INVESTORS fretted over plummeting stock markets last week as approval of
America’s unprecedented banking sector bailout looked touch-and-go, sending
world stock markets into a tailspin.
Britain's FTSE 100 hit a three-year closing low on Monday, and tumbled to
4,671 at one stage – its lowest level since November 2004. It lost more than
13% during September – its biggest monthly decline since October 1987, when
it tumbled 26%.
Despite recovering to end the week at 4,980, it remains down 25% on the year.
About 72% of Barclays Stockbrokers’ clients bought into market weakness on
Monday, while 28% sold holdings. But what are the professionals doing with
their money? And is the end of the bear market in sight – or are there more
torrid times ahead? We speak to the super-bears and bulls.
THE BEARS
David Kauders, Kauders Portfolio Management
The current crisis has been brewing for years, according to Kauders, who has
held nothing but UK gilts and US Treasury bonds for more than two decades.
“We thought it would break suddenly, so have been invested in government
bonds since a little before the stock-market crash of 1987,” he said.
“All the prosperity of the last 20 years has been built by easy credit and
it’s now pay-back time: nothing in the way of bailouts and rescues will
resolve the situation.”
Kauders believes that the stock market is wildly overvalued. He said in the
midst of the last bear market in 2002 that the FTSE 100 could lose 75% from
peak to trough, taking it to 1,350 before it bottoms out. He stands by that
belief today, saying it could even drop to below 1,000 before he would start
advising people to invest in equities.
His view is based partly on past performance: UK equities fell by almost 73%
in the 1970s bear market before recovering.
How to get in: You can now buy 2009 UK gilts with a running yield of
3.9%. Five-year gilts are yielding 4.3%, 10-year 4.4% and 20-year 4.5%.
Gains on directly held gilts are free of capital gains.
Kauders Portfolio Management runs portfolios for individuals with a minimum of
£250,000. Investors can buy into some gilt funds for far less, though: M&G
Index Linked Bond fund has an entry level of £500 or £10 per month and is up
10% in the past year. At present it has a yield of 1.32%.
Hugh Hendry, Eclectica Asset Management
Hendry believes the stock market will do nothing for the next 15 years and has
been buying into long-dated German government bonds – 30-year stock yielding
4.5%.
“The market’s now gone sideways for 10 years, and I think it’ll do so for 25
years in total,” he said. “If you don’t want to take on risk, government
bonds are the only place to be. I’m getting a wonderful return for taking no
risk.”
How to get in: You can buy 2010 German gilts with a running yield of
3.5%. Five-year stock is yielding 3.8%; 10-year stock 4% and 2039 stock is
yielding 4.7%.
Scottish Widows International Bond fund has substantial holdings in German
gilts, although its largest holding, at 14.2%, is in US 4.25% 2013 stock.
The fund, which has entry levels of £1,000 or £50 monthly, has risen by 17.5%
in the past year and is yielding 2.7%.
Darius McDermott, Chelsea Financial Services
McDermott has been buying into gold as investors plough into the safe haven.
“Gold is generally a good hedge against falling markets, and although the US
bailout is likely to stabilise financial markets, the bad economic news will
continue.”
Gold hit an all-time high of $1,030.80 an ounce earlier this year, against
Friday’s level of around $840. The gold industry expects bullion prices to
rise to $958.6 by November next year, according to a poll at the annual
London Bullion Market Association meeting in Kyoto last week. The poll has
been a reliable indicator in the past.
McDermott has bought into the Black Rock Gold & General fund, which
invests heavily in mining stocks. Its largest holding is Newcrest Mining at
7.7%.
How to get in: Instead of buying into funds invested in mining shares,
which can magnify gains or losses from the gold price itself, you can buy
shares that track bullion. Each Gold Bullion Securities (GBS) share
represents one tenth of an ounce of gold and is backed by bullion held in
HSBC vaults.
David Schwartz, stock-market historian
Schwartz has been bearish for several years and is sitting in cash. “I’m
waiting on the sidelines, but am not going to wait very long because when
the market starts to move, I think it will move rapidly. We’re near the end
of the 2007-8 bear market. Investors should get ready to pounce.”
