Category: Business Solutions

From soaring market returns, solid and dependable government bonds and even cash protected in some way from the debilitating impact of inflation in the past, investors are now left with a bleaker future ahead, investment managers have warned.

The regulator has backed this glum prediction with the Financial Conduct Authority’s latest consultation paper confirming its estimate for returns over the next 10 to 15 years from investment products was around the 5% mark.

It said projection rates provided for investors to see how their money might grow should not exceed this measure.

Rather than shouting down a pessimistic regulator, investment managers have instead agreed, noting with a glum realism that things are indeed different this time but alas, not for the better.

Tom Becket, chief investment officer at Psigma Investment Management, points to three key factors that hinted at what the future holds.

Rock bottom interest rates and bond yields, expensive equity valuations and a prediction of sluggish global growth over at least the next decade all suggest returns will remain lower over the next 10 years than they have been over the previous 10.

He says: “Our own in-house forecast is for equities to return just under 5%. The FCA is absolutely correct on this call.

“My view has always been to under promise and over deliver. It’s time to be realistic and I think our industry has been very good at over promising and under delivering in the past. I think being realistic is particularly appropriate at this point in time.”

The globe was bloated by booming economic growth over the latter half of the twentieth century and the early years of the twenty first, and equity returns over a long 40-year time frame came in at around 7%.

Future global growth even after an economic recovery, is expected to remain sluggish, if it exists in any meaningful way at all, and consensus says 7% equity returns will be but a pipedream for future investors.

Darius McDermott, managing director at Chelsea Financial Services, says: “I think 5% is a very realistic bet, you might hope to do better over the long term.

“But over the 7% return period we have had strong global growth and a number of very experienced managers have come to me and said growth will be much lower in the future, and so you should expect lower returns from equities.”

The FCA’s growth prediction was based on a portfolio made up 60% equities, 20% gilts, 10% corporate bonds, 7% property and 3% cash and money market funds.

For products without a tax exemption estimated returns were even lower at 4.5%.

Put fees into the mix and returns would drop further still – although of course lowering fees is also something the industry is working on.

So, it seems the low yielding world we have lived in since the financial crisis is not going to be the short-lived beast many had hoped.

However, while returns look likely to remain significantly lower than many have been used to in the past, you will still be better off in the markets than outside holding cash.

Tom McPhail, head of policy at Hargreaves Lansdown, says: “In spite of all the economic and political fluctuations and uncertainties we have experienced in recent years, the FCA is still comfortable with the view that an investor holding a typical mixed portfolio predominantly invested in equities, can expect to enjoy a real return of around 3% a year.

“For any investor fearful of committing their savings to the investment markets, this is an important message: if you want to make your money grow over the long term, take advantage of the tax breaks on offer and invest in the stock market; holding your money in cash is fine for the short term but over time it is likely to be eroded by inflation.”

Want to turn £1 into £300? Invest in equities. Want to turn £1 into £22,000? Reinvest dividends – such is the power of compound interest.

These figures aren’t plucked from thin air – they represent the movement of the US stock market in the 20th century. Albert Einstein called compound interest the eighth wonder of the world – saying: “He who understands it, earns it, he who doesn’t, pays it.”

Warren Buffett, the sage of Omaha himself described investing to Forbes magazine as “forgoing consumption now in order to have the ability to consume more at a later date”. Compounding interest is when you pay dividends back into the capital sum, allowing that capital sum to grow and in turn the dividends will grow too. These larger dividend payments are invested back in to the pot, and the process repeats itself. Reinvested dividends have been the single biggest driver of equity returns in the UK, the US and Europe over the long-term.

If you want to double your money in half the time, you cannot simply rely on returns from investing in local cash deposit accounts.  You have to invest in the open financial markets and purchase good quality stocks. Some Private Investors who are actively investing in the stock market tend to forget or overlook that income-oriented strategies can also be a source of capital growth. Dividend-paying stocks benefit from the compounding effect that occurs over the life of the investment, which explains why dividend-paying stocks tend to outperform.

Dividends can also help act as a barometer to a company’s financial health. Simply put – if a business has enough cash on its books to reward shareholders it probably means it has low debt levels and is in good shape. Take HSBC Bank PLC for example.  You can purchase HSBC PLC Shares today on the London Stock Exchange for £5.18 per share.  HSBC PLC in turn are paying shareholders an annual dividend return of 6.97% GBP.  Alternatively if you held an HSBC Bank savings account, the interest you would earn in a year would be less than half of the dividend HSBC is paying to shareholders in way of dividend payments.

In times of low interest rates this method is not fail safe however as many large corporations are loading their books with cheap debt to boost dividend payments. In emerging markets where corporate governance is not as prevalent as in developed markets, dividends also indicate that the company’s interests are in line with shareholders’.

Inflation Proof Your Portfolio

Dividends not only maximise your growth potential, they help protect your portfolio from the erosive nature of inflation, this is a particular issue for savings account holders in Turkey, where inflation tends to run high with the weakening of Turkish Lira. Equity income should provide a level of protection against inflation. While quantitative easing remains a prominent feature in many leading economies, we think that inflation poses a risk to investors no matter where they reside. While income returns on traditional assets such as government bonds and cash deposits remain low, and in many cases are below the rate of inflation a well-managed equity income strategy which offers both stability and shield against inflation should be an attractive option for investors with long-term horizons.

If you would like to receive more information on how you can double your money and increase your future purchasing power, Contact us here