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Against the grain

Emerging markets are being tipped but the developed world may be a surprise story

At this time of the year, newspapers are filled with predictions for the months ahead. The one prediction I can make with confidence is they are mostly going to be wrong. Trying to forecast a market’s level in a year’s time uses up plenty of column inches but I am afraid is really just a matter of pure guesswork.

Before I am called a hypocrite because I have done it myself, I have always told editors they should take it with a pinch of salt. However, from a private investor’s point of view, forecasts can be interesting and can actually be helpful. Why? Because if you can find a consensus among the experts you can often find the very thing not to do.

I note, for example, that many are keen on emerging markets this year. So am I, but then I have been a fan of this sector for more than 20 years and remain positive over the longer term. Nonetheless, in the last couple of days I have grown a little wary of the market in the very short
term.

Valuations, as yet, do not look too demanding but the fact remains that they have had a tremendous run from the lows in 2008. In some cases markets have risen 100 per cent or so. I would therefore suggest that if you are keen on this area you do one of two things: start a monthly savings plan, which will even out the fluctuations in the stockmarket over time – something I do myself – or, for those of you who want to invest a lump sum, why not just wait a little. I note that experts such as Mark Mobius from Templeton emerging markets are suggesting a 20 per cent fall at some stage and this would be the time to invest.

Might it be that the developed world surprises on the upside instead? Everyone has written off Europe, the UK, America and obviously Japan, but in stockmarket terms they might do better than you first think. The UK is a perfect example in that the economy looks absolutely dreadful. If I had a brick to hand I would now have no television, as I scream at senseless politicians (both right and left) who can talk about nothing other than how to spend money they do not have. Sterling has seen its biggest fall since we left the exchange rate mechanism in 1992 and, having just come back from holiday, I can certainly confirm that going overseas is very expensive. You know something is up when a steak costs you £25 in a mediocre Australian restaurant.

However, a weak pound might not be so bad for the UK stockmarket where three-quarters of earnings comes from overseas. You could see an increase in profits simply through the deterioration of the currency. It is therefore essential to divorce the stockmarkets of the world from their economies – they can behave quite differently. Combined with the huge private sector cost-cutting we have already seen, the fall in the pound could well provide hope for the UK stockmarket.

One area I think is particularly cheap within the UK market is blue-chip, defensive shares. UK income funds have been hit hard over the last two or three years, yet funds such as Newton higher income yield some 7 per cent. The likes of Invesco Perpetual high income, income and others are full of companies that will not only survive but also prosper through a difficult recession. I believe they deserve, and will achieve, a re-rating.

So do not write off the UK and put all your money in emerging markets. The UK is a cheap area and, on a global basis, so too are the big, blue-chip defensive shares on high yields. Over the next few weeks, you will see one or two funds in my column that reflect this theme.

Mark Dampier is head of research at Hargreaves Lansdown

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