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Why 2012 will be a ‘make or break’ year for savers and investors

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Why 2012 will be a ‘make or break’ year for savers and investors

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After a dismal decade of falling share prices and rising inflation, 2012 will be a ‘make or break’ year for millions of savers and investors.

Fear has replaced greed as the dominant emotion in global stock markets and there are signs that many individual shareholders are about to ‘throw in the towel’ – or have already done so.

Savers in most bank and building society deposits have suffered too, as interest paid has failed to match the Retail Price Index (RPI) 5.2pc annual increase and preserve the real value or purchasing power of their money.

That is one reason to keep faith with equities, while the FTSE 100 index of Britain’s biggest shares pays an average yield – that is, dividends expressed as a percentage of share price – of 3.7pc net of basic rate tax. Many blue chip shares – such as AstraZeneca, Aviva, BAE Systems, HSBC, National Grid, RSA and Vodafone, which I hold in my self-invested personal pension (SIPP), yield more than 5pc net.

But an 8pc fall in the Footsie during 2011, including a 15pc plunge in the first fortnight of August, demonstrates the risk inherent in stock markets. Shares offer no capital guarantee; unlike bank and building society deposits.

So it should be no surprise that Britain’s biggest share registrars, Capita, recently reported that individual investors, who had continued to buy more equities than they sold since the start of the credit crisis, have now become net sellers. Further stock market shocks during 2012 might mean we reach a point of capitulation, where shareholders rush to sell at any price.

If that happens, I will try to find the courage to top up my SIPP with cheap stock, as I did in August. The Polar Capital Technology Investment Trust shares I bought then at 301p have made modest gains to trade around 321p and I hope this fund’s three biggest holdings – Apple, Google and Microsoft – mean it will profit as we spend more of our time and money online in future.

Here and now, I cannot recall any period in the quarter century I have been writing about investment when leading fund managers have been more gloomy about the outlook. That includes the 1987 stock market crash when the Footsie fell 20pc in two days but nonetheless ended the year slightly higher than it began.

Perhaps the problem today is that the pain has been going on for too long – the Footsie remains more than 20pc below its peak 11 years ago – and nobody expects a sharp recovery. Predictions for 2012 include comparisons with World War II, the collapse of the euro, further nationalisation of banks and the reimposition of exchange controls.
Contrarians argue that current pessimism means shares are cheap and should offer good value to buyers today who can hold – despite likely shocks – for more than five years. Jeremy Tigue, fund manager of the giant investment trust, Foreign & Colonial, said: “All the statistical measures show that equities globally are as cheap relative to bonds as they have ever been.

“The difference between the yield on the FTSE 100 and 20-year gilts is the biggest for more than 50 years. If you look at this as the dividend yield divided by the gilt yield, it is 1.32. The only time in the last 100 years this has been above 1.5 was in the summer of 1940 when many expected the United Kingdom to be invaded by Germany.

“A ratio of 1.5 would be the equivalent of a FTSE 100 level of 4800. Or, to put it another way, if share prices fall 10pc from here they will be valued at the same level as they were before the Battle of Britain.”
Similarly, Mark Tyndall, chief executive of Artemis Asset Management, said: “Contrarians have reason to believe that all the bad news is already ‘in the price’ and that equities are good value at current levels.

“The risk is that a major financial shock could lead to a big sell-off, and so we are circumspect. But what cannot be cured must be endured. Whether or not it’s after a further sell-off, we can see upside for equities in 2012.”
Rising inflation and falling interest rates have combined to create a form of slow-motion bank robbery. Ros Altmann, director general of Saga, calculates this combination has cut the purchasing power of many pensioners’ savings by nearly a fifth since the credit crisis began.

Few people expect interest rates to rise substantially during 2012 but many predict inflation will fall. Reasons include reduced demand and prices for commodities, plus the fact that last January’s increase in Value Added Tax will drop out of the annual RPI figure next month.

Richard Jeffrey, chief investment officer at Cazenove Capital Management, forecast: “2012 will see the inflation squeeze on households ease dramatically.”

Shocking setbacks in the eurozone and emerging markets this year could prove to be merely tremors before the earthquake to come. Terry Smith, who invested £25m of his own money in Fundsmith Equity, said: “In 2012, I predict that China will have an economic hard landing, and the major emerging markets will struggle.

“Greece will leave the euro and, as a result, some other eurozone countries may have to impose exchange controls to protect their banking systems from the flight of deposits. Banks across Europe will be nationalised.”
Another expert who is also bearish about China and the eurozone is Carl Stick, fund manager of Rathbone Income fund. He added: “I worry that, in the short term, there will be a correction and equity markets, at current levels, do not reflect the harsh realities.

“Therefore, I currently have high levels of cash. What if markets do fall? This will be frightening but it would offer up a veritable smorgasbord of opportunities. I must be in a position to take advantage, because there shall be some very good businesses on sale.”

Next November’s Presidential Election in the United States of America gives its government good reason to make every effort to ease economic misery as soon as possible. America remains not just the world’s biggest economy but also one of the most flexible and several experts predict it will lead global recovery.

Willem Sels, head of investments at HSBC Private Bank, said: “Although the US economy may slow in the coming months, we prefer the US stock market over other developed markets as it is typically more defensive and likely to see fewer negative headlines than Europe in the short term.”

Similarly, Steven Andrew, manager of the M&G Income Multi Asset Fund said: “We continue to be more comfortable with equity exposure in the US and Latin America, where the combination of valuation, policy-setting and observable support from fundamental macro data is compelling.”

Warren Buffett, the billionaire investment guru, points out that when it comes to stock market predictions, there are only two types of expert: “Those who don’t know and those who don’t know they don’t know.”

Bearing that caveat in mind, I intend to hang onto the shares I hold in my SIPP and – as mentioned earlier – continue to buy on the dips. More sophisticated investors may prefer to switch into cash and buy after prices have fallen further.
But perfect market timing is not easy and might not even add much to long-term returns. John Newlands of Brewin Dolphin stockbrokers explained: “£1,000 invested in Foreign & Colonial Investment Trust shortly after the 1987 crash would now, with net income reinvested, be worth £9,370 as opposed to £8,150 for the FTSE 100 Index over the same period.

“Had you invested the same sum shortly before the 1987 crash, that same £1,000 would still be worth some £8,440 today, or around £7,500 if invested in the FTSE-100. These figures may seem counter-intuitive but they illustrate the way that over the long term, dividend income forms an incredibly important component of total returns.”

They also show why long term investors, seeking to accumulate capital for retirement, should not be unduly influenced by short term setbacks. And how, whatever happens to share prices in 2012, dividends can deliver substantial comfort to investors in uncertain times.

Why 2012 will be a ?make or break? year for savers and investors – Telegraph Blogs

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