A tough financial year for some could be the big break for others...

This year’s financial outlook may appear gloomy, but as Kate Hughes and James Daley report, a closer look suggests it won’t all be bad news

Last year was not a happy one in the world of finance. If you were lucky enough to have your savings in a bank that didn't go bust, and you managed to hang onto your job, you still probably lost hundreds or thousands from your pension as equity markets collapsed. And if you own a property, it is likely to be worth at least 20 per cent less than it was 12 months ago. To add insult to injury, your utility bills will be more expensive and cheap new mortgage deals are all but impossible to come by – even though the Bank of England interest rate has fallen to its lowest level since 1951. But what about 2009? Surely, things can only get better...?

Investments

Predicting the polar direction of stock markets is a tough game – and one that we'd all dearly love to excel at. A year ago, we asked five professional fund managers and financial advisers to come up with their top fund choices for 2008 – and all but one of their 10 choices delivered a negative return over the year. The one success was The Biotech Growth Trust – picked by the chief investment officer of Iimia Asset Management, Nick Greenwood. Pharmaceuticals was one of the only sectors to do relatively well in 2008. But most major equity markets around the world lost more than 25 per cent of their value over the year – an outcome few pundits would have expected at the start of 2008.

Predictions for 2009 are much more cautious. Although over 60 per cent of managers believe Britain's FTSE 100 index will finish 2009 higher than it began, the majority are predicting only a modest rise of a few percentage points.

Nearly one-in-four managers, however, believe the index will finish the year below 4,000 points – more than 10 per cent down on yesterday's opening levels, according to the Association of Investment Companies.

But whether they're predicting markets to fall or rise in 2009, most finance professionals are predicting another difficult year economically. Britain's economy is expected to continue shrinking, unemployment is forecast to continue rising and interest rates are tipped to fall even further than their current 57-year lows.

The good news for equity investors is that markets tend to start to recover before the worst economic winds have stopped blowing. John Greenwood, the chief economist at Invesco Perpetual, believes that 2009 will be a good year for US equity markets. "With stockmarkets having fallen as far and as sharply as they have, we think that a severe recession has been largely discounted in valuations," he says. "We believe stockmarkets have fallen to levels which offer exciting upside potential over the medium term, especially as some of the reasons for the depth of the current bear market have borne little relation to US corporations' fundamentals or valuations. In the year just passing, hedge funds have been forced to unwind leveraged positions in order to pay back investors. This has meant that their most liquid holdings – often large-cap, bellwether companies – have had to be sold in order to fund redemptions. Current estimates are that combined hedge fund and unit trust redemptions have led to a forced liquidation of $1 trillion (£690bn) of equity assets... [which] is providing investment opportunities."

There is also considerable excitement about the opportunities in bond markets over the coming year. The debt of many good quality companies is now valued at levels which suggest their imminent collapse.

Chris Bowie, head of credit, Ignis Asset Management, says: "Investment grade credit has never been better value – ever. Forced sellers of corporate bonds have created a situation where investors can achieve comfortable double-digit yields on household names. Some companies will fail in 2009 but these are unlikely to include high street supermarket chains or banks with a government guarantee. Sainsbury's, for instance, has a 14 per cent yield while investors can secure 16 per cent with Barclays, HBOS or RBS. Admittedly, the lack of liquidity means it is difficult to get out of the asset class cheaply, so a corporate bond investment has to be for at least a year. But corporate bonds have been so battered that this is the best buying opportunity in several generations."

Mortgages

Those who hoped that 2009 would bring the end of the mortgage lending squeeze or the house market slump will be disappointed. The latest Land Registry figures show that the number of property sales has dropped by over 60 per cent in the last year, and the Council of Mortgage Lenders expects the number of housing transactions to fall by 200,000 in 2009, down from 900,000 in 2008 and 1.6 million in 2007. Total gross mortgage lending will be around £145bn next year, the CML believes, down dramatically from around £258bn in 2008 and £363bn in 2007.

Consumers expect property prices to fall by another 9 per cent over the next 12 months, according to the Building Society Association, and even The Royal Institute of Chartered Surveyors predicts a further 10 per cent drop in 2009, due to lenders' caution.

"The lending levels of 2006 and 2007 were overblown, but now the pendulum has now swung the other way," says Louise Cuming, head of mortgages for price comparison site Moneysupermarket.com. "We will see another Bank of England base rate reduction in early 2009, but increasingly lenders are struggling to pass these rate drops on to customers because of falling profit margins, so future base rate decisions are likely to impact less on homeowners.

"Lenders will be targeting the real cream of the borrowers out there in 2009, and the knock-on effect is that the housing industry will continue to stagnate. It has been a painful correction and I can't see the market coming out of it until 2010/2011."

