Investors aren't out of the woods just yet
Brighter economic news suggests that a cautious return to the markets may be in order. But keep the bubbly on ice, warns Emma Dunkley
Sunday 04 November 2012
It was a pleasant surprise when figures came out showing that the UK economy had actually grown in the third quarter, lifting the country out of a woefully long recession. But cries of glee that the economy is "healing" and "back on track" might be premature.
Although the 1 per cent growth in the economy – which is the highest rate since the third quarter of 2007 – is no doubt a boost to sentiment, there are major, imminent hurdles that could easily throw the tentative recovery off track again.
"We think the improved GDP data needs to be handled with care," says Jason Hollands at Bestinvest. "A triple dip back into recession in the final quarter is a possibility.
"At best, we feel growth will be anaemic, and any recovery protracted. It's too soon to crack open the bubbly."
So is growth worth getting excited about, and does it actually affect your money? "All year, we have found the official GDP data to be at odds with what companies trading in the UK have told us," says Richard Buxton, head of UK equities at Schroders. "It wasn't as bad as the 'double dip recession' that numbers suggested; nor has it bounced back recently as strongly as recorded."
Instead, Mr Buxton anticipates a gradual improvement over the next two years – although the pace of this will be tempered by weak global trade among other issues. "Companies which benefit from self-help improvement rather than purely levels of economic activity will still do well," says Mr Buxton.
Debenhams, Ladbrokes, Taylor Wimpey and Legal & General are a few of the names Mr Buxton is backing in this category. The manager of the Schroder UK Alpha Plus fund also invests in banks, including Barclays, Lloyds and Standard Chartered.
"Most investors are too concerned about further write-offs and regulatory uncertainty to invest in bank shares, but we still feel these are more than reflected in valuations," he adds.
For anyone who points to the ongoing turbulence in Europe and other parts of the world, it is worth remembering that just because the economy might be in the doldrums, it doesn't mean the markets are in the same situation. The FTSE 100 is up almost 9 per cent in 2012, rising from lows of around 5,300 to highs of 5,900 this year, while the economy has, for the most part, been in recession.
So is it worth taking the plunge and investing some of your cash sitting on the sidelines before it's too late? "By the time good economic data and news come through, the market has long since reacted and rallied," says Rob Morgan at Hargreaves Lansdown. "I believe those brave enough to enter the market will be rewarded over the long term, especially from large companies with diverse, international earnings ideally with a good dividend."
Indeed, UK companies that aren't entirely reliant on a domestic economic recovery may provide more robust returns. "We favour international companies," says Gemma Godfrey at Brooks Macdonald. "Those that sell their products and services into more protected pockets of demand have strong balance sheets and good management teams to weather any future storms."
You can invest in these types of companies, which pay out solid dividends, by buying equity income funds. "You are also benefiting from compounding dividends over time – really powerful when growth and interest rates are low," adds Mr Morgan. "These sorts of stocks tend to be less volatile, too."
If you are cautious about simply rushing in to invest and don't want to fall victim to wild swings in the market, Mr Morgan says you can opt to "pound-cost average", which means investing a fixed amount on a monthly or regular basis.
As a result, when market prices are high, your monthly payment might buy fewer fund units or shares, but conversely, will buy more when prices are low. Over time, this averaging means the price you pay will likely be lower than the average market price.
So where should you invest? Equity income funds are paying out more than UK corporate bond funds at the moment, and dividends are generally robust, says Mr Hollands. For months, people have piled into bonds looking for safety, but prices have become expensive as a result and cheaper equities are looking attractive.
And investors are starting to recognise this. According to the latest figures from the Investment Management Association, equity funds were more popular than bond funds in September, for the first time in 12 months.
"We like equity income funds – Fidelity MoneyBuilder Dividend and Threadneedle UK Equity Income, for example," says Mr Hollands.
If you have a bigger appetite for taking on risk, buying funds that invest in smaller companies might mean you get a bigger boost when the economic recovery starts to gather momentum, although you will likely to be hit harder if things take a turn for the worst.
Mr Hollands recommends the Old Mutual UK Select Smaller Companies fund and Marlborough Special Situations in this category.
For an equity income fund with a twist, Mr Morgan recommends J O Hambro UK Equity Income. He says the fund has had exceptional long-term performance and that the managers, Clive Beagles and James Lowen, are great stock-pickers.
But don't forget that the UK is not out of the woods yet, and that there are arguably more attractive investments out there. Still, even if it is too early to crack open the bubbly, you could line up a few bottles so they are ready for the party further down the line.
Under new state pension rules we will all be much worse off
Interest-only mortgages return to give more flexibility to borrowers
Scam alert: make a big noise to beat the crooks
Bargain Hunter: Eurostar offers child fares for £1 each way to Paris, Brussels and Lille
Five Questions On: GB Energy's new tariff
- 1 David Cameron refers to 83-year-old Labour MP Dennis Skinner as 'Jurassic Park'
- 2 iPhone 7 (or iPhone 6S) leaked pictures show similarities to older model — but Apple is fixing the biggest issue of all
- 3 Russell Brand condemns moment of silence for Tunisia attack victims as 'minute of bulls**t'
- 4 'Help me I'm trapped in a factory' messages keep being found on bottles of vitamin water
- 5 Alwaleed bin Talal: Saudi Prince to donate entire $32bn fortune to charity
The moment a Queen's Guard soldier lost it and drew his gun at annoying tourist
Greece crisis: IMF was pushed around by Angela Merkel and Nicholas Sarkozy – and now it is being humiliated
'I wish the BBC would stop calling it Islamic State' – David Cameron unleashes frustration at broadcaster
Greece crisis: The wider lesson is that it’s time to abandon this failed experiment in currencies
Girl, 7, stares down hate preacher at Ohio festival with pro-LGBT rainbow flag gesture
Forget little green men – aliens will look like humans, says Cambridge University evolution expert
iJobs Money & Business
£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...
£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...
£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....
£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...
Day In a Page
This five-bedroom home enjoys countryside views over the Blyth estuary to Southwold, offering flexible living space with a ground-floor annexe - ideal for use as a holiday let.
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.
Less than five miles from Malmesbury, this four-bedroom cottage comes with equestrian facilities and gardens that extend to approximately three acres.
Spanning three storeys, this late-Victorian five-bedroom farmhouse is a spacious family home with a modern interior and B&B potential.
With an original church arch, this triplex one-bedroom church conversion has a light, spacious, feel and comes with a secure off-street parking space.
This recently-refurbished three-bedroom home has bi-folding doors that lead out to a decked seating area - ideal for alfresco dining this summer.
Well-located for coastal walks and popular restaurants, this detached four-bedroom home offers views over farmland, to the Solent, the Purbecks and Bournemouth.
If you love high ceilings, school conversions like this one are bang on the money. This two-bedroom flat is minutes from Burgess Park and the foodie haven at Borough Market.
Set within a church conversion in Bermondsey, this two-bedroom maisonette combines existing features, such as original arches and brickwork, with a contemporary finish.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.