Investors’ finances have been in a state of uncertain flux ever since the Government bailed out Northern Rock in 2007.
The subsequent banking and global economic crisis left consumers wondering whether they should sell equities and invest in safer havens such as cash, gold or gilts. Britain may well be officially out of recession but the outlook is as uncertain today as it was three years ago. Will the UK economy suffer a double-dip? Will the sovereign debt crisis spread across the Channel? Will shares fall further?
Up until a couple of months ago investors probably thought they were out of the woods given the stock market’s year long revival. But the sovereign debt crisis has put a spanner in the works and share prices have fallen since mid-April. Many investors, already wondering whether there is worse to come, would not have even countered the biggest oil spill in US history and the collapse in BP’s share price as a result.
At least the Coalition’s swift announcement of spending cuts in May gave some much-needed respite to the gilt market, which endured a terrible period in the run-up to the General Election.
The gilt market is still volatile and this will have ramifications for bond markets which make it ever more important to consider a diverse approach to fixed interest, where opportunities for reasonable returns still exist in both investment grade and non-investment grade.
Understandably, many investors are in a cautious mood and they have been looking at traditional safe haven shares such as pharmaceuticals, tobacco, food retailers and telecoms. The added benefit is that many such shares offer the carrot of dividend payments too.
Dividends are a crucial part of total return and the good news is that the prospects for dividends have improved this year after a poor 2009, which saw many companies scrap or reduce their annual payout.
With clouds still hovering over the UK economy, FTSE stocks that derive a significant chunk of their earnings from overseas have also been getting attention from investors and it is why blue-chip defensives have started to win favour.
On the international front, China continues to heavily influence the performance of global markets. Certainly investors who bought the China story early will have seen decent returns; the question they might be asking themselves is whether they should be taking some profits and redirecting them elsewhere.
The reason? Several analysts fear that China’s property market has overheated – values have increased sharply in the past five years sparking fears of a correction. The key, fund managers say, is whether Government intervention to stabilise the property market will work. Many managers remain optimistic that this will be the case and say that its long-term prospects remain as strong as ever.
All the uncertainty has played into gold’s hands. It has been one of the undoubted investment winners of the past three years. Its price has doubled and has sat above the $1,000/oz level for some time now, as risk averse investors have hunted down safe assets.
Gold advocates argue that the fundamentals support the gold price but given its performance some wonder whether the easy money has been made. There are an increasingly wide range of ways available to investors wanting to gain exposure to gold price movements including commodity-based exchange traded funds and investment funds.
No one can predict what will happen – as the BP saga starkly illustrates - and many suggest the best way to avoid boom-and-bust cycles is to make objective investment decisions that ignore fashions. The advice more often than not is not to panic.
There is the well-trodden argument that "it's about the time in the market, not out of it that counts''. It is an argument that makes sense, but it can seem flippant when it comes to the prospect of losing your hard-earned cash.
If you haven't already, it would be well worth reviewing your holdings to see if you are overexposed to any asset class or classes. Diversification across different assets and getting the balance right are vital.
After all, many people don't appreciate the risk they are taking when stock markets are going up. They only become aware of risk when markets are going down and subsequently sell out – and all too often - at entirely the wrong time.
If you have any questions give Thompson Wealth Management Ltd a call today on 01623 88 3884