So, for those who really are determined to buy or move this year despite all this, getting the right deal is crucial. "Focus on your loan-to-value," says Melanie Bien, director of Savills Private Finance. "It is still the case that a deposit of 25 per cent or more, or existing equity if you are a re-mortgager, will give you by far the best deals. So working hard to minimise the proportion you need to borrow is vital.

"The base rate will fall further next year so you may wish to consider a tracker, but some people will prefer the security of a fixed rate deal. If you can get a fixed rate mortgage for 4.5 per cent you will be doing well."

Savings

It's all about rates again in 2009, but in stark contrast to this time last year, concerns surround just how low rates will go rather than how to make the most of the high rates of early 2008.

The base rate is expected to fall further in the first half of 2009, meanwhile, savers are being warned that the full effect of the last cut in December hasn't yet been felt. Banks and building societies expect us to continue focusing on safety rather than headline interest rates, and with little competition in the form of new entrants to the savings markets expected, at least for the first half of the year, savings rates are likely to keep falling in 2009. Premium Bonds are becoming increasingly popular because the chance of a big win tax free is fast becoming more attractive than negligible savings rates.

Nevertheless, there are still some attractive savings deals out there. Regular saver accounts from Principality, Barclays, and Norwich and Peterborough Building Society are offering 6 per cent with a minimum monthly saving of as little as £10 or £20, plus there is the enforced discipline that comes from being unable to withdraw your cash without significant penalties.

Savers who can move fast and lock in a fixed interest rate for a year or two as soon as possible, will be the best off in 2009 (despite lower rates initially), and this includes using your 2008/9 ISA. Don't wait until April to sort out this year's ISA allowance because by then rates will have dropped further. Deals on offer for tax-free saving include the Alliance & Leicester Easy ISA offering a variable 4.5 per cent, or Nationwide's 4 per cent rate, fixed for 2 years. But as rates continue to drop it may be worth turning to lesser- known, index-linked savings in 2009. National Savings & Investment's index linked savings certificates, for example, are tax free, and currently paying the Retail Price Index rate of 3.9 per cent plus 1 per cent. Certificates are issued for three or five years for a minimum investment of £100.

Bills

Oil prices rose from just under $100 a barrel at the start of 2008 to almost $150 in July. By yesterday, they were down below $40. Unfortunately, most consumers are so far only feeling the hit of last year's energy price increases. But gas and electricity bills should start to come down this year.

"The next move in energy bills will be down," says Joe Malinowski, founder of energy price comparison website TheEnergyShop.com.

"We expect price cuts of around £170 off gas and electricity bills in the New Year. But don't wait for a price cut to fall into your lap. If history tells us anything it is that you could be waiting some time.

"Instead, customers on standard tariffs can already save more than the likely price cut by switching to British Gas' WebSaver 1 tariff. This not only guarantees an immediate saving but also further savings if British Gas cuts its standard prices by more than 5 per cent. That's the deal to go for."

Three funds for 09

'Your Money' columnist Mark Dampier, from financial advisers Hargreaves Lansdown, believes 2009 will be a good year for bond funds. For conservative investors, he recommends the Jupiter Corporate Bond fund or Invesco Perpetual's Corporate Bond fund. For those looking to take on a bit more risk in 2009, he picks out the Jupiter Financial Opportunities fund, which he believes will make the most out of the recovery in financial equities.

Ones to watch Stock tips for the year ahead

Gavin Oldham, from The Share Centre, believes 2009 will be a good year for the support services sector in the UK, and tips stocks such as Serco, Babcock and Carillion to enjoy a decent 12 months. He also believes UK life insurer Prudential is in for a better 2009, after losing almost half its value in 2008. He points out that the Pru's diverse business – covering the UK, US and Asia – puts it in a strong position to weather the current downturn.

Overall, Oldham is bullish about the outlook for equities in 2009, predicting that the FTSE 100 will rise more than 20 per cent. "We do not envisage a dull and steady year ahead," he says. "Anything but. You need quality stocks in your portfolio whose yields are good and whose dividends won't be cut."

Share Competition Pick a stock and win £200

Due to a technical glitch, many of last month's share competition entries weren't received. The good news is we're rolling over last month's prize and giving you the chance to win £200 this month. To enter, simply send us the name of a stock. The reader whose share performs best between 6 and 28 January will scoop the prize. The stock must have its primary listing on either AIM or the main London Stock Exchange and must have a market value of at least £75m. Entries should be emailed to yourmoney@independent.co.uk before midnight on 5 January. Postal entries should be mailed to Share Competition, Your Money, The Independent, 191 Marsh Wall, London E14 9RS and should be received no later than the morning of Tuesday 6 January. The winner will be announced on 31 January.