House prices may fall in 2008 and stock markets may remain volatile, but savers could have a good year.
Statistics can be dangerous, so take the data in the table with a pinch of salt. The figures are correct, but looking at things in terms of 12-month and other fixed periods is entirely arbitrary. In reality, prices move in waves, some of which last for years and others for months.
Looking at the figures below, you’d surely say property has been a magnificent investment over the past five years for what is usually seen as involving pretty low risk. So have investments in the world’s booming ‘emerging markets’, only in this case taking lots and lots of risk enabled you to almost quadruple your money in five years.
Emerging markets are very hot right now
That doesn’t mean emerging markets are the right area to buy into now, though. Most people like buying things that have gone up a lot, but this is not a reliable method of getting rich. More on my top investment selections for 2008 below.
For most of the past six years, you did better to have your money in bricks and mortar than in the bank. I predict the opposite will be true in 2008 and that the 6% you get on a deposit, added to a fall in house pieces, means that by the year-end your cash will buy you at least 10% more bricks and mortar than it does today.
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The investment winners and losers
| | Value of £1,000 after one year | Three years | Five years |
| UK Retail Price Index+ | £1,039 | £1,105 | £1,173 |
| High interest deposit account | £1,044 | £1,118 | £1,181 |
| House prices* | £1,044 | £1,191 | £1,530 |
| UK shares - big companies | £1,074 | £1,494 | £2,009 |
| UK shares - small companies | £935 | £1,409 | £2,422 |
| UK commercial property funds | £852 | £1,167 | £1,725 |
| European shares | £1,125 | £1,689 | £2,416 |
| US shares | £1,049 | £1,246 | £1,403 |
| Japanese shares | £885 | £1,105 | £1,432 |
| Emerging market shares | £1,330 | £2,346 | £3,740 |
+ Amount needed to buy today what £1,000 bought originally *Nationwide UK national average. Figures for returns include reinvested net income. Data to December 2007. Source: Financial Express
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Property party is over
Of course the media will hype this up as a crash at some point. But I predict we won’t have a property crash unless one or both of two things happen: a big rise in interest rates and a big rise in unemployment.
It was this double whammy that caused the last crash in 1989-91, but neither looks at all likely at present. So long-term homeowners can afford to ignore the doomsters.
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Collect 6.3%-plus
With banks competing fiercely for your money, you should find it easy to get a return of 2-3% more than inflation from an instant access account. Many in our table pay over 6.3%.
That’s a good start. But with base rate likely to fall in 2008, now may be a good time to lock in a fixed rate and there are good offers available of up to 6.5% over up to 5 years.
Tougher for borrowers
Borrowers, on the other hand, face a grim 2008. We’ve already seen lenders withdraw two-thirds of the mortgage offers they had available to less creditworthy borrowers six months ago.
Banks are all tightening their lending criteria, which means higher interest rates for people borrowing more than 80% of the value of a property, and for people borrowing on a self-certified basis. Buy-to-let investors too face higher deposit requirements and demands for a higher level of cover for repayments by rental income.
Even if base rate is cut next year, borrowers without first-class credit ratings may face higher repayments.
If you are among the over-borrowed, you simply must slash your spending in order to repay as much of your debt as you can. Cut up the cards, cancel the premium subscriptions, go through the bank statement and red-line any direct debit you can cancel. If you are in trouble, showing lenders that you’re making a serious effort means they may be more inclined to cut you some slack.
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Growth selections for 2008
There are two reasons why you should allocate some of your capital to high-risk growth investing.
First, the kind of stuff that is high risk tends not to follow the same path as stock markets in general, so you get a diversification benefit. Second, all share investing is risky anyway and there isn’t that much extra risk involved in more specialist areas.
And for regular savers, high-risk investing has added attractions I’ll come back to later.
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High-risk selection 1: Gold
The plunge in the value of the US dollar gives the gold price upwards momentum, added to which there’s a shortfall in newly-mined supply, more of the new-mined supply comes from high-risk territories like Russia, and the emergent middle classes in India and China are predisposed to use gold as a store of wealth.
My selection is Blackrock Merrill Lynch Gold & General, which holds a wide spread of gold mining shares around the world. If, as I expect, the gold price rises to the $1,000 level, the prices of gold mining shares should rise more sharply because the mining companies’ profits will soar.
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High-risk selection 2: small oil
Big oil companies have proved a terribly disappointing investment in the light of oil going up to near $100 a barrel. You can buy BP shares today for the same price as you could five years ago. One reason is that the oil giants simply haven’t been able to replace their existing reserves, so the amount of the stuff they’ve got to exploit is reducing.
Before we get round to replacing oil, demand will outrun supply and the price is likely to keep rising - with regular setbacks, of course. Best placed to profit from this are exploration companies, which are mainly small and focus on specific areas such as the Falkland Islands, Africa, and the North Sea.
Buying shares in one of these companies is a bit like a lottery: they drill holes and if they find something, the share price soars and if they find nothing, it slumps.
So instead, buy units in a fund - CF Junior Oils Trust - that spreads its money across a range of speculative and not-so-speculative exploration companies, some of which are already producing oil. Oil at $150 a barrel should see many of its shareholdings soar in value.
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High-risk selection 3: natural resources
It’s not just oil and gold that have risen in price. Metals such as platinum, copper and iron ore; coal and natural gas; sugar and other foods- all have risen in price thanks to soaring demand from China.
Growing wealth in China and India will see the demand increase, but supply will probably lag behind for many years to come. So even though resource prices have risen, they are still likely to keep on rising.
For a lower-risk way into this sector, buy M&G Global Basics, which doesn’t just buy the commodities sector but staples and necessities such as soap and medicines.
For a higher-risk approach, it’s JP Morgan Natural Resources, where Ian Henderson has over a decade’s experience and a tremendous track record. The fund spans mining, oil and other commodities and is sure to be more volatile than the M&G fund.
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High-risk selection 4: technology
Today’s investment fad is ‘green energy’. The best of these new technologies, like some developments in fuel cells, are probably worth investing in. But I think you should do so via a general technology fund rather than chasing the green will-o-the-wisp.
Artemis New Enterprises is an unusual tech fund in that two-thirds of its investments are in the UK. Most tech funds invest heavily in the US, and there are good reasons for this, but the UK now sports a raft of technological innovators, mostly listed on the AIM market. Expect a rollercoaster ride, but in cyclical terms we’re probably due another general rise in technology-related shares.
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Regular accumulator
For regular savers, the ideal high-risk investment is one that plods along for many years and then takes off like a rocket, thus enabling you to accumulate stacks at low prices before cleaning up in the boom. This is exactly what tech funds did in the 1990s.
I reckon biotechnology is that sector today. It’s gone from hope to delivery, with all the big drug companies now employing biotech businesses to work for them in finding new drugs and starting to buy them out at fancy prices.
My selection here is AXA Framlington Biotech, which has a strong management team and has most of its investments in the US where the industry is furthest advanced. AXA Framlington Biotech and JP Morgan Natural Resources look ideal candidates for a long-term regular savings plan.
Important risk warning - please read
The value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance. If you are in any doubt as to the suitability of an investment, you should seek independent financial advice.
