Five sectors for beginner investors in 2014
10th January 2014 17:15
by Philip Scott from interactive investor
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During September 2013, thousands of UK investors squirrelled away some £1.3 billion into funds that invest in shares.
In fact, between July and the end of September, these investment vehicles raked in a total of £3.8 billion, the highest three-month intake for more than 13 years, according to the Investment Management Association.
For those willing to beat the banks by taking some risk, there are big gains to be had with the UK's FTSE 100 index (UKX) up by 17% over the past year - far surpassing the return from any savings account.
Last year was full of highs and lows for the FTSE 100. To recap what happened to the headline index in 2013, read: FTSE 100 - 2013 round-up.
Experts believe the strong gains have the potential to spill into 2014 and beyond.
Martin Bamford, an independent financial adviser at Informed Choice, says: "It is notoriously difficult to gaze into the crystal ball and pick an investment sector which might perform the best in the short term.
"But there are attractions for several asset classes right now, particularly UK and US equities which have the potential to perform strongly as the global economy recovers."
To help you find the best places for your money, Moneywise has looked at five key areas, which could potentially to do well in 2014.
The UK
Britain has been surfing a wave of economic recovery and between July and September, the UK's economy grew by 0.8% - its biggest three-month gain since 2010 as exports and overall business activity improved.
On the back of this, the UK stockmarket has risen strongly. Gary Potter, co-head of multi-manager at F&C Investments, believes there is more to come.
He says: "The UK still looks very attractive and shares will once again surprise on the upside next year. I believe the FTSE 100 could surpass its previous high of 6930 in 1999 and could push on to 7500 in 2014."
To find out why Jupiter Asset Management fund manager Steve Davies believes the UK will be one of the most attractive markets for stock investors in 2014, read: Viewpoint - Should investors look to UK markets in 2014?
An area that remains hugely popular with investors is equity income. These funds invest in dividend-paying firms - companies that share their profits with investors.
And 2014 is set to be a bumper year for dividends, with UK-listed firms expected to shell out some £100 billion in investor payouts.
While the numbers are inflated on the back of an anticipated £16.6 billion one-off special dividend from Vodafone, the total payout is still more than £30 billion above the pre-recession high, according to Capita Asset Services.
To find out whether there is a secret downside to the regular stream of cash, read:The hidden downside of dividend payments.
Equity income funds are also considered to generally be a sensible way to play the UK stockmarket, given they typically invest in large firms with plenty of cash on their books.
Justin Modray, founder of independent financial adviser Candid Financial Advice, says: "Long-term returns from UK equity income funds tend to be attractive, in part thanks to dividends, and their more defensive nature may prove useful if we experience another downturn."
UK fund recommendations
Modray recommends . It is investing in big and stable household names such as and . It has returned 141% over the past five years and pays a historic yield of 3.9%.
Patrick Connolly, a financial planner at Chase de Vere, and Jason Hollands, managing director at Bestinvest, both tip the , which counts and among its top holdings. The fund has returned 110%, and yields 3.5%.
Hollands also likes . He says: "It differs radically from most UK equity income funds by focusing on small-cap names, which have been faring well recently.
"It has achieved a considerable 256% return over the five-year term and has a yield of 3.2%."
The US
The world's largest economy appears to be exiting the doldrums thanks to ultra-low interest rates and vast injections of cash, via so-called quantitative easing (QE), from its central bank, the Federal Reserve.
Like the UK, the US has seen its economy steadily rise and at the latest count it rose by a better-than-expected 2.8% in the three months to the end of September.
Most notably, 2013 has witnessed US shares enjoy their best year for a decade, raising fears that the market is becoming expensive. This year is proving to be a boon for corporate earnings, where many firms are delivering results ahead of expectations.
Russ Koesterich, chief investment strategist at BlackRock, says: "This strong trend in corporate earnings has been a key factor in supporting this year's rally in stocks. We believe this can continue into 2014."
However, experts warn that while the case for the US looks more promising over the long term, there is a risk the recovery could slow when the Federal Reserve starts scaling back its QE initiative.
As such, investors should expect some volatility.
To find out how fund managers and market commentators have reacted to the Fed's decision to taper, read: Market reaction to US Fed's taper decision.
US fund recommendations
Modray likes the , a passive fund that mirrors the performance of America's S&P 500 index, which includes technology giants and .
Connolly rates the , up 117% over five years, which also has investments in the likes of Apple and Google.
Hollands favours , with holdings in and . It has delivered a 152% return (in US dollar terms) to its investors over five years.
Japan
Once the world's second-largest economy, Japan has been ousted from that position by China. But on the back of the implementation of some extraordinary economic measures, dubbed 'Abenomics' after its Prime Minister Shinzo Abe in 2013, it has enjoyed a change in fortune.
A devaluing of the currency has hugely helped the country's exporters, making their goods and services cheaper; while there has also been strong upgrades in corporate earnings. However, it is still troubled by debt.
James de Bunsen, manager of the , says: "Japan's valuations relative to the rest of the world still look attractive. The government has strong political mandate to pursue reforms and achieve goals."
Japan fund recommendations
Hollands says: "While the easy money phase has now happened, the Japanese restructuring story has further legs in it, with the exchange rate considerably more favourable to Japan's exporters."
His top pick is the , while Connolly cites the , both of which are 65% better over the past five years.
Emerging markets
The world's emerging markets, typified by Brazil, Russia, India and China, or so-called BRIC nations, have endured a tougher time of late.
But to put this in perspective, China - the powerhouse of emerging markets - saw its economy, which has slowed in recent years, still expand by 7.8% year-on-year in the three months to September.
The BRICs alone house some 40% of the world's population, alongside a wealth of natural reserves. As they prosper, it is predicted their citizens will spend more money, driving markets higher.
And while the BRICs may have suffered, they are trading at valuation levels near 2008 credit-crunch lows, offering a compelling buying opportunity but only for intrepid investors.
Hollands says: "With valuations pretty bombed out, some commentators are signalling this area as a great buying opportunity. So for long-term investors, building emerging market positions over the coming months may be a perfectly sensible move - just don't pile in blindly."
Emerging markets fund recommendations
Modray says: "While often volatile in the short term, the longer-term outlook for emerging markets remains very enticing."
He rates the , which launched in 2012 and has a high-yield bias.
Hollands' core pick is , with investments in Hong Kong and Indonesia. It is up 105% over five years while Connolly recommends , up 85%.
Commercial property
Commercial property fell out of favour when the credit crunch hit back in 2008 but as the UK economic recovery gathers pace, it has come back on to the radar.
Investors can spread their cash over a wide variety of properties, such as offices and retail parks, and the rents paid by tenants can provide a stable income above inflation for yield-hungry investors. There is also scope for capital growth over the coming years, too.
Commercial property recommendations
Hollands says: "We favour funds with exposure to long leases, high-quality tenants and London and the south east."
His main pick is the 4.4% yielding . Modray rates , which has a yield of 2.8%, while Connolly is backing with 3.5% income yield, which has also risen by 21% over the past five years.
This article is part of our sister publication Moneywise's Beat the Banks series. You can find out more about the campaign here.