2008 was one of the roughest years on record for global economies and officially the worst year for the FTSE 100 in its history.
As the dust starts to settle and the financial markets return to some sort of normality, the major question is where to invest this year or how to re-allocate a portfolio to achieve the greatest returns?
In this article, I have collated ideas from fund houses, individual fund managers, economists and market commentators as a rough guide to where money might be made in 2009.
Corporate bonds
Many fund managers believe that corporate defaults are likely to rise in 2009 but clients need to look beyond the negativity. “The extent of the rise in bond yields and decline in bond prices over the last year has gone way beyond anything that is reasonable by historical standards,” says James Gledhill of New Star.
“With most corporate bonds trading considerably below par there is an opportunity for investors to lock into some significant capital gains once sentiment improves, and in the meantime receive highly attractive yields.”
While L&G’s credit strategist Ben Bennett believes bond defaults will increase in 2009, he says: “Even assuming worst-case defaults … investors should be able to make excess returns.”
Russia
Russia could be the surprise investment of 2009. While many global economies are expected to record negative economic growth in 2009, Russia is viewed as one country that may have already gone through its negative downturn and is now firmly on the road to recovery. This view is supported by Raiffeisen Capital Management which predicts that Russian GDP may expand by up to 3.5% this year.
The case for investing in Russia is supported by the vastly oversold market situation. The panic selling in the last few months has pushed values far lower than fair values, which presents an excellent buying opportunity for the more adventurous investor.
North America
The first economy into the recession is usually the first out. This is the sentiment behind the sudden influx of new money into US equity-based funds.
The S&P 500 fell nearly 40% in 2008 but many fund mangers remain positive about the investment opportunities available to clients in North America. For example, Neptune’s Felix Wintle is one fund manager who is particularly optimistic. His optimism is derived from the quick action by the Fed in cutting interest rates and the “rock star” image of Barack Obama, which he believes will having an on-going positive effect on US market sentiment.
This perspective is shared by Terry Ewing, manager of the Ignis Growth Fund. He also believes the US could fare better under a democratic administration and is positive about the prospect of the US economy starting to show signs of recovery in the second quarter of the year.
Financials
Managers suggest market concerns about the stability of the financial sector mean it is best placed to bounce on renewed confidence, plus recent capital raisings by the banks mean they have the capital in place to weather the storm.
Indeed, many fund managers believe banks are valued low in historical terms, meaning that they could represent a very good buying opportunity.
UK equities
The highly respected Neil Woodford, head of investment at Invesco Perpetual, feels that overall UK equity market indices are now lower than 10 years ago and he therefore believes that there are good grounds for thinking that the overall market has bottomed out. As always, it is important to look at individual stocks and sectors. It is now possible to find very good value amongst companies well placed to get through this difficult period for the economy with rising earnings, cashflow and dividends and where this prospect is not appropriately valued by the market. Woodford cites the pharmaceuticals and utilities as being prime candidates in this category.
Emerging market debt
Emerging market debt could be another good bet for 2009. At a country level, emerging market balance sheets are strong, while emerging market central banks have built up a stockpile of foreign exchange reserves and have limited need for external financing.
Oil
The price of oil slid dramatically during the latter stages of 2008 and although analysts predict it will continue to slide in 2009, the pressure oil and oil stocks face now could see a complete reversal in the medium term.
Oil companies are reacting by cutting back on exploration and capital expenditure, and tight supply and reinvigorated demand from the developed world and the emerging markets are expected to bounce the oil price back to record levels.
Bob Doll, BlackRock’s global chief investment officer, says oil prices could go above $US150 once the recovery begins. Some others go even further and see the price of oil reaching $200 at some point within the next five years. It is a sad fact, but the world is running out of known oil which means the price of oil should only rise in the long term.
Commercial property
In December, the highly respected ex Fidelity special situations manager, Anthony Bolton, came out to call a bottom to the markets, citing commercial property as an area he was prepared to buy at yields of 7.5%.
With property prices down 47% and yields several percentage points above the bank base rate, he said he felt the investment would more than compensate him for the risk that some tenants might default.
Cash
For the risk averse, cash will always remain king. We would also recommend that all investors retain an element of cash in their investment portfolio as an emergency fund. This will mean that in the event of another stock market crash, investors will have cash reserves available to draw upon and thus avoid the need to encash their investments at the entirely wrong time in order to meet any income or capital requirements.
- The author can be contacted at Allchurch Bailey Investment Consultants Ltd, Almswood House, 93 High Street, Evesham, WR11 4DU; telephone 01386 442597, e-mail andrew.neale@allchurchbailey.co.uk.
