It is the question vexing every investor: should they put this year's ISA allowance into the UK stock market or are there likely to be further dramatic falls before a long-term recovery? This is particularly valid given turbulence in the FTSE All Share index – even over the past few days. Violent fluctuations are now virtually a daily occurrence as the global recession starts to take hold.
Nerves of steel
When markets are so volatile and even professional investors are left scratching their heads, it's hardly surprising that people are confused, says Ben Yearsley, investments manager at Hargreaves Lansdown. Traders and fund managers are so nervous about the prospects for companies and global economies that even the slightest bit of bad news can translate to extreme price movements that can wipe thousands off the value of portfolios.
"The market is moving around so much that it's difficult to know when and where to commit your money," he says. "You are getting 5 per cent swings and you don't want to be on the wrong side of such moves."
It takes nerves of steel to invest in such conditions, agrees Colin Morton, lead manager of the Rensburg UK Equity Income Trust, but that doesn't mean ISA investors should steer clear, because there is money to be made. "If you're willing to close your eyes, forget what's going on with the markets and just invest, then this is probably as good an opportunity as there has been for the past 15 to 20 years," he says.
With cash offering next to nothing and fixed-rate returns coming down all the time, equities are certainly starting to look very appealing. "You can get 15 to 20 well capitalised UK companies offering an average yield of around 5.5 per cent," he says. "You will be taking a risk but you are being pretty well rewarded for that right now."
Before deciding where to put your money, you need to be clear on your attitude to risk and your investment horizon, says Darius McDermott, managing director of Chelsea Financial Services. "Equity investing should only be for the long term and people need to recognise that," he says. "We are in one of the worst recessions in our history and markets have reacted to that. However, if you are looking to invest your ISA allowance, then now appears to be a reasonably good time as the market is so cheap."
History is on the side of the investor, according to Fidelity International's analysis of the Barclays Equity Gilt Study, which reveals that every rolling decade of negative average equity returns has been followed by 10 years' positive growth.
Considering that equities have suffered annual returns of -1.5 per cent in the decade to the end of 2008, that might mean investors have more to look forward to going forward, suggests Rob Fisher, Fidelity's head of personal investments.
"Markets recover from losses – even big ones – so investors should consider their long-term goals and make best use of tax-efficient savings plans," he says. "History has shown again and again that time can reward the patient investor."
There will always be winners, irrespective of how deep the recession goes, points out Geoff Tresman, chairman of Punter Southall Financial Management. "There are a number of leading UK companies that one knows will be there at the other end of the tunnel," he says. "They will be leaner, meaner and far more efficient organisations as a result of cost-cutting that will improve margins. They will also have far less competition."
So what are the potential benefits of putting money into the UK market? Is it not better to have a wider spread of equity investments? As far as the UK is concerned, the fact that it is so global in outlook makes it a pretty attractive proposition, suggests Charlie Morris, head of absolute return at HSBC Global Asset Management.
"It is dominated by international stocks and there is no shortage of perfectly good franchises you can buy into which have strong cashflows and robust business models," he says. "Most of the bad companies have now been flushed out."
He cites Autonomy, the technology firm that grew from research at Cambridge University. "Growing software companies have got amazing economics as they have no debt, costs are relatively flat and everything goes to the bottom line," he says. "Unfortunately, the best tech stocks are always going to be in the United States, but Autonomy is our shining star."
Media companies such as Pearson, which owns the Financial Times, could also be worth a look. "They have been unloved but some are very strong franchises," he says. "And pharmaceutical companies like GlaxoSmithKline are also cheap and robust."
Avoid defensive areas, which could be value traps. "Stocks such as tobacco companies have held up, but you're not going to make money from them soon," Morris adds. "The best place to be is in robust stocks that have fallen and are now recovering."
Paul Feeney at BNY Mellon Asset Management agrees. "It is possible to get yields of around 7 per cent on some of the strongest companies," he says. "None of us can say when the markets will pick up, but you are getting paid in the meantime."
Worrying about particular companies will only be an issue if you opt for a self-select ISA. These products enable you to invest in any quoted company – as long as they are listed on a stock exchange recognised by HM Revenue & Customs – as well as collective schemes, such as unit trusts.
Pick a professional
However, buying companies should come with a severe health warning, points out Ben Yearsley. Anyone going down this route must tread very carefully. "It's dangerous buying individual shares unless you've the time to research them," he says. "One bit of bad news and the price can fall 20 per cent, whereas a fund wouldn't be affected in the same way."
For most ISA investors, buying into a fund will be the most sensible option. As well as giving access to a variety of companies, they will have professionals monitoring the portfolio.
Yearsley suggests sticking to managers with years of experience. He cites Invesco Perpetual's Neil Woodford, Adrian Frost at Artemis and Tony Nutt at Jupiter as three such names.
He also advises putting money in gradually. "Instead of investing a lump sum, phase the money in over a couple of months because everything is so volatile at the moment," he explains.
This can help develop a good savings discipline, adds Hugo Shaw, at financial adviser Bestinvest. "It converts an annual investment amount into more manageable sums of money," he says.
Wherever you invest, don't agonise daily over your ISA because we could be in for further pain, warns Geoff Penrice at Bates Investment Services. "It seems likely that share values will be volatile over the next few months," he says. "It is only when things start to stabilise, together with signs that the recession is bottoming out, that we would expect to see a sustainable increase in values."
Equities Track record
According to figures compiled for 'The Independent' by Moneyfacts.co.uk, someone who had invested £7,000 every year since 1999 would have seen the value of that £70,000 total shrink by £11,864 to £58,136 in the average ISA equity fund. However, those invested in the best performing portfolio – BlackRock's Gold and General Fund – will have cause to celebrate as the value of their investment would have rocketed by more than £100,000 to £171,433.
So how would people have fared by investing regular amounts of £100 a month over the past five years (a total of £6,000) to the same date? The best bet would have been M&G's International Sovereign Bond Fund, turning in a profit of £3,012.96. Among the worst would have been the Rathbone Special Situations Fund – a loss of £3,487.15. Even so, performance will be dependent on the global backdrop and last year's poor performer could well be next year's investment star.