Confidence has Waned but Appetite for Risk Remains

Overall investor confidence has slipped over the past year but appetite for riskier assets remains strong

Holly Cook 23 March, 2010 | 3:32PM
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The Government's pre-Budget report is only hours away and the next General Election is mere weeks from us, so it should come as little surprise to learn that taxation, taxation, taxation are the words on investors' lips. When asked what they consider to be the biggest threat to their finances, 45% of active investors said changes in the tax rates were the biggest threat, when quizzed by Morningstar company Hemscott on behalf of the Association of Investment Companies (AIC).

The research carried out last month reveals that, of more than 1,000 active investors, 22% named the increase in income tax to 50% as the biggest threat to their finances, while another 22% said they expect additional tax hikes following the 2010 General Election to put further pressure on their income.

Overall confidence amongst active investors has fallen slightly over the past 12 months--during which we've seen leading global indices surge 50% and more--with only 40% saying they will increase their stock market investments this year, down from 50% in March 2009. However, while 40% are planning on delving deeper into the markets, a fractionally larger proportion (46%) do not plan to make any changes to their investments and only 12% plan to decrease their investments, suggesting that after a year of almost unprecendented rallies, investors by-and-large feel comfortable with their current asset allocations. The research shows that current low interest rates combined with optimism about the markets provide the main impetus for active investors to increase their efforts this year.

For those worrying about a double-dip in the stock market, it seems you're not alone but you're certainly in the minority: just 9% of active investors surveyed cited a possible stock market crash as raising concern about their finances, while similarly small percentages listed inflation and the possibility of UK credit rating downgrade.

Investors continue to have a home bias, with 64% saying they are mainly investing in the UK. Interestingly, an increasing number are putting money into emerging markets, perhaps indicating the increasing risk appetite of investors and the popularity of these regions--13% of active investors are mainly investing in emerging markets versus just 6% a year ago, while 10% are investing predominantly in Asia Pacific (up from 4%), 6% in Europe and 3% in the US.

Investor confidence in the UK housing market has improved over the past 12 months, explaining why the 54% who said last year that they expect equities to outperform property has now dropped to 45%, though this still shows that the largest proportion of participants continue to back stock markets over the housing market.

Within equities, blue chips remain the most popular sector amongst active investors, following which come (in order of investor preference) resources and commodities, utilities, smaller companies, technology, pharmaceuticals and financials--an interesting mix of risky and defensive, implying investors have an appetite for risk but continue to seek out 'safe havens'.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Holly Cook

Holly Cook  is Manager, Morningstar EMEA Websites

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