Recession biggest financial threat to investors

Research from the Association of Investment Companies (AIC) indicates that stock market upheavals and the continuing credit crunch are concerning both active investors and the general public. The AIC’s latest Investor Confidence index found that 37% of active investors believe a recession is the biggest threat to their finances, with 26% most concerned about a stock market crash.

The general public mirrors this sentiment saying their greatest fear for their finances in the next six months is also recession (24%), followed by an interest rate rise (17%). In stark contrast to last February when the general public’s financial worries were focused closer to home and they were most worried about losing their job (17%).

With concern over the credit crunch and fears over an impending recession, over a quarter of both active investors and the general public are changing the way they manage their money with 28% of the general public and 26% of active investors decreasing their spending and saving more each month. Although of course, 71% of active investors and 55% of the general public admitted the credit crunch hasn’t changed their spending or saving habits.

ISAs - Use it or lose it!

The general public could well be missing out on valuable tax relief by not using their ISA allowance, as three quarters (74%) of active investors are planning to use their ISA allowance this year compared with less than one third (30%) of the general public. Interestingly this is very similar to last February’s resultswhen 71% of active investors planned to use their ISA allowance in comparison to 31% of the general public.

The general public also look set to ignore potential growth of the stock market, by sticking predominantly to cash ISAs (24%), with just 2% planning to invest in an equity ISA and 4% who will use a combination of both, a total of just 30% are taking out an ISA. However, 20% of active investors plan to use their allowance to invest in equities only, a further 28% plan to invest in just cash and 26% plan to utilise both.

When asked about the changes to the ISA system announced in the 2007 Budget less than half (47%) of active investors knew about the increase to the allowance limit which comes into effect on April 6th. There was also a widespread call for a rise in the current ISA allowance with most active investors (78%) wanting the ISA maximum limit to be increased to £10,000 or more.

Changing investments

The tough economic conditions have also had an impact on active investors’ propensity to invest with 38% of active investors planning to increase their investments in the next few months – down from 43% last February. The number of active investors planning to keep their stock market investments the same is 36% down from 43% last February, with more than a third (35%) saying that the stock market is still too uncertain after the recent falls.

The vast majority (68%) of investors who planned to increase their investments said this was because recent falls presented buying opportunities. Of those 16% planning to decrease their stock market holdings one third (35%) said this was because the economy looks likely to enter a recession.

Property versus equities

The majority of active investors questioned thought that equities would produce better returns than the UK housing market (52%), an improvement on last year when 43% were of this opinion.

The research also shows the UK’s love affair with property is continuing to wither, with confidence in returns from bricks and mortar falling yet again – just 2% of active investors backed the housing market to outperform equities, down from 12% in February 2007. Of those that think the stock market will outperform the property market, more than one third (36%) think this is because there are more buying opportunities on the stock market at present.

However, the general public still favour property over equities – twice as many think that the housing market will outperform the stock market (18% vs 9%) but this a dramatic decrease from last February when 31% thought property would perform best. Also more than one third (38%) believe both the housing market and stock market will perform badly.

Oil still a winning choice for investors

Active investors have continued to rely on Resources (including oil) to calm their harried nerves as the rest of the market has remained volatile. Resources is the sector most commonly cited by active investors as the most attractive sector at present (23%) with blue chips coming a close second (19%).

UK is the geographical hot spot for investment

The UK retains the top spot for active investors (67%) when it comes to the geographical area they are investing in at the moment. Emerging markets are still continuing to grow in popularity (10%) in comparison to 6% in February 2007.

Green issues a key consideration

‘Green’ investing is still very much on the agenda for more than half (57%) of active investors. Almost half (46%) said global warming might impact some of their investment decisions and 10% said it would definitely affect their investment decisions. These figures are largely similar to last February’s, demonstrating that global warming is an issue that looks set to stay on the agenda for the long run.

Annabel Brodie-Smith, Communications Director, AIC, commented: “The credit crunch and recent market volatility have created a trying time for investors and it has led to a fall in investor confidence. The biggest financial fear for all investors is a recession and the UK’s love affair with property is coming to an end. It’s not surprising active investors are backing resources at a time when oil prices are at record levels.

“It’s hard to predict it’s going to be a busy ISA season with the recent doom and gloom but the research indicates that active investors do not want to miss out on using their ISA tax allowance. In contrast the general public are still missing out on ISA tax breaks and for them cash ISAs remain king. Of course, the recent market conditions are daunting but investors need to take a long-term approach and over the long-term equities usually outperform bank and building society accounts.

“If investors are in any doubt about markets going forward they should consider investing monthly in an investment company ISA which gives a lower risk profile than lump sum investment. Investment company ISAs allow investors to spread their investment risk, have independent boards to look after shareholder interests and on average have low charges and are available from as little as £50 a month.”

For factsheets, performance figures, top holdings, stock exchange announcements and daily prices of member investment companies, visit theaic.co.uk.