For the first time since the 1980s, inflation has soared towards double digits in much of the developed world. This has left wealth managers scrambling to minimise the impact of rising prices on the value of clients’ portfolios and, equally crucially, their bottom line. Going forward, wealth managers must be able to clearly explain how they are insulating clients from this resurgent threat.
2022 was a tough year for investors as asset prices plummeted while any gains were mostly outpaced by inflation. Indices such as the S&P 500 fell by around 19% while UK 10-year government bond yields shot up nearly 3%, resulting in capital losses. Much of this was caused by central banks’ aggressive response to inflation as they battled to bring it back to earth. Despite early signs that inflation is slowing, GlobalData’s Macroeconomic Data forecasts inflation above central banks’ targets in 2023, including 7.1% in the UK, 6.3% in Germany, and 3.7% in the US.
The extent that further rate rises are needed to curb inflation is hotly debated. Inflation expectations need to be controlled to curb wage growth filtering through to prices more consistently in the coming years. Whether or not enough has been done, investors will navigate high inflation, potential recession, and interest rate risks in 2023.
Wealth managers are responding to these threats. A net 46%, 40%, and 39% of wealth managers are set to increase allocations to cash or near-cash products, equities, and alternative investments respectively according to GlobalData’s 2022 Global Wealth Managers Survey.
The three biggest reasons for near-cash investments are the expectation of higher rates in the future, preparation for future investment opportunities, and general risk aversion. The attraction of these products is understandable, with rising interest rates and volatile markets creating an incentive to avoid potential short-term losses as returns on safer assets improve.
As for equities, capital appreciation is the main driver for investment in this asset class. This is swiftly followed by asset diversification concerns, with geographic diversification and inflation protection also major considerations. As fewer rate shocks are expected in 2023, equities should provide investors an opportunity to make positive real returns after inflation and diversify across regions to minimise inflation and geopolitical risks.
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Demand for alternative investment products is also driven by returns, although notable motivations include lower correlation to financial markets and higher volatility. This shift shows a concerted effort to protect clients’ portfolios from potential threats traditional assets are more immediately exposed to, including inflation and interest rate risk.
In 2023, wealth managers will be judged on their ability to protect clients’ portfolios from inflation and generate positive real returns. Careful reallocation and diversification to safer assets and jurisdictions will be necessary to minimise risk, but equities and alternatives will play a key role in efforts to beat inflation. The year is likely to see falling performance fees and profitability, but it is times like these when managers can best demonstrate the value of expert advice. Managers should judge their own success this year on the metric of client retention, mitigating the negative impacts on performance. 2022 was a difficult year, but unfortunately 2023 will not be much of an improvement.