Cost-of-living crunch set to hit investment plans

Financial advisers expect clients to invest less this year as inflation eats away at their disposable income. 

Investors are set to put away less into the market as the highest inflation for 40 years eats into disposable income.

Schroders, the fund manager, canvassed 225 financial advisers in the UK and found that 69% expected their clients to adjust their investment plans due to the cost-of-living crisis.

Inflation in Britain hit 9.1% for the 12 months to May, led by rising fuel, electricity and food costs. The Bank of England expects it to peak at 11% this year and then settle at its target 2% in around two years. However, wages have risen around 4%, meaning that people have less money to invest each month.

A tough economic backdrop, coupled with falling stock markets, means that investor sentiment is extremely bearish.

Schroders found that bearish sentiment rose from just 12% of those surveyed in November 2021, to 57% in May 2022. Only 7% of respondents were bullish in May 2022, compared to 41% last November.  

• What an inflation shock really looks like
• A tactic to ride out the inflation storm using these funds and trusts
• US stocks enter bear market, but there’s a silver lining for funds

Around two-fifths of advisers reported in May 2022 that they expect equity returns to be lower than historical averages over the next five years, compared to 20% in November 2021.

Professional investors are also extremely pessimistic. Bank of America’s “bull & bear” indicator, which measures investor sentiment, is signalling extreme bearishness, with a score of zero.

It has only hit this level in August 2002, July 2008, September 2011, September 2015, January 2016 and March 2020.

However, when investors are fearful, it is often a good time to buy shares. Bank of America calculated that when its bull & bear indicator hit zero, three-month returns afterwards tended to be strong, except in 2002 when there was a double-dip recession, and in 2008 and 2011. Its sentiment reading is therefore a strong buy signal, it argues.

• Recessions are becoming more likely – here’s how to invest
• Why the world’s biggest fund manager isn’t buying the dip

Doug Abbott, head of UK intermediary at Schroders, said: “The results of this year’s Schroders survey, which broadly highlight the return of market uncertainty, will come as little surprise to anyone given the macroeconomic and geopolitical context that has characterised the year to date.

“As financial advisers seek to navigate this, they will be keen to identify ways in which they can mitigate against risks and capture market opportunities where they can for their clients. It is therefore pleasing to see they are continuing to recognise the benefits of outsourcing their portfolio management, with the survey showing the number of advisers reporting that they have increased their use of outsourced solutions has risen.”