2010-06-24
INVESTORS are being urged to go global to protect their finances from rocky markets as the UK enters a period of severe spending cuts.
Confidence in the markets has taken a knock in recent weeks on the back of bad news including debt crises in Europe, a spike in US employment figures and the ongoing furore over the implications of the BP oil spill in the Gulf of Mexico.
Then there's the prospect of possible inflation, a shortage of liquidity in credit markets and expected increases in unemployment in the UK, as the government embarks on a swathe of spending cuts after Tuesday's emergency Budget.
For UK investors the outlook is mixed. With good buying opportunities – witness the flurry of trade in BP shares after its price plummeted – come heightened risks. So how should investors nervous about the coming months respond to the challenge?
Many advisers say it is increasingly imperative for UK investors to avoid keeping all their eggs in the domestic basket. A growing proportion of UK corporate earnings may now come from overseas and global markets are increasingly correlated. But there remain significant benefits from spreading your investments across the globe.
Barry O'Neill, a chartered financial planner at Thomson Shepherd in Aberdeen, favours a split between UK and international exposure on both equities and fixed interest.
"There are obvious examples of UK companies that are global market leaders, but there are many more that are listed on overseas exchanges so if you only invest in UK markets, you will miss out of the growth potential and the increasing dividend discipline being adopted by companies overseas," he said.
Similarly, Iain Wishart, owner of Wishart Wealth Management in Edinburgh, cautions against over-exposure to UK equities and government bonds.
"I was educated to believe that shares were the natural 'default' assets for longer-term investment, where high risk means high reward, but the last decade would indicate otherwise," he said. "Over the past year we have been reconsidering returns on Western shares. The ten-year returns throughout that period have been poor, in many cases even negative, in all cases well below wage inflation."
Consequently Wishart believes investor portfolios should increasingly reflect the shift in power and growth expectations from West to East.
"There are now so many worries about all the Western markets to conclude that you can no longer buy and hold these shares to match your liabilities. The growth is in Asia, and growth drives higher values and higher dividends. Fund managers need to be extremely nimble if they are going to make any money out of Western markets."
This view is shared by Tom Munro, director of Tom Munro Financial Solutions in Larbert. Munro pointed out that, despite the difficult economic environment, many global companies have produced strong results over the past year, presenting a strong case for investing outside Europe.
"In the US in particular, productivity has shown a spectacular improvement, and this is one region I believe investors will benefit from over the longer term," said Munro. "If you are prepared to invest for longer periods, I would also consider exposure to the Bric economies including Brazil, India and China, which should prove good value also even though they carry a higher risk."
For exposure to the US, Munro recommended the Schroder US Mid Cap and Blackrock US Opportunities funds, while he picked out emerging markets funds from Aberdeen and Baillie Gifford for access to developing areas. However, he cautioned against over-exposure to bond markets, with confidence dented by debt crises in Greece, Spain and Portugal.
Similarly, cash doesn't offer much promise for future returns, said Munro.
"Bank of England governor Mervyn King's strategy of holding interest rates for the foreseeable future to 0.5 per cent could last into next year leaving cash investors seriously out of pocket, especially when these derisory rates are adjusted for inflation and tax seriously eroding real purchasing power."
It's not just about where your money goes – for pension investors fundamentals such as asset diversification and keeping a long-term view are crucial in times of uncertainty.
Brian Steeples, managing director of the Turris Partnership and the UK chartered financial planner of the year, emphasised the importance of keeping in mind the investment timescale. "There will continue to be much volatility in the short term. However, over a longer term of five years or more there is more opportunity to anticipate reasonable returns from a well constructed portfolio."
From: news.scotsman.com
