The uncertain economic outlook may dissuade many investors from buying FTSE 100 shares at present. Rising unemployment, weak consumer confidence, and a likely recession could mean investors become more cautious about how they manage their hard-earned capital. That means they may seek lower-risk assets, such as Cash ISAs, instead of relatively risky FTSE 100 stocks.
However, the returns from Cash ISAs could be highly disappointing over the coming years. By contrast, the FTSE 100’s 20% fall since the start of the year means many of its constituents offer capital growth potential that could improve your retirement prospects.
Cash ISA outlook
The past decade has been exceptionally difficult for savers. Interest rates have been at, or close to, historic lows since the global financial crisis over a decade ago. This has meant the returns from Cash ISAs have been extremely low compared to the FTSE 100. They’ve even struggled to match inflation in some cases.
Looking ahead, things are set to become even tougher for savers. Not only have interest rates declined even further so that they’re now 0.1%, the prospect of higher inflation over the coming years may have increased. The vast amount of quantitative easing being used to stimulate the UK economy, alongside low interest rates, could push the rate of inflation higher.
If this takes place, which is by no means guaranteed, it could mean the loss of spending power on Cash ISAs is even greater than it has been in the past. And, even if inflation remains within its 2% target, low interest rates could remain in place for the medium term. This means Cash ISAs are likely to offer a negative real return that doesn’t help your retirement prospects.
FTSE 100 potential
The FTSE 100 may have a riskier near-term outlook than a Cash ISA, but its prospects over the long run appear to be far more attractive. Many of its members have dominant positions in their respective industries, as well as solid balance sheets. Therefore, they’re among the businesses that are most likely to survive a likely recession in 2020. They could even improve their competitive positions through increasing their market shares.
Furthermore, the index has an excellent track record of recovering from its bear markets to post new record highs. Investor sentiment has always improved following a market crash. Meanwhile, the world economy has always returned to growth following its past recessions. Therefore, buying stocks in an internationally-focused index such as the FTSE 100 could lead to high returns in the long run as the stock market recovers.
Certainly, FTSE 100 investors may yet experience a return to the market crash that dominated March. But, for those investors with a long time horizon who wish to boost their retirement prospects, now could be the right time to buy a variety of large-cap shares.
Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.