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What lockdown could mean for stock markets and interest rates

How to navigate your finances through the second national lockdown.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Boris Johnson announced his intention to impose a second lockdown on Saturday evening. FTSE 100 and FTSE 250 futures didn’t react at the time, and the indexes haven't made any major moves this morning.

More details are due to be published later today, and parliament will vote on the proposal of a second national lockdown on Wednesday. If it’s passed, lockdown will start on Thursday.

Schools are set to stay open and while so far it sounds unlikely to be a like-for-like lockdown, lots of businesses on the UK stock market will be affected.

Before you consider making any changes to your savings and investments, it’s important to look at the whole picture.

This article isn’t personal advice. Make sure you ask for financial advice if you’re not sure what, if anything, you should do.

Government support

The share price of a company will move up and down depending on how people feel about it’s future prospects. A second lockdown is certainly going to hurt some businesses already struggling, but the government knows this too.

We’ve seen a range of support for businesses this year. Measures have been broad – lots of companies were able to defer their VAT payments – as well as targeted to certain sectors, like ‘Eat out to help out’.

Beyond a furlough extension, we don’t know what the government is planning to help combat the economic impact of a second lockdown.

There’ve been arguments the government needs to do more. Remember the proposals go to vote on Wednesday – MPs might push for extra support before backing the proposals.

The Bank of England’s role

Earlier this year the Bank of England (BoE) cut interest rates to 0.1%. Lowering interest rates means it’s cheaper for business and people to borrow. Borrowing can increase the amount of money in circulation and help support the economy.

There might not be much room for interest rates to be lowered moving forward. However, some countries have already started using negative interest rates. The BoE has signalled that we won’t need negative interest rates. But this was before the second lockdown was announced. It’s also been speaking to banks to see if they’re ready to implement negative interest rates.

Interest rates generally have a negative correlation with stock markets – as rates fall, markets are expected to rise.

Negative interest rates – what do they mean for investors?

For lower, or negative, interest rates to work, banks have to be willing to make loans. The BoE’s been working with banks here too.

The BoE is also responsible for quantitative easing (QE) – injecting money into the economy. The bank increased it’s QE program by £100bn in June in in response to the pandemic. It’s yet to announce any extra stimulus after Saturday’s announcement.

What should savers and investors do?

Just because you can sell your investments quickly doesn’t always mean you should. We think it’s best not to make big financial decisions based on fast flowing news and impulse.

A second lockdown will certainly have some kind of effect on UK businesses, but there’s also so much that’s impossible to know right now.

The government could step in with more support, as could the Bank of England. MPs might vote to block the proposal, and there’s also speculation a vaccine could be ready for early December. Any or all of these could quickly change how investors feel about the UK.

Whatever the weeks and months ahead bring, we’re almost certainly going to see some volatility in markets. Now’s a great time to make sure you put the principles of diversification into practice. Own a wide range of investments so you don’t have too much or too little in a specific area.

If you’re comfortable building your own portfolio and feel like you need to spread your investments a bit wider, you could take a look at our Wealth Shortlist. If you’re not sure if you’re on the right track and want a second opinion you can get in touch with one of our advisers.

All investments fall as well as rise in value so you could get back less than you invest.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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