Where to put your cash this year

A bull, a bear, a hippo or a camel? What sort of animal will characterise 2004's stock markets? Since the post-Iraq bounce last March, a growing band of investors have gingerly come round to the view that the bear market is dead, but few have telescopes strong enough to let them see the bull coming over the horizon yet.

A bull, a bear, a hippo or a camel? What sort of animal will characterise 2004's stock markets? Since the post-Iraq bounce last March, a growing band of investors have gingerly come round to the view that the bear market is dead, but few have telescopes strong enough to let them see the bull coming over the horizon yet.

In September, The Independent suggested we have entered a hippo market, where stocks flounder around in the mud, slip beneath the surface for a while but come back up again. The hippo metaphor was taken up by Edward Bonham Carter, Jupiter Asset Management's chief investment officer, as his prediction for this year, but he has come round to the belief that maybe a camel might be more appropriate. "There are bound to be ups and downs, after all," he says. Or it could just turn out to be a monkey, leaping all over the place.

To find how accurate animal instinct would be, The Independent has polled a cross-section of experts to gauge the mood at the start of the year.

Equities

Most of the big City investment groups are predicting that the FTSE 100 index will rise by as much as 500 points from its present level, but independent financial advisers are more gloomy. Nvesta, a leading precipice bond provider, asked 1,000 independent financial advisers where they expected the FTSE 100 index to be in a year and found a range from 3,661 to 4,993. Graham Devile, Nvesta's managing director, says: "This is a depressing forecast. Nevertheless, after four years of unprecedented stock market conditions we are now seeing some signs of stability."

Patrick Evershed, manager of the New Star Select Opportunities Fund, says: "Consumers are being squeezed, wages are rising at less than inflation, tax is rising and house- price inflation is slowing.

"House builders and retailers should be avoided and investors should be cautious about companies involved in building schools, hospitals, railways and defence equipment because the government will probably have to cut back its growing deficit. But we should see growth from companies with new products such as in biotechnology."

Oxford Biomedica is Mr Evershed's choice. It is a gene therapy developer he believes should announce contracts with big drug companies this year.

Nigel Thomas, manager of the Framlington UK Select Opportunities Fund, says: "Even if you think equities are in some sort of sideways phase, stockpicking will reap rewards." He likes the banks Standard Chartered and HSBC because of their Asian operations, the UK retailers Majestic Wine and Ottakar's, the BSkyB media group and Protherics, maker of anti-snake venom.

Julian Fosh, Scottish Friendly's investment director, says: "It will be a good environment for equities because we are in a recovery phase without inflation being a big problem. I tip Vodafone, the broker Icap, the oil and gas explorer Premier Oil and Centrica, the gas supplier."

Alan Hardy, head of investments at Lloyds TSB Private Banking, goes for Caledonia Investments, the caterer Compass Group, the industrial materials specialist Cookson Group, Carphone Warehouse and the Artemis UK Special Situations unit trust.

Damion Larkin at the Share Centre says: "We're not going wild, but we're expecting a sustainable rally in the FTSE. With the US economy recovering strongly and a US election meaning further tax cuts may emerge, this should continue to push our market higher, and where Wall Street leads we will follow. We also think modest interest rate rises will dampen consumer spending. This could be positive, as it will cool the housing market. House builders and possibly lenders could feel the heat."

The Share Centre tips Anglo Irish Bank, Man Group, Exel, Goshawk and Lastminute.com, but says sell EMI, British Airways, Sainsbury, Northern Rock and Marks & Spencer.

Fixed interest

Bond funds will hog the limelight in the next three months, if only because changes to the Isa rules mean that from 6 April they will be one of the few remaining ways into a tax-free investment.

But investors will have to choose carefully: government stocks (gilts) are likely to come under pressure, and riskier corporate bonds could do well.

Bob Michele, global head of Fixed Income at Schroder, says: "We expect to see higher interest rates across all markets. But the one thing that remained constant last year was the growing demand for corporate bond funds and increased credit risk.

"This is a relatively safe environment to capture the extra yield of these lower rated issues. Lower-rated corporate bond funds and inflation-linked bonds will be the two best performing bond market sectors."

