Money news, advice and predictions for savers and spenders. This week: is now the time to invest in the stock market?
By Jeremy Gates
"Sell in May and go away" is a familiar axiom for shareholders. But this year, small investors who regard equities as an escape from rock-bottom savings rates paid by banks and building societies face a real dilemma.
Since the start of March, London's FTSE 100 index, measuring the value of the UK's biggest firms, has jumped nearly 25%. Spectacular recoveries include a five-fold jump in Barclays Bank's share price - while housebuilder Taylor Wimpey bounced from 4p to nearly 50p.
Bill Mott at PSigma Income Fund says: "Some of our holdings rebounded in a remarkable way: Travis Perkins climbed from 213p on January 5 to 790p, while Enterprise Inns has reached 178p, from 30p on January 30."
Rises like this have boosted millions of private sector pension pots, and brought out 'day traders' who often hope to buy and sell within days.
Can recovery last - or will these gains melt as the Governor of the Bank of England talks of a long and painful recession?
There is no doubt that most shares, as an investment class, remain highly risky in the present climate. Large firms are as vulnerable as tiddlers.
More than 1.1 million small shareholders at BT, for example, saw their dividend slashed this week - from 15.8p per share last year to 6.5p in 2009 - in the face of a pension deficit would could hit £10 billion. With the money saved, BT will pour £525m a year into its pension pot for three years.
Against that grim news, leading share guru Anthony Bolton at fund manager Fidelity claims: "We have already started a new bull market." No wonder small investors are dabbling again.
Angus Rigby, chief executive of leading execution-only broker TD Waterhouse, says: "Our customers vastly increased their purchasing activity this week, with over twice as many stocks bought as sold. Overall, we saw a 26% increase in trading activity, with an 82% increase in the number of shares bought compared to last week."
The average Waterhouse customer manages a £50,000 portfolio, with four main holdings. Savvy investors, says Rigby, are chasing shares in US companies, and others in Canada and Australia, in the belief those countries will recover faster than Britain.
The 'top four' buys by Waterhouse investors this week - Royal Bank of Scotland, Lloyds Banking Group, Barclays and Taylor Wimpey - suggest traders are seeking a fast profit rather than long-term investors.
However, Meera Patel, senior investment analyst at financial advisor Hargreaves Lansdown, thinks most people are still too scarred by the crash to return to equities at this stage.
"Small investors who want ISA cash to produce better returns have tended so far to move it into managed equity income funds and corporate bond funds," she says. "Risk-averse investors simply won't touch shares at present."
Patel thinks the return of small investors is more likely in the second half of 2009, following a correction or fall after this surge which few anticipated.
"The market has moved significantly since March because big institutions and funds have tried to find shares at bargain-basement levels in banks, property firms and other cyclical areas where values hit rock bottom," she says.
Nick Raynor, investment advisor at the Share Centre, which claims a 50% growth in the number of new customer accounts opened in the first quarter of 2009, sees it differently.
"After a 10% rise in the past fortnight, we expected a bit of a stumble," he says.
"It is really hopeful speculators who are pushing this market, while institutions and pension funds sit on cash. Until they decide to come in, we remain very cautious indeed about genuine recovery.
"For two or three weeks, our clients have been buying banking shares although we think they are foolish to do so. People are chasing a quick buck, buying cheap in search of a quick profit."
Raynor urges investors to seek out only the quality companies with balance sheets strong enough to outlast the downturn - including BP, Glaxo and firms like Balfour Beatty, Carillion and Serco, the latter group underpinned by committed Government construction/infrastructure projects.
The Share Centre is equally conservative in its recommendations of managed funds: it likes Invesco Perpetual Corporate Bond Income Fund, which might generate a juicy 7.1% dividend this year; Newton High Income Fund; and Allianz RCM BRIC Stars A Accumulation Fund, which focuses on the growing economies of Brazil, Russia, India and China.
Paul Kavanagh, at Killik & Co, a broker managing around £2 billion for 25,000 private clients, sees both sides of the argument.
"Although we are clearly past the danger of Armageddon in the global financial system, there is a split in where people see markets going from here," he says.
"Do we re-test low points which the market touched a few months back? Probably not, but only the brave expect it to go much higher than it is already.
"The market will become extremely selective in distinguishing between companies likely to ride out recession and those which have scant protection against the worst. I expect the market to bounce over the summer, trending higher, but anybody still buying should be extremely careful where they put their money.
"While some larger companies have been over-traded in recent weeks, there are interesting valuations in many medium and smaller companies. Some companies, currently valued at 2-3 times annual earnings, could get re-rated to 5-6 times."
