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Monday 18 November 2019

Investments set to beat the rest in the New Year

It's time to choose investments for this year
It's time to choose investments for this year
Louise McBride

Louise McBride

The New Year is shaping up to be a game changer for investors. Interest rate rises certainly seem to be on the cards in the US - and possibly in Britain. Any moves made by the ECB to print money will be closely watched by investors who stand to lose or make money from any quantitative easing by the bank.

The upcoming general election in Britain could rock the investment boat, as might any deepening of the Ukranian crisis or Russia's economic woes, and how successful (or not) the Japanese Prime Minister, Shinzo Abe, is at stimulating his country's economy.

So in such an uncertain climate, what investments are likely to come up trumps in the New Year?

Last year, many investors made a killing from Chinese, Indian and certain US shares. The Irish Stock Exchange, one of the top-performing European stock markets in 2013, continued its winning streak last year and outperformed some of its international peers. Aer Lingus and Ryanair shares did very well - anyone who snapped up Aer Lingus shares early last year has almost doubled their money since.

Equities still seem to be the place to be this year - although they need to be chosen wisely. "For stock markets to move ahead, you need company profits to get bigger - and we believe there will be stronger company profits in the Eurozone, United States and Britain this year compared to last," said Eugene Kiernan, head of investment strategy with Appian Asset Management. "That will be the fuel for equity markets to do better. There will be a good outcome for equity funds and managed funds in 2015 - returns may be a bit more modest and choppy than 2014, but they are still likely to be positive for the year."

There could be money to be made on US and British equities this year, according to Andrew Milligan, head of global strategy at Standard Life Investments. "In the current business cycle, we believe the US economy can continue to expand," said Mr Milligan. "The British economy also has good growth - and this will probably continue for a few years. On that basis, it is sensible to be thinking about putting money into US and British equities. We are looking for economies that are doing better than others, as it's easier for companies in those markets to make good profits."

Not everyone is hot on US and British shares, however. Although Barclays Wealth & Investment Management believes US shares could do well this year, it was more cautious about the prospects for British equities. "Most of the companies quoted on the FTSE 100 have the majority of their revenue exposure overseas, with a strong leaning towards Asia," said William Hobbs, head of equity strategy at Barclays Wealth in the wealth manager's latest newsletter. "The British equity market is also heavily over-represented by commodity and energy companies relative to other major developed world stock markets. It is this latter characteristic that has kept us underweight in British equities for much of the last few years."

Ian Quigley, director of investment strategy at Investec Wealth & Investment Ireland, believes the US equity market has become more expensive over the last few years. "There's less value in the US market," said Mr Quigley. "We would expect better returns to be made on equities outside the US. European equity markets are looking more attractive than they have been for a number of years. Although key European markets have been depressed, with the ECB becoming more stimulatory and less austerity-driven, there is the potential for greater earnings on European stocks."

Some believe that Japanese equities could be worth a bet - though, as with all shares, be prepared to invest your money for a number of years. Since Japan's Prime Minister took office about two years ago, he has pursued a number of policies to boost the country's economy, and promised structural reforms.

"The Japanese economy is not growing that much - however its currency is changing a lot, which is helping exporters," said Mr Milligan. "Structural reforms generally give shareholders a better return than in the past. However, if these structural reforms don't happen, markets will be disappointed."

Commercial property

Almost €5bn worth of Irish commercial property was bought and sold over the last year - more than twice the number of property deals completed in 2013. Rents for prime commercial property also shot up last year.

"Commercial property in Dublin is still something worth considering," said Mr Kiernan. "It's still in a sweet spot because of rising rental, rising demand and the short supply of such properties."

However, there have been a number of developments which suggest that the best pickings could be gone from commercial property. Last June, Kennedy Wilson, one of the biggest buyers of commercial property in Ireland since the crash, signalled that it was starting to move on from the Irish market because pricing was "moving ahead of itself". Although Kennedy Wilson still has commercial property here, it has since begun to focus more on Spain and Italy where there is better value to be had.

"Think about real estate outside Ireland," said Mr Milligan. "Though Ireland is going quite well, it is cheaper to buy outside Ireland. The demand for Irish commercial property is picking up as the economy grows, employment picks up, and supply is limited. Still, we don't believe the next three years will be quite as good as 2014 was for investors in Irish commercial property."

Government bonds

Investors largely steered clear of government bonds last year - because of poor returns. But bonds look like the wild card of 2015.

"Bonds are tricky at the moment," said Mr Kiernan. "People have been negative on bonds. This year could be a turning point for bonds - because of central bank policies."

Mr Milligan agrees. "If the ECB starts going out and buying government bonds (under quantitative easing), that would help bond investors," said Mr Milligan. "However, if the US raises interest rates, we'd get higher bond yields and lower bond prices - which would be bad for investors in government bonds. The ideal situation for bond investors would be a EU recession, a plunge in growth and a huge amount of quantitative easing from ECB. But that's not our view of what will happen."

With plenty of wild cards on the investment table this year, 2015 certainly looks like it could be an interesting one.

Investment no-nos for the New Year

Dismal interest rates and low returns on bonds have encouraged investors into uncharted territory in a bid to make money. Many are at risk of losing everything as a result.

"People need to be conscious of esoteric investments," said Ian Quigley, director of investment strategy at Investec Wealth. "There's a lot of new investment vehicles coming up and some of the investments which were around in 2006 and 2007 have come back - but they're not suitable for private investors."

Such investments include contingent convertible securities. Last August, the British financial regulator, the Financial Conduct Authority, restricted the sale of such investments to individual investors. "These are complex investments," said Mr Quigley. "We would caution against putting money into them."

The recent oil-price slump has had an impact on many businesses - so bear this in mind before investing in companies in that sector. "With all that is happening in oil, anything related to the energy sector has to be thought of carefully," said Standard Life Investments' Andrew Milligan. "The same is true of the financial and banking sector due to the amount of regulation there. If you're considering investing in corporate bonds, think about non-energy and non-financial services companies."

Having said this, Barclays Wealth does not believe oil prices will fall much further. "We now see less downside for the oil price and suspect it may even drift up from current levels over the next year or so," said William Hobbs, its head of equity strategy. "Much of the rest of the commodities space still looks precarious, with precious metals particularly vulnerable as interest rate rises loom larger."

Avoid investing in the stock markets of commodity-driven countries such as Russia and Brazil, advised Mr Quigley. Many commodity prices fell last year - and are expected to continue doing so.

"Our preference would be for countries which benefit from the fall of commodity prices such as India and China," said Mr Quigley.

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