Where to put your money in 2006

Which parts of the market will outperform in 2006? We look at the six sectors we think will be the best performers – and which investments to go for to play the theme...

Which parts of the market will outperform in 2006? We look at the sectors we think will be the best performers and which investments to go for to play the theme.

Tobacco

The health risks associated with cigarettes are well documented, but tobacco companies may be emerging from their "cloud of litigation", says the FT. Recently, an Illinois court reversed a $10bn verdict against Philip Morris's Marlboro Lights and other low-tar cigarette brands. The class action alleged that smokers were misled about whether such cigarettes were safer, an issue that has been "plaguing" the tobacco industry since the 1980s. This decision will make it harder to bring similar cases to court good news, given that in the US light' cigarettes account for 89% of the market. Other pluses for the sector are the good yields available on the big stocks and the fast emergence of new markets in heavy-smoking China and Russia. If you want to invest, Andrew Johnson in the Express suggests Gallaher (GLH, 890p), which is seeing good sales in eastern Europe. The shares are on a p/e of 14 times and yield just under 4%.

Drugs

The big pharmaceutical firms have been through a rough patch recently as new drug launches have struggled to keep up as patents expire. They have also been hit by pricing pressure all over the world and have found that many of the mergers they have indulged in have only increased costs, hitting profits along the way, says the FT. But now they are cutting costs fast and a new focus on research and development (R&D) means we are beginning to see the emergence of new drugs. So, after a terrible 2004 and an uninspiring 2005, 2006 could be turnaround year. In the UK, GlaxoSmithKline (GSK, 1,474p) is one to consider, says Paul Durman in The Sunday Times. After a period of slow growth, it is to raise its spending on R&D from 16% to 25%, and its cancer portfolio, an area where it has traditionally been weak, is looking "particularly promising". 

Resources

The commodities sector has been the main beneficiary of the amazing growth in the industrialising economies of China, Russia and India, and the tight supply situation should mean that the bull market will continue. Add a pinch of inflation to the recipe (inflation pushes people to invest in real assets), says Barry Riley in the FT, and they will be the only game in town, particularly as despite the recent run-ups commodities are still priced not far off their 200-year lows in inflation-adjusted terms. Funds to look at to take advantage of this include the Investec Global Energy fund (which returned 80% in 2005), the Merrill Lynch World Mining Trust (an investment trust up 250% in five years), and the Merrill Lynch Commodities Income investment trust, a new launch that aims to generate a yield of around 4.25%.

Nanotechnology

Nanotechnology building machines out of atom-sized particles has been promising much for sometime, but it could be on the brink of making good. Technologies on the cards, according to The Independent, include silicon combs for destroying cancer cells; nanobots' for clearing blocked blood vessels; hydrogen-based fuel cells using nanotubes' that could allow cars to travel thousands of miles on one tank of fuel; and solar cells on road surfaces to create cheap energy. The sector is risky, but Oxford Instruments (OXIG, 241p) might be one to go for, says Investors Chronicle. Development costs mean the firm is making losses, but orders are rising and the company is "starting to deliver" top-line growth.

Two trends to boost your returns: green energy and debt

If you're looking for themes to follow in the market, you could look to a few that have started making savvy investors money in 2005: green energy and other people's money woes. On the first, note there is growing pressure (price and environment-wise) for us to cut back on oil and use more alternative fuels, such as clean coal', biofuels and wind and solar energy. Good funds to look at, Jennifer Hall-Thornton of Climate Change Capital told the FT, include Jupiter Ecology Fund, Impax and Merrill Lynch New Energy funds.

The second trend of interest is the relentless rise in personal debt, which, far from slowing, has risen by 10.3% in the last 12 months, says the Investors Chronicle. This means that the number of bankruptcies is on the up, but also that the number of people going for the alternative individual voluntary agreements (IVA) is soaring. These are arranged for debtors by specialist firms that negotiate with creditors to allow them to pay off their debts in a manageable manner. The company gets an upfront fee and a maintenance fee for its trouble. Debtmatters (DEBT, 170p) is the stock to go for here, says theInvestors Chronicle. The company processed 78% more IVAs in September than in April, and while it looks pricey on a p/e of 32 times, it is growing its profits fast enough for that to fall to 15 times next year.

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