Where should you invest in 2012?
The best places to invest do not easily reveal themselves in any market conditions but the current environment makes it particularly tricky to know how to position your investment portfolio.
So what can you learn from the professionals? We asked six stockmarket experts to tell us what they believe 2012 holds for the markets and how they are positioning themselves to profit.
GAVIN HAYNES, INVESTMENT DIRECTOR, WHITECHURCH SECURITIES
Haynes feels 2012 will be a good year for investors to get into emerging markets. The shift in economic power from US-led Western economies to Asia and emerging markets is ongoing but in 2011, risk aversion, concerns over inflation and slowing global growth left emerging markets out-of-favour, meaning there are many buying opportunities out there.
Haynes’ top picks for 2012 are focused on Asia.
He likes the First State Asia Pacific Leaders fund, managed by Angus Tulloch, which provides good core exposure to the region. He also likes the Newton Equity income fund, which combines the philosophy of buying dividend-paying stocks with investment in Asia to good effect. For anyone looking for a broader emerging markets investment, he suggests the Aberdeen Emerging Markets fund because of its experienced management team.
Haynes suggests another key problem for investors in 2012 will be the issue of income starvation. There is unlikely to be an increase in interest rates, which will force people to turn to the stockmarket in the hunt for income.
He says: “There are good opportunities in corporate bond markets. We like strategic bond funds, which can invest across fixed income asset classes. In particular, we like the M&G Strategic Corporate bond and the Jupiter Strategic bond funds.”
MARK DAMPIER, HEAD OF RESEARCH, HARGREAVES LANSDOWN
Dampier says that he has never seen market volatility at current levels and for 2012 he is looking to funds that aim to beat cash while avoiding any nasty surprises.
With this in mind, he likes the Melchior European Absolute fund. This is a fund that has the ability to ‘short’ a stock (in other words, make money when the share price is falling) and, above all, it aims to protect investors’ capital.
“Many traditional ‘safe haven’ assets, such as government bonds, are simply not safe right now.” He still likes corporate bonds but admits the impact of the eurozone situation is diffi cult to predict. He says managers such as Richard Woolnough at M&G are relatively confident on the outlook for the sector because markets are factoring in high levels of corporate bankruptcies. Dampier’s favourite is the M&G Optimal fund, currently paying a yield of 4.85%.
For those looking for a riskier investment, Dampier suggests Europe and Japan – the two areas of the market that look ‘phenomenally’ cheap. He says: “Every possible bad situation is now in the price of shares with the possible exception of a break-up of the euro. That said, everyone says the break-up of the euro would be a disaster. It might not be – it might be the buying opportunity of the decade.”
DARIUS MCDERMOTT, MANAGING DIRECTOR, CHELSEA FINANCIAL SERVICES
McDermott is putting his faith in dividends for 2012. He believes that in uncertain times a 5-6% payout is extremely valuable.
He particularly likes the global equity income funds, such as M&G Global Dividend and Newton Global Higher Income. He says: “They invest in companies that are paying strong dividends at a time when the markets are volatile. Not much is going to affect the dividend of companies such as AstraZeneca. These are well-capitalised companies with strong cash flows.”
McDermott says the macroeconomic situation is as difficult as he has ever seen it and that building a strong view on the direction of the markets in 2012 is tricky. There are plenty of risks but if policymakers come up with a credible solution to the eurozone crisis, equity markets could be “back to the races”.
He adds: “If Europe does sort itself out then the markets could move up by 20%. In this case, it may be punchier areas such as emerging markets or growth shares that perform the best.
“I don’t believe economic growth will come back strongly even if Europe resolves itself, but equities have been badly beaten up. If the market does start to feel a little bit better I would suggest a fund such as Newton Asian Income, which gives access to higher growth markets.”
