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Research suggests investors fear inflation may hit returns for years to come

Inflation fears for investors

A majority of investors believe the soaring inflation will erode stock market returns for years to come.

In a poll of 1,000 ISA holders commissioned by Freetrade and InvestingReviews.co.uk, the average investor expected to make returns of 5.8% pa over the next three years. Currently, inflation is running at 6.2% with the Bank of England warning this will climb to 8% by June.

This raises the prospect that ISA holders may find it harder to make real gains in the short-term. However, leaving money in cash savings potentially leaves someone even more exposed, as they are effectively locking in a loss in real terms with the best rates at just 0.95%.

Despite creeping interest rates and increased market volatility, some investors still remain optimistic about the future with around 1 in 5 (19%) anticipating jumbo-sized returns of 10% or more annually.

The research also asked respondents about their investment strategies for 2022. While growth stocks like Tesla and Apple proved attractive to investors during the pandemic, recent volatility may have some thinking more broadly.

Less than a third (31%) thought single stocks promised the best future returns, compared to almost half of respondents (49%) who believe that low cost funds were likely to perform the strongest. Just 9% thought bonds would offer the more attractive returns.

The poll also found that confidence in UK equities may finally have turned a corner following record outflows of £5.3billion in 2021. Now, 1 in 5 of those surveyed said they intended to increase their exposure to domestic assets with just 4% saying they would reduce exposure.

Dan Lane from Freetrade commented: “Maybe the UK market’s relatively cheap valuation is proving too hard to resist, or maybe the allure of US tech is waning slightly. Whatever the reason, the UK seems to be back on the menu in 2022. Investors will still need to maintain that long-term view though.

“The wild swings over the past two years might have typified some investors’ entry into the market but the longer-term story has fewer episodes like that. What is clear though, is leaving your money in a cash account is really just not an option for anyone hoping to generate meaningful returns. It doesn’t carry the same risks as investing but cash drag is real.

“Inflation might concern some investors but that should make them look at their assets and how well-prepped their companies are to take charge of their own destiny regardless of what’s happening in the global economy.

Top 3 tips from Dan Lane at Freetrade on how investors can weather the inflation storm:

  1. Think about your asset mix. Inflation is constantly eroding the value of what you can buy with your money. It’s worth noting that inflation isn’t always terrible for stocks. It can even be a positive thing. In fact, equity valuations have tended to hold up well historically if inflation hangs around in the 2-4% range. Granted, the latest reading is above that range but reacting hastily to that reeks of short-termism. Make sure your companies are in control of their own destiny and stick to your knitting.
  1. If you haven’t already done so, diversify your stocks now. While equities in general perform quite poorly in high and rising inflation environments, there are some potential sectors investors can and should look to diversify into, that will hedge them against inflation. For example, commodity producers who can raise prices at source and keep a healthy pipeline of customers can be a good way to maintain margins too. Some of the precious metals miners have got a lift as investors eye up this trade.
  1. Now more than ever, investors need to be able to spot pricing power when it comes to picking stocks. Pricing power exists when companies are able to pass on increases in input costs to consumers and maintain profit margins. This is very important in today’s supply constrained global markets where input cost pressure is higher than it has been in decades.

Simon Jones, CEO of InvestingReviews.co.uk, said: “It’s unsurprising to see most investors being guarded in their forecasts for the future.

“And while recent market volatility, interest rate hikes, and soaring inflation all threaten to erode gains in the short-term, history has taught us that the ups and downs of the market tend to iron out over time.

“With all the current uncertainty in the world, a well-balanced portfolio is still the best defence against inflation.”

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