Experts fear that returns are unlikely to have improved by the end of the year. Paul Kavanagh of Killik & Co, a stockbroker, said: “Investors with broad portfolios may be disappointed. When they look back over 2004, the value of their assets will probably be largely unchanged.”
Within the market, however, some sectors have delivered strong gains, while others have slumped. Investors who bet on the steel sector at the start of the year, for example, have enjoyed a return of nearly 50% because of strong global demand. At the other end of the scale, technology stocks have dropped by 24% after a strong run in 2003.
John Hatherly of M&G, a fund manager, said: “Markets round the world have moved sideways; all the activity has been beneath the surface. I think it will be the same story for the rest of the year — the market in general will struggle to make headway, but there will be a big gap between the best and worst sectors.”
We asked the experts where they would invest to make a quick profit before the end of the year. Their tips are aimed at sophisticated investors who have a balanced portfolio and are prepared to take a gamble with some of their money.
Back Germany
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Justin Urquhart Stewart of Seven Investment Management would bet on the German market. The Dax 30 index has been among the worst performers this year, down by about 4%, but Urquhart Stewart thinks its fortunes could improve, albeit briefly, later in the year.
He said: “We could see a short-lived autumn rally in world markets, once the uncertainty surrounding the US presidential election is out of the way and as a slowdown in the American economy puts the brakes on the oil price. When world markets rally, Germany tends to be among the best performers.”
The German index has a high proportion of growth stocks that tend to perform well in a rally but lag the market in a downturn.
Urquhart Stewart said the Dax could also get a boost if the German economy continues to improve. It rose by 0.5% between April and June, the fastest pace for three years, as exports to the Far East boomed.
He would buy an exchange-traded fund (ETF) that tracks the German market. ETFs are similar to standard tracker funds, but they are listed on the stock market. The iShare DJ Euro Stoxx 50 is dominated by German companies.
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For information about ETFs, visit the Investor Centre on the “inside prices and news” menu at londonstockexchange.com.
Buy an investment trust
Hilary Cook of Barclays Private Clients, a stockbroker, would buy an investment trust, many of which are at their cheapest for 15 years.
Investment trusts, like unit trusts, pool your cash with that of other investors to buy shares. Unlike unit trusts, however, they are companies in their own right with shares listed on the stock market.
If market conditions are poor and demand for investment-trust shares is weak, they may trade at a discount to the value of their underlying assets. If a trust’s assets were worth 100p, but its own shares were priced at just 90p, it would be trading at a discount of 10%.
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At present, trusts in the global-growth sector are trading at discounts of up to 20%. If the market picks up and demand improves, however, discounts could rapidly narrow — netting brave investors a quick profit.
Cook would buy shares in Scottish Mortgage & Trust, which invests in international blue-chip stocks and trades at a discount of 19.7%. “I expect this discount to narrow over the next few months as the market improves,” said Cook.
However, other advisers sound a note of caution. Justin Modray of Bestinvest said: “Discounts could widen further. They went to 25% in the stock-market downturn of the 1970s.”
Snap up tech stocks
Tech stocks have been among the worst performers this year. The Nasdaq, the US tech index, has slumped 8%, compared with a gain of 0.3% in the Footsie and a fall of 0.6% in America’s S&P 500.
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However, a number of experts think tech stocks could be due for a change in fortune.
Jeremy Batstone of Charles Stanley, a stockbroker, said: “We think that the world economy is heading for a period of slower growth, rather than an outright downturn. There could be opportunities for speculators later in the year when investors realise they have been overly pessimistic. For a bet, therefore, consider picking up shares that are sensitive to changes in economic prospects, such as tech and telecoms companies.”
Kavanagh would also back the tech sector. He said: “In the short term, we think the oil price will drop and that equities will enjoy a relief rally as investors become more optimistic about the prospects for the economy and company profits. In that environment, I would look to tech and media shares that have been sold off over the past three months.”
He suggests buying shares in ARM, the microchip maker. They have slumped by 28% over the past three months and slid by 17% to 83p last week after the firm announced a £500m takeover of Artisan Components, an American rival.
Kavanagh admits that the shares could fall further, but he would use any weakness as a buying opportunity.
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He would also buy shares in WPP, the advertising group. They have dropped by nearly 8% over the past three months, compared with a rise of 0.3% in the Footsie, and closed at 503½p on Friday.
Buy financial firms
The speciality-finance sector, which includes fund managers such as Amvescap and loan companies such as Provident Financial, has been one of the worst-performing UK sectors this year, down by nearly 9%.
However, some experts believe the sector could be due for a short-term bounce.
Graham Secker, UK equity strategist at Morgan Stanley, an investment bank, said: “We believe that investors should start taking a little more risk with their portfolios, given our view that the US economic recovery will prove to be sustainable. Financial stocks are a good place to start.”
He likes 3i, the venture-capital group, at 577p, and Man Group, the hedge-fund manager, at £13.50.
Hatherly would also consider the sector. He said: “It is looking cheap on a dividend yield of 3.1% and could therefore beat the market if we get an upturn.”
Bet on the oil price
Investors who backed oil at the start of the year have enjoyed strong gains. The price of Brent crude has soared by 42% to $42.19.
However, some experts would now bet on price falls. Barclays Private Clients, for example, thinks oil could drop to as low as $36 by the end of the year.
Batstone believes the price could slip back into the $30 to $40 range. He said: “Oil has been boosted by speculators. But if you think the economy is slowing down, you would now bet on price falls because demand should ease off.”
You can gamble on the oil price through a spread-betting firm. Cantor Index, for example, was last week quoting a “spread” of between $40.43 and $40.53 for the price of Brent crude in October. If you think the price will fall, you could bet £10 for every point below $40.43. If you think it will go up, you would bet £10 for every point above $40.53.
If the price was at $40.00 when you closed the bet, you would win £430 (£10 for every point between $40.00 and $40.43).