The next 10 years will be more positive for both stock markets and fixed income investors, digital wealth management firm Moneyfarm has predicted.
Developed equity markets is likely to be the best performing asset class, with annual return of 8.3%, with emerging market equity and emerging government bonds set to be the next two best performing asset classes, with annual returns of respectively 6.6% and 6.4%.
More broadly, fixed income should experience a revival, with the different categories of bonds delivering returns of at least 3% each year.
Bonds have experienced a resurgence in recent times due to higher interest rates, but delivered a poor performance in 2022. For example, UK gilt yields surged around 5% following the Autumn mini-Budget in October 2022.
Total returns of different fixed income sectors in 2022
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Source: FE Analytics
Many stocks and shares ISAs also suffered an overall loss last year, something that is in direct contrast with savings rates that reached heights unseen for more than a decade. Some instant access cash ISA deals now offer more than 3%, but savers agreeing to a fixed rate can enjoy rates of 4% or more.
Moneyfarm warned, however, that parking money in cash has not historically been the best course of action. From 1930 to 2022, there were a total of 71 positive and 21 negative years for stock markets, which have typically outperformed.
Chris Rudden, head of investment consultants at Moneyfarm, said: “A market downturn should not be seen in a negative light entirely. There is, after all, an opportunity to capitalise on lower valuations.”
The wealth management firm does not expect cash ISAs to offer similar annual returns over the next 10 years as stocks or bonds.
The real value of £100,000 left in an account could fall to £78,000 in 10 years with the current trajectory of inflation. The firm forecasted levels of inflation for 2023 and 2024 of 6.7% and 2.4% respectively. Inflation should then return to 2% from 2025 onward.
Source: Moneyfarm
Rudden added: “Cash ISAs have their place for short term needs and can be useful for those ‘raining day’ events, however, history has shown that investing in stocks and shares ISAs tends to provide investors with a better outcome on longer term savings.”
Commodities and real estate were the only asset classes that should offer returns below the Bank of England’s inflation target of 2%, with annual returns of 0.3%.