The year ahead: thoughts on where to invest
2014 will not make the history books as an epic year for savers and investors. The FTSE 100 was down over the year, savings accounts still paid next-to-nothing. This was in spite of a relatively promising start to the year, with the global economy in recovery, companies in rude health and an apparently benign geopolitical backdrop.
2015 starts with a far more unpromising environment. The Russian crisis rumbles on, while the Middle East continues to see turmoil. The geopolitical impact of a lower oil price has yet to be quantified. Economic indicators show slowing growth, even in the stronger economies and the Eurozone and Japan are still contending with potential deflation. In the UK, the uncertainty surrounding the General Election threatens to create volatility.
Nevertheless, even in 2014 there were pockets of strength – gilts, Chinese equities, the US and commercial property, for example – and the same will be true in 2015. In 2014, the best areas were those that looking the least likely to do well at the start of the year. Applying the same logic to 2015 would imply that Russian equities or government bonds might be set for a strong year. However, I would question whether these are the best places to start investing this year.
Although the usual rules apply – holding a diversified, balanced portfolio that includes some fixed income, shares and commercial property for the lion’s share of your portfolio is undoubtedly the safest approach – I would hazard a couple of observations. Much of the fixed income market does not offer a good reward for the risk taken. 2015 might be the year in which interest rates finally rise and that will create volatility in bond markets. I’m sticking with strategic bond funds (specifically Artemic Strategic Bond), leaving it to the experts to determine those parts of the fixed income market that still offer value.
In selecting between the various global stock markets, the decision is really between those markets where recovery is assured, but share prices look expensive, such as the US, and those areas that may offer more bargains, but where the economic data is still variable, such as Japan and Europe. Emerging markets look cheap, but declining commodity prices may hit commodity producing economies particularly hard. Areas such as India are less exposed, but have had a good bounce in 2014 and this may not be a good starting point for new investors.
As ever, it isn’t easy. There are no bargains and there are a lot of risks. If there is an improvement in the global economy, the Eurozone, Japan and emerging markets are likely to bounce. My preference would be for the UK: It may sound a boring choice, but the UK stock market has had a poor year relative to the UK’s economic strength. The election may create some disruption, but if the result goes the ‘right’ way, there could be a significant bounce. The Majedie UK Income and Schroder UK Alpha will be going in my Isa this year.
These are, of course, just the views of a hobbyist investor, but in a year where the rates on savings accounts are likely to remain at historically low levels, I think it’s important to look beyond cash and make your money work a little harder. So that would be my new year message: dip a toe outside cash this year. In the long-term, it may make for happier New Years.