As we say farewell to 2007 and hello to the real prospect of falling house prices, tighter credit conditions and jumpier stockmarkets, “one thing looks certain”, says Mark Atherton in The Times. “It is going to be hard work making money in 2008.”
However, there are several areas that should almost certainly ride out – and perhaps even benefit from – more turbulent times.
Gold: still a safe haven
“The two stories for 2008 are going to be the subprime credit crisis and inflationary issues,” Ross Norman, director of TheBullionDesk.com, tells Bloomberg. While these will weigh heavy on indebted consumers in the US and UK, it means gold, a traditional save haven, may rise to “well above $1,000” after climbing more than 30% to over $800 an ounce in 2007.
The flagging fortunes of the US dollar, along with fewer new discoveries and falling production from existing mines, are also good news for gold investors. Graham Birch’s Merrill Lynch Gold & General Fund (call 0800-445522) remains one of our favourite means of playing this theme, but with mining costs rising, it promises to be more volatile this year.
Those who simply want to track the gold price can do so through an exchange traded fund (ETF). ETF Securities provides a sterling-denominated ETFS Physical Gold (PHAU), which you can put in your Isa.
Emerging markets: buy into Russia
Emerging markets have had a stellar year, with the Morningstar China Equity fund category rising 60.8% and Latin America up 39%. This year, Russia, which posted a 26% return last year, should keep doing well as the “economic growth rate is not far behind China’s, yet its stockmarket is significantly cheaper, trading at a 60% discount to China”, Juliet Schooling, Head of Research at Chelsea Financial Services, tells The Daily Telegraph.
“If you can handle the risk, take a stake in Neptune Russia and Greater Russia Fund”, says Mark Dampier of Hargreaves Lansdown. It offers exposure to one of the world’s most dynamic economies and Robin Geffen “is an outstanding fund manager” (call 020-3008 8000 for details).
Meanwhile, if Russia isn’t risky enough for your tastes, you might want to take a look at Africa. Hargreaves Lansdown points out that “the African markets are characterised by a low correlation with each other and to other emerging and developed markets”, which could make them a good choice at a time when Western markets in particular look weak. New Star’s Heart of Africa Fund (0845-608 8704), which can be bought through a fund supermarket, is one of the easiest ways for retail investors to play the continent.
Stay bullish on Japan
Investec Asset Management strategist Max King says Japan could surprise everybody next year, with “much more attractive” valuations and prospects than a year ago, he tells IFAonline.co.uk. “Economic growth is steady, corporate profitability is improving, valuations are the lowest for decades and dividend yields are above government bond yields.”
Investors can buy it though an ETF such as iShares MSCI Japan Index (NYSE:EWJ), or even better an investment trust with little exposure to export markets. One example is the Baillie Gifford Japan Trust (BGFD), which is currently trading on a 10.4% discount.
Commodities: buy softs
2008 should be another good year for softs, although not for consumers. “In 2008, high food prices will replace expensive oil as the bogeyman of Western consumers and central bankers,” says Liam Halligan in The Daily Telegraph, who points out that higher food costs will hurt consumer spending, while making it harder for central banks to cut interest rates as sharply as they might like. Wheat has doubled this year, putting pressure on everything from beer prices to bread and milk.
You can track the price of wheat and other grains through ETF Securities’ wide range of exchange-traded commodity products. But it’s not just about grains. “For coffee, the picture is extremely bullish just because stocks are…tight” and demand is increasing, says Rodolphe Roche of Schroders on Reuters. ETFS Coffee (COFF) tracks the DJ-AIG Coffee Sub-Index.
How last year’s tips fared
2007 was a good year for the emerging market funds we tipped in January, with all three boasting impressive returns. The Neptune Russia & Greater Russia and Neptune China funds posted returns of 36.6% and 45.5% respectively, while Jupiter Emerging Opportunities gained 30.3% for the year.
It’s also been a good 12 months for gold, with the Merrill Lynch Gold & General fund rising 40%. In the energy sector, Investec Global Energy rose 33.1%, while JP Morgan Natural Resources is up 43.3%. JPM Europe Dynamic, our European equity market pick, has returned 19.7%.
Our Japan picks have had a rougher time, but as mentioned above, we’d stick with them. JP Morgan Fleming Investment Trust is down 14%, but now trades on a 14.3% discount, while Japan Investment Trust and Fidelity Japanese Values are down 16.9% and 22.9% respectively, and trade on appetising discounts of 10.4% and 16.7%.