There is little to cheer anyone except insolvency lawyers in the bleak economic data emerging at present. Some commentators forecast signs of recovery towards the end of the year, but others think we could be in for a considerably longer haul, with little improvement until well into 2010, and that the markets could dip further before they pick up. All of which leaves some big question marks for investors looking for good ideas for their Isas.
Certainly, valuations across the board are looking very cheap; but Stephen Barber, head of research at broker Selftrade, sounds a note of warning that current price/earnings ratios may be misleadingly low because they are based on historical rather than current earnings. 'When p/e ratios are recalculated to reflect the more realistic earnings numbers of the new environment, we'll have a better indication of the value available in the market.' This view is echoed by Legal & General Asset Managers who estimate the FTSE 100's current p/e of 7 is probably more like 9 times.
Meanwhile, one powerful theme for Isa investors this year is the search for income, as falling interest rates seem set to decimate cash returns. The good news is that the slump in share prices has boosted dividend yields dramatically.
However, the danger is that many businesses are struggling to refinance their bank debts and may be forced to divert cash from dividends during 2009, just to keep themselves afloat. Companies with strong balance sheets and good cash flows are therefore highly prized by canny investors.
Funds and shares for risk-takers
For more adventurous investors, one interesting focus is on the sectors that will lead the way, as and when recovery occurs. Stephen Barber points out that the banks usually lead the markets out of their slump – which is clearly not going to happen this time.
'Technology or tech-connected industries might be among the first to recover,' he suggests. 'People are wary of technology because not only did it do so very badly in the last downturn, it pretty much caused it. But its global nature and widespread application in other industries make it one to watch at least.'
Meanwhile, he likes infrastructure: 'It continues to suffer from over-liquidity – a real rarity these days – but it's attractive because of its resilience, dependable long term returns, and the extent of support by fiscal stimuli in the east and west alike.'
Moreover, as one investment trust analyst points out, utilities are supported by the long-term growth in demand for energy, coupled with the huge investment required to make up for years of under-investment. For an interesting globally oriented position for the long term, look at the Ecofin Water & Power Opportunities trust, considered 'highly attractive' - especially on a 22 per cent discount. Alternatively, shares in National Grid or Centrica could fit the bill if you want individual holdings.
Healthcare is another favourite with a clear long-term future, driven by continuing research and by demographic factors such as ageing western populations and increasingly global demand. 'But it's not a trading sector – it's one to buy and hold,' says Mr Barber.
Other advisers highlight the fact that pharmaceutical companies are relatively cash-rich (which should underpin their attractive dividends), and that because they do much of their business in the US they are benefiting from the strong dollar.
For a collective pharmaceuticals-oriented investment, Finsbury Worldwide Pharmaceutical Trust is widely liked, while individual stock choices include GlaxoSmithKline, Shire and AstraZeneca. The former two holdings feature in the M&G UK Select fund, a suggested choice for those looking for a more broad-based recovery play.
Funds and shares for non risk-takers
Cautious investors looking to minimise the risk to their capital may well be attracted by the current interest in corporate bonds, which in advisers’ eyes have superseded government gilts as offering better value for 2009. They are more risky, as the companies backing them (unlike the government) may fail, but they are currently priced to reflect an extremely high level of default – much higher than is considered realistic.
Advisers suggest sticking to investment grade bonds issued by the most secure companies as an added precaution, and using bond funds to dilute the risk that any single company will default. It's quite feasible to find yields of 6 or 7 per cent, with the potential for capital uplift once sentiment improves.
Popular recommendations include Artemis Income, yielding 6 per cent, which has been very successfully managed by Adrian Frost and Adrian Gosden. It focuses on companies with strong balance sheets and good cash flow that will help to ensure dividend payments are sustainable. L&G Dynamic Bond fund is also liked for its flexibility and global remit; it currently yields over 7 per cent.
Non risk-takers may also be interested in the potential offered by so-called total return or absolute return funds. These aim to produce a positive return, regardless of markets. Some have unquestionably done a much better job than others, but one outstanding performer is the Threadneedle Absolute Return Bond fund, which achieved 9 per cent last year and 21 per cent over the last three years.
On the equity front, it's worth looking in particular among the FTSE 100’s globally diversified mega-companies, which will benefit from currency translation back into the weak pound; many also offer strong balance sheets and a boardroom commitment to dividend growth. The likes of BP, Vodafone and British American Tobacco as well as utilities firms are picked out as good buys for long-term defensive investors.
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