Time consuming? Yes, but in-depth discussion with so many experts allows me to build up an excellent picture of what is going on and what might cause the market to change its mind. Change its mind it certainly has – looking at the FTSE–100 index, there have been four distinct up and down phases so far this year, each large enough to have a material impact on the value of an investor’s portfolio. How can we take advantage of such volatility?
Financial markets should be volatile for some time to come. Yes, the economic recession can formally end in a few months time. However, we expect only a moderate economic recovery into next year. There are major headwinds facing businesses and households, such as the debt mountain and the tax burden. A key statistic we should all monitor is the regular retail sales reports, to check whether consumer spending is holding up. Markets will swing sharply between undue optimism and extreme pessimism, responding to conflicting economic data, political decisions and corporate announcements. A clear example would be the uncertainty amongst most professional investors about whether the greatest risk is a period of falling prices into 2010 – driven by the highest unemployment for a generation – or rather high levels of inflation, say in 2011, perhaps driven by governments deciding to monetise their mounting debts.
What are the best investment opportunities?
We suggest sustainable yield is a theme many should examine. As the Bank of England will keep official interest rates low for the foreseeable future, investors should look at a mixture of funds or stocks providing relatively high and secure yield, combining good quality corporate bonds, equity income and commercial property.
No one would doubt that there are risks: bonds can default and dividends can be cut. However, when we look at many of these assets we see that most of the bad news has been priced in – as long as the very worst of the forecasts for the UK economy are not realised.
Some investors already have corporate bonds and equity income funds in their portfolios; if so, commercial property is an asset to think about. In volatile markets, buying on dips, or pound cost averaging, both make sense, meanwhile profit-taking is an option.
Andrew Milligan is Head of Global Strategy, Standard Life Investments
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