pension had been invested, were markedly less so.
 
The lows of early 2003 looked to be an opportunity to redress things a little — an escape route into a more prosperous future, in short.

Soaring Footsie

I was lucky: the Footsie’s 3,287 on 12 March 2003 marked the market’s nadir. It closed the year up 18%, and burst through the 5,000 level in February 2005.

And by the 2007 financial crisis in June 2007, the Footsie was at 6,732 — more than twice its March 2003 level.

As I say, I was fortunate. But others today may be less so, as two recent surveys make clear.

Pressured consumers

In mid-July, pensions saving firm Standard Life put out some research showing the extent to which consumers were suffering from rising prices. Over three quarters, it reckoned, were expecting to cut back on spending or saving.
 
Standard Life’s clear message: try hard to make those cuts as cuts in spending, not saving. A 35-year-old stopping pension contributions for one year, it calculated, would wind up with a pension pot £12,764 smaller. Stop for two years, and the hit would be £25,335.
 
Come early August, and Canada Life — another pension saving firm — issued its own survey findings. 5% of UK adults had already stopped contributing into their company pension due to the cost‑of‑living crunch. And a further 6% reported that they were actively thinking about pausing their pension contributions, also.

Triple-whammy

But stopping pension contributions — as opposed to ISA contributions, say — is a really bad idea.
 
As Canada Life points out, the costs extend beyond the contributions themselves.
 
Those of us who save every month in Self-Invested Personal Pensions (SIPPs) would lose the valuable government-funded tax relief, for instance — additional funding that gets directly added to your SIPP, helping it to grow further and faster.
 
Those of us who save in their employer’s pension schemes lose out not only in terms of the tax relief, but also their employer’s matching contributions.

Someone aged 40, suggests Canada Life’s modelling, and earning £50,000 and saving 8% of salary, would wind up with a pension pot worth 4% less for every year of contributions missed.

Rear-view mirror

Even so, you might think that — while it’s doubtless tough for the individuals themselves — if just 10% or so of pension savers are having to suspend their pension savings contributions, the problem is manageable.
 
But it’s worse than that. Canada Life’s survey took place in April. Standard Life’s survey took place in May. Several months ago, in other words.
 
It’s now the end of August, and inflation is over 10% — and set to climb higher. (Investment bank Citibank is projecting 18.6% in January, for example.)  And any day now, Ofgem will announce the level of October’s energy price cap — and by mid-September, most of us will have been informed what it means to our energy costs.
 
The clear inference: by late September, many more people will be thinking of slashing their ISA and pension savings contributions.

What to do?

What should you do, if you’re in this unhappy position? Obviously, we’re all cutting back, and you should only be contemplating slashing your savings after other household budgeting economies have been made.

In particular, carefully consider the opportunity cost of major expenses: that foreign holiday is attractive, to be sure, but would you rather have a more comfortable retirement instead?

Three things to think about:

• Aim to reduce monthly savings and investment contributions, rather than stopping them completely. Your provider will be quite accustomed to this, and all it takes is a letter.
• Cut back non-tax advantaged saving and investing before impacting tax-advantaged savings and investment vehicles such as ISAs and pensions.
• Consider cutting back all forms of saving and investing (ISAs and ordinary brokerage accounts, for instance) before cutting back on employee pension scheme contributions — because of the valuable employer’s contribution, which might otherwise be lost.

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Wrong again?

Now, the Bank’s record in these things is pretty dire.

Those of you with long memories of its dismal track record might be forgiven for immediately concluding that the UK is headed for an unparalleled boom in living standards, soaring GDP, an era of low interest rates, and plummeting inflation.

But sadly, simply assuming that the Bank has got it wrong — again — won’t on this occasion work. The UK’s economic prospects really are fairly bleak, and about to get worse.

There’s more than a whiff of the 1970s in the air: ‘stagflation’, with all its wealth-sapping consequences.

Consumers are set to suffer

How bad a recession will it be? Two other recessions come to mind: 2008-2009, and the short, sharp slump of 2020.
 
According to the Bank, 2022-2023 won’t be like either of those. The Bank has produced an interesting chart, comparing a number of recessions, and both in terms of depth (peak-to-trough) and duration, it is expecting 2022-2023 to most closely resemble the recession of the early 1990s.

