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Investors have been left battered and bruised by the dramatic events of 2008. The year delivered a series of body blows, with the demise of Bear Stearns, Lehman brothers falling into bankruptcy, and the government rescue of some of the UK's biggest banks prompting one of the most turbulent periods in financial history and stockmarket volatility across the globe.
Understandably, many shell-shocked investors will be hiding, fearful of what next year may bring. "They are scared," says Darius McDermott of independent financial adviser Chelsea Financial Services. "The last 12 months were seismic, as we came close to world markets being destroyed, with clients losing between 30% and 40% of their money."
Even the emerging markets of Brazil, India, Russia and China, expected to enter their golden age as western markets suffered from the sub-prime fallout, were severely battered by global headwinds, with the IMA Global Emerging Markets index sinking by a staggering 44% over the past year. And hefty interest rate cuts, bringing the Bank of England base rate down to a level not seen since 1951 in an attempt to boost the economy, means the traditional safe haven of cash accounts offer paltry rates.
Yet, while it is an extremely anxious time for investors, the New Year brings hope of a fresh start. By holding a diversified portfolio, and avoiding cherry-picking a single stock or sector, you have the best chance of avoiding further falls. "Different asset classes can be expected to perform well under different economic scenarios, and we cannot be certain which scenario will emerge in 2009," says Frederik Nerbrand, head of global strategy at HSBC Private Bank.
Bonds tipped as best sector
Experts agree that corporate bonds are the stand-out sector for next year. "Investment grade credit has never been better value - ever," says Chris Bowie, head of credit at Ignis Asset Management. After recent heavy falls, low prices mean that bonds are also on comparatively high yields, which makes them a welcome addition to portfolios for income-seeking investors.
And they are set to thrive over the following year, as interest rates and inflation are expected to fall further, which is likely to send prices higher, offering capital growth alongside income streams. "Investment grade bonds, in particular, are, on average, yielding 8% and are also pricing in a 35% default rate over the next five years," says Meera Patel, investment analyst at IFA Hargreaves Lansdown. She recommends Invesco Perpetual Corporate Bond and the M&G Optimal Income fund.
Corporate bond fund managers can take advantage of double-digit yields on household names, adds Bowie. "Sainsbury's, for instance, has a 14% yield while investors can secure 16% with Barclays, HBOS or Royal Bank of Scotland."
Stocks that may shine
While stocks may struggle to make headway in early 2009, forecasts suggest it will recover from its currrent level towards the end of the year. The Share Centre reckons the FTSE 100 could recover to 5,555 from its current level of about 4,300, and tips Prudential as a top performing share next year. "If our FTSE prediction is correct and it is a big if, then a share geared to a market rally should outperform," says chief executive Gavin Oldham. "Prudential lost around 47% of its value in 2008, and its spread of business in the UK, US and especially Asia, provide a diversification that we see as a key for 2009."
Alternatively, UBS, the Swiss bank, forecasts that the FTSE 100 could recover to 5,800, and it favours food retailers, household goods and health equipment, with preferred stocks including Tesco, Smith & Nephew and Next. The key is to be selective within sectors to search for potential star performers.
Emerging markets
Many experts remain positive that emerging markets will recover more quickly than developed markets. "These still exhibit the best fundamentals from almost every angle," says Bryan Collings, managing partner at Hexam Capital. "Corporate health is good and balance sheets are generally robust, significantly more so than in developed markets." Asia is particularly well placed to survive the downturn, according to Andrew Beal, manager of Henderson Pacific Investment Trust. "In general, the region has well capitalised banks that fund their lending the old-fashioned way, through deposits," he says. "Asia's famously robust saving ratios mean there are none of the problems with personal indebtedness and property market bubbles that have dragged down Western nations." .
Funds that offer some protection
In these tougher times the key to success for fund managers will be identifying sectors that can ride out market storms, thanks to low levels of borrowing and their ability to pay out dividends.
"If markets fall further, then income generation is at least a sign of life for investors, which is not to be underestimated in the environment we're in," says Dennehy. Experts recommend equity income funds, now yielding around 5.5% to 6.5%, 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 to make money when shares are falling as well as rising. With interest rates at 2% in the UK, and virtually zero in the US, income-generating assets have become extremely attractive," says Patel. She recommends Artemis Income and Invesco Perpetual Income, while Dennehy favours Newton Higher Income and Liontrust First Income.
"They will invest in UK sectors where yields are sustainable, and the Newton fund, in particular, has not had any exposure of note to banks, and that's clearly worked for them," he says.
Going for gold
Another area to be bullish is gold, says Patel. Its price has also been volatile, peaking over $1000 an ounce earlier this year and falling to $714 in October. "However, we are seeing a reversal of this trend, supported by simple demand and supply dynamics," she says, recommending BlackRock Gold & General Fund, to "perform well next year and beyond". The World Gold Council says demand for gold reached a record high in the third quarter of 2008. Oil should also be considerably higher this time next year.
Three to avoid?
Martin Bamford of Cranleigh independent financial adviser Informed Choice, says cash, europe and equities and commercial property are likely to be the worst-performing sectors in 2009: "With the average instant access savings account now paying 3.3%, after tax and inflation savers are likely to see their cash eroded in 2009. Holding investment money in cash also puts you in a difficult position when it comes to timing your entry back into investments."
On European equities, he says: "The recent fall of the pound against the Euro makes investing in European companies more expensive. While some of our continental neighbours could be better positioned to ride out a recession in 2009, we generally don't see many short-term investment opportunities in this region and will reduce our client exposure accordingly."
Rent from commercial property will be hit by continued business closures in 2009. "At best, we expect a flat return from the sector, but there is the likelihood of further price falls in 2009. Another concern is liquidity, with the potential risk of fund managers been forced to sell property assets to meet investor demand for redemptions."
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