I write this week's column with some trepidation. Financial markets are moving so quickly that, as I sit here, I wonder if everything I say will be rendered obsolete by the time you read it on Saturday!
We are in uncharted territory. Even those stockbrokers who were around in the last big financial crisis during the 1970s have not see anything on this scale before. Fear stalks the markets, confidence is at zero and the whole thing resembles a casino more than a functioning stock market.
Anthony Bolton, who was probably the leading UK fund manager before he retired last year, said last weekend that for the first time in ages he was turning positive on the market. Well the market fell at least 10 per cent since he made those comments, but in his defence he wasn't suggesting that this was the bottom of the market. He knows better than anyone that it is impossible to call the bottom exactly. His general point was that fear usually leads to buying opportunities.
Interestingly, the VIX Index (a measure of volatility) has shown its biggest leap ever. This may look like a bad sign but peaks in the VIX are usually accompanied by at least a short term rally. I fully expect interest rates to be cut further – in fact, I believe they will halve over the next six to nine months. I have no idea when the market bottom will be reached, but I am quite prepared to say that long-term investors should make money from these markets.
If you are feeling brave enough, what do you buy? I believe that investors in the UK should concentrate on income. Here I think there are two very interesting areas. Corporate bond funds have fallen sharply over the past few months because of their exposure to financial bonds, however bond managers continue to say there is compelling value here.
I spoke to the managers of the Invesco Perpetual UK Corporate Bond fund today; the fund now yields 7 per cent with a yield to maturity of 9 per cent. Virtually all the bonds in the portfolio are under par (meaning they are under 100, the normal maturity price of a bond) indeed in some cases they are substantially below par. This means that you are getting paid a high yield while you wait for the potential of an uplift. If the markets are going to recover it could happen in bonds first.
After this, I do think that UK Equity Income funds are your next port of call. Once again, yields are high – between 4.5 and 6 per cent net (variable and not guaranteed) depending on which fund you choose. In this sector, my top picks include Artemis Income, Invesco Perpetual Income, Jupiter Income, PSigma Income and Liontrust First Income. These fund managers say they can hold their yields/dividends and indeed increase them probably in line with inflation. With interest rates falling these look more and more attractive. Those after something really spicy might consider emerging markets. Despite their strong balance sheets, huge foreign reserves and generally younger populations their markets have come down sharply. Why? I think there are a number of reasons. Firstly, they can't totally decouple from the global economy and are bound to suffer a slowdown of their own, albeit far milder than the one we will experience. In addition, redemptions from hedge funds and an increase in risk aversion have meant that they are being heavily sold down by investors across the world. Yet I go back to say that these markets remain fundamentally strong, especially compared to the west.
I have said, and continue to say, that the huge urbanisation story in emerging markets is not going to end any time soon. The further these markets fall the more interesting they become. In this area I favour funds such as Aberdeen Emerging Markets, First State Asia Pacific Leaders, Allianz RCM BRIC Stars, and (dare I say it) Jupiter Emerging European Opportunities and Neptune Russia & Greater Russia. The Russian market has been hit more than anything else and it looks absurdly good value to my eyes.
Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent