A year ago the stock market was in crisis. Covid-19 was raging globally and investors could only watch as their nest eggs plunged in value.
But 12 months after global markets fell 30 per cent, most investments have bounced back. It has been a bumpy ride, but there’s light at the end of the tunnel.
Savers have also squirrelled away a record £153 billion in lockdown after spending was restricted by the closure of offices, shops, restaurants and pubs.
Recovery ahoy: 12 months after global markets fell 30 per cent, most investments have bounced back. It has been a bumpy ride, but there’s light at the end of the tunnel
By summer, this already huge figure is set to hit £180 billion — up from just £53 billion saved in 2019.
Now Isa season is here again.
Individual Savings Accounts (Isa) allow you to save or invest up to £20,000 each financial year without a tax bill on the gains. You have until April 5 to use up this year’s allowance.
Any you don’t use, you lose because it cannot be rolled over.
And with the Chancellor’s freeze on capital gains tax rates for the next five years, the popular tax-free Isa could prove a vital tool for savers.
Today, Money Mail publishes our guide to Isas. We will explain over the next 12 pages how you can make the most of Britain’s comeback from coronavirus, and guide you through the sectors, funds and shares likely to bring the best returns.
We’ll also set out the stocks and shares basics, plus signpost the best cash Isa rates available for those keen to build up an emergency fund, tell you the best ways to save for children, and how to invest with a conscience.
But one thing is clear, long-term savers can no longer afford to ignore the stock market. Interest rates paid on cash savings are still at rock bottom, and inflation is eating away billions of pounds sitting in poor-paying accounts.
The average rate paid on a cash Isa today is just 0.40 per cent. That will pay £40 a year on £10,000.
Experts have told Money Mail this year could be the first in which savers pour more money into stocks and shares Isas than cash Isas.
And investment brokers have reported record numbers of savers putting their money on the stock market.
The last half of 2020 saw £4.8 billion pulled out of cash Isas. Re-search by broker AJ Bell found that £10,000 held in the average cash Isa over the past ten years would now be worth £9,772 after adjusting for inflation.
‘A COILED SPRING’
Bank of England economist Andy Haldane last month described Britain’s economy as a ‘coiled spring’ waiting to revive.
Positive: Bank of England economist Andy Haldane (pictured) described Britain’s economy as a ‘coiled spring’ waiting to revive
Isa investors can capitalise on the predicted 14 per cent growth by using bumper lockdown savings.
Jason Hollands, of Tilney Investment Management Services, says: ‘While the pandemic is far from over, from an investment perspective there are good grounds for optimism.
‘When the economy opens up again, people will be itching to spend some accumulated savings, which will help fuel a rebound in profits at firms which have survived the crisis.’
Laith Khalaf, financial analyst at AJ Bell, says: ‘A huge cash war chest has been built up by UK consumers during the pandemic, and we expect a chunk of that to be deployed in Isa season.
‘With interest rates so low, and life taking off post-pandemic, hopefully, it could be a bumper year for stocks and shares Isas.’
Chancellor Rishi Sunak did not cut Isa allowances in his Budget this month, so they remain generous.
The stocks and shares Isa allowance was just £7,000 when introduced in 1999, rising to £20,000 in 2017. The Junior Isa limit last year went from £4,368 to £9,000.
Rob Burgeman, senior investment manager at wealth firm Brewin Dolphin, also predicts much of the nation’s savings will be put into stocks and shares Isas in 2021.
He says: ‘[Savers] may well look to invest money they have saved to reap the benefit of stock market performance and to benefit from compound returns.’
Analysis from Brewin Dolphin reveals that the stock market has beaten cash savings accounts over the past 25 years.
A £10,000 deposit put into an average savings account in 1996 would now be worth £13,307 after inflation. The same investment in the FTSE 250 would have delivered a 540.51 per cent return — growing the cash to £64,051.
BOUNCE BACK BRITISH
Experts say that British stocks have long been undervalued and could be a smart investment.
Mr Hollands says: ‘As the economy starts to reopen this year, as I think it will, some of the harder-hit parts of the markets have great bounce-back potential.
This could be a time to look closer to home. With Brexit in the past and economic recovery in sight, I believe the unloved UK market could be the wildcard performer in 2021.’
Mr Hollands suggests investment trust Fidelity Special Values, which targets UK firms with turnaround potential. A £10,000 investment made ten years ago would have more than doubled to £20,263.
Adrian Lowcock, head of personal investing at Willis Owen, suggests Man GLG Undervalued Assets. The fund, which has exposure to easyJet and house builder Redrow, would have turned £10,000 into £13,005 over the past five years.
