In a new era of economic growth, the stock market is the best place to shift assets

Investors will pay the price if they persevere with low-risk assets such as cash

‘Cash may seem to be a sound investment today, but the UK’S economic outlook is about to dramatically change’

Why would anyone bother investing at the moment? After all, savers can obtain an interest rate in excess of 5pc from a range of easy-access bank accounts. This beats the FTSE 250’s income return of around 3.5pc and is higher than the 10-year yield on government bonds, or gilts, of roughly 4pc.

Furthermore, investors may gravitate towards supposedly lowerrisk assets, such as cash, at a time when the economy’s performance is thoroughly disappointing. The British economy shrank by 0.1pc in the third quarter of 2023 and contracted by a further 0.3pc in the final quarter of the year, thereby entering a recession. And with the Bank of England maintaining a relatively hawkish stance, the near-term prospects for savers appear to be relatively upbeat.

But nothing stands still in the investment world. Cash may seem to be a sound investment today, but the UK’S economic outlook is about to dramatically change. The era of rampant inflation and restrictive monetary policy is now in its latter stages, with falling interest rates set to supercharge GDP growth and the operating environments for a wide range of Uk-focused companies.

Clearly, interest rate cuts cannot be predicted in advance. The Bank of England may decide to make sure that rapid price rises are extinct before taking a more dovish stance. Or it may determine that a more accommodative monetary policy can be implemented much sooner because improvements in inflation are time-lagged.

Either way, the coming years are likely to be dominated by interest rate cuts and significantly faster economic growth than that experienced over recent years.

Fixed income investors will benefit, since bond prices have an inverse relationship with interest rates and a buoyant economy means there is a lower risk of default of the bond issuers. But the stock market equities offer far greater total return potential on a long-term view.

Fortunately for holders of cash, valuations across the UK stock market are extremely cheap at present. They therefore offer a wide margin of safety that fully compensates new investors for short-term economic uncertainty and elevated political risks associated with the forthcoming general election.

More importantly, discounted share prices provide scope for extremely generous returns over the long run.

So-called “cyclical” companies, which are those most dependent on the economy’s performance, are among the cheapest stocks available at present. As interest rates fall and GDP growth improves, though, their growing profits are likely to command higher share prices. And with investor sentiment set to improve, their lowly valuations are likely to rise.

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 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 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 expected to further boost the stock market’s performance, with investors 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 better financial performance, investors should purchase companies with sound finances and competitive advantage. They should also diversify across sectors to reduce overall risk.

But the biggest threat to investors is persevering with perceived low-risk assets such as cash. Not only will they find their returns decline, they are also likely to miss out on 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.