US interest rate rises, the impact of the strong dollar and continuing demand for long-dated bonds are the key themes to consider when evaluating your Isa investments ahead of the new tax year, according to Stephanie Flanders, chief market strategist for UK and Europe at JPMorgan Asset Management.
Experts are queueing up to offer advice to investors in the weeks ahead of the new tax year, when the Isa allowance will rise from £15,000 to £15,240. On the economic events influencing the markets this year, Ms Flanders says the one of the key issues facing portfolios in 2015 will be the uncertainty over interest rates in the US, and the possibility that rates in the US and eurozone could be heading in different directions.
"With cheaper oil prices pushing down the headline US inflation rate, many in the markets think that the long expected rate rise will happen later than previously expected," she says. "But the people making the decision in the Federal Reserve have always said they will base it on all of the available data - and most of the data coming out of the US economy today points in the direction of higher rates."
Ms Flanders also advises caution in emerging markets in relation to falling oil prices and the strong dollar. "The bottom line is that you just can't treat 'emerging markets' as a single asset class any more," she says. "You have to dig deeper and be more selective."
Investors need to think carefully about exposure to bonds, which could continue to see reducing yields and increased prices, throwing into question their risk-reward trade-off. Demand for bonds with longer maturities is showing no sign of a slowdown and even lower yields and higher bond prices could be on the horizon. Ms Flanders says: "It makes sense to have exposure to core bonds as part of a balanced portfolio, but anyone looking for income from this part of the portfolio is going to need to cast their net a bit further than in the past."
ISA PORTFOLIO TIPS
When it comes to top tips for putting together an Isa portfolio, she stresses the importance of taking diversification seriously and not trying to time the market. "We all know that a well-balanced portfolio can deliver higher returns at lower risk, but the market surprises of 2014 demonstrated this with brutal clarity," she says. "Bonds shocked market commentators and investors by soaring: after returning just 0.1 per cent in 2013, government bonds generated over 8 per cent in 2014. Long-duration bonds, which most in the market had expected to do badly, were among the best performing assets out there, delivering returns of up to 30 per cent. The lesson is that you need to allocate your portfolio on the basis of what might happen - not just what everyone expects to happen."
Set yourself an asset allocation model, says Adrian Lowcock, head of investing at AXA Wealth. "Different investments have different characteristics and risks; for example individual shares and bonds offer significant potential, but can be volatile and require a lot of knowledge time, and indeed experience."
For first-time Isa investors, his top tips are: know why you are investing, know your appetite for risk, do your research and pick the right investments.
Investors also need to accept that volatility is an inevitable aspect of investing. "Volatility is a fact of life in financial markets," says Ms Flanders. "In 2014, the Stoxx 600 had 34 days where there was more than a 1 per cent positive or negative movement on the index. Going back to 1990, the average has been 67 days per year.
"We expect volatility to be higher in the next few years than it has been recently, and market returns to be lower. The message is stay invested and realistic in your expectations for future returns," she adds.
The Association of Investment Companies has also issued advice for Isa investors deciding on which investment companies to choose. It says investors should think about how much access they need, how much risk they are willing to take and how much the Isa is likely to cost.
