Safe ports for cautious investors

Alan Hardy, head of investments at Lloyds TSB Private Banking tells MoneyWeek where he'd put his money now.

A pitfall too often overlooked by many investors is the impact of inflation. Most commentators are now making pretty pessimistic forecasts for economic growth in the UK. But that doesn't mean inflation isn't still a risk for investors. It is. And particularly vulnerable are long-term investors. Even low inflation fluctuating between 1% to 3% a year can halve the purchasing power of savings over 20 to 25 years.

To safeguard against this, index-linked gilts are a good choice of investment, especially for higher-rate taxpayers, as they virtually guarantee tax-free capital appreciation towards redemption, given that the capital value of the gilts is indexed according to changes in the retail price index.

These aside, of the major asset classes, equities appear to us to be now offering the best prospects for investor and are therefore the best place to put your money long term, if you want exposure to real assets. How do you do this? We are impressed by the strong risk-management controls of the manager of manager' route, and would say this is definitely one of the most appealing ways to invest. There are many options available to suit your needs.

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For the more adventurous, Asian equities in particular look promising. Despite the currency risk, the whole region is booming, largely thanks to growth in China. China's GDP is currently growing at close to 10% a year, and China and Malaysia have both recently revalued their currencies, moving to more flexible exchange rate regimes, opening the way to possible currency gains. One of the best ways to benefit from the growth in the Chinese economy is not necessarily to invest in China itself, but to invest in companies in the region that trade with, or otherwise service, China. The Aberdeen Far East Emerging Economies Unit Trust has a strong track record in this area.

In terms of sectors, oil and utilities continue to look strong. Utilities are offering attractive yields and earnings stability for the next five years. Putting regulatory concerns to one side, this sector remains a safe port for investors who are concerned that there is stormy weather ahead.

Electricity group Scottish Power, the third largest UK generator with a niche market in wind power, has recently divested its US operations and has plans to return the resulting cash to shareholders. This will also allow it to concentrate on boosting the profitability of it UK business. It has also been the subject of takeover speculation.

Similarly, oil remains a strong bet as high oil prices look set to stay with us for the foreseeable future. The recent restructure of Shell, merging the UK's Shell Transport & Trading and Royal Dutch Petroleum of the Netherlands, has been almost universally applauded and makes the company more attractive. When investing in oil, investors would be wise to stick with buying shares in large, well-established players such as Shell and BP, rather than the small explorers, which, while on the face of it may seem rather more exciting then the majors, tend to offer a far from reliable return.