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What the experts say
By Sam Barrett
After several years of strong performance, the stockmarkets have become much more unpredictable, with strong increases wiped out one week and returned the next. But while it's still possible to make money, this change in investment climate requires a change in the way you invest.
"It's going to be a tougher year but not one when it will be impossible to make money," says Mark Dampier, research director at Hargreaves Lansdown. "Each piece of data that comes out will shape the market and determine where the investment opportunities are."
Just as different pieces of data will shape the market, a number of factors have caused the change in the investment climate. Possibly the biggest factor is the credit crunch. This started in the US and is being felt to varying degrees around the world, with the more developed markets at most risk of any fallout.
"We forecast a western economic slowdown over 2008 with technical recession in the US a real possibility," says Jeremy Batstone-Carr, director of private client research at Charles Stanley. He believes that base rate cuts might mean that markets recover in 2009, but that until then the markets will be a lot rockier with more corporate profit warnings as companies struggle with more expensive credit.
Indeed the UK has already seen signs of a slowdown. But in spite of this, some sectors of the stockmarket will be less affected than others. Dampier explains: "Sectors such as utilities and telecoms are fairly immune to the current market conditions. They're not so affected when consumers cut back on spending." He also recommends sticking to quality names as they are more likely to withstand the pressures of a difficult market.
A mixed year on the stockmarket
Gavin Oldham, chief executive of the Share Centre, also believes it's going to be a mixed year for stockmarket investors. He predicts that the FTSE 100 will finish the year lower on balance, possibly around 6000. "Within the year, and the index, there will be many different stories to tell. The banks, property and retail will continue to suffer, although there may be some cheap bids to lift the gloom, for instance Woolworths (WLW) or Halfords (HFD)."
He favours the oil support services sector, which will benefit from exploration and high oil prices, alternative energy and aerospace and defence, which will do well due to global tensions.
As well as shifting to defensive stocks during the slowdown, some investors are preferring to take a less risky approach to investing. This is something that Tom Ryan, director of Barclays Stockbrokers, has noticed. He's seen a shift towards
structured products, which give investors more protected growth. For example, Barclays has issued 16 different investment notes including a FTSE 100 investment note that is 100% capital protected and gives 140% of any rise in the index, and an alternative energy investment note offering 100% capital protection and 100% of any rise of a weighted basket of alternative energy companies.
Although these are term products, they are traded on the stockmarket, which makes them eligible for ISAs.
Ask the experts
Passing on investment decisions to the experts will also become a major trend in 2008. "We've seen a movement away from shares in ISA portfolios with many investors looking to hold at least part of their holdings in funds," Ryan explains. As well as taking advantage of their expertise this approach also allows you to get good diversification. This can be especially important when fortunes are so mixed as only an unlucky manager will pick a basket of losers.
Although it's possible to plump for single manager funds, Nick O'Shea, director of independent financial advisers Pharon, is a big fan of the multi-manager approach to investment and believes it will become even more important in 2008. "With a multi-manager fund you have good diversification with between 16 and 25 funds within the portfolio. This gives a lot of diversity through exposure to different classes. Additionally the manager will use his expertise to decide the portfolio weightings."
He admits that these funds have higher total expense ratios than other funds, but says this is usually justified by better performance. He recommends multi-manager funds from investment companies Jupiter, Newton, Schroders as well as IFA-only provider Lawrence House.
While many investors are battening down the hatches and sticking with the well-known names, it may also be worth looking outside the UK and developed markets to what are traditionally seen as riskier markets. "Emerging markets are seen as higher risks, but in the current conditions they may turn out to be lower risk," explains Dampier.
While China, India and the Asia-Pacific region have all been tipped as the next big thing, he plumps for Russia as the emerging market worth considering in 2008. "It's been overlooked but has huge amounts of oil and gas. It's also a strong market that is well insulated from the credit crisis thanks to the domestic growth it's seen from people looking to buy their homes," he explains.
But he's not advocating a gung-ho switch entirely into Russian funds. The maximum exposure he recommends is 5%, and then only if you're comfortable with the additional volatility that emerging markets offer. Whether you go for a protected investment note, an energy stock or an emerging markets fund, ensure you're happy with the risk involved.
With markets set to be more volatile, it could be a bumpy ride, requiring nerves of steel.
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