Investors have turned cautious as the crisis in the Middle East and renewed concerns about Europe have pushed shares to their lowest close this year. However, some professional investors say they could be missing a great buying opportunity.
Sales of Isas fell nearly 90% to just £21m in January compared with the previous year, according to latest figures from the Investment Management Association last week — well below the average of £204m in the past year and unusual in the run-up to the end of the tax year on April 6.
The figures came as the FTSE 100 suffered its biggest weekly fall since July, closing down 159 points at 5,832. The huge earthquake in Japan knocked the confidence of investors who were already uneasy after Moody’s, the ratings agency, downgraded Spain’s sovereign debt and oil remained above $110 a barrel.
Oliver Gregson at Barclays Wealth is advising clients to buy developed market equities while the FTSE 100 remains below 6,000. “Markets have indeed suffered a setback and may remain volatile in the short term but we don’t think the fundamental picture has changed,” he said.
“The global economy is improving and stock market valuations are undemanding especially in continental Europe. We are buying US and European companies as they will get the biggest upgrades.”
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Laszlo Birinyi of Birinyi Associates, the US research firm, which predicted the stock market crash of 2008, is urging clients to stick with equities. He points out that the two-year return of the S&P 500, the US index, is still 52 percentage points below the average bull market gain of 131% since 1962 — despite doubling since it bottomed in March 2009. “This is a bull market we expect to go on for years,” he said.
We highlight some of the best buying opportunities for your equity Isa:
Spain
Morgan Stanley, the investment bank, tipped Spain as one of its outside bets for 2011 and says its market is one of the cheapest in the world. Graham Secker, a strategist at the bank, said: “On some measures, the Spanish equity market is the most undervalued in the world. Last year was the time to sell Spanish companies and buy German ones, this year’s not as clear cut.”
Nick Gartside at JP Morgan, the investment bank, pointed out the Spanish downgrade had been expected and five-year Spanish government bond yields were flat over the week at 4.5%, suggesting international investors were comfortable with the move.
Spain also has some strong international companies, such as Repsol, the oil firm, and Telefonica, the telecoms giant, which owns O2 and is yielding 5.7%.
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Adrian Lowcock at Bestinvest, the adviser, tips the Ignis Argonaut European Income fund, which has 6.4% of its portfolio in Spain and yields 4.9%.
Undervalued Europe
Valuations in Europe look cheap, said John Chatfeild-Roberts at Jupiter Asset Management. “European companies are cheaper on the back of negative headlines, and many look like they are good value, especially those that do not rely on European economies to generate their performance.”
He likes the Schroder European Alpha fund, up 9% over the past year.
Marcus Brookes at Cazenove likes European funds that have exposure to financial stocks, such as Neptune European Opportunities, which holds Sampo bank in Finland and UBS in Switzerland.
Defensive shares
Investors have a great opportunity to buy defensive shares, according to Morgan Stanley. The sector looks extremely cheap, having lagged the market for the past two years, which has happened only once before — during the tech boom. “History suggests that defensives outperform when the economy peaks and at the start of a new interest rate cycle,” Secker said. His favourite stocks include KPN, the Dutch telecoms firm that yields 6.3%, and BT and Vodafone, yielding about 5%. Ben Yearsley at Hargreaves Lansdown, the adviser, likes Invesco Perpetual’s Equity Income fund, which has 11% in telecoms. It is up 7% over 12 months and yields 3.9%.
Pricing power
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Gregson likes companies with strong brands that can use image to pass on cost increases, which could result from rising commodity prices, to customers. In the US, this includes Apple, which is enjoying a surge thanks to the recent launch of the iPad 2. It is up 62% over 12 months. He also likes German brands such as BMW. It charges a 74% premium on vehicles sold in China compared with prices in Germany.
Inflation
While bonds in general would suffer if inflation and interest rates rise, David Coombs at Rathbones, the adviser, tips undervalued corporate bonds — company debt — called floating rate notes (FRNs). He has bought a five-year FRN from Lloyds paying 0.73% plus Libor, or 1.56%. However, it is trading at 88.5 per unit, so you will get a capital gain as units are paid out at 100 on maturity. It means the minimum return on maturity will be 2.3% capital a year plus 1.56% interest — more if interest rates rise. The Threadneedle Corporate Bond fund holds FTNs.