Good news of a sort, you might think: in GDP terms, that recession was far less severe than 2008-2009, and also far less severe than 2022.
 
Maybe so, but it felt bad. And economist and writer Duncan Weldon, writing in the Financial Times, observes that 2022-2023 will feel the same.
 
“The hit to household incomes will run far deeper [than 2008-2009 and 2020]. The forecasts show the largest two-year fall in real household disposable income on record,” he noted.
 
So if your portfolio relies heavily on discretionary consumer expenditure, it could be time to re-think things. 

Three thoughts

With all that said, three things appear to be worth pointing out.
 
The first is that we don’t yet know — despite a lot of public posturing — exactly which economic policies our new incoming prime minister will pursue.
 
The Bank has had to assume a broad continuation of present policy, and that obviously won’t be the case. So actual economic outcomes could vary a lot.
 
The second observation is that you don’t fight a recession by raising interest rates and increasing taxes — yet that is exactly what the government and the Bank are doing.

So again, the Bank’s projections could differ from the actual outcomes, should battling recession take precedence over battling inflation.

And the third — and for investors, most interesting — observation is that projections for the UK are much bleaker than for the rest of the G7 economies, as a telling chart in the Financial Times makes clear.

The United States, Canada, Japan, German, France, Italy: all these countries will see high inflation in 2022, and again in 2023. But all look set to experience positive economic growth in 2023.

Only one G7 economy — the UK — will see an economic contraction. As well as levels of inflation far greater than the other G7 economies.

Go global for growth

For investors, then, the message is clear. As I’ve said before, diversifying out of the UK makes good sense, for at least a proportion of your portfolio.

Now, it makes even more good sense.

Low-cost ETFs? Sure. And don’t forget the investment trust sector either: Scottish American, Witan, Mid Wynd International, Murray International, Brunner — all these (and several others besides) provide global exposure to varying extents.

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Malcolm holds shares in Scottish American and Murray International. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

“They say that hard work never killed anyone — but I figure, why take the chance?”

Former American president Ronald Reagan’s comment, back in the 1980s, still brings a smile to my lips. Reagan, it must be said, wasn’t known for being particularly industrious, but he certainly had a talent for folksy self-deprecation.

The trouble is, Reagan’s wry words also sum up many people’s attitude to investing. Again and again, excuses are found not to anything about it — until, sadly, it’s all too late.
 
People’s thirties drift by, and then their forties — and all of a sudden retirement is on the horizon, and the job market, they suddenly find, isn’t as kind to fifty-somethings as it was to thirty-somethings.

What a comfortable retirement looks like

You probably haven’t heard of industry body The Pensions and Lifetime Savings Association: and frankly, unless you’re in the investment industry, there’s no reason for you to.

But this summer, they’ve put out some very interesting projections, based on independent research by Loughborough University. Basically, what they’ve done is some very detailed lifestyle analysis, in order to build up three retirement projections: a ‘minimum’ level of retirement income (including state and other pensions), a ‘moderate’ level of retirement income, and a ‘comfortable’ level of retirement income.

The minimum level of retirement income works out at £10,900 (£16,700 for a couple); the moderate level works out at £20,800 (£30,600 for a couple); and the comfortable level works out at £33,600 (£49,700 for a couple).

And, to stress, these aren’t just ‘fingers in the air’ figures, as such estimates often are: each figure is backed up by a detailed set of assumptions and costings regarding the associated standard of living.

How do you fund it?

Let’s take that comfortable standard of living, for which a single person would need £33,600 a year.

What level of assets might deliver that?

Fund supermarket Fidelity reckons £840,000 — which equates to either a natural yield of 4%, or a safe withdrawal rate of 4%. Looking at my own investments, which tend to be quite income-centric, 4.5% is a figure that I conservatively use as an upper limit in my own calculations, but 4% sounds about right as an average.

Now, if you’re one of those people who has put off thinking about retirement, you’re probably thinking that £840,000 as a savings or investment pension ‘pot’ is wildly unattainable.

Hold on, though. If you knock off the income from the state pension, and the required pension pot drops to around £600,000, using that same 4% figure. Knock off some help from some kind of personal or workplace pension — let’s say a projected pension income of £10,000 — and it drops to around £350,000.

Growth projections

Now, £350,000 is a lot of money. But it’s not completely unattainable. And even making progress towards it has a positive impact on your eventual standard of living.

