US bulls retreat, but you can still run with 'value' shares

The saying goes that when America sneezes, everybody else catches a cold.

The saying goes that when America sneezes, everybody else catches a cold.

For millions of savers with equity individual savings accounts (ISAs) and investors with stock market share portfolios, it'll be worth stocking up on tissues.

With 2005 on the horizon, many will hope for vigorous market growth, yet the potential for economic trouble brewing in the US could dampen returns as its difficulties have a knock-on effect on markets around the world.

Add to this signs that we may well already be near the peak of a short-term economic cycle, and it probably won't be worth holding your breath for big gains next year.

"The timing is still uncertain but, at some point, the long-term structural problems that the US economy faces will begin to affect the market," says Bob Doll, the chief investment officer at Merrill Lynch fund manager.

The country's problems include high debt levels inhibiting growth; rising interest rates (which have risen four times in six months and are now at 2 per cent) making borrowing more costly; and shares with inflated prices that make them more expensive to buy than those in the UK and Europe.

With heavy US influence on our markets, expect growth in UK shares to be limited.

As a benchmark, returns are likely to reach "between 6 and 9 per cent [in 2005]," he says.

This prediction is echoed at other fund managers.

"We are in for a period of lower returns of between 5 and 10 per cent a year - lower than those in the 1980s and 1990s," warns Errol Francis, the manager of the Credit Suisse UK Growth & Income fund.

Such forecasts don't make it much easier for average investors wanting to dust down their portfolios or shake up their equity ISAs in the new year.

Many independent financial advisers (IFAs) report that investors continue to stick to UK income funds because they feel happier investing in companies and brands with which they are familiar - rather than higher-risk funds that "shoot the lights out" by investing in emerging markets such as Latin America.

"Investors are going back to basics and heading for equity income [funds run by] stars such as Neil Woodford at Invesco Perpetual and Nigel Thomas at Framlington, rather than emerging markets," says Jon Horton at IFA Chamberlain de Broë.

Both managers have been top 10 performers in 2004 and, crucially, over comparative three- and five-year periods too.

Their success has been down to their particular fund management style, seeking what are known as "value" companies that have often been overlooked by investors and are likely to offer unspectacular, steady share price rises.

By contrast, rival fund managers might try to make their gains by hunting for "growth" companies likely to experience rapid but often short-lived bursts of growth.

It might not appear huge, but this distinction is critical for 2005 since "value" shares are likely to outperform "growth" stocks, says Patrick Armstrong of Insight Investment fund manager.

It will be worth checking to see exactly what kind of equity fund you have; it could mean the difference between an average year or a good one.