He believes the market will enter a bull phase as early as this month: in the
past 16 years there have only been two negative Octobers for UK markets – in
1997 and 2005, both after a big September bounce.
How to get in: Investors can hold cash in fund supermarket, such as
Cofunds and Fidelity Funds Network. They now pay 4.5% (0.5% below Bank rate)
and up to 4.8% (0.2% below Bank rate) respectively.
THE BULLS
Anthony Bolton, Fidelity
The veteran investor, who has been cautious on equities for the past two
years, has started to buy in the past couple of weeks, putting his own money
into the funds he used to manage – Fidelity’s Special Situations and Global
Special Situations funds.
As financials were first into the bear market, contrarian Bolton expects they
will also be the first area to recover. He also likes consumer stocks, such
as retailers and media firms.
The Special Situations fund has the publisher Reed Elsevier (4.3%), Provident
Financial (3.5%), HSBC (3.5%) and Alliance & Leicester (2.5%) among its
top 10 holdings.
Its global counterpart holds Turkish bank Turkiye Halk Bankasi (2.2%), as well
as agriculture firm Mosaico (3.7%), energy group Eon (2.6%), and
pharmaceutical firm Roche (2%), according to Trustnet data.
Valuations in some unloved sectors are as low as Bolton has seen in his
near-30-year career.
How to get in: Investors can buy into the two Fidelity funds with a
lump sum of £1,000 or £50 per month.
James Henderson at Henderson UK Equity Income fund, Chris White at
Thread-needle UK Growth and Income, and Bill Mott at Psigma Income, also
believe banking stocks have fallen to prices that now represent good value.
Robin Geffen, Neptune
Geffen has been increasing his exposure to emerging markets, notably Russia
and China. He has doubled the proportion of his personal wealth in Russia to
20%, and upped holdings in China from 8% to 12%.
The A-rated manager, who is just back from a week-long trip to Moscow to visit
the businesses he invests in, is “encouraged” by what he saw.
“The market is trading at about half its historic p/e [price/earnings ratio].
It’s very cheap by emerging-market standards, and its own standards.”
Russian firms are buying back shares and declaring special dividends, while
the government has put $200 billion (£114 billion) behind the country’s
financial system.
How to get in: In addition to the Neptune fund, Invesco Perpetual
Emerging European, launched in December, has 60.6% in Russia. First State
Greater China Growth has 43% in China.
Peter Hargreaves, Hargreaves Lansdown
Hargreaves is far from a typical investor: 95% of his investment portfolio is
tied up in £300m worth of shares in the £894m company, Britain’s largest
financial adviser and a FTSE 250 firm. The shares have fallen by21%from a
peak of 239p in October 2007 to190pon Friday.
However, Hargreaves has recently been buying into market weakness with the
remaining 5% of his portfolio. He likes the UK equity-income sector, which
he has been buying into through his family trust.
“You’re getting as much in income from high-yielding shares as you’re getting
in fixed interest and if it [the stock market] goes down any more you’ll get
more than cash,” he said. He called the bottom of the market on Tuesday
after huge losses on both sides of the Atlantic.
How to get in: Hargreaves likes Jupiter Income, which is yielding 5%
and is managed by Anthony Nutt. He also likes Neil Woodford’s income funds,
Invesco Perpetual Income, yielding 4.11%, and Invesco Perpetual High Income,
yielding 4.06%. None of these funds has banks among its top 10 holdings.
Alan Steel, Alan Steel Asset Management
Steel has increased his exposure to the US from around 10% to 35% in the past
year.
He points to the fact that investment king Warren Buffett has ploughed $5
billion into the investment bank Goldman Sachs. Last week, he also announced
plans to buy $3 billion of preferred shares in General Electric, America’s
largest conglomerate.
How to get in: Steel has been buying into Martin Currie North America,
a £490m fund with investments in US exporters and tech; Resolution Asset
American Growth, a £118m fund whose largest holding is retail giant
Wal-Mart; and Neptune US Opportunities, a £44m fund with 12.6% in biotechs.