50% of the way there, for instance, is £175,000 — and using that 4% figure, again, delivers a likely income of £7,000 a year.

Invest £250 a month, for 25 years, with dividends reinvested, and the result is £128,961 — and that figure takes no account of rising stock markets at all, simply assuming that stock markets stay flat, but that investments yield 4%, over the whole 25-year period.

Plug in a (conservative) 2% annual stock market growth rate on top, and the result is £174,115, a figure that’s almost at our £175,000. And of course, the reality could be 3% or 4% — or higher.

And in practice, too, it’s likely that if you can afford £250 a month at the start of those 25 years, you’ll be able to invest rather more as the years roll by, taking you even closer to that magic £350,000.

Make a start

You can play with such projections for hours, of course.
 
All of which will deliver not a single penny of income unless you actually make a start, begin investing, and work to hit whatever monthly investment amount that you’re targeting.

Which takes us back to Ronald Reagan’s words: it’s about making the effort, and sustaining it. And this, I know, can be difficult. Not least because there are so many other things on which to spend your money. Things that are, frankly, very likely to be much more enjoyable: fancy holidays, new kitchens, flash cars, pricey consumer electronics and so on.

And today, you might argue, isn’t the time to start. There’s a cost-of-living crisis, remember?

But remind yourself of what happened to many people’s savings in lockdown: with far fewer things on which to spend money, the figures show that personal savings rocketed.

Just imagine that you can’t spend it. Not that you don’t want to spend it.

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Recession stalks the commodity markets

But take a look at the commodity markets, and there are signs of fears of a different situation: recession.
 
Simply put, given the level of economic activity, global commodity prices might be expected to be higher. Instead, demand is depressed, driving down prices. The suspicion: fearing recession, supply chains are de-stocking, opting for liquidity.
 
And of course, there are clear linkages between consumers feeling pain, and recessionary forces: over 60% of UK Gross Domestic Product (GDP), for instance, is consumer-led. So if consumers aren’t feeling flush — and are cutting back, as a result — then it’s logical to expect a resulting downward pressure on GDP.

Will there be a recession — particularly here in the UK? No one knows. GDP growth is anaemic, to be sure, but it’s still positive. And the next quarterly figures aren’t due until 20 September.

Diverging opinions

At which point, let’s introduce what we economists call an exogenous variable. And it’s one that could well decide the question.
 
It’s a fairly unusual one, too: the Conservative Party’s current leadership election, in which the UK’s MPs and around 100,000 mostly elderly, white, male, reasonably well-off members of the Conservative Party will decide who will become the next party leader, and hence the next prime minister.
 
In one corner we have Rishi Sunak, the former chancellor of the exchequer, and by all accounts one of the leading contenders — if not the leading contender. Basically, he wants to continue with tax and expenditure policies that he was pursuing until his resignation.
 
In the other corner, we have pretty much everybody else — united, it seems, by a common objective to cut taxes. Personal taxes, down. Corporation tax, down. Fuel taxes, down.
 
Who will win? And, having won, will they follow through with what they said on the campaign trail? Who knows?

But what it does mean is that one set of policies is likely to see inflation reduce, and the chances of recession increase — while the other set of policies will see money pumped into the economy from all those tax cuts, running the risk of driving inflation higher, but possibly seeing off the threat of recession.

Preference shares have higher inflation baked in

Why all this matters is that with even-higher inflation — or a recession — on the horizon, investors will want to position their portfolios accordingly.
 
I wrote last October about shares that might prove resilient in times of high inflation, and I’m not going to repeat myself here. The answer back then? REITs — coincidentally the subject of my last article here — looked like a good bet.
 
But here’s another interesting option, one that wasn’t available last October: fixed-income preference shares — shares such as National Westminster Bank PLC 9% Series non-cumulative preference shares (LSE: NWBD) or Lloyds Banking Group 9.25% non-cumulative irredeemable preference shares (LSE: LLPC).
 
If preference shares are new to you, you might want to read up on them: they’re not for novice investors. But suffice to say that there are plenty of preference shares out there — these are just two that are popular with the class of private investors who like to buy these things.
 
Why? Because preference shares are seen as offering a safer dividend than ordinary shares, and a dividend yield that is fixed — essentially as a percentage.

