Where are your investment returns going to come from in 2022?

By Simon Lenney1st February 2022

As an experienced investor, you may find yourself facing an important question this new year: amidst an uncertain and volatile savings and investment landscape, where are your returns going to come from?

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Economies across the globe have witnessed the extreme impacts of the Coronavirus pandemic since its emergence almost two years ago, with investors in turn facing all-time low interest rates on cash – the Bank of England, as you will likely remember, dropped their base rate to a record-low 0.1% in March 2020 – and severe fluctuations within the equities market.

And now, soaring inflation is causing further repercussions, with figures from the Office for National Statistics (ONS) showing the Consumer Price Index (CPI) rose to 5.4% in December 2021, an almost-30 year high.

Whilst the Bank of England increased their base rate to 0.25% in December 2021 – with analysts expecting to see this rise further to 1% by the end of 2022 – there remains a clear disparity between the interest rates offered on cash savings and the rate of inflation. 

This disparity is already providing investors holding cash with a negative net return on their savings, and this will likely only worsen, as inflation is expected to reach 6% by the second quarter of 2022. Furthermore, it’s anticipated that inflation in the UK will also be impacted further by changes related to Brexit influencing increased costs across the manufacturing sector.

Even with the tax-efficient benefits of an ISA wrapper, those investors subscribing their ISA allowance to a Cash ISA run the risk of the value of their capital being eroded over the long term, with diminished purchasing power in the real world. 

As is typically the case, instant-access Cash ISAs and traditional savings accounts have the lowest rates to offer – at the time of writing, the highest rate available on an instant-access Cash ISA is a far-below inflation 0.61%. But even for investors willing to lock their capital up for two or five years, current rates remain unable to provide a net positive return on cash savings. 

Though the importance of having some cash savings is clear – we may all have instances where instant-access to some of our funds is imperative – it’s unsurprising in the current climate that experienced investors are searching for investments to add to their portfolio that, whilst higher risk with return on capital not guaranteed, have the potential for strong capital growth. 

For many experienced investors, this may mean turning to equities first and foremost. However, global equity markets are being impacted by fears of higher interest rates across many countries, as their central banks endeavour to cope with rising domestic and global inflation.

With this in mind, it’s now the advantages of alternative investments, which bear no correlation with the Bank of England's base rate or the fluctuations of the equities market, become apparent for experienced investors.

 

Adding alternative investments to your portfolio

It’s important to remember that diversification is crucial for an investment portfolio. One of the key ways to spread risk and work towards a number of different investment goals is to have a well balanced portfolio made up of a variety of assets. 

And now more than ever, experienced investors should consider adding alternative investments into this mix. Research from NextGen Cloud found that 43% of investors surveyed – all with a portfolio value in excess of £10,000 – were more inclined to consider alternative investments in the wake of the economic impacts of Coronavirus.

With the addition of soaring inflation, it’s clear experienced investors must look beyond cash and equities, looking at whether alternatives could be valuable additions to their portfolio. 

In particular, property bonds – which allow experienced investors hands-off access to the ever-popular property sector – could offer inflation-beating potential returns alongside exposure to an asset that has performed exceptionally well throughout Covid-19. 

A strong, excelling housing market, paired with the clear need for small and medium-sized housebuilders to play a larger role in housing delivery in the UK, could make property bonds a crucial consideration for investors. 

Providing opportunities to invest completely tax-free  when utilising an Innovative Finance ISA (IFISA), SIPP or SSAS whilst targeting above-inflation returns often in excess of 7%, they could be extremely beneficial in balancing low-yielding cash and volatile equities. 

 

Generating inflation-beating potential returns in 2022

As we continue to live with the threat of further Coronavirus outbreaks, which will continue to have ongoing impact on equity markets – as Governments will likely react with additional measures, such as those introduced to deal with the Omicron variant at the end of 2021 – and inflation continues to soar, experienced investors must explore all possible options to ensure their capital is working hard. 

And with an attractive range of alternative investments now readily available for those investors willing and able to take on the associated risks, it’s easier than ever to build a diversified portfolio that can do just that.