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Aug 24
2009
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Though opinion remains divided over when the recovery will take hold, we consider where you should put your cash... By
So is the party over? After four months of storming stock market gains, investors received a scare this week as world stocks tumbled amid fears about the strength of the economic recovery.
On Monday equities in Europe and Asia endured some of their biggest one-day falls since the market turnaround in March. The FTSE 100 index fell 1.5 per cent as investors took profits after American and Japanese data indicated that economic recovery may take longer than expected. Japan’s Nikkei 225 dropped 3 per cent and China’s Shanghai Composite index slumped nearly 6 per cent.
The markets made back most of the losses later in the week, but Monday’s events will have left many investors worrying whether this is a prelude of things to come.
Plenty of doom-mongers would say that they are. Richard Batty, global investment strategist at Standard Life Investments, says: “Most of the world’s economies are likely to come out of recession by the end of the year, but I am worried that growth rates will remain subdued. That suggests that equity markets will remain volatile.”
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Better-than-expected company results have helped to buoy the markets since the spring, but some feel that this has offered false hope. Rupert Robinson, the chief executive of Schroders Private Bank, says: “One should not lose sight of the fact that the reason why profits have come in ahead of expectations is cost-cutting, not top-line revenue growth.”
However, not everyone is gloomy. Trevor Greetham, manager of the Fidelity Multi Asset Strategic Fund, says: “We remain in the early stages of a sharp V-shaped recovery. Policymakers responded to the gut-wrenching slump after Lehman Brothers collapsed with the most aggressive policy-easing any of us has ever seen. It’s working.”
Bulls are encouraged by evidence that the economic outlook is improving. The latest survey of fund managers by Merrill Lynch, the investment bank, suggests that investor optimism about the global economy is at its highest level in nearly six years.
Ashton Bradbury, head of equities at Old Mutual Asset Managers, says: “The economic data will get better. Valuations are not extreme and, if we are at the start of an earnings recovery, equities will do well.”
Even those who are convinced that the stock market will move downwards in the autumn believe that it is now time to start putting money back into equities, albeit selectively. Rather than trying to second-guess the market, they argue that many stocks look decent value and are worth buying in preparation for a recovery. We grilled the experts about where they would invest.
Shares
Nick Raynor, of The Share Centre, the stockbroker, expects the FTSE 100 to be up to 5 per cent lower by the year end, at about 4,400. However, he thinks that it is worth seeking out high-dividend payers that have been left behind in the recent rally. The recovery has been led by the cyclical sectors that are most sensitive to economic growth prospects, such as financial and mining companies, while defensive sectors, including utilities, pharmaceuticals and tobacco companies, have struggled.
Mr Raynor is keen on United Utilities and Severn Trent, both of which have dividend yields of more than 7 per cent. He says: “This is a better yield than you can get from a bank. The yields may come under pressure when Ofwat [the industry regulator] publishes its review of future returns in November. But even if the dividends dropped by a third, they would still be yielding 5 per cent.”
Simon Denham, of Capital Spreads, the spreadbetting company, also recommends a defensive stance. He likes Imperial Tobacco, the cigarette company, which should hold up even if economic growth proves anaemic.
Mr Raynor says that the racier options that should lead the pack when the recovery in in full swing include housebuilders such as Taylor Wimpey or Persimmon. He also expects pub companies, such as Enterprise Inns, Punch Taverns and Mitchells & Butlers, to rebound strongly.
Many experts are wary about recommending banks but are keener on insurers, whose share prices have also been battered during the downturn. Morgan Stanley, the investment bank, favours Legal & General and Admiral.
Funds
Ian Shipway, managing director of Bluefin Wealth Management, says that anyone who wants to invest in UK equities using a collective fund — and is worried about market volatility — should consider Invesco Perpetual High Income. A more adventurous choice for long-term investors who can stomach greater risk is Aberforth Smaller Companies. Mr Shipley says: “We would not suggest investing money that you might need in the next five years. But over the long term, studies show that equity investors are compensated for risk-taking.”
Many experts believe that emerging markets will beat the pack during a recovery — they certainly have in the rally since March — and are particularly keen on Asia. To gain access to the continent, Hargreaves Lansdown, the independent financial adviser (IFA), recommends First State Asia Pacific Leaders. If you prefer a more diversified fund, its choice is Aberdeen Emerging Markets.
Jason Walker, of AWD Chase de Vere, another IFA, thinks that America is another market worth backing. He says: “The US has been out of favour, but it is likely to be the Western nation that leads the recovery. We favour Martin Currie North American and Neptune US Opportunities.”
Mr Walker also expects commodities to do well when the global economy begins to strengthen. His fund choices are M&G Global Basics and JM Finn Global Opportunities, which has a commodities bias.
It could also be time to move back into property funds, which have taken a pounding as confidence in bricks and mortar has slumped. Adrian Lowcock, of Bestinvest, the IFA, says: “Some of these funds are now offering 8 per cent yields, which make them very attractive, even if capital growth is non-existent. You can reduce risk by drip-feeding money into a property fund over many months. We would recommend New Star UK Property.”
Alternatively, investors can gain exposure to property shares through an investment trust such as TR Property Sigma. The trust is yielding only 3 per cent but is trading at a 15 per cent discount.
Case study
Simon and Rebecca Tully, of Tunbridge Wells, Kent, decided this year that they would prefer to be invested in shares than risk missing out on a stock market recovery.
The couple, pictured with their sons Reuben, 4, and Nathaniel, 2 (above) decided to top up their Isa by putting several thousand pounds in the Blackrock Gold & General and Newton Managed funds, following the advice of Black Swan Capital Management. The first fund invests in mining shares, the second in a spread of global equities.
Mr Tully, a 38-year-old IT program manager, says: “We thought about putting the money into a savings account but were worried that we would miss the market bottom. We’re hopefully not going to need to draw on the funds for many years, so we are not worried about what happens to the market in the short term.”