And also — very rarely — because preference shares (very occasionally) can have a decent capital upside.

And one of those occasions might just be hoving into view….

Is opportunity knocking?

Since last summer, LLPC is down 27%. NWBD is down a similar amount, 30%. Other preference shares are also similarly down.

And the reason isn’t difficult to see: inflation. Simply put, in inflationary times, preference shares’ fixed incomes become less attractive, for obvious reasons. So their prices fall. Right now, both LLPC and NWBD are yielding around 7%.

For a safer-than-average income, 7%-ish sounds attractive — at least, if you can stomach the risk of further price falls as inflation climbs ever-higher.

But let’s suppose that inflation doesn’t climb ever high. Let’s suppose that those tax cuts don’t materialise, and that recessionary forces do drive inflation sharply lower. In which case, the prices of preference shares could rise sharply higher.

How likely is such a scenario? You’ll have to ask those 100,000 members of the Conservative Party.

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Malcolm has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Around 15 years ago, I began positioning my investment portfolio for retirement, gradually moving away from a strategy of capital growth to one of income generation.
 
That said, I’d begun income investing some years before that, building up a clutch of higher-yielding income stocks. But now, it was time to get serious, selling funds and index trackers and moving into investment trusts and individual stocks.

And it wasn’t long before I started adding Real Estate Investment Trusts (REITs) to my portfolio, seeing in them a tax-efficient source of stable and resilient income — and one that could often be picked up at a discount to REITs’ underlying net asset value.
 
I’ve not been disappointed. Today, I hold shares in almost 20 REITs — and would be quite happy to see that number grow higher.

So what is a REIT?

REITs aren’t difficult to understand. Essentially, they’re companies that hold property portfolios, from which they earn rental income.
 
You’ve probably heard of the two FTSE 100 behemoths of the REIT world, British Land and Land Securities, each of which holds property portfolios of £4–5bn — generally city centre office blocks, corporate campuses, and shops.
 
Segro is even bigger, with £13bn of property in the form of warehouses and industrial space, with some of the land on which those warehouses sit going back to the 1920s when the business was first founded.
 
The appeal of property as an asset class isn’t difficult to understand, and by buying shares in a REIT, we’re gaining exposure to property and the associated rental income in affordable bite-sized chunks, without the hassle of managing leases and tenants.

Tax break

REITs are even more attractive as an investment proposition when considered from a taxation perspective.
 
Essentially, provided that property companies meet the eligibility requirements for REIT status, those property companies are allowed to become Real Estate Investment Trusts, after which they are allowed to pay out their profits directly to investors without paying Corporation Tax.
 
This — particularly when one remembers that Corporation Tax is rising from 19% at present to 25% in April 2023 — is quite a boon, making REIT status highly desirable for property companies.
 
There are still quite a few ordinary property companies out there, but since it became possible to convert to REIT status in 2007, significant numbers of property companies have done so. And of course, many more new property companies have been established from scratch since then, and these are almost all REITs.
 
That said, buy a REIT and all of this is quite transparent from an investor point of view. The only difference that you’re likely to see is that instead of dividends, payments are in the form of something called ‘Property Income Distributions’ (PIDs), which arrive in your hands in exactly the same way as dividends.

In addition, some REITs pay dividends as well, as they earn profits from activities other than purely renting out property — property development, for example, and providing tenant services.

Property picks to ponder

Although I hold British Land, for me the real attraction of REITs doesn’t lie in such large generalist portfolios — particularly in the present post-Covid era, in which there’s much talk about ‘the death of offices’ and ‘the death of retail’ and so on.
 
Instead, I tend to favour smaller, specialist REITs — although ‘smaller’ needs some clarification: a number of my favourite specialist smaller REITs have market capitalisations over £1bn.
 
There’s Primary Health Properties, for instance, where the property portfolio comprises doctors’ surgeries. Warehouse REIT where the property portfolio comprises warehouses. Tritax Big Box, where the property portfolio comprises really, really, really big warehouses. Regional REIT, where the property portfolio comprises offices in the UK’s regions. Custodian REIT, where the property portfolio comprises industrial and warehousing properties — again, spread out over the UK. And LXi REIT, where it comprises a diverse mix of properties on very, very long lets.
 
And so on, and so on.
 
