Where to invest in 2015: equities
In retrospect, if 2013 was the party, 2014 was something more akin to a hangover for UK investors.
Indeed, as the Christmas decorations come down and the fuzzy heads from New Year's Eve clear, many Brits will be wondering how they can make their cash work better for them in 2015 than perhaps it has done in the previous 12 months.
To put it in context, while 2013 witnessed the UK's FTSE 100 index soar by 19%, by late-November last year, following some steep ups and downs, the UK's blue-chip index had limped ahead by just 3%.
But ultimately investing should never be considered in terms of a discrete 12-month period. After all, over three years, Britain's blue-chip index is up by a more than respectable 45% – far beyond what any savings account has offered.
Looking ahead into 2015, there will undoubtedly be opportunities but simultaneously there is no shortage of challenges.
The UK has a general election to get through, the eurozone is struggling with its own economic engine and geopolitical issues still engulf the Middle East as well as Eastern Europe in the form of the Russia/ Ukraine conflict, all of which have the potential to weigh on markets. In addition, there is the looming prospect of higher interest rates.
But sensible investing is about diversification and looking longer term. So we've asked the experts for their views on the future for equities, as well as their suggestions for what you might consider putting in your stocks and shares Isa.
Despite its comparatively lacklustre 2013, the UK market still hit a 14-year peak while the US market reached its own new highs. And many experts, although cautious, believe there are potentially more gains to come, especially given the strong rebound both the UK and US economies are enjoying.
But, given the performance of recent years, some markets are far from cheap, especially the US. However, for investors willing to take on the risk, funds – which invest in shares – could be a good long-term bet. A number of themes appear to be on the radar, namely Japan, Europe and the UK.
Patrick Connolly a certified financial planner at Chase de Vere, believes that markets are awash with uncertainty given the plethora of economic and political obstacles ahead. But he likes the UK: the economy is doing well and, at the time of writing, Blighty was on track to enjoy its best economic growth rate for some seven years. Connolly says: "The market still offers some value in comparative terms. I feel it could be a good middle ground."
For those looking at investing in Britain, Ben Willis, head of research at wealth manager Whitechurch Securities, recommends Equity Income funds that invest in dividend-paying firms – corporations that share their profits with investors. Vodafone, for example, made a world record special payout of some £16.5 billion in 2014 after selling its US business; and dividend-monitoring firm Capita forecasts that overall payouts from UK firms should be £85.8 billion in 2015.
Europe and/or Japan might pique the interest of the more intrepid. Despite the economic woes of the embattled eurozone, many of the regions' firms are global operations, and not reliant on local customers to grow their business. There is also talk of the European Central Bank injecting some cash into the region via quantitative easing (QE), a process that has been very supportive of equities, and one which helped the UK and US economies get back on their feet.
Adrian Lowcock, head of investing at AXA Wealth, says: "Overall, we are positive on Europe given the cheap valuations of equities relative to other markets such as the US."
One region that has already turned the QE tap on is Japan, a country that while struggling with its own economic issues remains a favoured play for many given that its government is instigating numerous new reforms, all of which should be a boon for investors provided they come to fruition.
Mark Dampier, head of research at Hargreaves Lansdown, says: "The market looks relatively good value compared to most other major markets, with corporate profits rising quite strongly." As for struggling emerging markets, such as China, they remain strictly for the very risk-tolerant but as Connolly says: "At some point they will outperform and, in terms of valuations, remain cheap."
Equity fund tips
For UK investors, Ben Willis tips the Woodford Equity Income fund run by Neil Woodford, famous for delivering strong, long-term returns. The portfolio was only launched in mid-2014 and has already proved hugely popular.
Patrick Connolly likes Threadneedle UK Equity Income, up 68% over three years. He says: "Its managers are highly experienced and take a fairly contrarian approach to investing." For investors looking towards the land of the rising sun, a preferred pick for Adrian Lowcock is GLG Japan CoreAlpha, up 37% over the same timeframe. He says: "Its manager looks for out-of-favour companies, which are well managed and financially solid. He buys them cheap before the turnaround story is recognised."
Adrian Lowcock also tips BlackRock Continental European, 65% better over three years. He says: "The manager focuses predominantly on large companies, where we believe offer the most attractive opportunities at present."
All investment returns are measured against a benchmark to represent “the market” and an investment that performs better than the benchmark is said to have outperformed the market. An active managed fund will seek to outperform a relevant index through superior selection of investments (unlike a tracker fund which can never outperform the market). Outperform is also an investment analyst’s recommendation, meaning that a specific share is expected to perform better than its peers in the market.
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.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
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.
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).
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.