A chance to buy into markets cheaply

With equities at historic lows they may offer more than gold and bonds

Matthew West
Sunday 26 August 2012 00:50
Gold coins are still a safe haven, but they are unlikely to offer great returns at present
Gold coins are still a safe haven, but they are unlikely to offer great returns at present

Global investment markets have been remarkably sanguine this summer, with most seeing a steady upward tick in prices, despite all the economic double-dip doom and gloom. The old City adage of sell in May and come back St Leger's Day would have served you poorly as an investor this year.

But with the eurozone problems looking as intractable as ever and global economic malaise spreading from the US and even China, there is more than a feeling that the summer represented calm before the storm. According to Jane Coffey, the head of equities at Royal London Asset Management, investment markets are "in pretty defensive territory so there is some upside available".

Against such a backdrop of uncertainty the advice that investors should consider buying into equities might seem unusual, but with equity prices at historic low levels they could potentially offer a better alternative to traditional safe-haven investments.

Equity income funds which invest in companies that consistently provide a dividend yield of around 4 or 5 per cent are, according to Ms Coffey, one way of doing this with minimal risk to the investor. The funds have remained fairly resilient throughout the credit crisis by investing in companies, such as Vodafone or GlaxoSmithKline, that have consistently provided inflation-beating dividend yields over a number of years, offering a buffer to market volatility.

"It makes sense that people look for the quality companies that give them a healthy dividend yield which are often telecoms, pharmaceuticals and utilities. So all defensive sectors but also well performing sectors," Ms Coffey says.

Investors with a slightly higher risk appetite, suggests Justin Urquhart Stewart, the managing director of Severn Investment management, could consider Exchange Traded Funds (ETFs), which invest in a whole market index such as the FTSE 100, rather than individual company stocks.

"Buying simple ETFs can be a very cheap and easy way of buying into markets as a whole and buying into quality stocks as a result. If in the US, for example, politicians fail to reach agreement on the fiscal cliff by the end of the year, that may introduce a degree of volatility into the S&P 500, which could present an opportunity to buy into the market cheaply," he says.

Equally if there are further problems in the eurozone, the Eurostoxx50 – which includes companies such as Siemens, BASF and Danone – could experience similar levels of volatility to last year, when it fell 20 per cent, presenting private investors with another buying opportunity.

"The good thing about ETFs is that you are buying into quality stocks without taking the risk of buying into those stocks individually," says Mr Urquhart Stewart.

"I would not be selling the pension fund to get into ETFs, but if you had some spare cash for a punt then it would be a better bet than the 2.30 at Newmarket," he adds.

Meanwhile, Jeremy Batstone-Carr, a director of private equity research at Charles Stanley, says investors have "no real alternative but to invest in the equity markets if they are looking for a reasonable return".

He suggests the markets are already questioning the safe haven status of British, American and German sovereign bonds.

"The credit ratings agencies are beginning to ask questions about the validity of Britain's triple-A credit rating. I think if we get another slice of bad data some of the ratings agencies are going to be chomping at the bit to downgrade Britain.

"It's not too unlikely that continuing disagreements about the budget deficit and the fiscal cliff could see the US suffer another credit rating downgrade at the end of the year. And failure to agree legislation could impact the US economy by as much as 5 per cent of GDP next year," Mr Batstone-Carr says.

Ms Coffey is equally dismissive of the trio's status as safe havens, particularly Germany.

"Germany is a very dubious safe haven for me. If a solution is found to the eurozone crisis then that will have an impact on Germany's safe haven status as yields will go up.

"If they don't and the eurozone breaks up and Europe goes into a deeper, darker recession, then Germany may stay a safe haven but people may not want to give their money to a country that they perceive as having been responsible for the EU's demise," she says.

The other favourite safe haven – gold – is also unlikely to yield any great return; although as usual the advice that investors should hold physical gold as part of a balanced portfolio of investments still stands.

For Mr Batstone-Carr, it is still possible that gold could reach $2,000 an ounce, or even as much as $5,000. Much, he says, will depend on the policies of central banks over the next year, and to what extent central banks in Europe, Britain and the US seek to devalue their currencies, which he argues are still over-valued.

Ms Coffey suggests this verges on the nuclear option, however. "It is quite hard for an individual investor to buy gold unless you have the money to buy individual gold bars. If you are investing in gold because you think Armageddon is coming, then you want to put your money into physical gold rather than paper gold or a gold ETF," she says.

"The other reason you might want gold is because you fear central banks will print too much money, reducing the real value of a currency or even causing hyperinflation, which means your gold bar becomes a physical asset," Ms Coffey adds.

For Mr Urquhart Stewart, gold is the investment world's equivalent of the teddy bear: reassuring but ultimately not much use.

"It could go up a little, but it's going to be marginal. Buy gold coins, or better still buy medieval gold coins; at least they are interesting, that's what I did."

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