What hope for investment recovery in 2009?

From The Times
December 11, 2008

What hope for investment recovery in 2009?
We ask the experts for their predictions as beleaguered investors say good riddance to 2008
Mark Atherton

Most people cannot wait to see the end of 2008. Whether you were a saver, a stock market investor or a property owner, the past 12 months has delivered some nasty shocks to the system.
The FTSE 100 index of leading UK shares is down 32 per cent this year and the US stock market has fallen by 34 per cent. Emerging markets such as Russia and China, once the darlings of UK investors, have fared even worse.
Even traditional safe havens, such as bricks and mortar, have proved no defence against this year's chill financial winds. UK house prices are down 17 per cent while commercial property has fallen by about 20 per cent.
One piece of good news is that the situation has grown so bad that experts are not expecting it to deteriorate much in 2009. Here are their predictions of what is in store.

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The UK stock market
With the UK economy now in recession, most experts are forecasting that shares will struggle to make headway in early 2009. But the green shoots of recovery could begin to show in the latter part of the year as the market starts to expect an improvement in the economy. UBS, the Swiss bank, reckons that the FTSE 100 could recover to 5,800 from its current level of about 4,300. Among the sectors it favours are food retailers, health equipment and household goods. Its preferred stocks include Tesco, Smith & Nephew and Next.
Brewin Dolphin, the stockbroker, also forecasts a recovery, albeit a more modest one. Mike Lenhoff, Brewin's chief strategist, says: “There will be more bad news, but the market is already discounting a great deal of it, so shares are now looking cheap. Governments are making huge efforts to respond to the impact of the credit crunch and next year we should start to see them take effect.”
Brewin Dolphin is looking for good performance from sectors such as general retailing and media stocks. Among the shares it likes are Marks & Spencer and Reed Elsevier.
Global stock markets
The general consensus is that the US, which led the world into recession, will also lead the world out of the downturn, triggering a recovery in the US stock market. Max King, strategist at Investec Asset Management, says: “The US trade deficit is falling and household debt is lower than in the UK. The ability of the US economy to bounce back should never be underestimated.”
Meanwhile, Morgan Stanley, the US investment bank, thinks that emerging markets as a whole could rise by more than 60 per cent in the next 12 months. This reflects the expectation that the economies of the industrial world will shrink by 0.9 per cent, while those of the developing world will rise by 4.3 per cent.
For those wishing to invest through funds, Rob Harley, of Bestinvest, the independent financial adviser (IFA), suggests Aberdeen Emerging Markets and Legg Mason US Smaller Companies.
Bonds
Many experts reckon that a lot of bonds are attractively priced after the recent heavy falls. These price falls mean that bonds are also on comparatively high yields, which is good news for investors seeking income. Darius McDermott, of Chelsea Financial Services, another IFA, says: “Falling interest rates and falling inflation will be good for bonds and are likely to send prices higher. It is possible that investors could benefit from a high yield and a rise in the capital value of their investments.”
Among the bond funds that Mr McDermott favours are M&G Optimal Income, which yields 6.5 per cent, and the Henderson Strategic Bond fund, yielding 7.5 per cent.
Alternative investments
Mick Gilligan, a partner at Killik & Co, the stockbroker, says that popular investments such as fine wines and vintage cars have fallen off the radar as prices have fallen.
Among more widely traded alternative investments, Mr Gilligan thinks that gold could have a strong run, especially when investors realise the enormity of the debt burden in the developed economies. He also thinks that oil, which was trading at about $40 a barrel recently, should be considerably higher this time next year.
Meanwhile, experts say that private equity funds, which rely heavily on borrowing, could struggle.
Commercial property
Bill Siegle, of Cluttons, the chartered surveyor, reckons that commercial property prices are likely to continue falling as we enter 2009. As the recession bites, more tenants, including some household names, are likely to default on rental payments.
“There is still a bit further to go before we hit the bottom, though this is likely to happen sometime next year,” Mr Siegle says.The areas that he thinks will prove most profitable when the market recovers are retail warehouses and some industrial parks.
Savers face a bleak 12 months
Prudent savers are finding it harder to obtain a decent return after the Bank of England cut the base rate to its lowest level for 57 years. And with economists predicting that the base rate could drop as low as 0 per cent next year, the prospect for savers is looking increasingly bleak, writes Lauren Thompson.
The rates on savings accounts have fallen fast as the base rate has dropped by three percentage points in the past three months to only 2 per cent. Michelle Slade, of Moneyfacts.co.uk, the financial website, says: “The 7 per cent deals that were available in October seem like a distant memory. The best accounts now pay about 5 per cent - and these will probably not be around for long.”
Capital Economics, the research consultancy, expects the base rate to fall to 1 per cent in the first quarter of next year. It thinks that it could drop to 0 per cent by the end of the year. The experience of Japan, where interest rates have been near zero for years, provides a worrying indication of what that could mean for savers.
Simon Somerville, of Jupiter Asset Management, says: “The most that you can earn from a Japanese bank account is 0.4 per cent, but most pay no interest. Many Japanese have abandoned banks and put their savings in safes or under the mattress.”
There are still some good deals available in the UK. Leeds Building Society is offering 5 per cent on its Fixed Rate Postal Access Bond until May. Those hoping to lock in for three years can get 4.75 per cent with Cheshire Building Society's Three-Year Fixed Rate Bond.
Some of the highest returns are from foreign banks, such as ICICI, the Indian-owned bank, which offers 4.75 per cent for 12 months on its HiSAVE Fixed Rate bond. Even though the bank is foreign owned, deposits of up to £50,000 are guaranteed by the Financial Services Compensation Scheme.

http://www.timesonline.co.uk/tol/money/investment/article5326730.ece