As inflation remains above 2%, interest rates have failed to keep up. This will continue to drive investors towards financial assets more closely related to real assets like housing or gold, a new GlobalData Inflation Outlook Executive Briefing suggests.
As money becomes less valuable, investors will flock to equities, mutual funds and ETFs, particularly those in higher growth markets like India and the US. India achieved the highest global growth rate among developed and emerging economies at 6%, and whilst the US remained below the global average, it significantly outperformed the Eurozone.
The nation also faces a lower risk of recession, with base rate cuts forecast for later this year based on supply-side growth, making it more attractive than other developed economic regions.
This holds true for retail investors as well as institutional ones. In 2022, 55% of retail investment portfolios were held in equity-based investments although savings accounts made up the largest single investment. Perhaps surprisingly, the drop in savings accounts allocation predominantly went to bonds and ETFs (which saw a 3.2% and 3.8% increase, respectively), suggesting that whilst the less affluent are moving towards risker investments, they are not necessarily willing to engage in active wealth management.
Cryptocurrency is also expected to remain out of favour despite the January approval of the Bitcoin spot ETF.
Despite these moves to combat inflation’s reduced returns, it remains the number one cause for concern for wealth managers. 69% of those GlobalData surveyed reported it as a threat to their business, beating out the Russian invasion of Ukraine, cybersecurity and disruptors in the sector.
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One of the key worries for wealth managers is the higher churn rates that are associated with lower returns. As inflation rises, it becomes harder to see meaningful returns without increased risk tolerance, which comes with its own challenges. The report recommends that wealth managers reach out to clients regularly, particularly in the US given historic runs on private banks.