So what do you want from this year's ISA – sexiness or safety?

With short-term prospects looking bleak for Western stock markets, Cherry Reynard and Julian Knight look at the dash for cash or Eastern adventure
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The Independent Online

As the deadline looms for taking out an individual savings account (ISA), investors are going to opposite extremes. Deterred by negative economic news and worries over the credit crunch, some are turning their backs on mainstay funds investing in the UK stock market and looking at the emerging, though high-risk, economies of China, India and Russia. Others, though, have embarked on a flight to safety by putting their money into deposit accounts.

"We're seeing people invest in either cash-orientated products or in things like Russia," says Mark Dampier, head of research at independent financial adviser (IFA) Hargreaves Lansdown. Likewise, Darius McDermott, managing director of discount broker Chelsea Financial Services, comments: "There has been a polarisation among our clients. Now it's either all cash or it's all emerging markets. Nothing is going into Europe, the US or Japan."

So are these likely to be the most rewarding strategies in the current climate?

It's easy to see why deposit accounts are in vogue this ISA season. When there is uncertainty, cash becomes king as investors crave a safe haven. What's more, the rates on offer are attractive, with a substantial number of accounts paying more than 6 per cent – well above inflation and the Bank of England base rate.

By ploughing into deposit accounts, savers are also in line with some high- profile fund managers. For example, Gary Potter and Rob Burdett, joint heads of the Thames River Capital fund, are holding around 20 per cent in cash in response to concerns about market conditions.

With no end in sight to the credit crunch, investors are unlikely to miss out on huge stock market rises by putting their money in deposit accounts in the short term.

However, "short term" is the key phrase; in the long run, deposit savings accounts have proved one of the worst investments, returning less than bonds, shares or property.

As for the rush to the emerging economies, Mr Dampier puts this down to the "sexiness" factor.

"What we are seeing," he says, "is the strong past performance of emerging markets heavily influencing investors. They see it as one of the very few areas where they can actually see growth taking place."

And the numbers are impressive. Economic growth continues to be strong, with Chinese GDP rising at 10 per cent and Indian GDP at 9 per cent. However, there is debate as to whether this growth can continue in the face of recession in the US.

Likewise, Mr McDermott says the shift towards India, China and Russia simply reflects how these economies are moving "centre stage in the world economy".

There are dangers in being blinded by the bright lights of the emerging markets. "We categorise the risk associated with a particular fund on a scale of one to 10 – one being least risk, 10 the highest," explains Mr McDermott. "Emerging economies are always near the top of this scale.

"People should only think about these funds if they can afford to lose their investment. Otherwise, they should steer clear until they have built up investments in deposit accounts and funds that invest in more mainstream stock markets such as the UK."

However, finding a potential growth story in the stock markets of the traditional big economies is not easy. Mr Potter at Thames River is downbeat about the UK and continental Europe as both are very "vulnerable" to the world economic slowdown. The US, too, is exciting little interest among investment experts.

But the long-moribund Japanese market may provide one ray of hope. The Nikkei exchange has slid back so far this year, but Mr Potter believes that Japanese shares are undervalued and offer growth potential.

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