In short, for a decent income that should prove reasonably resilient — most of my REITs held up pretty well during the recession — it’s well worth taking a look at the world of REITs.

And when doing so, going beyond the likes of Footsie favourites British Land and Land Securities. Particularly when, as now, many of those REITs can be snapped up at a tidy discount to net asset value.

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Malcolm owns shares in British Land, Primary Health Properties, Warehouse REIT, Tritax Big Box, Regional REIT, Custodian REIT, and LXi REIT. The Motley Fool UK has recommended British Land Co, Landsec, Primary Health Properties, Tritax Big Box REIT, and Warehouse REIT. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

“Global shares fall as growth fears rattle investors”
 
“Stock markets tumble over China lockdown fears”
 
“Oil hits £113 a barrel despite emergency measures”
 
“Stocks slump as UK GDP contracts”

The headlines are gloomy. Markets have been nervous since late February. Ukraine, rocketing inflation, soaring energy prices, commodity shortages — and now, here in the UK, the latest GDP figures show that GDP growth has unexpectedly turned negative.
 
Is it any wonder that the Footsie is down 1.8% as I write these words (at the beginning of the week)?
 
At 7,185, it has lost almost 500 points since early February.

Simplistic analyses

Seasoned investors, however, are leery of such headlines, and even leerier of the simplistic analyses that they often denote.
 
Yes, the Footsie is down 1.8%. And yes, today’s GDP figures do show that the UK economy is unexpectedly contracting.
 
But cause and effect are tricky things to disentangle — and while the Footsie is down 1.8% today (Monday), Frankfurt’s DAX is down 2.11%, Amsterdam’s AEX is down 3.1%, and Paris’s CAC down 2.3%.
 
UK investors might have cause to be gloomy about the UK’s economic performance — but not investors in Frankfurt, Amsterdam, and Paris.
 
Far less investors in distant Hong Kong, down 3.4%; or Tokyo, down 3%.

Headlines of hype

At which point, I’ve a confession to make.

“Global shares fall as growth fears rattle investors” This, in fact, is a headline from 19 May.

“Stock markets tumble over China lockdown fears”  Er, 25 April.

“Oil hits $113 a barrel despite emergency measures”  2 March, actually. Incidentally, Brent Crude is $7 higher, today — but I don’t see any panicking headlines.

In fact, day-to-day headlines are mostly just noise. On any given day, markets are liable to be “tumbling”, investors “rattled”, and commodity prices hitting new lows or peaks.

The reality is that, at 7,185, the Footsie is actually higher than it was in December, before market nerves set in, and markedly higher than the 6,844 it stood at mid-July last year. When — you don’t need me to tell you — the economic news was distinctly sunnier.

Indeed, look at a five-year chart, and the Footsie is trading roughly in the middle of its range during 2017–2020, right up until the Covid-induced crash in February and March 2020. But “business as usual” doesn’t sell newspapers, or generate clicks.

What to do? Here’s three thoughts

First, keep a sense of proportion.
 
As I’ve remarked before, stock market events that seemed quite dramatic at the time — 1987’s Black Monday, for instance — barely register on a long-term chart of the FTSE 100 going back decades. The Gulf Wars, the dotcom crash, the financial crisis of 2007: wobbles in the chart, yes, but dwarfed by the Footsie’s subsequent steady growth.
 
And I’ve no doubt that today’s market nerves will be no different.
 
So definitely, don’t rush to sell.
 
Second, decent stocks can be snapped up at reasonable prices. There are still bargains to be had, and shares to be acquired that should have a place in almost any investor’s portfolio. In particular, the UK-focused FTSE 250, to my mind, is looking over-sold.
 
And third, it’s undeniably true that the rush away from stocks that have been regarded as ‘tainted’ on ESG concerns has come screeching to a halt. Far from ditching these stocks in order to burnish their ethical and sustainability credentials, institutional investors are instead looking to load up on them. (Me? I never sold them in the first place.)
 
Oil and gas stocks, defence stocks, mining stocks — even, oddly enough, tobacco stocks: all up 20%, 25% or more. No longer unfashionable or unwanted, they’re delivering decent profits and a tasty income stream, with arguably more upside to come.
 
So if your portfolio is light on such stocks, now could be the time to redress that.

Gloom? No way.

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Views expressed on any companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.