Executive Golf Magazine

It may be a tough time for investors but not one to despair. The experts tell you where best to place your faith

With the Stock Market seeing a significant correction in May from which, so far, it has only made a hesitant recovery, and with property still considered precariously overvalued many people are wondering just where they can put their money.

Fears of terrorist attacks, wars in the Middle East, rising oil prices, higher interest rates and the prospect of a slowdown in the United States economy (and the consequent effects of that on world growth) are making investors nervous. There are also fears emerging again about the property market and whether recent and future increases in interest rates will send prices finally into reverse. All in all, many investors are beginning to feel they are facing a difficult situation on many fronts and are wondering what key decisions they need to take to safeguard their wealth.

Justin Urquhart Stewart, director of investment managers Seven Investment Management, believes the current outlook does present a difficult challenge to investors. “Equities are going through a nervous time,” he says. “You have problems in emerging markets, growth figures are looking weaker and so the markets are having trouble deciding where they go from here and trying to second guess them is difficult.”

He says the recent market correction, ironically, came at a time when people had begun to have confidence in equities again. “It had just reached the stage when people felt they could go back into the market and that is exactly the time it started going wrong. People always have this amazing habit of buying at the top and selling at the bottom,” he says.

Mark Dampier, head of research at leading stockbrokers and asset managers Hargreaves Lansdown, says it is very difficult to predict where equities are going.

If I only had one week a year to invest I would choose the first week in November

“If I knew the answer I would be a multi-millionaire. I think if any of us could foretell the Stock Market we would be extremely rich,” he says.

Carl Astorri, head of investment strategy at leading private bank Coutts & Co., takes an upbeat view. He says it is still possible to get good returns on equities even in difficult times. “The nervousness in the markets since earlier this year has been caused by the Federal Reserve Bank’s decision to shift interest rates above neutral for the first time in five years,” he says.

“Once you move above neutral it does become a more difficult time for riskier assets such as equities and commodities.”

Yet he insists that certain equities do well in the window from when monetary policy tightens to when interest rates start to fall below neutral again – neutral being the level at which rates keep the economy stable.

“The last time the market was in such a window was in the late 1990s and that lasted five years. The equities that do well tend to be the bigger companies, defensive stocks and also more established markets such as the US, UK and Europe rather than emerging markets,” he says.

Astorri says the best option for many investors is to choose structured investment products which protect investors against losses but still offer the potential for gains. Coutts itself provides a range of such structured products. “I think they work well if you think, on balance, that equities are going to go up but are still a bit nervous about the possibility of them going down,” he adds.

Dampier doesn’t believe that investors should be unduly concerned by the recent fall in share prices. “I don’t think it was that big a correction. You have to set it against the three years we have had of a fantastic bull market. Over this time emerging markets in the Far East and Eastern Europe have been up 200 per cent and now they have come down 20 to 25 per cent. Similarly, the falls in the UK market have come after a period of significant increases,” he says.

“I wasn’t surprised by the correction. It had gone too far, too quickly really. I think we had got a little bit ahead of ourselves.”

Dampier believes there is a lot of truth in the adage that markets tend to fall in May only to rise again in the Autumn. “If I only had one week a year to invest I would choose the first week in November,” he adds.

Urquhart Stewart insists the worst possible response is to take bets on particular shares. “Those trying to pick today’s stock should remember that the stock of the day makes soup. If you pick stocks it is like getting John McCririck to pick your portfolio for you. It is great fun and you are having a punt but it is not serious investing.”

He believes that what people need in these uncertain times is to have a balanced portfolio with investments in a wide range of asset classes. “It applies at all times but in times like these where people are not sure what the future trends are likely to be, it gets you away from all the second guessing. If one asset class goes down then another may go up.”

He recommends that an investor should have a spread of investments in equities, in property, fixed interest deposits, commodities such as gold or commodity funds and alternative investments such as hedge funds or private equity (investing in private businesses). “The point of asset allocation is to smooth out the volatilities. You don’t end up as happened in 2000 when you had a lot of pension fund managers with 80 per cent of their money in equities and equities then fell by 60 per cent. They then got out of equities when they were about to recover. That is known as incompetence,” he says.

Despite the current market volatility, Dampier at Hargreaves Lansdown believes that investors should not be afraid of investing in equities. He points out that current price earnings (P/E) ratios (price of a share relative to its earnings) are relatively low at 11, compared to historic averages of about 13 to 14 and the 25 achieved in 2000 just before the market crashed. “Shares prices by any historical standard are not particularly high,” he says.

