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Equities to bonds, we look at investment outlooks for 2011 Go compare with our comparison table

Equities to bonds, we look at investment outlooks for 2011

11 January 2011 / by Paul Dicken

Despite volatility and uncertainty, in what turned out to be a relatively good year for equities, the FTSE 100 finished 2010 at 5899.94 points having reached the 6000 points mark earlier in December 2010.

As trading on the London Stock Exchange opened for business for 2011, optimism was overriding pessimism over the VAT increase and what the leader of the opposition has called the ‘year of consequences’.

Although some of these gains were pulled back as trading continued during the week and most commentators see the volatility of the last year in equity markets continuing.

The stock market

After the stock market rally into the end of 2010, there are mixed views on equity investments and the opportunities for stock market performance.

With emerging markets posting a strong year for growth, head of global strategy and asset allocation at Aberdeen Asset Management, Mike Turner, points to Asian and other emerging markets as providing the power for economic growth again in 2011.

With interest rates likely to remain low the return on cash investments will be limited, which Aberdeen says will lead some searching for yield to invest in equities.

Developed economies

While economic growth in many developed economies is predicted to be muted in 2011, a theme for some fund managers is seeking out the potential returns from equity investments in these markets, such as the UK, US and Europe.

One theme for developed market funds is investment in multinationals that are benefitting from growth in emerging markets, and the emerging middle class.

This has been a strategy of the JP Morgan Global Consumer Trends fund, while Robert Hagstrom of Legg Mason Global Asset Management says US multinationals will be competing with other multinationals to capture new consumers in developing economies.

“The current hesitation to invest in US multinationals appears to reflect worries about domestic economic growth. This hand-wringing may prove costly because it underestimates and undervalues the continued growth in developing markets that is a near certainty,” Hagstrom said.

Emerging markets

On emerging market investments, many believe emerging economies will continue to grow, but there are increasing concerns about inflation, tighter monetary policy to restrict the inflow of money and assets becoming over-inflated.

In a recent outlook for 2011 Legal and General Investment Management said: “We are now less keen on emerging markets after their strong relative performance in 2010. Inflationary pressures are building and not just in commodities. In contrast to the West, labour markets are tightening and wage pressures will add to costs.”

In terms of the domestic equity market, companies that provide consumer basics or necessities are preferred by some commentators as a robust performer when consumer spending may be tight.

Smaller companies

Following strong performance in 2010, some UK smaller companies funds are also seen as another source of potential growth. This will partly be linked to how the UK economy fares, but exposure to international markets is also likely to be a key area for these funds.

Corporate Bonds

Several investment houses remain positive on the returns from corporate bonds. Andrew Wells, global chief investment officer of fixed income at Fidelity said: "I believe investment grade corporate bonds offer the best mix of risk and reward for next year and it's likely that we will see mid-single digit returns from this asset class.

“Heading into 2011, companies are in good shape - leverage is falling, rating trajectories are improving and the willingness of corporates to borrow to invest is low.”

Head of global strategy at Standard Life Investments, Andrew Milligan, said in a recent edition of its global perspective commentary that corporate bonds were preferred in a ‘moderate economic environment’ rather than recession conditions. He also said higher yielding debt was becoming more attractive.

“Although investor confidence will wax and wane periodically, over the year it should improve as more investors recognise that the economic recovery does have momentum and the corporate sector remains in good shape,” Milligan said.

Adding that income and growth opportunities could be found across the credit (bonds), equity and property markets.

Strategic bonds

Research by Fair Investment in November 2010 showed strategic bonds were the preferred investment sector for investment through the Fair Investment fund service between January and October 2010.

Strategic bond funds have the flexibility to invest right across the bond market, in government or corporate bonds, including higher yield bonds and emerging market debt.

Investment approaches

The need for diversification is ever important, especially when markets are volatile, to reduce exposure solely to one type of asset or region.

Chris Stevenson, vice president at Barclays Wealth said: “Product diversity and attention to asset allocation will remain of utmost importance in 2011. The past three years have been a rollercoaster ride and there is nothing to suggest that this is not the new ‘market-norm’.”

Stevenson said having a more carefully constructed portfolio that can take advantage of peaks and ride out the troughs would be crucial.

More information on the investment funds mentioned here and how to invest through Fair Investment is available in the Investment Funds section.

No news, feature article or comment should be seen as a personal recommendation to invest.

The value of investments and income from them can fall as well as rise and you may not get back the full amount invested. Different types of investment carry different levels of risk and may not be suitable for all investors. Investors in emerging market funds should be prepared to accept a higher degree of risk than for a fund with a broader investment mandate, as difficulties in dealing, settlement and custody could arise. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment and should read the investment Factsheet.

If you are in any doubt as to the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.

© Fair Investment Company Ltd

Emerging Market Funds
Fund ManagerFundSectorFactsheetMore info
RCM BRIC Stars SpecialistFactsheetMore Info >
The aim of the fund is to produce long-term capital growth by investing predominantly in the equity markets of Brazil, Russia, India and China. Up to a third of the fund’s assets may be invested in companies based in other countries that are likely to benefit from the BRIC phenomenon. See latest fund factsheet for details.
Neptune Russia and Greater RussiaSpecialistFactsheetMore Info >
The investment objective of the Neptune Russia & Greater Russia Fund is to generate capital growth from investment predominantly in Russian and Greater Russian securities or securities issued by companies transacting a significant proportion of their business in Russia and Greater Russia. See latest fund factsheet for details.
Fidelity South East AsiaAsia PacificFactsheetMore Info >
Capital growth fund which invests in companies located in the Pacific Basin, excluding Japan. See latest fund factsheet for details.
Greater China Growth FundAsia PacificFactsheetMore Info >
Intends to provide long-term capital growth by investing in companies that have strong connections in China, Hong Kong and Taiwan. Save 100% on Initial Charges.
Invesco Perpetual Latin AmericanSpecialistFactsheetMore Info >
Primarily invests in South and Central American companies, including Mexico and Brazil. Save 100% on initial charges.
M&G Global Emerging MarketsGlobal Emerging MarketsFactsheetMore Info >
Aims to achieve a total return, a combination of capital growth and income, through investments in emerging market countries. See latest fund factsheet for details.

The value of investments and any return from them can fall as well as rise and you may not get back the full amount invested. Please ensure that you read the Important Risk Information below.