Teodor Dilov, fund analyst at Interactive Investor, tips ES River and Mercantile UK Recovery, which is made up of about 250 holdings and targets good businesses that are undervalued because of a drop in profits. A £10,000 investment made five years ago would now be worth £17,154.
Spending power: Savers have also squirrelled away a record £153bn in lockdown after spending was restricted by the closure of offices, shops, restaurants and pubs
According to the Government’s road to recovery, the nation will return to just about normality in the summer,
Richard Hunter, head of markets at broker Interactive Investor, says there are also ‘coiled spring’ stocks ready to benefit.
He says: ‘Economies will start to recover, which should be good for beaten-down sectors, like travel, tourism, leisure, banks, oil and mining as [pent-up] demand returns.’
NatWest, which hit a low in September, could also be a stock to watch he believes. In March 2020 before lockdown, NatWest’s dividend yield was 4.3 per cent.
Mr Hunter also thinks drinks firm Diageo, with brands such as Guinness, Bell’s, Captain Morgan and Gordon’s Gin, could pick up.
‘Should the post-pandemic world result in the levels of revelry predicted, the benefits would be swift,’ he says.
Russ Mould, AJ Bell investment director, says when picking stocks, it is best to look at undervalued firms with ‘strong balance sheets and plenty of cash’ and well placed to weather a long economic downturn.
He says house builders Crest Nicholson and Vistry are good examples, as is lender OSB Group.
And land redevelopers St Modwen and Harworth could be a good bet if the pandemic leads to a shift to working and living away from cities.
Mr Mould says soft drinks firm AG Barr is suffering now from the loss of the hospitality trade, but adds: ‘The balance sheet is strong and profits could pick up sharply as and when consumers can get back to pubs, bars, cafes and restaurants.’ He also says Whitbread should make a comeback.
Ryan Hughes, active portfolio manager at AJ Bell, says outside Britain, the Schroder Global Recovery fund is an option for those looking to capitalise on a bounce back.
Holdings include firms hit hard by the stalled global economy – casino operator Genting Singapore, Kia Motors, mining firm Anglo American and oil company Eni SpA.
Mr Dilov also suggests Fidelity Asia, which would have turned £10,000 into £25,561 over the past five years.
He says: ‘Asia has learned a lot from past experience with virus outbreaks and has managed to navigate the pandemic much better than its Western peers.’
GREEN ENERGY SPARK
We are travelling towards a greener planet. The U.S. president has an environmental agenda, China has committed to becoming carbon neutral by 2060 and Boris Johnson has said he wants Britain to be a world leader in renewable energy.
Clean energy stocks, such as electric car maker Tesla, have boomed. So how can investors continue to ride the green revolution?
Brewin Dolphin’s Mr Burgeman says passive exchange traded fund (ETF) iShares Global Clean Energy has a global spread of investments, including fuel cell firm Plug Power and U.S. solar farm company Enphase Energy.
He adds: ‘For more risk-averse investors, the iShares ETF would be a lower-risk way to participate in a sector that could have a long road ahead of it.’ For UK clean energy investments, he tips Greencoat UK Wind and Renewables Infrastructure Trust.
Individual Savings Accounts allow you to save or invest up to £20,000 each financial year without a tax bill on the gains. You have until April 5 to use up this year’s allowance
REMEDY FOR RECOVERY
The hunt for a Covid vaccine has been good news for the pharmaceuticals sector — and it is not too late to benefit.
Vaccine research has helped find more information to treat other conditions affecting the elderly. And the average age of the global population is rising.
Office for National Statistics data predicts that by 2030 there will be 1.4 billion over-60s. By 2050, 2.1 billion.
Mr Burgeman says: ‘The pharmaceutical industry is an obvious route for investors.’
He says the SPDR World Health ETF collection of stocks could be a good bet or the iShares Ageing Population.
GETTING RICH SLOW
Mr Burgeman says Isa investors should think long term rather than seek quick and easy gains and recommends backing good-quality firms that pay decent dividends to compound your savings over the years.
He says: ‘Think of it more in terms of getting rich slow rather than getting rich quick.’
He recommends Lindsell Train Global Equity and Fundsmith Equity funds.
TAKE-OFF IS DELAYED
But experts warn Isa investors should steer clear of airline stocks in the hope they take off after the pandemic.
Mr Hollands says sectors such as travel could take time to recover fully: ‘Yes, buy attractively priced businesses, but also ones that are fundamentally sound, will survive and can quickly rebuild profits.’
Mr Burgeman says: ‘Covid has hit the airlines’ long-term growth and although people will start going on holiday again, there will be far less business travel.
And he says private hospitals are a shaky bet: ‘There is not a variety of private firms except, maybe, Spire Healthcare, which has struggled since floating in 2014.’
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