He recommends that anyone who is worried about market volatility but wants to derive income from their investments should look at income equity funds. These invest in shares that produce a good dividend yield such as BT and Lloyds TSB. He recommends the Invesco Perputual Income Fund managed by Neil Woodford. Unlike with money on deposit, the investor gets higher income (since the yields are greater than rates of interest) and also the prospect of capital growth as well. If you spend the interest, the value of money left on deposit is eroded by inflation over time.

“I think income funds ought to be the backbone of any portfolio. They give you the income you need and if you want to play golf all day you don’t want to be looking at shares all the time,” he says.

Brian Tora, investment communications director at Gerrard Investment Management, part of the Barclays Group, says buying shares in larger companies is often a good defensive strategy in a difficult market. “If you look for big companies in big markets and also companies producing high yields with low valuation levels.”

He also recommends that investors should consider structured investment products which sometimes offer guaranteed returns. “This might involve being offered a guaranteed 10 per cent return on one-third of your investment with the rest invested in the European markets for five years, for example.”

He also suggests looking at hedge funds which invest in financial derivatives to protect you from the potential downsides of the market. “With a market neutral hedge fund you might not do as well if the market goes up but you should fare better if the market goes down,” he adds.

Property
Over the past 10 years with the advent of buy to let mortgages many people have ploughed their money into property by becoming private sector landlords.

Returns have been unprecedented. In many areas of the country property has trebled in value since 2000. The London market, particularly in central areas, has seen increases of up to 20 per cent this year. Many worry, however, that the whole property market is still on the edge of a precipice and values could even fall if there is another rise in interest rates.

Some have dangerously begun to regard property as a one way bet, a refuge from the volatility of conventional pension investment products based on equities.
The big question now, however, is whether the property market is likely to take something of a slide over the next few years. There has certainly been evidence of this in the United States recently with developers having to throw in free swimming pools in order to achieve sales in some areas. Ed Stansfield, property economist at economic research consultancy Capital Economics, predicted a 20 per cent fall in house prices in 2004 which has so far failed to materialise. Prices, in fact, have continued to go up.

“We thought when the property market cooled in mid-2004 we were going to see something far less benign than what has transpired,” he says. “The Bank of England has to take credit for engineering the soft landing which we thought it probably couldn’t achieve.

“I think we underestimated the extent to which the banks would extend credit by raising the average income multiple that was being offered and I think we also underestimated also the impact of immigration.”

But he adds he still thinks the whole market sits on a knife-edge and any number of events could trigger a major correction. “I think we accept now it has to be something more than a pause in confidence which we thought might be enough in 2004 but if interest rates were to climb to 5.5 or 6 per cent it could have a big impact because everyone is so heavily borrowed,” he says.

However, he insists the market cannot carry on rising at anywhere near its current rate. “It might be that prices remain relatively static for 10 years and that, in effect, becomes the correction. We took the view that the weight of historical evidence was for a sudden fall.”

John Heron, director of mortgages for Paragon Group, one of the UK’s leading buy to let lenders, believes that investors should still have confidence in the property market. He says property as an investment is underpinned to a large extent by increased demand for private sector rented accommodation. “Many young people, in particular, are choosing to rent. Many are leaving college or university with high levels of debt, they are forming lasting relationships later in life and are opting to rent for about 10 years after leaving the parental home,” he says.

“Housing analysts are predicting that private rental property will make up about 15 per cent of total UK housing stock in 10 years’ time from a level of 10 per cent today.”

But if someone were looking to get into the buy to let market now where should they invest? “Rule number one is to follow tenant demand. City centre apartments might look attractive in the brochures but all the developers’ deals you can get are not going to find you a tenant if none wants to rent these apartments. Good letting areas often tend to be in established and more modest parts of town.”

Heron says that is not essential to have a large number of properties in order to be a successful property investor. “You can just have just a few as a hedge against the non performance of other assets. If you are getting to the 10 or more mark it is becoming like a business,” he adds. “With any property investment you have to take a five to 10-year horizon. Anything less does not make a great deal of sense.”

Many would agree that investing generally is about adopting a long term approach. Those who hold assets over a very long period often ride out difficult market conditions. The current uncertainty in investment markets is far from a new phenomenon and it is those who have the nerve to ride out any storm who are most likely to prove the winners in the end.

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