With rising inflation and interest rates, how might investors change their strategies? Giles Coghlan, chief currency analyst, HYCM, takes a view and and considers what else might be affecting their investment outlook.
The most recent Bank of England’s (BoE) Monetary Policy Committee meeting was very eventful indeed, in the world of monetary policy, as it the voted in favour of another interest rate hike, hot on the heels of December’s increase, as inflation forecasts continue to climb. Does any of this come as a great surprise? Perhaps not. However, investors remain nervous about their ability to withstand months more of pandemic upheaval.
To understand how investors are managing and mitigating the effects of the pandemic in 2022, HYCM commissioned a new body of research* amongst 815 UK-based investors – it found that just 43% were confident they will emerge from the pandemic in a stronger financial position. Significantly, this figure marks a 10% decrease from the figure in 2021. Delving in a little deeper, the research also uncovered that 36% of investors’ strategies were impacted by the BoE’s interest rate increase in December, with those surveyed anticipating that further hikes in the pipeline will affect their investments even more.
This begs the question: how will investors devise their strategies in 2022 to account for this outlook, and what other factors are driving their activities?
As Omicron fears fade, will supply chain woes take over?
Throughout the latter half of 2021, media fanfare suggested that investors would be ruled by a surge in Omicron cases and escalating supply chain issues. Yet, HYCM’s research suggested that quite the contrary, investors weren’t exactly stirred by the events.
According to the survey, just 28% of investors said that the risks associated with the Omicron variant of Covid-19 prompted them to re-think their strategy. Perhaps not the most surprising news to hear heading into 2022, given that fears about the strain seem to be dwindling in both the public consciousness and amongst leading public health figures due to research suggesting Omicron causes milder symptoms. Likewise, government guidelines are also easing in the UK alongside the BoE’s quantitative tightening measures, which should give investors fewer things to worry about.
Perhaps more surprisingly, the research found that even fewer (26%) investors were concerned about the prospect of continued supply chain bottlenecks. Very curious indeed, given that experts are suggesting that the delays caused by the pandemic last year are likely to continue long into 2022. At the moment, even big tech titans like Apple and Tesla are predicting that the worldwide traffic jam is likely to continue, with the electric car manufacturer in particular taking measures to address this, such as increasing vehicle prices and substituting alternative chips for those that are in short supply to cope with demand.
Whatever special measures organisations undertake the mitigate supply issues, one thing is for certain: chronic delays could fuel inflation further and even change the very nature of world trade. To this end, it is a relief to see that those investing the most money appear to be attuned to these problems, as 41% of those with investment portfolios over £500,000 said that supply chain issues have driven them to act.
Investors are looking to cash savings and stocks
So, how do these insights translate into asset allocation? According to the research, the most common asset classes right now are cash savings (76%), stocks and shares (48%) and property (31%). In practice, just less than half (45%) of the investors surveyed said that they would be putting more of their money into cash savings during 2022, meanwhile over a third (32%) said they plan to purchase more stocks and shares.
In the current climate, others preferred to hold their position: 45% said they would hold steady on their position on cash savings and stocks and shares – elsewhere, the majority (61%) said they would not waver on their property investments.
With all this in mind, something worth returning to is the fact that across the globe, interest rates are rising. Indeed, as central banks act against inflation and ‘normalise’ their policies, conditions will become much tougher for companies. This translates into higher mortgage repayments for consumers, as well as making the prospect of financing pre-existing debts much more difficult. In short, organisations may find their profitability hindered, and this is something that investors should consider if they are putting more of their money into stocks, or even holding their position. Any sharp correction could result in investor pain, so investors would do well to monitor the changing monetary policy of central banks across the globe.
Quietly confident?
Despite the various challenges that investors face throughout the year, many are self-assured about their ability to account for any trials and tribulations heading their way.
Ultimately, HYCM’s research revealed that the majority (70%) felt confident about their ability to manage their finances and investments in the current climate. Meanwhile, exactly one third (33%) said they even see the pandemic as an opportunity to invest in new and emerging assets that stand to thrive in the new normal. So, it seems like one thing is for certain: whatever events hit the markets this year, investors aren’t shying away.
*About the research: The market research was carried out between 11th and 17th January 2022 among 2,000 UK adults via an online survey by independent market research agency Opinium.
[Main image: jose-martin-ramirez-carrasco-unsplash]
