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Brave and the bold

Writing a column a week in advance is fraught with danger at the best of times. It is especially so now given the incredible speed with which the market is moving. However, I do feel that the politicians have finally woken up to what is going on and the move to recapitalise the banks should be some help. Despite this, I am convinced that a recession is unavoidable – in fact we are probably already in recession.

Anthony Bolton, probably the leading UK fund manager before he retired last year, said in the press recently that for the first time in ages he was turning positive on the market. The market fell dramatically after he made those comments but in his defence he was not suggesting this was the bottom of the market.

Bolton knows better than anyone that it is impossible to call the bottom exactly. His general point was that fear usually leads to buying opportunities.

Interestingly, the VIX Index (a measure of volatility) has shown its biggest leap ever. This may look like a bad sign but peaks in the VIX are usually accompanied by at least a short-term rally.

I fully expect interest rates to be cut further. In fact, I believe they will halve over the next six to nine months. I have no idea when the market bottom will be reached but I am quite prepared to say that long-term investors should make money from these markets.

If you are feeling brave enough, what do you buy? I feel investors in the UK would be well advised to concentrate on income where there are two very interesting areas. Corporate bond funds have fallen sharply over the last few months because of their exposure to financial bonds. However, bond managers continue to find compelling value here.

I spoke to the managers of the Invesco Perpetual UK corporate bond fund today. The fund now yields 7 per cent with a yield to maturity of 9 per cent. Virtually all the bonds in the portfolio are under par (meaning they are under 100 – the normal maturity price of a bond) indeed in some cases they are substantially below par.

This means you are getting paid a high yield while you wait for a potential uplift. It seems to me that if the markets are going to recover, it could happen in bonds first.

After this, I think UK equity income funds are your next port of call. Once again, yields are high – between 4.5 per cent and 6 per cent net depending on which fund you choose. In this sector, my top picks include Artemis income, Invesco Perpetual income, Jupiter income, PSigma income and Liontrust first income.

These fund managers say they can hold their yields/dividends and indeed increase them, probably in line with inflation. With interest rates falling, these look more and more attractive.

Those after something really spicy might consider emerging markets. Despite their strong balance sheets, huge foreign reserves and generally younger populations, their markets have come down sharply.

There are a number of reasons for this. First, they can not totally decouple from the global economy and are bound to suffer a slowdown of their own, albeit far milder than the one we will experience.

In addition, redemptions from hedge funds and an increase in risk aversion have meant they are being heavily sold down by investors across the world. Yet I must reiterate that these markets remain fundamentally strong, especially compared with the West.

I have said, and continue to say, that the huge urbanisation story in emerging markets is not going to end any time soon. The further these markets fall the more interesting they become.

In this area I favour funds such as Aberdeen emerging markets, First State Asia Pacific leaders, Allianz RCM Bric Stars and (dare I say it) Jupiter emerging european Opportunities and Neptune Russia & Greater Russia.

The Russian market has been hit more than anything else and it looks absurdly good value to my eyes.


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