IAN BRADY, OAKTREE WEALTH MANAGEMENT
Brady is also a firm believer in dividends and is heading into 2012 with all his UK share exposure in equity income. Specifically, he holds the Franklin Templeton UK Equity Income, Artemis Income and the Newton Higher Income funds. For each fund, he has ensured that the manager holds little weight in banks or commodities, where he feels there is the potential for significant weakness.
He says: “Investors have to balance their need for a good return from their investment against the risk of a cataclysmic loss. We are entering a draconian economic period where the strong will get stronger and the weak will be left to whither on the vine. What we are doing is looking for the strongest of the strong.
“The banks, for example, are ‘cheap’ but it is not worth taking the risk that they could go to zero. The same is true of commodity-orientated companies. The balance of probabilities might suggest they could go up – but it is a big risk to take.”
Brady equates the current environment to “economic hill-walking”: investors are on a narrow ledge, with infl ation on one side and deflation on the other. Policymakers need to try to find a firm footing without sending the economy over the precipice.
JOHN HUSSELBEE, CHIEF EXECUTIVE, NORTH INVESTMENT PARTNERS
Husselbee believes the global economic environment is not as complex as it may seem. With developed markets entering a prolonged period of weakness, investors need to look to higher growth areas of the world, such as emerging markets.
His choices for 2012 are the Aberdeen and First State Emerging Markets funds for those investors with capital preservation in mind, and the Hexam Emerging Market fund for those investors willing to take a little more risk.
He says: “In 2012, developed markets will remain in a low-growth environment. Both governments and consumers are still going through a programme of debt reduction.
“There may be some growth in the US but it will not be significant. The real growth engine is the East. After some inflationary problems they raised interest rates, but this seems to be reversing and consumers in Asia and other emerging markets are gradually starting to spend.”
TIM COCKERILL, HEAD OF RESEARCH, ROWAN DARTINGTON
Cockerill prefers UK funds that invest in solid companies with strong business models or cash flows, which can continue to thrive and may even benefit from the current economic climate.
His top fund for the year is JO Hambro’s UK Opportunities fund, run by John Wood. This reflects his generally gloomy outlook for the UK economy as the impact of eurozone uncertainty continues to weigh on growth.
Cockerill also favours the Liontrust Special Situations fund, run by Anthony Cross and Julian Fosh. The managers’ process looks at a company’s ‘economic advantage’, including barriers to entry, cash flow and balance sheet strength. He admits neither of his choices is exciting but believes excitement is best avoided in the current economic climate.
WHAT SHOULD YOUR INVESTMENT STRATEGY BE?
Most managers believe that the economic environment will remain tough in 2012 and beyond, hampered by weakness in the eurozone, bank deleveraging and slower growth in emerging markets.
The message is that those business that are low risk, cash generative and pay high dividends, wherever they are in the world, are likely to be the winners in the current climate.
AND WHAT SHOULD YOU AVOID?
The most painful lesson in investing is the importance of avoiding the weaker areas as well as finding the strong ones. With this in mind, what are the experts avoiding?
Mark Holden, manager of the Ignis UK Focus fund has moved out of financials: “We can’t see a situation where the problems in Europe do anything other than materially damage the outlook for the banks. They are almost impossible to analyse. They have to cut debt and will have to sell large chunks of their business to do so, cutting into the muscle of their business. The outlook for bank profi tability has changed and I can’t see a reason to be invested.”
Elsewhere, businesses focused on the mainstream Western consumer remain unpopular. Simon Haines, manager of the Threadneedle UK Mid-250 fund, says there are simply better opportunities overseas. He also dislikes the mining sector, believing that shaky politics in some emerging markets and an overoptimistic gold price have left much of the sector overvalued.
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).
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 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).
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.
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.
This is the opposite of inflation and refers to a decrease in the price of goods, services and raw materials. Economically, deflation is bad news: the only major period of deflation happened in the 1920s and 1930s in the Great Depression. Not to be confused with disinflation, which is a slowing down in the rate of price increases. When governments raise interest rates to reduce inflation this is often (wrongly) described as deflationary but is really an attempt to introduce an element of disinflation.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.
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.