Theo Zemek, head of Fixed Interest (Strategy) at New Star, says: "The prospects for holders of gilts and AAA corporate bonds are fairly bleak because the government is likely to need additional funding if it is to deliver on its public spending promises.

"The Chancellor may well need to dip into the gilts market at a time of waning demand. This is not good news. It is important to know your fund manager's views on the direction of interest rates, and how they plan to address the issues raised. I expect negative returns for gilts, but a decent 7 per cent from higher-yielding corporate bonds."

Savings

Higher interest rates are are something for savers to look forward to after a period in which returns on savings fell to their lowest in more than 40 years. Philippa Gee, at the Midlands IFA Torquil Clark predicts there will be a growing emphasis on children's savings as the government's proposed child trust fund gains momentum.

"This will encourage more people to consider some form of immediate investment for their children," Ms Gee says. "And investment companies, banks, building societies and National Savings are all going to have to make their products more user-friendly."

Paul Ilott, at Bates Investment Services, recommends taxpayers putting money into the latest five-year National Savings certificate.

This pays the RPI inflation rate plus 1.25 per cent of that rate, making a current total of 3.85 per cent, equal to 6.42 per cent grossed-up for higher-rate taxpayers. But there are penalties for cashing in early, especially in the first year.

MORTGAGES

Rising interest rates have already started sending mortgage borrowers scurrying for cover to find the cheapest deals. This should cause even stronger competition for their custom, which experts predict will help to soften the impact of base rate rises.

John Goodfellow, chief executive of Skipton building society and chairman of the Building Societies Association, says: "It is likely to be another busy year for the mortgage industry. In 2003 we had a continued rise in house prices and a level of churn which resulted in remortgaging accounting for more than half the market. The consensus is that interest rates will rise, although incrementally and that the housing market will slow, but not crash."

Peter Brodnicki, chief executive of Mortgage Advice Bureau (MAB), a leading mortgage broker, predicts a significant increase in remortgage business as homebuyers flock to the security of fixed rates after the base rate rise. This is confirmed by research at MAB.

Mr Brodnicki says: "People are scared that rates will rise and they are concerned about managing the repayments on mortgage borrowings and other debts.

"They are increasingly wise to the benefits of remortgaging, and we have seen a marked upturn in enquiries about fixed rates. We expect this to continue over the next year especially if base rates rise again, as we expect."

Elliot Nathan, mortgage development manager for The MarketPlace, Bradford & Bingley, says: "We believe the housing market will remain buoyant, with demand continuing to outstrip supply and property prices will continue to increase, albeit at more sedate levels.

"We would not be surprised if UK house price inflation for this year ends up somewhere about 7 per cent. Borrowers should not be surprised to see further rate increases but they are expected to be at modest levels, ensuring mortgage borrowing remains affordable."

NEW YEAR RESOLUTIONS

Research from the One account shows one in five adults plan to stop smoking because of their health. But a little new year financial housekeeping will certainly help your wealth. The Financial Services Authority and the accountants KPMG suggest these tips:

* Use the FSA's Financial Planning CD ROM to work out where you stand, identify your financial goals and suggest ways of reaching them;

* Set targets on how and when you will pay off debts, dearest first. Avoid new debt;

* Shop around for the best deals on savings accounts, credit, mortgages, investments and insurance;

* Pay tax and file returns on time. Self-assessment tax returns must be in by 31 January, with balancing payments of income tax for 2002/03, capital gains tax for 2002/03 and the first payment of income tax for 2003/04

* Check regularly that you are on track to achieve your goals;

* Make maximum use of tax allowances. See www.inlandrevenue.gov.uk

* Make a will or, if you have one already, review it to avoid as much tax as you can;

* Explore ways of giving to charity. In addition to tax relief for one-off payments under the gift aid scheme, consider relief for gifts of listed shares or UK land;

* Give yourself financial know-how with the FSA's new interactive learning programme, Learning Bytes, available on www.fsa.gov.uk/consumer in the What's New section;

* Review your pension. The rules are changing, and more is in the pipeline for 2004. As you get older, you are allowed to put more into pension contributions. Check the position on www.dwp.gov.uk.

* Get a tax health-check. Ask someone else to review your position in case you have overlooked anything. You can find a financial adviser on www.unbiased.co.uk.

* And do not forget to keep reading Save & Spend for the most up-to-date advice.