SOME of the City’s top professionals are betting that sterling will slide this year, making Britain one of the least attractive world markets in 2008 and throwing up better opportunities overseas.

The news came as UK stocks officially entered bear-market territory on Friday, according to stock-market historian David Schwartz.

The FTSE 250 index of medium-sized firms – a better indicator for the state of the British economy than the main FTSE 100 index because it contains more domestic businesses – has now dropped 20% since its peak in early June. The Footsie is down 6% since then and 4% since the start of the year.

British stocks, particularly retailers and housebuilders, have slumped amid fears that the UK could be one of the biggest casualties of the global economic slowdown.

The Bank of England is expected to cut interest rates at least twice this year to 5% or lower to prop up the ailing economy, despite keeping them on hold last week. This is putting pressure on the pound.

Jim O’Neill, chief economist at Goldman Sachs, an investment bank, said last week that one of his top trades of 2008 was to bet against the pound.

He said: “Last month saw close to the biggest single monthly drop of the pound since the exit from the exchange rate mechanism at the start of the 1990s, and suggests that the world is developing a different view of the UK. This seems justified as there are lots of reasons to be bearish on the pound.”

In a dramatic reversal to last year, sterling dropped to $1.9575 last week, its lowest level since March. It has slid 8% in the past two months from $2.11, its highest since 1981. The fall against the euro has been equally dramatic: from 70p to 75p.

O’Neill believes sterling could drop as low as 81p against the euro – another 7% fall. Meanwhile, HSBC predicts the pound could fall another 10% to $1.76 by this time next year. Falls are expected against the Japanese yen too.

We offer some tips on profiting from the trend.

Time to invest overseas

Nearly half the fund managers questioned by Merrill Lynch for a monthly survey of investor sentiment said they were negative on the outlook for the FTSE 100, making Britain the least preferred of all the main world markets.

Thomas Becket at PSigma Investment Management said: “With sterling under pressure, now is the time to invest overseas.

“For the long term we prefer emerging markets, but as a contrarian bet, one of our favourite overseas markets is America, where returns could get a real boost as sterling weakens against the dollar.”

David Rosenberg, an economist at investment bank Merrill Lynch, warned last week that a US recession is already under way. However, experts still think it will be one of the more profitable markets during a global slowdown because it has so many high-qual-ity defensive companies.

You could look at the consumer goods firm Colgate Palmolive, phone company AT&T and computing giant Microsoft. An easier way to get exposure to American shares is through a fund. Advisers recommend M&G American and UBS US Equity.

Europe also has its fans, although some experts are concerned that its markets are full of exporters whose goods and services will become less competitive if the euro continues to strengthen.

Citigroup recommends focusing on companies with strong balance sheets and low levels of borrowing such as mobile-phone group Nokia, technology company Siemens and drinks firm Pernod-Ricard.

Recommended European funds include Jupiter European and Neptune European Opportunities.

If you would prefer to stick to the UK, analysts recommend companies that derive large amounts of their profits overseas, such as oil giant BP and publisher Pearson. These will be worth more when their profits are converted back into sterling.

More adventurous investors should consider Swiss government bonds and Japanese utilities, such as Central Japan Railway, according to Steve Russell at Ruffer, an investment manager. A stronger Swiss franc and yen will boost returns for UK investors.

Fix repayments on a holiday home

A weaker pound has its downsides if you have a foreign holiday home and have financed it using a mortgage in an overseas currency, say the euro or dollar. As the pound weakens, repayments will rise in sterling terms, assuming interest rates stay the same.

For example, you would have paid £900 to cover a monthly repayment of €1,300 at an exchange rate of 70p. At 76p to the euro your sterling repayment will now be closer to £1,000 a month.

However, there are ways to protect yourself. Specialist currency-exchange brokers, such as Foreign Currency Direct or HIFX, allow you to fix your exchange rate.

Last week HIFX was offering a fixed exchange rate of 76p to the euro for two years including its fees. This means your payments in sterling to cover a €1,300-a-month mortgage would be fixed at £1,000 until January 2010.

Buy your foreign currency now

Prepay cards let you load up on foreign currency when the exchange rate is in your favour so you don’t need to worry about storing hard cash.

Though sterling has already fallen against the euro and dollar, many experts think it will weaken further so you could still profit from one of these cards.

The best for dollars are Barclays’ Prepaid Travelcard, Post Office Travel Money card, Travelex Cash Passport and Caxton FX Dollar card which do not have application fees.

If you loaded up a card with £1,000 last week you would have got $1,857 with Barclays, $1,861 with the Post Office, $1,903 with Travelex and $1,940 with Caxton FX.

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