Where to place your bets if shares seem too cheap to shun any longer
America, Japan, the emerging economies, corporate bonds ... as time ticks away for using this year's ISA allowance, Julian Knight and Kate Hughes report on possible destinations for investors who see the chance of a profit amid the stock market turmoil
Sunday 22 March 2009
These are tough times for stock market investors as the credit crunch and recession wreak havoc on econo-mies from the US to Japan. But with the end of the tax year looming, Britons have to decide whether to take advantage of this year's individual savings account (ISA) allowance of £7,200. And those brave souls who see a potential profit amid the equity mayhem must then settle on where they are going to put their cash. Each major stock market or investment area has its pluses and minuses for the years ahead; here, we take a look at each.
The US was the first into the credit crunch and economic downturn, and so, according to some, it will be the first out. "The US was quicker to cut interest rates than the UK and has a dynamic economy with a history of bouncing back. I feel broadly positive," says Ben Yearsley from independent financial adviser (IFA) Hargreaves Lansdown.
However, there is a risk that currency shifts could erode returns. "When buying into the US, you're converting pounds to dollars, and when selling up, vice-versa," he adds. "If the dollar depreciates against the pound while you're invested in the US then you can find that returns are reduced."
In addition, Mr Yearsley is not impressed by many US fund managers. "The Martin Currie group has a good, consistently performing fund, but other than this perhaps the best way to enjoy market growth is through buying a tracker fund."
The major emerging economies of Brazil, Russia, India and China have suffered as a result of the recession in their biggest market – the west. Russia has been worst hit as it has also seen a dramatic fall in oil and gas revenues. But, says Mr Yearsley, brighter times could be just around the corner: "As the west recovers, so will these emerging economies, and some of the stock markets are looking decidedly cheap at present, particularly Russia."
Mr Yearsley likes the look of the Hexam Global Emerging Markets fund, which he believes is well placed to take advantage of any upturn.
Investing your ISA allowance in corporate bonds can offer security and a steady income. These bonds are basically IOUs for money you lend to a private company. They are more risky than government gilts or savings accounts because the company may fail, but businesses are rated according to their reliability, and individuals can usually only invest in "A" grade bonds.
They cost around £100 each, depending on wider market conditions, and investors buy a number of bonds. Their money is tied up for a set period and fixed-interest or yield payments are made on a monthly or annual basis, ending with a final payment and the return of the original capital. People could choose to invest in a corporate bond unit trust fund, which puts money in a basket of company shares so that that even if one or two default, overall returns should be positive.
UK equity income
These funds, which can be rolled up into an ISA, spread investors' money across a number of companies. You could choose to look for ones that aim for growth in share values and a regular dividend payment.
Tim Cockerill, head of research at Rowan Capital Management, says: "Equity income funds are offering around 6 per cent average annual income at the moment. Threadneedle UK Equity Income is a highly regarded fund offering 6.5 per cent, for example. The UK stock market and economy will recover and I suspect in time, we will see this period as one offering exceptional value."
Investing in a Japanese fund isn't for the faint-hearted. The economy has been struggling for more than a decade and the global slump hasn't helped. For instance, the country's exports were down 20 per cent in 2008. Advisers suggest having only a small part of your portfolio in this sector.
"Like the rest of the world, Japan is suffering from the economic downturn," notes Darius McDermott at IFA Chelsea Financial Services. "But with its focus on car manufacturing and exporting, there are additional difficulties. Having said that, neither Japan's banks, nor its individual consumers, are close to as indebted as they are in the UK."
Fearless investors who feel that now is Japan's moment to begin recovery could consider the Jupiter Japan Income fund. It has lost 1.7 per cent over the past year, but bear in mind that, globally, equities have fallen as much as 40 per cent.
These funds are designed to offer you a positive performance regardless of what the economy is doing. They aim to achieve this by putting your money into corporate bonds, cash and index- tracking investments. Last year was an incredibly difficult one, with UK equities dropping some 40 per cent, but astonishingly, some absolute return funds recorded positive performance. Two of the best are BlackRock UK Absolute Alpha and Threadneedle Absolute Return Bond, but watch out for high management fees with this type of fund.
Investing in global funds means you have access to a far wider range of sectors and regions. But there are risks in looking overseas, particularly in terms of currency fluctuations and geopolitical risks. Some global growth funds will invest in emerging markets and some won't.
Interested investors could con- sider M&G Global Basics or the Neptune Global Equity fund, Mr McDermott suggests.
Europe excluding UK
Investing in Europe again offers a wider range of companies and industries. The euro-sterling exchange rate has been bad for holidaymakers but great for British investors in Europe: invest in this region and you could hope for 8 per cent annual growth – though again you can't depend on that given the volatility of the global economy. That said, equities are incredibly cheap right now as the downturn in underlying share prices is based on economic doubts, not the value of the companies themselves. The BlackRock Continental Europe fund is a favourite among financial advisers for this sector.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
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