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Volatile markets: The tragic war in Ukraine has shaken the world
Markets are volatile as the horrific war in Ukraine and a severe bout of inflation shake the world.
Some investors may have moved at least some holdings into cash or gold, while others will be holding off on making decisions on how to use up this year’s Isa allowance.
‘Volatility can be incredibly off-putting for anyone considering investing,’ says Sarah Coles, senior personal finance analyst at Hargreaves Lansdown.
‘Once-in-a-generation shocks used to live up to their name, but we’re facing another horrible jolt, while many of us are still reeling from the last.
‘The Russian invasion of Ukraine shocked and appalled the world, and the days since have seen reactions reverberate around the globe. Markets hate nasty surprises and this was both unimaginably horrible and completely unexpected.’
But Coles warns being put off by volatility means missing out on potential long-term growth.
We look at some stock ideas from investing experts at Hargreaves and Brewin Dolphin below (we will be looking at funds later this week).
How to invest when markets go haywire
Sarah Coles of Hargreaves suggests some approaches to investing this Isa season.
1. Check you’re happy with your level of diversification: ‘Don’t assume your portfolio is diverse: revisit it. Over time, growth in some areas and falls in others can unbalance it.’
2. Buy into long term growth stories: ‘A falling market will drag almost everything lower, regardless of the prospects of the business, so when the market pulls back, there will be some companies with sound fundamentals you may want to consider.’
3. Protect your Isa allowance: ‘You can open a stocks and shares Isa and park the money in cash, then gradually drip feed it into stock market investments when it suits you best.’
Living on your pension investments?
Beware the ‘pound cost ravaging’ trap. Find out how to sidestep it during current market volatility here.
4. Drip feed cash into next year’s allowance: ‘Start regular savings into an Isa. You can make payments from £25 a month, and then top up with lump sums throughout the tax year when it makes most sense for your finances.
‘Alternatively, you can spread Isa contributions through the tax year by investing £1,666.66 a month. This means your money goes further during the dips, and benefits through the rises.’
5. If you’re drawing on pension investments, consider Isa income alternatives: ‘When you’re drawing cash from your pension, the most sensible approach is to take the natural income it produces.
‘However, some people choose to take more, and some have no alternative at times when dividends are unreliable, so they end up nibbling into the capital instead.
‘This can be very risky. You’re eating into a larger percentage of your pot when prices fall, and this will continue to have an impact even when it recovers.
‘If you have Isas alongside your pension, it gives you far more flexibility. You can draw income tax free from stocks and shares Isa, or you could dip into cash Isas to make up the shortfall, and refill the coffers when better times return.’
Fear: Some investors will have moved at least some holdings into cash during the current market volatility
Markets have had a torrid start to 2022 but investors should stay focused on the long term and gradually invest in a broad portfolio of assets, according to John Moore, senior investment manager at Brewin Dolphin.
‘Using as much of your tax-free allowances as you can is a central part of that advice. Everyone can contribute up to £20,000 for the tax year to either a cash or stocks and shares Isa, with the latter tending to outperform the former – albeit, past performance is no guarantee of future returns.
‘In terms of stocks that are well-suited for Isas, our smart advice is to look for companies that will see their share prices grow and provide a reasonable level of income as a safety net.
‘These should compound over the long term and grow within the tax-free Isa wrapper.’
Don’t forget your pension
Savings threatened by inflation? Tempted to start investing? A simple (and potentially cheap) option is to top up your pension fund. We explain how here.
What stocks should you consider for your Isa this year?
1. Rentokil: ‘No one puts up with rats in the kitchen because the catcher put their price up by 5 per cent,’ says Steve Clayton, manager of HL Select Funds at Hargreaves Lansdown.
‘What Rentokil does is essential to their customers, and whilst there is competition, having a strong brand and reputation for service is a powerful protector of margins.
‘The company is in the middle of executing a major takeover, adding Terminix to its US pest division which should offer plenty of scope for cost synergies in the years ahead.
‘This gives Rentokil further scope to grow and defend its margins, despite today’s inflationary environment.’
2. EMIS Group: The software provider to GP practices and community pharmacies is likely to hold up against inflation, according to Clayton.
