the best investment

The best investments for 2008

Russia, wine and cash look the best bets for the coming year

Mark Atherton

As we say farewell to 2007, still reeling from the Northern Rock crisis, a crackdown by mortgage lenders and the first signs of falling house prices, one thing looks certain: it is going to be hard work making money in 2008. Justin Urquhart Stewart, of Seven Investment Management, the wealth manager, says: “There is an economic slowdown on the way and the US could be right on the brink of recession. The first half of the year looks like being particularly tough as the continuing problems in the US residential property market continue to reverberate round the globe.”

Both he and Mike Lenhoff, of Brewin Dolphin, the stockbroker, expect the Bank of England to continue to cut interest rates in an effort to revive the economy. Mr Urquhart Stewart expects the Bank to implement two rate cuts this year, while Mr Lenhoff is looking for three to take the base rate to 4.75 per cent by the end of next year.

Mr Lenhoff says: “The cuts will start off as damage limitation, but they should be enough to stimulate a pickup by 2009. The hope is that by the middle of next year the markets will start to look forward to better times in the following year.”

His year-end target for the FTSE 100 index of leading shares is 7,200 while Mr Urquhart Stewart goes for a figure of 6,800.

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In these tougher times the key to success will be identifying sectors that can ride out market storms thanks to low levels of borrowing and their ability to generate cash and pay out dividends. Traditionally, these have included utilities, tobacco and telecoms, but Henk Potts, of Barclays Wealth, the wealth management arm of the high street bank, is less keen on utilities, pointing out that they are already near record highs and that they could face a tougher regulatory regime in the future.

Mr Potts favours mining stocks, because of continued strong demand for raw materials, and banks, where he thinks that most of the bad news is already in the share price. He expects the UK stock market to rise by about 6 per cent to 7 per cent over the next 12 months, indicating a figure for the FTSE 100 of about 6,700 by the end of next year.

Given the modest prospects for share growth next year, some private investors may be tempted to opt for alternatives such as bonds or commercial property. However, Mark Dampier, of Hargreaves Lansdown, the independent financial adviser (IFA), says that they should tread with care. “Some people believe that the commercial property sector has taken such a tumble that it is now looking quite attractive,” he says. “But I would want to see property yields, currently about 5 per cent, climb back to 6 per cent before they start to become tempting.”

Mr Dampier is also wary of the bond market, especially at the high-yield, low-quality end of the market. He concedes, however, that there is some value in the lower-yielding top-quality end of the market.

He thinks that better returns are likely to be obtained by investing in equity funds. For fairly cautious investors in these stormy times, he suggests an equity income fund or an absolute return fund. Both offer some downside protection thanks to the yield on the income fund and the ability of absolute return funds tomake money when shares are falling as well as rising.

Among overseas stock markets, Mr Dampier expects Asia to do well, though his favourite country is Russia. He says: “It is rich in commodities and natural resources, for which there is huge global demand, and share prices are still quite cheap.”

Rob Harley, of Bestinvest, another IFA, thinks that Europe looks a good choice. He says: “Consumers on the Continent are not as indebted as those in the UK and the US, and European stocks are on attractive valuations. Buying into Europe is also a way to gain exposure to emerging markets through European exporters without running the risk of buying directly into such a volatile sector.”

Those of you who think that your homes could be your best investment in 2008 may be disappointed. Property price forecasts for next year vary wildly, ranging from a rise of 10 per cent to a fall of 12 per cent. Both Nationwide and Halifax, two of Britain’s biggest lenders, forecast that house prices will remain static next year and both expect falls of 2 per cent in northern England.

Lucian Cook, of Savills, the upmarket estate agent, expects there to be a revival of the North-South divide, with London prices rising fastest – at about 5 per cent – while regions such as the North East, North West and Yorkshire struggle to register growth of even 0.5 per cent.

If you do not want to take a bet on shares or property you could simply put your money in a savings account, where it will earn as much as 6 per cent risk-free. Sue Hannums, of AWD Chase de Vere, the IFA, says: “Anyone who is nervous in these turbulent times can always fall back on cash as a tried and trusted standby.”

Those who are tempted to seek refuge from the gloomy forecasts by drowning their sorrows in drink may have inadvertently hit upon one of the best prospects for making money next year. Simon Staples, of Berry Bros & Rudd, the wine merchant, says that demand at the top end of the market remains extremely strong.

He says: “Wines from the top ten châteaux of Bordeaux are still proving very popular with buyers from Russia, China and Korea. They particularly favour Château Lafite Rothschild. A case of the outstanding 2005 vintage now sells for about £7,500 – and that price is likely to rise with time. “

Buyers are also very keen on Lafite’s second growth: Carraudes de Lafite Rothschild. This ranks just below Château Lafite Rothschild in quality but the price of the wine has been rocketing. Two years ago it would have cost about £20 a bottle, but now you will not find one for less than £100 a bottle.”

The experts’ top tips

Mike Lenhoff, of Brewin Dolphin: “Buy Vodafone shares. The stock has a reasonable yield and good management – and it has underperformed for a long time.”

Justin Urquhart Stewart, of Seven Investment Management: “Go for Cable & Wireless. It is a stock that generates cash, which is a useful anchor in choppy waters, and there is always the possibility of a takeover bid.”

Henk Potts, of Barclays Wealth: “Buy shares in Standard Chartered. The bank has an international footprint, largely focused on the fast-growing areas of Asia and the Middle East. It also offers the prospect of growth, both organically and through acquisitions.”

Mark Dampier, of Hargreaves Lansdown: “If you can handle the risk, take a stake in Neptune’s Russia and Greater Russia fund. It offers exposure to one of the world’s most dynamic economies and Robin Geffen is an outstanding fund manager.”

Rob Harley, of Bestinvest: “My tip is Invesco Perpetual Income. The fund is run by Neil Woodford, one of the great fund managers. He has positioned his portfolio in anticipation of the credit crunch, which has finally hit us, so it is ideally placed to ride out the current stock market storms.”

Sue Hannums, of AWD Chase de Vere: “Make sure to use your cash Isa allowance, which enables you to receive interest tax-free. National Savings & Investments is currently paying 6.05 per cent with instant access.”

Simon Staples, of Berry Bros & Rudd: “I would buy a case of Château Lafite Rothschild 2004, a great vintage, if overshadowed by the even finer 2005. Over time its quality will be appreciated and I expect that a case, currently selling for about £3,000, will double in value quickly.”

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