In the recent Autumn Budget, the Chancellor Philip Hammond reported slow productivity, which may be cause for some to worry about what the effect would have on their UK investments. As you would expect, there have been a lot of opinions being expressed both in the media and at a political level. So, this week, we decided to explore this subject further by giving investors an insight into this area…
Productivity and GDP
Productivity is linked directly to GDP (Gross Domestic Product); this is the best way to measure output in terms of both labour and capital and measure a country’s economy. Essentially, it determines the standard of living, i.e. how people can get what they want faster, or more of what they want in the same time.
Over the long term, improving productivity – the amount of output produced per hour worked – is the best way to boost pay and increase living standards. When measuring productivity and predicting forecasts, economists will look at revenues, labour growth, wage levels and technological improvements. When physical productivity causes the value of labour to increase, wages will tend to increase too. In simple terms, the greater the gains in productivity, the greater the growth in GDP.
However, accurately measuring productivity is very complex. With the increase of service-based businesses, outputs are more effectively measured as inputs. Some economists suggest that we are not measuring the quality of such inputs properly, i.e. enhancements to services. There is no simple solution to increasing productivity, but there is an increasing urgency to grow GDP.
So, how does productivity affect your investments?
Companies have tough decisions to make in how to deploy their revenues. For example, choosing between increasing their workforce or investing into new technologies. When a company struggles to raise capital to invest into their business, this can have a knock-on effect on company infrastructure, profits and growth. This affects shareholder dividends, as well as the company share price. When a company is investing into growth, they are seen in a better light by investors. The more efficient a company is, the more likely stocks and share prices will rise. However, in our current complicated economic climate, there are a lot of other factors that will affect the amount of investment into a company, i.e. the level of confidence in the country’s governing system and interest rates.
The most sensible approach to investing should always be in making sure you that have a diverse portfolio, not just in terms of asset type like equities or bonds, but also different geographies. In today’s globalised economy there can often be significant divergence in countries’ respective economic performance. This performance obviously has a significant effect on the firms operating within that country and their capacity to generate profits and shareholder returns.
Investing across different regions or geographies is the easiest way to limit risks of economic downturn.
Here are a few tips for you to consider:
• Spread your wealth – don’t put all of your money into one stock, sector, region or asset type.
• Check that your financial planner that any investment portfolio is suitably structured for your risk tolerance and financial situation.
• Review your investment strategy with your financial planner.
If you would like a review of your current investments or you would like to create a safer investment strategy, please speak to one of our financial planners.