Diversifying assets vital for a happy New Year

EXPERTS agree on the best way to protect your savings in what looks likely to be a stormy 2015, writes Jeff Salway

Investors will be forced to navigate choppy waters in 2015 as political uncertainty and further turbulence in global markets underscore the need for diversification.

That’s the consensus among investment experts in Scotland as they preview a year that looks set to be dominated by the UK general election, continued economic difficulties in Europe, the fallout from the oil price plunge and sluggish growth in emerging markets.

But there’s cause for optimism too, on the back of a year when many predictions were confounded. In this space 12 months ago our experts were forecasting troubles in bond markets as the US began to withdraw quantitative easing; further growth in UK equities; bargains to be found in small-cap companies; and strong returns from commercial property.

They weren’t far off the mark either, so here’s what they think 2015 has in store.

Alan Steel, chairman of Alan Steel Asset Management, Linlithgow

A year ago I said to stay cautious and back quality. I reckoned that if the FTSE made 7,000 we’d win a watch and (for risk-takers) I also tipped India. Not bad then.

It was quality that won through in 2014, with US large caps and India giving big rewards, and some of the quality UK income funds battering the index.

With the FTSE dominated by oils, utilities and banks (and capital-weighted to boot), it’s probably easier to pick six winning lottery numbers than to identify outperformers in the index.

Our view is that 2015 could be a pleasant surprise across the board for risk investors, even including the FTSE (which should surely break through 7,000 after 15 years in the doldrums).

Small-cap funds had a hard time in 2014 and should make up for that in 2015. Oil is cheap, which gives tax-free benefits to all consumers almost everywhere. Healthcare, biotech and technology funds should do even better this year, and US and Far East fundamentals remain attractive.

So which funds will do well? I like Fundsmith for international quality, CF Miton for small caps, First State for the Far East, and Axa Framlington for healthcare and technology. Yet again, however, it won’t be a year for bonds, cash or FTSE trackers.

Simon Lloyd, chief investment officer at Murray Asset Management, Edinburgh

After a year in which it appears likely that the UK equity market will make little or no progress, the outlook for investors remains mixed. Economic growth looks to be established now in the UK and we see the weak oil price as a net positive for the economy through both increased consumer spending and lower inflation.

With the relative strength of sterling easing, share prices of both domestic and overseas earners in the UK market may have a better year of it. However, UK investors will have to contend with a general election that is likely to be even more divisive than usual.

Progress may be derailed by the issues that are building in Russia and Greece. In the latter, looming elections may install a leadership that will reject the austerity measures imposed upon the country, which could result in Greece being the first country to leave the euro, while Russia may respond to economic sanctions with a more aggressive military stance. Either situation will not sit well with investors.

When combined with anxiety about economic growth in China, deflation in Europe and rate rises in the US, we see the potential for another volatile year for equity investors.

Tom Munro, director of Tom Munro Financial Solutions, Larbert

I think 2015 will be a year for greater portfolio diversification as I expect the high level of uncertainty in global markets to continue. At home, investors don’t like uncertainty. Conditions remain unsettled, and with a general election around the corner they are unlikely to get much better.

Although the UK’s GDP figures have been relatively strong this year, its effect has not filtered through to the real economy. In fact, slower growth may well beckon for the UK next year as one of our largest trading partners, Europe, continues to struggle with below-average GDP and the threat of deflation. If conditions in the region do not improve, will the UK be able to maintain its current pace of growth?

The bond markets suggest growth is going to slow, even though the equity markets have been more positive. This raises questions about whether the current cycle has peaked, which could lead to more short-term volatility.

So if you are going to weather the predicted storm, build a solid ark. Two funds that offer complete diversification are the Seven Investment Management Balanced fund of funds and the F&C MM Distribution.

David Thomson, chief investment officer at VWM Wealth, Glasgow

Equities in many regions remain relatively attractive in the prevailing low interest rate environment and may prove a good option for investors in the year ahead.

While the UK market traded sideways in 2014, I remain positive and predict that the FTSE 100 will end 2015 at around 7,000, with most of the growth coming after the general election.

The US is looking expensive but the economy continues to power ahead. On the other hand, Europe has been slowing but the market may now rally, provided the European Central Bank lends further financial support. Japan is also a bit of a wildcard and may perform very well if the Japanese quantitative easing programme proves effective.

For those seeking a degree of safety, property is a typical “late cycle” investment that continues to perform very steadily and may provide better returns than corporate bonds or gilts. But as usual I will be keeping a weather eye on markets as it could all change quickly, particularly if government bonds collapse – my least favoured area.

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