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.
Guide to emerging markets
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.