Investment Commentary: New Year, New Opportunities?

Brian Tora is one of the City's most respected financial commentators. Previously he held the post of Investment Communications Director at Gerrard Investment Management Limited. He writes a regular monthly column on investment issues for Moneyextra.

A New Year - new investment opportunities and, no doubt, new threats. Seldom has a New Year been ushered in with such uncertainty overhanging sentiment. The "R" word is on everyone's lips and those in the know are warning us that the full effects of the credit crunch have yet to be felt. These are not conditions that favour the optimistic forecaster.

But shares actually finished 2007 higher than where they started - just. It would be more correct to say the FTSE 100 share index was up on the year because within the 100 companies that represent the great and the good of British corporate life there is a variation of performance that is positively staggering. Northern Rock was, after all, a FTSE 100 constituent at the beginning of the year.

Even amongst those companies that finished the year as part of the FTSE 100, the UK's principle benchmark there are those that have doubled and those that have halved. Amongst the investment winners are, unsurprisingly, oil and mining shares. The losers include builders, banks and property companies. But the real question is, what does the New Year have in store for investors?

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With oil breaching the $100 level, US economic activity declining, credit remaining in short supply and the British high street suffering, it is all too easy to present a pessimistic stance. But interestingly investment professionals are divided in their views, with a balance in favour of a further positive year for equities. Behind this optimism in the face of indifferent news lies the rise of the East and demanding valuations.

Decoupling is certainly being touted as the reason we should be less concerned over an American recession. This is best demonstrated by the steady rise in the valuations of emerging markets, to the extent that they are now more expensive than the developed markets of the West. While it must be debatable these countries will escape the effects of a full blown recession in America, it is likely that the damage will be less extensive.

And a further reason to take a more sanguine view over markets in general is the likelihood of further monetary easing from the central banks. Anxious to head off the worst potential consequences of the credit crunch, the Fed and the Bank of England at least look likely to lower interest rates this year. The cynical might argue that this merely postpones the final reckoning, but even with cheaper money it is likely that credit will be harder to come by.

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Which is why there seems little reason to expect an early reversal in property fortunes, both here and in the US. Residential property in the UK could suffer a real fall during this year, although conditions are very different to the early 1990s when we saw a third of the value wiped of house prices. Then changes to the tax treatment of mortgages created artificial demand just before a recession hit. Today even a recession is unlikely to trigger such a retrenchment, given the imbalance between supply and demand.

Buy-to-let could suffer, though, not least because financing those off-plan city centre flats could prove more difficult. Perversely this could have a beneficial effect as it might deliver affordability at the lower end of the market more swiftly. It only goes to show that few clouds are completely devoid of a silver lining.

Not that any cheer appears present in the commercial property world at present. If the shake out that these funds have experienced recently demonstrates anything it is the difficulty of making available to small retail investors an asset class that is essentially illiquid through an open-ended structure. As it happens closed-ended funds have suffered just as badly even though they do not suffer the same selling pressure on their underlying portfolio. It strikes me there could be an opportunity there somewhere.

Read last month's: Investment Commentary: Strong nerves needed

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04 January 2008 © Moneyextra.com

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