Where in the world to invest a last-minute ISA?
- There is less than three weeks left of the 2023/24 tax year.
- Investors need to use it or lose it when it comes to tax allowances.
- 3 themes we think the biggest investment opportunities right now.
Emma Wall, head of investment analysis and research, Hargreaves Lansdown:
“In three themes, the biggest investment opportunities right now are Fixed Income, UK Equity Income and China. Those are our short-, medium- and long-term sector picks. All three of these have been out of favour with HL clients in the past year. Instead, clients have been riding the momentum trade and opting for US equities. Of course, all portfolios need a good chunk in the US, but you also need other assets as well, and with valuations towards the top end of its historical range in the US we urge diversification, to include other styles, sectors and countries. So, take the opportunity to trim gains and consider putting those gains into;
Fixed income – high quality corporates and government bonds are a good lower risk addition to smooth the volatility in any equity portfolio. Though we don’t expect the UK, US or EU central banks to start cutting rates until the second half of the year, now is a good entry point as you get income now and growth as yields fall. On a one-to-five-year view, bond funds offer a great opportunity for total returns. What should you invest in? Most bonds are offering a significantly more attractive yield now than just a couple of years ago, but we think high quality corporate bonds – bonds issued by companies – offer an attractive yield premium over government bonds. We do predict continued volatility in the market, however, as macro news and events spook traders, and so suggest someone nimble – such as Stephen Snowden who runs Artemis Corporate Bond and we think is well positioned to take advantage of this market. We prefer active management in a market like this but if you want a passive, Vanguard Global Aggregate Bond ETF is a good pick.
The UK – it is just too cheap to ignore. The market is trading at a 40% discount to developed market peers, despite offering some great dividends, from high quality businesses. Artemis Income is our pick here or go for an investment trust like City of London where you get an exceptional manager on a double discount. If passive is your preferred option, we like iShares UK Dividend ETF, which offers a low-cost option for tracking the performance of the FTSE Dividend UK+ index. The index offers exposure to 50 of the highest dividend-paying stocks listed in the UK, while still making sure it’s diversified across multiple sectors. The sectors it invests most in are financials, consumer staples and materials. Stocks picks in the UK from our equity analysis team include undervalued dividend payer Lloyds Bank and out-of-favour pet care firm CVS, whose valuation has been dragged down by an upcoming competition and markets review, as well as oil and gas services firm Baker Hughes who is well placed to benefit from the energy transition.
This brings us to China – this is the longest term of our themes, and not without controversy. It is a contrarian call, but bad news is priced in, and we think it is significantly undervalued, even after the recent rally. Is there political risk? Yes. Are demographics as supportive of economic growth as they were 40 years ago? Definitely not. But it is still a global growth engine, and the market is significantly undervalued versus both developed markets and other more popular emerging markets such as India. It is the world’s second largest economy, and unless you’re focused on capital preservation and have a shorter-term investment horizon, around 10% of an 100% equity portfolio should be in China. Access it most easily through an emerging markets fund such as the cheap and diversified iShares Emerging Markets Equity Index or Vanguard FTSE Emerging Markets ETF. Or for an active play – stock selection can be key in this market – we like JPMorgan Emerging Markets Investment Trust.
