Hey big savers, spend a little time in shares: Sue Fieldman looks at options as European equity prices rise and interest rates decline

THE BURNING question for savers and investors this week is not what suntan cream to pack for the holiday, but what to do with their money now interest rates and share prices are heading in opposite directions.

Hopes of lower UK rates helped push the FT-SE 100 share index to a record high on Friday of 2969.8, and analysts' year-end forecasts range up to 3500.

The collapse of the Exchange Rate Mechanism should also lead to interest rate cuts on the Continent and a boost for the European stock markets. However, there is a danger of forgetting investment opportunities closer to home.

Kean Seager of Whitechurch Securities, the investment advisers, said he is 'not desperately keen to rush into Europe'. He regards it as a 'bit of flavour of the month' and thinks the continental recession will last longer than expected.

Mr Seager is much more keen to fly the British investment flag, with a possible switch into mainland Europe later. His favoured UK unit trusts are equity income funds, and he suggests putting them into a personal equity plan to get the best tax advantage. He recommends smaller company funds, such as the Aetna Smaller Companies Dividend and GT Smaller Companies fund.

Peter Edwards of Premier Unit Trust Brokers also favours the UK, with income unit trusts in a Pep the best investment vehicle. He plumps for the Credit Suisse Income fund, Merlin Jupiter Income and M&G Midland & General.

Those who do like the idea of Europe can buy into a unit trust or investment trust as a more practical alternative to purchasing 10,000 BMW shares direct.

Peter Hargreaves of the investment advisers Hargreaves Lansdowne backs the Morgan Grenfell European Growth unit trust. He also favours the Fidelity European Values investment trust, which he describes as 'a bit sexy but exciting'. In other words, if you are of faint heart and prefer to lie back and think of England, the fund is not for you.

People wary of equity investment may be tempted by the flow of guaranteed bonds now reaching the market. Mostly, these are five-year bonds that invest in the stock market but are designed to return your original capital at the end of the term. Some advisers are sceptical about them.

Mr Seager is particularly concerned about the type that pay an income.

'I can see these bonds being very bad news five years down the line. If you put pounds 10,000 in but take out pounds 5,000 of income during the term, then if there is insufficient growth over the period, all you will get back at the end of the period is pounds 5,000.

'In fact, I think there should be sufficient growth, but people should be aware of the risk. To me, the products are being over-sold.'

All the economic pundits reckon there will be a further drop in interest rates, but they expect it to happen later rather than sooner.

Mr Hargreaves said: 'There is no point locking into, say, a 90-day building society account. I am a great believer in fairly instant access for building society money.'

The Northern Rock's postal account offers instant access and pays out interest of 7.5 per cent gross on investments of pounds 20,000 plus. The Scarborough Building Society pays out 7.65 per cent gross on its 90-day account for investments of pounds 25,000 or more.

The interest rate on guaranteed income bonds looks decidedly uninteresting. For investments of pounds 25,000 plus, advisory firm Baronworth rates the best buy as Prosperity Financial Services, which pays 4.95 per cent net (6.6 per cent gross).

While the rates on guaranteed income bonds are dropping, National Savings put up its rates on deposits of more than pounds 25,000 in two accounts last week.

If you hold Income Bonds worth pounds 25,000 or more, you will earn an extra 0.25 per cent gross. The rate for holdings below pounds 25,000 remains at 7 per cent gross.

A higher tier has also been introduced on the National Savings Investment Account. For investments of pounds 25,000, the variable rate of interest will be 6.5 per cent gross. For less than pounds 25,000, the rate remains at 6.25 per cent.

If you want security and a fixed rate, the 40th issue of National Savings certificates pays 5.75 per cent tax-free. Mr Hargreaves said: 'They are not bad for the 40 per cent taxpayer, especially when we could have a 50 per cent tax band in the autumn. If you think you might be a 50 per cent taxpayer, then they could be worth buying.'

(Photograph omitted)

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