Another year of depression or are there grounds for optimism?

Published on Friday 2 January 2009 21:47

THIS time last year, most experts delivered their predictions for the 12 months ahead with confidence and conviction.

Many of the UK's leading investors and economists were certain that financials would be the place to invest, commodities would soar unchecked, the housing market decline would prove merely a blip and that the stock market would end above the 6,000 mark.

How wrong they were. The FTSE 100 has experienced the worst year since the index was created; oil and sterling are at lows unimaginable a year ago; mortgage lending has dried up and banks are mired in unprecedented turmoil – nowhere more so than in Scotland.

Undaunted, we asked some of Scotland's top investment commentators for their investment tips for 2009 – where to invest (and where not to invest), the assets that will fare best and the sectors poised to produce the best returns.

Here's what they had to say:

Alan Steel, chairman of Alan Steel Asset Management

NO WONDER most of us got 2008 wrong: 80 years of stock market volatility crammed into one, plus the worst banking conditions for 75 years.

But history tells us this is the time to take a deep breath and embrace value. This is a once-in-a-lifetime opportunity to buy stock market assets at massive discounts. So, will it pay off spectacularly over 12 months? Perhaps not – but those brave enough now will be very pleased in three years, in my view.

The sectors to consider? For the brave, the Far East, energy and commodities, which have been hit much harder than should have been the case.

For the medium-risk brigade, quality international and UK income funds look great value. For the cautious, good-quality corporate bond and fixed interest funds, with a focus on index-linked, should be rewarding over the next three years.

Alex Montgomery, head of asset management at Turcan Connell

THE heart murmur of the credit crunch was turned into a full cardiac arrest in September, due to the US government's extraordinary decision to allow Lehman Brothers to fail. The consequent seizure has affected all corners of the global financial system.

There will be many more corporate failures in 2009 – this is already priced in to stock and bond markets. But investors should not simply take refuge in cash, which is a poor long-term investment. Barclays Capital's 2008 Equity Gilt Study showed that equities outperformed cash in 75 per cent of consecutive five-year periods, in 93 per cent of ten-year periods and in 99 per cent of 18-year periods.

With sharp falls in 2008, many well-financed, quality companies are now attractively priced and paying equity dividends and bond interest well ahead of deposit rates.

Similarly, sentiment is extraordinarily negative, typically a good sign when investing. A weak stock market is better for net savers as lower prices mean more shares, units or bonds can be bought for a given sum. We expect 2009 to be volatile until the outlook becomes clearer, but remain certain long-term investors will be rewarded for taking risk.

Ken Taylor, director of Mackenzie Taylor Wealth Management

IN 2009, I believe that house prices will fall by a further 20 per cent on average; corporate bonds will outperform equities; at least one high-profile investment scheme will collapse in scandal and several major insurance companies will consolidate.

The best returns will come from overseas equities, but with considerable volatility attached. India in particular may well deliver stellar returns, assuming it does not go to war with Pakistan.

Good corporate bond funds will deliver superb returns as interest rates continue to fall and inflation reduces further.

It is going to be a year in which we all need to be careful, patient and sensible. Buy collectives and seek out the really gifted fund managers. Avoid fads and only invest in something you understand. If the FTSE reaches 4,600 by December 2009, we can consider that a good result.

John Moore, director of Central Investment Services

THIS year will be one of continuing bad news for the economy and jobs, but a better year for investment markets.

If we believe the global stimulus packages are going to ensure the economy doesn't fall into the abyss (and I believe that we must), then we will see a recovery for investment markets through 2009 as sentiment improves. The spending plans announced will, in my opinion, by the catalyst for a sharp rebound in commodity prices as demand for natural resources and energy increases.

This should also reignite demand in the emerging markets and both factors will serve to drive commodity prices higher.

For those looking for higher income or less volatility, then valuations for investment-grade corporate bonds look attractive.

Currently, yields on quality corporate bonds assume about a 35 per cent default rate over the next five years. I believe this is unrealistic, so as yields come down investors will also benefit from capital appreciation on the underlying securities.

Gordon Wilson, managing director, Thomson Shepherd

PREDICTING markets in the short term is a mug's game. Investing is about long-term strategy.

The most accurate 2008 forecast I have found was Morgan Stanley predicting a fall to about 5,300, about 1,000 points north of where we are today.

Admittedly, this year has been extreme and forecasts would have been revised as new information became available.

But there is no evidence that any company or person can predict future market movements with any consistency or reliability. So how do investors decide what to do? My advice is to keep it simple and invest across the asset classes.

If you are retired and looking for income, invest in corporate and government bonds; if you are young and want long-term growth, invest heavily in equities.

Most investors will be somewhere in between and should have a mix of cash, bonds, equities and property, depending on the return needed and your appetite for risk. Make a plan, stick to it and ignore the short-term noise.