Investing in stocks Is it time to get back into the market

It is the question on every investor's lips: is now the time to start buying cut-price equities, which have taken such a hammering – or is it better to seek refuge from turbulent global stock markets by moving into bonds and cash?

The devastating credit crunch, soaring inflation (driven by strong commodity prices), falling UK house prices and nervous consumers cutting back on their spending are all having a negative effect on a string on companies and markets. The FTSE 100 index, for example, has fluctuated madly over the past six months, from as high as 6,410 points to as low as 5,414. At present – after another week of heavy falls – it is at the lower end of that range; market observers warn that a further 10 per cent fall is possible.

Moreover, the rising cost of essentials, such as food and oil, have put family budgets under pressure, and many people are feeling the pinch harder since coming off attractive fixed-rate mortgage deals. As a result, businesses that rely heavily on consumers are struggling. Earlier this week, Marks & Spencer saw its share price slump after its chief executive, Stuart Rose, warned that there were tough times ahead.

But the headlines conceal the fact that there are winners as well as losers. Even as high street retailers, house builders and banks feel the pressure, sectors such as oil exploration have thrived, on the back of soaring demand.

In this environment, when even battle-hardened fund managers are scratching their heads over what's really happening, there's little wonder that investors are so confused, says Mark Dampier, head of research at Hargreaves Lansdown.

"The polarisation of views is the greatest I have never known," he says. "My view is to make sure you have enough in cash. This is a time to be patient, as the market will turn itself around eventually – it just might go 10 per cent lower before it does."

But sitting tight does have its drawbacks, points out Andy Gadd, the head of research for Lighthouse Group. "Investors that have chosen to remain in cash are doing relatively well," he says. "However, the danger is that being out of the market for certain crucial days of good performance can seriously damage long-term performance."

Others are even more bullish, and insist that now is the time to buy. James Smith, the chief investment officer of specialist funds at Resolution Asset Management, believes that equities are up to 30 per cent undervalued in comparison to bonds and cash.

"We came into this year overweight cash and cautious on markets, but as equity markets have fallen, we have drip-fed cash back into them," he explains. "Things don't look pretty, but stocks are at valuation discounts so a lot of bad news is built in."

More controversially, Smith also believes that the best value lies in the UK and Europe – both of which are being shunned by rival managers. "The consensus says to avoid these areas because of the economic slowdown threat, but the discounts are greater, and anyone buying on a medium- to long-term view should do pretty well."

Bill Mott, who runs the PSigma Income Fund, is another experienced hand who refuses to run with the crowd. He has been busy snapping up financial stocks over recent weeks, and believes that the economic fears are overblown. "Most domestic influences on the economy, such as house prices and unemployment, are deflationary," he says. "My view is that interest rates will fall over the next year to alleviate the stress and that this will instigate a rally in financials and consumer cyclicals."

Charlie Morris, the manager of the HSBC Absolute Return Fund, disagrees. He doesn't believe that financials will be the stocks to buy when the market starts to improve. He thinks that global growth will be a more productive theme. Japanese stocks are now extremely cheap, in his opinion, and he is also putting his faith in industrial companies most likely to benefit from the billions of dollars being poured into global construction projects.

"An enormous amount of infrastructure spending will happen in the West. At the same time, the new world is growing rapidly, and industrial stocks will do very well. They have spent years consolidating and have now got pricing power."

Having some international exposure in your portfolio certainly makes sense, agrees Geoff Penrice at Bates Investment Services, and this doesn't necessarily mean having to buy foreign companies. Exposure can be achieved through UK-listed stocks. "It is possible to invest in UK companies with strong overseas earnings, such as oil companies," he says. "As the UK and US economies slow, you need to have more exposure to dynamic countries such as India and Brazil."

A sensible idea is to invest in a fund and let the manager take the strain – and in these environments it's best to stick with the most experienced around, adds Darius McDermott, the managing director of Chelsea Financial Services.

"Within the UK, we like Neptune Income, AXA Framlington UK Select Opportunities and Schroder UK Alpha, as they are all managers that have been around a while," he says. "Internationally, we like the Rathbone Global Opportunities fund."

With all these different views, what conclusions can be drawn? Julian Chillingworth, the chief investment officer at Rathbone Unit Trust Management, recommends that investors go away for their summer holidays and stop fretting about their portfolios. "I wouldn't buy too much at the moment," he says. "However, I also wouldn't advocate selling equities because we're in the eye of the storm. People have to be aware that markets are volatile and not look at their investments on a day-to-day basis."

Instead, consider regular investing, suggests Rebecca O'Keeffe, the head of fund management at the Interactive Investor website. "With all investment types you should have at least a five-year time horizon," she says. "If you do, you will sleep better at night, while riding the roller coaster of the current markets. And eventually you could find yourself much better off."

Where are people investing?

According to New Star research, 70 per cent of investors believe that emerging markets such as China and India, along with Africa and Latin America, will generate superior investment returns compared to developed markets.

But that's not to say they are buying them now. Only 10 per cent of those quizzed had exposure to China, seven per cent to India, four per cent to Latin America and two per cent to Africa. In contrast, 90 per cent were exposed to the UK, 40 per cent to the rest of Europe, 22 per cent to the US and 14 per cent to Japan.

Nonetheless, more than half – 51 per cent – were considering increasing their exposure to emerging markets. "Investors have been willing to sacrifice superior returns in the past for more familiar markets such as the UK," says New Star's marketing director, Richard Wilson. "It appears, however, that attitudes are set to change."

Stocks to buy – and avoid

We asked Alec Letchfield, the head of UK equities at HSBC Global Asset Management, to pick five stocks he likes – and five he doesn't.

Five stocks to buy:

*AngloAmerican: Involved in mining, a good sector at the moment, it is attractively valued and has the possibility of increasing its production after previous problems.

*Wood Group: This oil services company helps the oil majors to extract from the ground and to improve efficiency. It stands to benefit from continued investment in the industry.

*Aveva: The software designer is working in lucrative areas such as oil and mining, where demand for its services will likely grow.

*Man Group: Its focus on alternative assets is attractive when equity markets are going down, because this is when cautious investors like to put more money in this area.

*Vodafone: Fears about the regulatory environment, new management and exposure to emerging markets are overdone.

Five stocks to avoid:

*Barclays and HBOS: Banks are being affected by the problems in the credit markets, so are not worth looking at until there is more visibility. HBOS, in particular, is very focused on the consumer mortgage market and transactions have collapsed.

*Carphone Warehouse: I am not a fan of the structure of the company's joint venture with the US electronic retailer BestBuy. Retailing is also suffering at the moment.

*BT: There are concerns over the sustainability of the dividend and the company's ability to meet targets in its global business.

*Enterprise Inns: This is a consumer-facing company that can be affected by both the reduction in disposable income and the smoking ban.

http://www.independent.co.uk/money/invest-save/investing-in-stocks

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Investing in stocks Is it time to get back into the market