William Kay: America's BSE may hold the key to a share collapse

This could, just could, be the year when the American BSE scare turns into a crisis that plunges the United States and the rest of the world into recession, making stock markets stagger like a herd of stricken cattle.

Apocalyptic? Maybe. Premature? Almost certainly. But one of the secrets of making money is not losing it, and it is worth keeping a weather eye on the Seattle BSE situation in case it mushrooms in the way the disease caught hold of sectors of the British economy 10 years ago.

The difference this time would be that the US is a vastly bigger and more influential economy than that of the UK. America is almost self-sufficient in food production, and thousands of jobs are devoted to delivering the ubiquitous hamburger and pepperoni pizza to millions of mouths every day.

If the owners of those mouths turn to other food on a large scale, the impact could be far more dramatic than it was in Britain. Many people could lose their jobs and be forced to reduce or modify consumer spending already bloated by billowing debt. The cumulative effect of such a trend is hard to guess at this stage, but it would not be good for the rest of the world, as many countries rely on exporting to the US.

That is why the US Agriculture Secretary, Ann Veneman, moved so quickly to ape John Selwyn Gummer, her UK equivalent during our BSE crisis, in promising to ignore the panic and stuff beef down her family's throat willy-nilly. The US administration is only too aware that they must put a lid on the scare as quickly as possible, especially in a presidential election year.

It is hard to say what this could mean for stock markets, on either side of the Atlantic. Let us hope the outbreak is contained and the problem goes away. In the meantime it would be wise to treat cautiously companies or investment funds with a high US content, either as exporters or with operations there.

After the miserable bear market which dominated the previous three years, the solid performance of the FTSE 100 in the second half of last year should lay the foundation for a more confident performance in 2004.

In generally benign economic conditions, only a catastrophe on the scale of 9/11 or a wholly unexpected financial collapse (possibly triggered by BSE) appear to have the power to unhinge the stock market. The banks' results for 2003, due in a few weeks, will be read closely as much for the trend in bad debts as for growth in profits or dividends. Provisions for such debts rose in the summer, and consumer borrowing has continued apace.

As our expert commentators suggest on page one, it will be intriguing to see how bonds perform this year. Interest rates will probably continue to move up and therefore against them, but the removal of tax relief on dividends from shares held in individual savings accounts (Isas) will enhance the attraction of interest-paying investments.

There was too much of a knee-jerk reaction to rising rates last year as investors were told to get out of bond funds. But the fact, which some found hard to grasp, is that bond funds have become more like equity funds. In each case, the skill lies in which securities the fund manager selects.

Because company balance sheets are generally healthy, there is less risk in going for lower-rated bonds now. The issuers of such bonds are less likely to go bust, and they should be able to keep paying the interest. In any case, bondholders take precedence over shareholders when it comes to payouts.

The most tantalising investment area for 2004 is emerging markets. Political instability and financial fragility will still allow them the ability to bite a chunk out of an investor's wealth, but the chances of making money from them are as high as for many years.

Wherever you look, the prospects seem brighter. The poorer countries of eastern Europe are plugging into the European Union, and those still waiting to join that party are increasingly likely to find themselves on the doorstep of an EU member, with all that implies for trade.

Skipping quickly over the Middle Eastern cauldron, India is rapidly becoming a world player. It is acquiring call centres for western companies the way some people collect stamps, and recently picked up the honour of hosting the 2010 Commonwealth Games. An Olympic bid is being considered.

The chain of Asian countries from Thailand through to Korea are beginning to benefit from the awakening of China, which will soon have outgrown the tag of an emerging nation. That phenomenon alone will make fund managers reassess the way emerging markets are analysed and categorised.

Even in arguably the most unpredictable emerging land mass, South America, the news is good. Like Australia, the region's mineral wealth has multiplied as commodity prices have risen, driven largely by Chinese demand, and the economies have stabilised.

Led by Brazil, Latin American stock markets had a good year in 2003 but there is still plenty to go for. The key is to spread risk. Invest in country funds rather than individual shares, and apportion your emerging markets money among at least three regions.

* After three lean years, investment companies' marketing departments are searching urgently for stories to convince people to open their wallets. The corporate bond Isa tale is likely to be given a good airing. Another to treat sceptically is children's savings.

This is always a reliable sector to sell into, because there are always grandparents wanting to give their offsprings' offspring a good start. But the heat will be turned up this year with the onset of the Government's tax-relieved child trust fund.

That will not begin until spring next year, but the private sector will take what advantage it can because the Chancellor, Gordon Brown, has put his seal of approval on the idea of saving for children. And fund managers will be racing to sign up customers they can convert into the state's fund.

So the stakes will be particularly high, but the advice remains the same: separate the good deals from the gimmicks, in a specialised area littered with toys and trinkets designed to take our eye off the ball. Ignore the gimmicks and take a good hard look at the funds' performance.

Investing for children is a long-term business, and a good fund manager will earn your youngsters more than enough to buy them all the toys they may want.

w.kay@independent.co.uk

William Kay is Personal Finance Editor of 'The Independent'