Where can investors hide from the bear?

Where can investors hide from the bear?

We are in a bear market: it's - almost - official. The Tuesday before last, the FTSE 100 dipped below 5,150, a 20 per cent fall from last October's 6,724 peak.

If you hold anything other than mining and oil companies, however, you will have been suffering a bear market, if not an out-and-out rout, for months. Household names such as Bradford & Bingley, Barratt Developments, Taylor Wimpey and Land of Leather have lost more than 90 per cent of their value and even FTSE 100 stalwarts such as HBOS and Marks & Spencer stand at little over a third of their year's peak.

In contrast, companies such as Rio Tinto and Tullow Oil have doubled during the year. It is too painful to speculate on what will happen to stock market indices if there is any sign of cracks in the commodity bull run which has been keeping such companies buoyant.

News on the domestic economy is unremittingly gloomy. Last week, Persimmon, Redrow and Bovis became the latest building companies to slash jobs and, for the latter two, dividends, as house sales plummeted. M&S has confirmed that the high street is also suffering, while this month's British Chamber of Commerce survey suggests that a recession is looming.

Where can investors hide? Ted Scott, manager of F&C's UK Growth and Income funds, warns against hunting for bargains among bombed-out stocks: 'Some will argue that the valuation of UK stocks is attractive at 12 times earnings, but I'm cautious. Unlike the.....continued below

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period prior to the bear market of 2000-03, we have not been in a valuation bubble but may have reached a peak in cyclical earnings - an earnings bubble. Earnings expectations are being downgraded for domestic cyclical stocks and any fall-back in commodities could see substantial downgrades.'

Many traditional havens look a bit less secure this time. Pharmaceuticals companies have a dearth of drugs in the pipeline, while regulatory costs and legal battles over patents are growing; food companies are suffering from commodity cost increases; electricity and water companies have enjoyed a bull run for years, fuelled by takeover speculation and rising fuel prices. Scott is still keen on utilities, but is also buying in telecoms and tobacco, where earnings are relatively unaffected by economic swings.

The troubles are particularly acute for fund managers and retail investors looking for income. Banks, as well as builders and retailers, are likely to have been an important part of any income portfolio, but many in this sector have already cut their dividends or warned that they will soon. None the less, private-client investment manager Brewin Dolphin says: 'If you are very selective, it is still possible to generate safe income growth by sticking to more defensive areas like utilities and tobacco, where yields are lower than banks and retailers but dividend growth forecasts are higher.'

It has put together an Income Model Portfolio, drawn from companies in the FTSE 350 index, with a yield of 4.8 per cent, including companies like GlaxoSmithKline, Vodafone, Imperial Tobacco and National Grid, all of which should be relatively resilient to an economic downturn, and which could even benefit if investors' love affair with commodities turns sour.