Investors could diversify their portfolio amid high inflation and economic uncertainty by upping their exposure to peer-to-peer loans, experts claim.
Double-digit inflation has put pressure on investors as traditional assets such as shares have been hit by rising costs and economic uncertainty.
The FTSE All Share Index has fallen 1.5 per cent in the 12 months to early January and it has also declined by around the same amount over five years as stock markets wrestled with Brexit, the coronavirus pandemic and now the Russian invasion of Ukraine and the cost-of-living crisis.
The Bank of England has also been pushing up the cost of borrowing by raising interest rates to shift inflation lower.
This has pushed savings rates up but real term cash returns are still below the inflation rate and experts say P2P lending offers the benefits of returns that come closer to the cost of living measure and are uncorrelated to the stock market.
“With all rate benchmarks increasing this year, P2P lending is now offering a very high yield in comparison to savings accounts,” said Samuel Mather-Holgate, an independent financial adviser for Mather and Murray Financial.
“Of course, the risk is correlated to the return but if you chose a good platform with a robust risk mitigation strategy you shouldn’t see delinquencies and default rates too much higher than they are now.”
He said P2P lending is now a “very viable asset” in a well-diversified portfolio.
“I can see up to 15 per cent of a client’s overall wealth exposed to this area,” he added.
“With such differences in approach between providers, it’s really key that clients understand how each platform works, their objectives on default rates and how they plan to achieve this and the diversification strategy.”
Read more: 4th Way names top six P2P platforms of 2022
Eugen Stamm of venture capital firm Verve Ventures said marketplace lending should have a firm position in every asset allocation.
“It is a very attractive alternative to more traditional fixed-income investments,” he said.
“There is a broad range of lending platforms that allow for diversification, which is essential. Returns compare favourably to bonds, which is why investors can allocate a large part of their portfolio to marketplace lending, as long as they are cautious to work only with established platforms that have a good track record and controlled growth.”
However, he cautioned that due to rising interest rates, investors should pick loans with relatively short duration.