Waiting for that elusive recovery

Things can only get better. That was how many investment analysts felt at the start of 2002. With the end of the year in sight, the feeling is, still, that things can only get better, if only because it all turned out to be so much worse than expected in the meantime.

"Equities obviously went through the floor this year," says Mr Ian Mitchell, general manager of financial advisers Towry Law.

Investors who mis-timed the market will still be shuddering from the memory of each plunge.

"I suppose historically people would have thought the worst must simply be over," agrees Mr Liam Ferguson of insurance intermediary Ferguson and Associates.

For sophisticated investors there were gains to be had on some hedge funds, with gains of more than 8 per cent on funds at New Ireland and Friends First, according to Mr Mitchell. But hedge funds are "not for your life savings", he adds, and most savers looking to invest outside the banks will opt for tracker bonds with good guarantees and the potential to gain from growth in equities.

Cautious investment products are being marketed around the idea of a recovery but with plenty of guarantees included for the hesitant majority - just in case it all goes wrong and the markets somehow slip a fourth bear year before things start to pick up.

"Potential recovery" is the key promotional phrase, emphasised in the brochures for Irish Life's tracker bonds, the World Titans series, and EBS Building Society's Secure Investment Bond.

Has this been the year for plunging money into tracker bonds rather than opting for more adventurous approaches to the equity markets? People who "tried to get in and make a quick killing" at the beginning of the year have suffered, Mr Ferguson notes.

"It is certainly true that, at the moment, tracker bonds are very popular, partly because people are looking for products with an underlying guarantee and partly because people's confidence in with-profit funds was shaken this year," he explains. "The last time we had a negative period, people were happy to dive into with-profit funds."

With-profit bonds are capital guaranteed products where the returns are smoothed out over the length of the investment term in the form of annual bonuses, with a terminal bonus promised, but not guaranteed, on maturity.

In August, Canada Life closed its with-profit bond to new investors with the warning that anyone buying now would end up subsidising losses created by over-generous bonuses already awarded to existing policyholders. Competitor life assurance companies discounted that reason, declaring that with-profit bonds were still as good an option as they ever were.

But annual bonuses have been cut to reflect the falling equity markets over the past two years and the danger is that they will fall so low they will start to make deposit accounts more attractive.

Tracker bonds and with-profit bonds mostly appeal to "people who want to accumulate not speculate" - savers trying to beat the interest on deposit accounts, notes Mr Trevor Cullen, BCP Asset Management investment director.

However, there has been some consolidation from investors who would normally take more chances and invest directly in shares but this year rearranged their portfolios so that more of their money was invested in corporate bonds, unit funds and trackers.

In 2002, investors faced the classic dilemma: shares could be bought at a low price but courage was needed to bet on them. Trackers are "a good compromise", according to Mr Cullen.

But there is often a maximum return with tracker bonds, limiting potential profits.

So is now the time to get back into equities? Leave it too late and investors could miss out on a lot of the gains. But lessons learned on market timing in 2002 mean that some might be reluctant to declare that the corner has finally turned.