One of the beauties of the Isa is that you don’t need to invest your money immediately to protect it from tax.
First, the 2017/2018 Isa is completely flexible: you can put your money into a cash Isa and then switch it into a stocks and shares Isa at any time. Second, most Isa investment platforms have a “cash park” facility, which pays a small amount of interest on money you haven’t yet invested.
Such tools may be useful for investors cautious about the current environment, looking to phase money into the market over time rather than put everything in immediately, especially given the new, higher Isa allowance of £20,000 this tax year.
There is some scepticism, after all, over whether the recent run of good news for equity investors can last. The first quarter saw the FTSE 100 post its fourth straight quarterly gain, the Dow and S&P 500 up by several per cent, and the Nasdaq enjoy its best quarterly performance since 2013.
But with valuations high, particularly in the US, and with nervousness about a host of political and economic factors, it may make sense not to jump all in at the beginning of the tax year.
It won’t pay to be too nervous, however, particularly by parking your Isa money in cash for too long. “The outlook for global growth remains robust, and with signs of inflation creeping back into the global economy, the importance for investors to find asset classes that can deliver returns ahead of inflation becomes ever more important,” says Richard Saldanha, global equities manager at Aviva Investors.
So where should you consider investing this tax year?
Accelerating growth – the case for equities
“On the surface, you’d think eight years into a bull market, you’d want to be a bit more cautious,” says Mick Gilligan, head of fund research at Killik & Co. “But sentiment remains strong in equity markets. There’s not a particularly compelling reason to look at the obvious alternatives, bonds.”
Partly this is because of renewed positivity about the health of the global economy. “Global equities have delivered good returns over the past few years as the global macro outlook has improved, and the key to sustaining this rally will be corporate earnings,” says Saldanha. “Earnings momentum continues to grow across developed markets.”
In terms of markets to invest in, and so long as it can ride out a dangerous series of elections this year, Europe regularly comes out on top. This is partly down to relative valuation, says Saldanha. “From a valuation perspective, Europe appears more attractive than the US, though we would caveat this with the political uncertainty of upcoming elections. It’s interesting to note that European equities have outperformed the US in dollar terms since the Trump election victory in November, suggesting there is positive momentum there.”
Read more: Is the Eurozone booming?
According to MSCI, the best-performing country index in March was France, with a 6.3 per cent total return. Year to date, Switzerland has returned 8.8 per cent and France 7.3 per cent, compared to 5.1 per cent for the UK and 4.6 per cent for Japan. As an indication, the iShares MSCI Switzerland Capped ETF, traded in dollars, has returned 8 per cent year to date, while the iShares MSCI France UCITS ETF Eur (Acc) GBP has posted a 5.59 per cent gain.
For investing in Europe, Gilligan likes the HSBC European index fund, a passive fund that gives broad exposure to high quality European companies outside the UK. “It contains a good spread of world class businesses that happen to be headquartered in Europe.”
Wider global trends
For a broader play on global growth, he notes Utilico Emerging Markets, listed in London, which owns utilities and infrastructure players in emerging markets – “ports, toll roads, airports. Most of its exposure is Asia. If you were to see a pick up in global GDP, they would benefit.”
And for much more long-term plays on the global economy, Chris Beauchamp of IG highlights thematic ETFs that focus on trends like a rising global population and rising global affluence. “There is increasing demand for agricultural ETFs, for example. We’re eating more meat, we need more productive farmland, we need more fertiliser.”
On a global level, says Steven Andrew, fund manager at M&G Investments, the rise in inflation in recent months has been benign, mostly “a result of the behaviour of energy prices, rather than any fundamental shift in underlying price momentum which would cause concern to policy-makers.”
That said, in the UK, inflation is expected to rise more strongly than elsewhere in the developed world. In this environment, cash savings will be hit as interest rates will be lower than inflation.
“Bonds may also suffer,” says Darius McDermott of Chelsea Financial Services, “as the income paid is usually fixed at the time they are issued. Finding a bond fund with a higher yield to compensate for higher inflation will be key.” He cites the Aviva Investors High Yield Bond fund, yielding 4.87 per cent, and the Rathbone Ethical Bond fund at 4.5 per cent.
Equities are typically a better bet in times of rising inflation, says Beauchamp of IG, and you should probably avoid gold as an inflation hedge – whether bought directly, or via an ETF. “It’s not a useful hedge at the moment when you can get better returns elsewhere. You don’t pick gold to take advantage of rising global growth.”
If you’re looking for an income stream that will rise in line with inflation, infrastructure looks attractive. Gilligan likes HICL Infrastructure, which tenders for public infrastructure projects. “They get contractual income as long as the infrastructure is available for use,” he says.
He also likes Ground Rents Income, a real estate investment trust which invests in long-dated ground rents. “Ground rents typically have a good level of indexation. They tend to be very long-term income streams and the level of default on this type of investment is incredibly low.”
Brexit – UK stocks
Many were surprised at the resilience of UK stock markets in the wake of the Brexit vote. “Large caps in particular have benefited from the fall in sterling, but even small and mid caps have bounced back from their initial sell-off,” says McDermott.
But the next two years “are likely to be a source of uncertainty and volatility in financial markets,” says Andrew. Russel Matthews of BlueBay Asset Management said “it is instructive that Theresa May has threatened a reduction in cooperation on counter-terrorism in the event that the EU does not play ball. This highlights a high stake poker game that cannot be constructive for investment or general sentiment towards UK assets.”
Gilligan does see virtue in UK assets, again because of relative valuation. And markets may be pricing in too much disruption to otherwise solid companies. “If prices move ostensibly on the back of ‘Brexit noise’, we should probably be vigilant for an over-reaction. We’ve seen this already in quite aggressive discounting of UK equities by a market too keen to see the pessimistic side of Brexit,” says M&G’s Andrew.
He wouldn’t put money into the UK right now, but if you want to increase your UK exposure, McDermott says small-cap stocks look best value. “My favourite funds are Marlborough UK Micro Cap Growth and Wood Street Microcap.” For ETF investors, iShares MSCI UK Small Cap UCITS ETF GBP, which attempts to replicate the performance of the MSCI UK Small Cap index, has returned 5 per cent year to date.
And if you’re a stock-picker, Simon McGarry, senior equity analyst at Canaccord Genuity Wealth Management, says a weaker pound could make select UK firms attractive takeover targets, potentially pushing up prices. He identified Schroders and Hays as among the most likely targets.
Beyond the Trump trade
The Trump administration’s failure to pass a bill repealing Obama’s healthcare legislation has cast doubt on its ability to deliver the rest of its proposals – including tax reform and a trillion dollar infrastructure stimulus. “He won’t be getting everything his own way,” says McDermott. “I wouldn’t pile into US equities right now but they could trend gently higher a bit longer.” If you’re buying into US markets now, adds Beauchamp, “you’ve probably missed the boat”.
There is another interpretation. “To our minds, recent months haven’t experienced a ‘Trump rally’ as much as a ‘reality rally’ as investors shift from the overwhelming gloom and pervasive pessimism of the financial crisis to the acknowledgement that things aren’t quite so bad and the combination of low interest rates and stronger demand growth means company earnings can more than justify current share prices,” says M&G’s Andrew.
Nevertheless, given the political uncertainties, some argue it makes sense to be cautious. “It is very difficult to predict how political events are going to play out. On top of that, even if you do foresee events, it’s equally difficult to predict how markets will respond,” says Peter Westaway, chief economist at Vanguard.
As such, he adds, the vast majority of investors “will be much better off focusing on what they can control – staying diversified, having a long-term perspective, and keeping their investing costs low.”