Equities start to look exciting for the brave: Vivien Goldsmith looks at the potential for share prices as interest rates fall

FALLING interest rates make investing in equities an altogether more appealing prospect. This week has seen enough movement to encourage the brave and deter the timid.

Kleinwort Benson, the investment house, expects the market to remain firm. 'It would be very risky to wait for any significant setback to give a better buying opportunity,' its latest research says.

But Jerry Evans, strategist at NatWest Securities, said: 'We are quite cautious of share prices. We feel that there is not a great deal to push prices higher.'

But although huge capital gains might not be in the offing in the next few months, he believes that, taking a three to six-month view, there will be capital gains as well as a decent income compared with building society investment. 'We believe the share index will reach 3,000 by the end of the year.'

Peter Sullivan, the managing director of UK operations at NM Rothschild, said: 'The market is a barometer, not a thermometer. It tells you what is going to happen, not what's happening now. But the private investor has not missed all the market rise. Obviously it would have been better to have got in before Black Wednesday.'

He believes that some of Britain's large companies, such as ICI and Glaxo, have become comparatively undervalued, as investors go for smaller companies.

Brian O'Neill, an international fund manager with Gartmore, said the UK looked set to give a total return of around 15 to 16 per cent over the coming year. 'That's a lot better than cash.'

He also likes the look of the Far East excluding Japan, and American Smaller Companies.

Kean Seager of Whitechurch Securities is keen on the capital shares of split capital trusts such as River Plate, Scottish National TR Technology and General Consolidated. These shares have a limited life, and need to achieve a certain growth to return investors' cash. But if the shares do better, then the gains are magnificent. For instance, with River Plate if the underlying assets grow by 10 per cent a year, then investors will get back nearly five times their investment when the trust is wound up in the autumn of 1996.

The traditionally equity-based fund management houses are launching funds with a strong fixed-interest content to offer a package with a lower risk than an all-share approach to tempt savers away from their building societies. The income is then given a boost by putting the fund in a personal equity plan wrapper.

But Harry Henderson, managing director of the unit trust division of the stockbroker Cazenove, pointed out: 'Investors have a simple choice: they can accept a lower rate of return or accept greater risk. It is the management of that risk which is important.'

Cazenove is launching its first PEP available to the public. The Bond & Utility Fund will deliver 7 per cent gross by investing up to 49 per cent in bonds and the rest in high-yielding utility stocks such as water, electricity and BT.

The fund, designed mainly for Cazenove's own clients, charges just 0.2 per cent initially and 0.5 per cent a year, with an extra pounds 35 to put it into a PEP. The minimum investment is pounds 3,000, or pounds 6,000 for the PEP.

The bond element has to be kept below half to maintain the fund's eligibility for a PEP. Bonds issued by companies such as Bass, Thames Water and PowerGen will be included in the portfolio. 'We are not going down-market with junk bonds,' Mr Henderson said.

Fidelity has a similar scheme, the High Income Fund, with a yield of 6 per cent. It will also have a good slug of corporate fixed-interest securities. The manager, Martin Woller, has selected a portfolio yielding about 9 per cent - including one from Abbey National with a yield of 8.95 per cent - a lot more than any of its retail investors will ever see.

M&G is also launching a new monthly income PEP. The M&G Managed Income Fund is a fund of funds with a yield of 5 per cent. Initially no more than 20 per cent will be in fixed interest.

Chris Whitaker, manager of the fund, said: 'We are looking for long-term growth in income, rather than the highest income at the outset.'

There is an initial charge of 4.5 per cent and an annual charge of 1.5 per cent. But there are no extra charges for putting the trust into a PEP.

Henderson Extra Income Plus PEP with a yield of 6.7 per cent invests in its Extra Income Unit Trust, the Highland Investment Trust and a selection of shares. The inital charge is 4 per cent with a 1.5 per cent annual charge.

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