‘Over 80 per cent of EMIS Group’s revenues recur each year under long term contracts agreed within NHS framework agreements.
‘This gives the group exceptional visibility of its income and with price escalations built into the contracts the group is well protected from cost pressures.
Steve Clayton: ‘No one puts up with rats in the kitchen because the catcher put their price up by 5 per cent,’ he says of Rentokil
‘With the group well positioned as a conduit for sharing data across NHS bodies EMIS should accelerate its growth in the years ahead.’
3. Tritax Big Box REIT: The firm owns and builds giant distribution centres along major roads and at motorway junctions, explains Clayton.
‘These distribution centres are at the heart of the digital economy. Businesses often run the sharp end of their ecommerce operations from them. Amazon is the largest tenant in the portfolio.
‘Occupiers take long leases with inflationary clauses built in, ensuring that Tritax’s income rises steadily. Demand for these assets is strong, and prices have been pushed higher.
‘With no business that we know of planning to use less technology or do less business digitally, this buoyant demand seems set to continue, leaving Tritax well placed to grow.’
4. Diageo: ‘Diageo is the group behind some of the best-known drinks brands in the world, including Guinness, Smirnoff, and Tanqueray gin,’ says John Moore, senior investment manager at Brewin Dolphin.
‘Whether times are good or bad, people enjoy a responsible, premium drink – which may sound glib, but underlines the resilience of this business.
‘Diageo continues to invest in broadening the reach and appeal of its brands, while also having the financial muscle to finance acquisition opportunities, buy back stock, and pay out a dividend of around 2 per cent.’
John Moore: Unvestors should stay focused on the long term and gradually invest in a broad portfolio of assets
5. GlaxoSmithKline: GlaxoSmithKline came under fire for its lack of responsiveness to the Covid-19 pandemic, failing to come up with a vaccination unlike many of its rivals,’ says Moore.
‘However, the company has set out a path to self-improvement by splitting its health and consumer divisions – the latter of which was recently the subject of a bid from Unilever.
‘This may mean reduced dividends in the short term – which currently stand at more than 5 per cent – but it should lead to improved capital returns from both sides of the business in time.’
6. Experian: The firm operates in the steady, if unexciting, business of providing credit checks and scores, explains Moore.
‘This is important financial data that is expanding in terms of relevance and geography, particularly in areas like Latin America where the company has significant business.
‘Crucially, the data Experian produces is most needed at times of change and uncertainty, which sounds very much like where we are now.
The shares are currently the cheapest they have been since the early months of the Covid-19 pandemic and offer a yield of more than 1.25 per cent.’
7. Greencoat UK Wind: ‘Greencoat UK Wind is an investment trust that, as the name suggests, owns wind farms in the UK – in fact, it is one of the largest independent wind farm owners in the country,’ says Moore.
‘Despite the stock market volatility since the turn of the year, the trust currently trades at a higher-than-average premium to its net asset value.
‘At least part of the reason for this is that it provides investors with a way of offsetting rising energy prices and delivering RPI-linked increases to its dividend, with a current yield of around 5 per cent.’
How do you buy overseas shares?
Want to get your hands on stocks listed outside the UK – find out how here.
8. Microsoft: The US tech giant is tipped as a dependable play by both Clayton and Moore – see the box below for how to buy overseas stocks.
‘Possessing something valuable and unique that customers cannot easily find elsewhere is a winning strategy in this environment,’ says Clayton.
‘Software can fit this bill. Only Microsoft can supply Windows or Office and few businesses would fancy their chances of prospering without them. So Microsoft can increase its prices every year.
‘There’s a lot more to Microsoft than just these two products, but to have such huge, cash generative franchises at the heart of the group leaves it well-placed to thrive in any environment.’
Moore says: ‘Few people will be unfamiliar with at least one Microsoft product – not least over the past two years, with so many of us spending a lot more time on Teams.
‘The company has grown to essentially become a modern utility. Microsoft has the advantage of pricing power over many of its rivals and a strong balance sheet to support future innovation and acquisitions, as the purchase of Activision Blizzard demonstrated earlier this year.
‘Although the dividend is only around 0.8 per cent, this is not too bad by US standards and there is room for growth in income in addition to capital growth.’
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