After a hard landing, investors who can take a risk are getting back in the saddle

This year will go down as one of the toughest on record for UK investors. The FTSE 100 index of leading shares has fallen by 33 per cent and the picture is no brighter for those putting their money overseas. American stocks have dropped by 33 per cent, while shares in Europe and Japan have fallen by 44 per cent.

Millions of UK investors hold money-purchase pensions, where the value of their retirement income depends on stock market performance, and the bitter truth is that many will find the size of their pension pots has been cut by a third or more in the space of just 12 months.

Savers in deposit accounts have, at least, not seen their capital eroded in this way, but they, too, have experienced some nasty shocks. Thousands of people with money in UK-based Icelandic bank accounts faced a nail-biting few weeks before the British Government agreed to compensate them after the banks collapsed this autumn. Depositors in some of the banks' offshore accounts are still waiting to find out how much compensation they will receive.

But even those savers who avoided the pitfalls of offshore accounts did not have much to cheer about. At the start of the year, Bank base rate was 5.5 per cent and it was possible to earn 6.5 per cent with no strings with an online instant-access account. The base rate is now at an historically low 2 per cent and the best no-strings online instant-access rate is paying just over 4.5 per cent.


However, if you knew where to look it was possible to make money in 2008 - you just had to be selective. Only a handful of FTSE 100 stocks performed well for investors, but those fortunate enough to hold shares in British Energy or AstraZeneca would have reaped gains of 40 per cent and 20 per cent respectively.

Investors unfortunate enough to own shares in HBOS have seen their value tumble by 90 per cent since the start of the year.

Those with money in unit and investment trusts had to be equally selective in their purchases if they wanted to show a profit this year. In many unit trust sectors, not a single fund notched up a positive return and barely 100 out of nearly 2,400 funds produced a return that would have equalled that obtainable from an ordinary deposit account.

But there were honourable exceptions. Leading the way was Neptune Japan Opportunities fund, which, with a return of 80 per cent this year, was head and shoulders above any other fund of any kind, according to figures from Financial Express, the data company. Almost all the following pack of good performers were bond funds. Ignis Asset Management's US Government Bond fund generated a return of 48 per cent, while M&G's International Sovereign Bond fund returned 47 per cent.

Former high-flying funds investing in emerging markets and special situations were relegated to the bottom of the performance tables in 2008. JPMorgan's New Europe fund lost 61per cent, Rathbone Special Situ- ations gave up 58 per cent of its value, while Invesco Perpetual European Smaller Companies lost 57 per cent. Commodity and natural resources funds, which had performed well in previous years, also came down to earth with a bump. Junior Oils Trust lost 50 per cent, while JPMorgan Natural Resources lost 55 per cent.

A similar pattern emerged with investment trusts. Only a tiny handful of the 300 trusts achieved a positive return, with a special mention for Ruffer Investment Company, whose defensive stance enabled it to produce a return of 13 per cent. At the other end of the scale, two of the biggest losers were SVG Capital, a private equity trust, which lost 76 per cent, and 3i Group, another private equity trust, which lost 75 per cent.

So what is the outlook for 2009? Most commentators expect stock markets to recover, with a general consensus that the FTSE 100 could test the 5,000 mark in the next 12 months.

UBS, the Swiss bank, thinks that the FTSE could reach 5,800 next year. It is looking for good performance from sectors such as food retailers, health equipment and household goods.

Brewin Dolphin, the stockbroker, says that shares are already discounting most of the bad news likely to break in 2009 and are now looking cheap. It favours sectors such as general retailing and media stocks.

Some of the most seasoned investors on both sides of the Atlantic are making optimistic noises about the coming year.

In the UK, Anthony Bolton, who managed the Fidelity Special Situations fund with great success from 1979 to 2007, is expecting a fresh bull market to begin in the new year - and thinks investors could be caught out by the strength of the rally.

He said: “All the pieces are in place for a rally in the first quarter. Valuations look cheap and you often have this kind of volatility at a turning point.”

In the US, Warren Buffett, one of the world's richest men and one of the most respected market commentators, has announced that he is buying US stocks because he thinks they now appear to be good value. Most commentators expect the US, which led the world into recession, to lead it out again, which should provide a much-needed boost for the US stock market.

Elsewhere in the world, emerging markets, which have taken a real pasting in 2008, are tipped to mount a strong recovery. Morgan Stanley, the US investment bank, is forecasting that emerging markets could rise by 60 per cent in the next 12 months, as their economies continue to grow, while those of the developed world battle their way through a recession.

Mark Dampier, of Hargreaves Lansdown, the independent financial adviser, said that he is still bullish about parts of the world such as Latin America and India: “They have enjoyed a fantastic five-year rise, followed by a dramatic one-year fall. I believe emerging markets are poised for another upward run, and people who didn't get on board first time round now have a second chance to profit from the continuing growth that we expect these regions to deliver. However, this area of investment is for the risk-tolerant only.”

Bond prices have already come down so far that they now look good value in the eyes of experts such as Brian Dennehy, of Dennehy Weller & Co, the independent financial adviser. He said that bond prices - and bond yields - are now at the most attractive levels he has ever seen. With falling interest rates and falling inflation expected to send the price of bonds higher, he expects 2009 to be a very good year for them: “Investors will be receiving the benefit of a high yield while savings rates are falling, and when bond prices start to recover, as we expect them to do, they will enjoy the additional bonus of some capital growth on top.”