Indeed, the stock market’s past performance shows that periods of lacklustre returns have always been followed by superior growth rates. Investors, though, seem to have forgotten the inherent cyclicality of the economy and stock market.
In Questor’s opinion, the mood among UK investors is far too downbeat given the potential for share prices to rapidly rise as persistently high inflation abates, monetary policy loosens and economic growth reverts to its long-term average.
Although it will inevitably take time for investors to abandon their bearish stance towards UK-listed stocks, improving financial performance among domestically-focused stocks is likely to prove irresistible to prospective buyers.
At the same time, declining returns on cash as interest rates fall will encourage investors to purchase riskier assets such as shares. This is set to further boost the stock market’s performance, with investors typically becoming more bullish as share prices rise.
Of course, those investors who ditch cash and bonds for stocks should be careful when deciding which companies to purchase.
Although an improving economic outlook and lower interest rates will mean even highly-indebted and lower-quality firms can deliver improving financial performance, investors should purchase companies with sound finances and a clear competitive advantage. They should also diversify across various sectors to reduce overall risk.
But the biggest threat to investors at present is persevering with perceived low-risk assets such as cash. Not only will they find their returns decline over the coming years, they are also likely to miss out on significant capital gains generated by the stock market. Therefore, in Questor’s view, investors should shift their asset allocation towards the stock market as a new era of economic growth begins.
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