Where The Wise Man Would Put His Money In 2011

by Richard Benson on 26 Jan, 2011

After a stronger-than-expected year for bonds in 2010, it is time for them to step aside. Indeed, if you want to make money investing in 2011, head straight for equities. And ask any Square Mile or Wall Street money manager where they would place their bets in equities this year and our guess would be that they would most likely point to emerging markets. Such markets are fast moving onto investors’ radar screens. More and more, these commodities-and consumer goods-driven markets, formerly viewed as high risk peripheral underdogs, are fast becoming the drivers of many global sectors – and all the rage in the investment community. Moreover, they can often boast two characteristics seldom found in more developed markets: high growth and low debt burdens. That said, on a technical basis, US equities are also finding a few fans as they are considered undervalued on a relative basis. In terms of industry sectors, meanwhile, it seems international technology, energy and consumer goods firms are, by most accounts, set to be the top picks for the year ahead.

First, let’s look at the facts. Bond yields are at historic lows. While this is great for issuers, it’s not the case for investors looking to make a pretty penny. Furthermore by most accounts, inflationary pressures are set to rise. At the time of writing the UK Office of National Statistics (ONS) has just dropped the bombshell that the UK economy contracted by 0.5% in 4Q10, derailing the consensus view of a positive 0.5% overturn from the previous quarter. Although this has given the Bank of England plenty to mull over, it is clear that Governor Mervyn King is willing to tolerate higher inflation in the short term. And this serves to make shares more enticing than bonds and cash alternatives. It is a simple rule of economics that during an inflationary period stocks will outperform. Why so, I hear you ask? Because companies can put their prices up, which also enables them to maintain their payments of dividends. This is likely to be further compounded by the cost cutting measures firms have implemented over the past couple of years, which will inevitably lead to a strong bounce-back in corporate profitability.

So, now you know this, what’s the best avenue to increasing your equities? Isas would seem a pretty good bet; especially as they offer tax incentives to sweeten the deal. Such products are the way forward for income seekers, as they exploit the tax loophole to full effect. Furthermore they are flexible; with an Isa you can make penalty free withdrawals, meaning they come up favourably when compared with pensions. One major downside, however, is that there are ceiling limits as to how much can be invested in any given year. Admittedly, not everyone is sat upon enough dry powder to invest the maximum possible per annum, but there does appear to be a lack of appreciation of the tax breaks such investments do offer.

About the Author

Richard Benson is a freelance financial journalist who has written for Corporate Financing Week, Dow Jones Newswires and the Wall Street Journal. He is executive editor of Cultsha.com.