Even troubled Dubai can't stop the surge in shares

A bull market is tempting private investors again. By Chiara Cavaglieri and Julian Knight

The surge in share prices since the spring has taken many in the City and beyond by surprise. Even the massive debt difficulties at Dubai World – which would probably have sent markets into a tailspin a year ago – has been brushed off, for the time being at least.

It seems that the bulls are out in force and rising share prices are tempting some private investors back into the market. The questions on investors' lips, however, are: can this bull run last and where should canny investors be putting their cash?

Since the beginning of the year, the FTSE 100 has risen by about 25 per cent, with some sectors performing beyond all expectations. Many investors are optimistic that this will last: more than a third of people asked by broker TD Waterhouse believe that the UK economy is in on the upward path in a V-shaped recovery.

Many of the shares that fell furthest during the financial crisis and the onset of global recession have turned around the quickest since the spring. "The industrial metals and mining sector has by far outperformed all its peers, gaining over 350 per cent. This is despite, or perhaps because of, its dismal performance in 2008," says James Daly from TD Waterhouse.

Similarly, property has been one of the biggest success stories of the year. Shares in real estate companies recovered rapidly, doubling since March 2009. As a result, funds that invest in a basket of real estate funds or hold commercial or residential stocks directly have also started to recover – so much so that in October property took over as the Investment Management Association's most popular sector for new private investor cash.

"The stock market is quite grossly undervalued at the moment when you factor in the profits that these companies are going to make next year. There are some low hanging fruits out there, one of which is property funds," says David Kuo, a director at The Motley Fool.

TD Waterhouse's findings show that in the past 12 months, banking sector stocks were rated both the best and worst performing investments.

In the week after the banks won in a shock result at the Supreme Court over overdraft charges, banks accounted for 50 per cent of trading activity at TD Waterhouse. Then, just two weeks ago, markets were rocked when Dubai World, the emirate's investment vehicle, asked to suspend debt repayments. The FTSE 100 plunged by 3.2 per cent, its worst one-day fall since the end of March.

The stock market rebounded quickly and many investors still seem to be backing the banking sector, with 35 per cent of investors questioned by TD Waterhouse ranking it in their top three sectors to perform well in the next few months. However, there is little doubt that the crisis served as a timely reminder that the worst of the global recession may not be over.

"Banks may have recovered sharply but this is all built on the premise that there won't be another dip. There are still lots of questions overhanging the banking sector. For instance, when the Bank of England's programme of quantitative easing is suspended, how will credit markets cope?" asks Tim Whitehead, investment manager at Redmayne Bentley.

Despite the uncertainty, investors are clearly feeling more positive. The majority (60 per cent) of investors questioned by TD Waterhouse are satisfied with the performance of their portfolios over the past year and more than half (58 per cent) say they feel more confident in the UK stock market, compared with 17 per cent in 2008. People are now looking to make the most of cheap shares that they believe have real recovery potential for 2010.

"Retail shares are the leading indicator of an economic recovery. Have a look at Next, which works as a sort of barometer of the high street," says Mr Kuo.

This renewed faith in the stock market has also led to an increasing appetite for more risk. October figures of the best-selling funds at Fidelity, for example, showed increased interest in the Specialist sector and individual funds such as Fidelity South East Asia. The Specialist sector is often criticised for having funds that invest in everything from commodities and healthcare to agriculture and Latin America, making it difficult to analyse or predict with any degree of accuracy. However, many Specialist funds have performed impressively in the recent market upturn. Latin American companies, for example, have already started to recover from the global recession and the International Monetary Fund (IMF) has forecast growth of about 3 per cent in 2010 for the continent as a whole.

"There is a definite sense that confidence is returning and investors are going for higher risk. I do think emerging markets will be more popular too – that's where the true long-term potential lies," says Ben Yearsley, an investment manager at independent financial advisers Hargreaves Lansdown.

The company is also predicting a surge in popularity for absolute return funds. The key to absolute returns is that managers hedge their share investments with the idea of producing consistent returns even during a downturn. In addition, Mr Yearsley recommends equity income funds, despite them taking a battering since the credit crunch took hold.

"Equity income funds will continue chugging away and remain a popular theme for UK investors. I still believe that, even when out of favour, this should be at the heart of almost every portfolio," he says.