2014 investment tips for beginners
Given the paltry savings rates on offer, it was only a matter of time before savers rekindled their love affair with the stockmarket.
During September 2013, thousands of UK investors squirrelled away some £1.3 billion into funds that invest in shares - in fact between July and the end of September, these investment vehicles raked in a total of £3.8 billion, the highest three-month intake for more than 13 years, according to the Investment Management Association.
For those willing to beat the banks by taking some risk, there are big gains to be had with the UK's FTSE 100 index up by 17% over the past year – far surpassing the return from any savings account.
Experts believe the strong gains have the potential to spill into 2014 and beyond. Martin Bamford, an independent financial adviser at Informed Choice, says: "It is notoriously difficult to gaze into the crystal ball and pick an investment sector which might perform the best in the short term. But there are attractions for several asset classes right now, particularly UK and US equities which have the potential to perform strongly as the global economy recovers."
To help you find the best places for your money, Moneywise has looked at five key areas, which could potentially to do well in 2014.
Britain has been surfing a wave of economic recovery and between July and September, the UK's economy grew by 0.8% – its biggest three-month gain since 2010 as exports and overall business activity improved. On the back of this, the UK stockmarket has risen strongly.
Long-term returns from UK Equity Income funds tend to be attractive, in part thanks to dividends Gary Potter, co-head of multi-manager at F&C Investments, believes there is more to come. He says: "The UK still looks very attractive and shares will once again surprise on the upside next year. I believe the FTSE 100 could surpass its previous high of 6390 in 1999 and could push on to 7500 in 2014."
An area that remains hugely popular with investors is equity income. These funds invest in dividend-paying firms - companies that share their profits with investors. And 2014 is set to be a bumper year for dividends, with UK-listed firms expected to shell out some £100 billion in investor payouts. While the numbers are inflated on the back of an anticipated £16.6 billion one-off special dividend from Vodafone, the total payout is still more than £30 billion above the pre-recession high, according to Capita Asset Services.
Equity income funds are also considered to generally be a sensible way to play the UK stockmarket, given they typically invest in large firms with plenty of cash on their books. Justin Modray, founder of independent financial adviser Candid Financial Advice, says: "Long- term returns from UK equity income funds tend to be attractive, in part thanks to dividends, and their more defensive nature may prove useful if we experience another downturn."
UK fund recommendations:
Modray recommends Cazenove UK Equity Income fund. It is investing in big and stable household names such as Vodafone and Tesco. It has returned 141% over the past five years and pays a historic yield of 3.9%.
Patrick Connolly, a financial planner at Chase de Vere, and Jason Hollands, managing director at Bestinvest, both tip the Threadneedle UK Equity Income fund, which counts BT and ITV among its top holdings. The fund has returned 110%, and yields 3.5%. Hollands also likes Unicorn UK Income. He says: "It differs radically from most UK Equity Income funds by focusing on small-cap names, which have been faring well recently. It has achieved a considerable 256% return over the five-year term and has a yield of 3.2%.
The world's largest economy appears to be exiting the doldrums thanks to ultra-low interest rates and vast injections of cash, via so-called quantitative easing (QE), from its central bank, the Federal Reserve.
Like the UK, the US has seen its economy steadily rise and at the latest count it rose by a better-than-expected 2.8% in the three months to the end of September. Most notably, 2013 has witnessed US shares enjoy their best year for a decade, raising fears that the market is becoming expensive. This year is proving to be a boon for corporate earnings, where many firms are delivering results ahead of expectations.
Russ Koesterich, chief investment strategist at BlackRock, says: "This strong trend in corporate earnings has been a key factor in supporting this year's rally in stocks. We believe this can continue into 2014."
However, experts warn that while the case for the US looks more promising over the long term, there is a risk the recovery could slow when the Federal Reserve starts scaling back its QE initiative, which is predicted to happen at some point in 2014. As such investors should expect some volatility.
US fund recommendations:
Modray likes the Fidelity Moneybuilder US Index, a passive fund that mirrors the performance of America's S&P 500 index, which includes technology giants Apple and Google. Connolly rates the AXA Framlington American Growth fund, up 117% over five years, which also has investments in the likes of Apple and Google.
Hollands favours GAM Star GAMCO US Equity, with holdings in American Express and Texas Instruments. It has delivered a 152% return (in US dollar terms) to its investors over five years.
Once the world's second-largest economy, Japan has been ousted from that position by China. But on the back of the implementation of some extraordinary economic measures, dubbed ‘Abenomics' after its Prime Minister Shinzo Abe 2013, it has enjoyed a change in fortune.
A devaluing of the currency has hugely helped the country's exporters, making their goods and services cheaper; while there has also been strong upgrades in corporate earnings. However, it is still troubled by debt.
James de Bunsen, manager of the Henderson Multi-Manager Income & Growth fund, says: "Japan's valuations relative to the rest of the world still look attractive. The government has strong political mandate to pursue reforms and achieve goals"
Japan fund recommendations:
Hollands says: "While the easy money phase has now happened, the Japanese restructuring story has further legs in it, with the exchange rate considerably more favourable to Japan's exporters." His top pick is the GLG Japan Cora Alpha fund, while Connolly cites the Aberdeen Japan Growth fund, both of which are 65% better over the past five years.
The world's emerging markets, typified by Brazil, Russia, India and China, or so-called BRIC nations, have endured a tougher time of late. But to put this in perspective, China – the powerhouse of emerging markets – saw its economy, which has slowed in recent years, still expand by 7.8% year-on-year in the three months to September.
The Brics alone house some 40% of the world's population, alongside a wealth of natural reserves. As they prosper, it is predicted their citizens will spend more money, driving markets higher. And while the Brics may have suffered, they are trading at valuation levels near 2008 credit-crunch lows, offering a compelling buying opportunity but only for intrepid investors.
Hollands says: "With valuations pretty bombed out, some commentators are signalling this area as a great buying opportunity. So for long-term investors, building emerging market positions over the coming months may be a perfectly sensible move – just don't pile in blindly."
Emerging markets fund recommendations:
Modray says: "While often volatile in the short term, the longer-term outlook for emerging markets remains very enticing." He rates the JPM Emerging Markets Income fund, which launched in 2012 and has a high-yield bias. Hollands' core pick is Lazard Emerging Markets, with investments in Hong Kong and Indonesia. It is up 105% over five years while Connolly recommends JPMorgan Emerging Markets, up 85%.
Commercial property fell out of favour when the credit crunch hit back in 2008 but as the UK economic recovery gathers pace, it has come back on to the radar. Investors can spread their cash over a wide variety of properties, such as offices and retail parks, and the rents paid by tenants can provide a stable income above inflation for yield-hungry investors. There is also scope for capital growth over the coming years, too.
Commercial property recommendations:
Hollands says: "We favour funds with exposure to long leases, high-quality tenants and London and the South East." His main pick is the 4.4% yielding Henderson UK Property Fund. Modray rates L&G UK Property, which has a yield of 2.8%, while Connolly is backing Ignis UK Property with 3.5% income yield, which has also risen by 21% over the past five years.
Source for five-year performance stats: FE Trustnet
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
An acronym, which stands for Brazil, Russia, India and China; countries all deemed to be at a similar stage of advanced economic development. The term was coined in 2001 in a report written by Goldman Sachs director Jim O’Neill who speculated that, by 2050, these four economies would be wealthier than most of the current major G7 economic powers.