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Investment analysis: What can investors expect from 2012/13 Isa season?

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As investors grow bolder in their move from bonds to equities, advisers are positive on the outlook for the 2012/13 Isa season despite a number of concerns in the background.

Indeed as global markets have recorded strong returns in the first month of 2013, the continued fears about the euro crisis and a potential last minute threat from the US fiscal cliff mean equity markets could be climbing a ‘wall of worry’.

Data from the Investment Management Association shows total inflows for net retail Isa sales for the 2011/12 tax year were approximately £2.3bn, almost half the £4bn seen in the previous two years.

Advisers agree the fluctuating figures from Isa inflows reflect the unpredictability in markets created by the ongoing crisis in Europe and concerns about the global economy.

The latest World Economic Outlook report from the International Monetary Fund states global growth should strengthen gradually in 2013, despite lowering its forecast for the global economy by 0.1 per cent for 2013 and 2014. The euro area is now expected to contract slightly, brought down 0.3 per cent from WEO October 2012 projections.

AWD Chase De Vere head of communications Patrick Connolly says investor caution over the last few seasons can be witnessed in their tendency towards more defensive funds such as income and bonds in preference to riskier equities.

He says: “Previously investors were looking at more cautious funds and when they went to equities they were looking at equity income or global equity income, where they thought they were on safer ground.”

However, some advisers are growing increasingly concerned about the sustainability of these popular defensive funds.

Chelsea Financial Services managing director Darius McDermott says pockets of value can still be found in investment grade and high yield bonds around BBB, recommending strategic bond funds due to their “flexibility and ability to manage interest rates and credit risk.”

McDermott is particularly wary of gilts. He says: “Gilts are giving next to nothing in terms of current yield on 10-year bonds and just a small rise in interest rates would lead to a significant capital loss on the gilt index. If yields should return to normal levels quickly, the potential capital losses are quite frightening.”

Hargreaves Lansdown head of advice Danny Cox points out the current inflation risk to bonds created by quantitative easing. Cox recommends a strategic fund or high yield fund as a way that avoids this risk.

Cox also suggests that gilts should be avoided along with property, which he describes as being “rarely a good Isa investment.”

Connolly says investors are becoming “more optimistic and bullish” recently. As confidence returns, he says investors are moving up the risk scale to more growth-oriented equities and perceived riskier areas such as Asia and emerging markets.

There is a general consensus amongst advisers that equities could be the way forward for investors, with equity funds appearing across their top picks for the Isa season.

McDermott is positive about returns on equities for 2013, taking into account the inevitable volatility and pointing out that equities are not actually as cheap as they were at the start of the year. He says: “Most markets are attractively valued on a price to earnings basis although a question mark remains over whether companies can maintain earnings. However, if you can buy at low prices, longer-term returns should be better.”

Another recurring theme for the upcoming Isa season is emerging markets, with the £3.5bn First State Global Emerging Market Leaders fund a popular pick among advisers.

Recent data released by the IMF shows emerging markets are continuing to grow at 5.5 per cent, despite being trimmed by 0.1 per cent when the IMF downgraded global forecasts for 2013 and 2014 at the end of January.

Skerritt Consultants head of investments Andy Merricks would generally avoid emerging markets for this Isa season, although he does consider the £170m Schroders Asian Income Maximiser as one of his favoured picks for this year.

He says: “Asia is more developed than any of the other regions that tend to fall under emerging markets. There are a lot of income opportunities in Asia and China looks like it will recover this year, with benefit to its immediate neighbours.”

Elsewhere, Japan is considered a risk worth taking by some advisers, as the country looks towards an economic boost following the election of a new government and the expected appointment of a new governor of the Bank of Japan in the upcoming months.

McDermott describes Japan as his contrarian bet for 2013, selecting the £261m JOHCM Japan fund in anticipation of a rise in the Japanese market.

With some signs of stability in Europe created by the European Central Bank, Merricks says there are early opportunities to be found. He encourages investors to “look beyond the noise” created by macro economic and political issues, saying,”while you’re ringing your hands, others are getting in there before you”.

However there is a threat that investor confidence could be knocked in the middle of the Isa season by the delayed fiscal cliff.

The spending cuts expected by the so-called fiscal cliff are set to be reconsidered on 1 March, after being postponed as part of the mini-deal reached at the turn of the year.

Jonathan Davis Wealth Management managing director Jonathan Davis says: “We know that inflows from retail investors have been higher than the last couple of years. This is probably lead by the postponement of the fiscal cliff. If retail investors are piling in now, I think people should be very careful about a late impact.”

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