Charlie Morris, head of absolute return at HSBC Global Asset Management, says: "On the long-term perspective, shares are available at reasonable prices, but the broader economic trend is very negative and recession will last longer than many expect.
"Any investors buying shares should be careful to avoid speculative and cyclical stocks and stick closely to quality assets - like Tesco, Unilever, Glaxo - with high-quality earnings to survive the worst the downturn can throw at them."
Managed funds, holding a portfolio of shares, lessen risks further for investors venturing into equities for the first time. Discount brokers, including Killik and Hargreaves Lansdown, reduce the initial charge which fund managers deduct on direct investments.
:: Information: TD Waterhouse (0845 607 6001 and www.tdwaterhouse.co.uk); Hargreaves Lansdown (0117 980 9800 and www.H-L.co.uk); The Share Centre (01296 414 141 and www.share.com); Killik & Co (020 7337 0777 and www.killik.com).
TD Waterhouse allows investors to buy up to 600 funds for their Individual Savings Accounts (ISAs) at no cost.
Poundnotes
:: Even babies are belted by low interest rates, points out Andrew Hagger at moneynet.co.uk, as building societies slash rates paid on Child Trust Funds (CTFs). Last October, the average rate on cash CTFs was 6%, and now that has slipped to a mere 2.38%, although the splendid Hanley Economic BS continues to offer 5%.
"Cash accounts are safe and simple and an ideal home for a child's future next egg if parents feel uncomfortable investing in volatile stock markets," Hagger says.
"There is nothing to stop you switching from a Cash CTF to a stocks and shares CTF at a later date, or vice-versa, but it is wise to seek professional advice before you do so."
:: Abbey has lifted the loan-to-value (LTV) limits on all its two, three and five-year fixed mortgages from 60% to 70%, with free legals, free valuation and even cashbacks included in some packages.
"Such great rates won't be around for long, so borrowers looking for a fixed rate to guarantee certainty of their monthly payment should take advantage now," says Abbey's Nici Audhlam-Gardiner.
HSBC has also unveiled a market-leading fix: 4.39% for five years, with a £999 fee and LTV limit of 75%, available both for purchasers and remortgagers.
:: On May 14, we reached that point in the year when workers stop working purely for the benefit of the taxman and start earning money which they can spend on themselves, says the professional advice website Unbiased.co.uk.
Its annual Tax Action report reckons consumers waste over £10 billion a year by squandering tax breaks, reliefs and credits and paying fines for late or inaccurate tax returns.
:: Savers should benefit from competition hotting up in the fixed-rate bond market, reckons Kevin Mountford, head of banking at Moneysupermarket.com.
In the past week, he says, Barclays, Abbey, Alliance & Leicester, Bradford & Bingley, Nottingham BS and Coventry BS all brought out fixed-rate bonds paying more than 4%.
Mountford says: "Somebody investing £10,000 in the Birmingham Midshires two-year, fixed-rate bond, paying 4.25%, would earn £425 in interest over one year, compared to just £29 in an account paying 0.29%, the average rate of interest on instant access accounts.
:: High-five savers:
Phone No Rate Account Period Deposit Interest paid
ICICI Bank UK www.icicibank.co.uk 4.40% (F) HiSAVE Fixed Rate Five Years £1,000 OM
Halifax www.halifax.co.uk 4.30% (F) Web Saver Five Years £500 Yly
Barclays Bank 0800 494949 3.55% Golden ISA Instant £1 Mly
United Nat Bank 0800 218 2266 3.50% Three Month Gold Deposit Three Months £1 Half-yearly
Nat Counties BS 0845 603 4876 3.26% Guaranteed Cash ISA Instant £1 Yly
Top-five borrowers:
Phone No Rate Period Max% Adv Fee Incentive
HSBC 0800 494999 2.49% discounted for two years 60% £249 Yes
First Direct 0845 610 0100 2.89% variable for term 80% £799 Yes
HSBC 0800 494 999 2.95% variable for term 75% £799 Yes
Co-Op Bank 0800 633 5286 3.24% to 31/09/12 75% £ 995 Yes
The One Account 0845 610 1060 3.75% for term 75% nil Yes
Code:
*F - Fixed
*P - Operated by Post
*B - Operated by Post/Telephone
*T - Operated by Telephone
*W - Operated by Internet
*H - Operated by Internet/Telephone
*S - Available only to those aged 50 or over
*R - Available to those aged 60 and over.
:: Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice).
