Investors expecting to make returns comfortably ahead of inflation in 2023

The bullish outlook for the stock markets sits in stark contrast to the economic storms brewing, writes Sam Benstead.

British investors expect to make double-digit returns this year, even as higher interest rates begin to suck the life out of the economy.

Natixis, the fund manager, found that UK investors hoped to make 9.3% gains ahead of the inflation rate, which currently sits at 8.7%. This implies a total return of around 17%, assuming inflation averages about 8% this year.

Including dividends, global shares, as measured by the MSCI World Index, are up 7% year-to-date. The FTSE All-Share is up 3% and the S&P 500 index of large US companies has risen 8%, in sterling terms.

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The rally in US shares this year has been driven by just a handful of giant technology stocks which are seen as winners of the emergence of artificial intelligence (AI). This could make the rally unsustainable if the hype around AI dies down, but more technological breakthroughs may power investors to their lofty return targets for 2023.

Natixis’ survey of around 8,500 investors from around the world with more than $100,000 (£78,000) in investable assets, conducted in March this year, found that 69% globally have a positive outlook on the state of their finances, which increases to nearly three-quarters (73%) of UK investors.

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The general positivity among investors contrasts with the challenging outlook for the global economy. High inflation and high interest rates are leading to concerns about recessions, with the UK battling a particularly stubborn inflation problem and also facing an economic shock linked to higher mortgage rates.

Natixis says that therefore there is a critical lack of investment knowledge among private investors, as they expect to make high returns above inflation even in this backdrop.

“Investors around the world list rising interest rates among their top investment concerns but only 2% of the 8,550 individual investors surveyed correctly identified what a rising rate environment means for their investments,” it said.

Over the longer term, Natixis found that investors globally expect 13% returns above inflation.

“While expectations are still high, the gap between what investors want and advisers say is realistic, has narrowed from 61% in 2021 to 42% today,” it said.

Against this backdrop, investors plan to increase holdings in bonds. Globally, 47% of individual investors say they have more confidence in bonds to outperform in 2023 than equities compared to just 30% in the UK.

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In the UK, 25% plan to increase their bond investments in response to rising rates – far lower than the 46% globally who are increasing investments in bonds.

Despite last year’s downturn as most major indices posted double-digit losses, respondents around the world say they generated positive returns of 1.9% on average. Investors in the UK came closest to a loss, reporting that they generated an average positive return of just 0.6%.

Most investors anticipate a return to the bull market that delivered average annual total returns of 14.6% from the S&P between 2012 and 2021, including gains of 30% in 2019, 18% in 2020, and 28% in 2021. UK investors are a little less optimistic and expect 8% returns over the long term.