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Cash points

The global equity markets have continued to gain upward momentum. Before February’s correction, we started to take a defensive approach due to the lack of pricing of potential risk and short-term technical and sentiment indicatorsWe believe these short-term market corrections offer great entry points for longerterm investors and we used the cash we had built up to buy equities at a better price. We now feel it is a prudent strategy to start building up cash again as a further correction may just be around the corner.

The equity market recovery since March has been faster than many people expected and investors who bought into the correction have made healthy profits. We are entering the summer period which is traditionally a tricky period for the equity markets.

Some of our shorter-term market outlook indicators, such as moving averages and investors’ risk appetite measures, are past the peak levels they hit in February and are approaching the same record levels we saw n May 2006. All this indicates that the market may have got slightly ahead of itself and a pause for breath and reflection is due.

The key question is what can cause a profittaking correction? The catalyst for global investors to de-risk within their portfolios can be almost anything from a small surprise in any economic data to a major geopolitical shock. High global market correlation and hedge fund activity results in global de-risking of portfolios.

Our approach to a de-risking correction continues to be positive for the majority of investors. In the longer term, we still believe that equity markets offer good value. On a price/earnings’ basis, they are still at attractive valuation levels despite the strong run over the last four years.

In the increasingly volatile market environment, we continue to favour appropriate diversification. The old adage comes to mind that “cash is king”. We have started to build up our cash position slowly by taking profits in areas and funds that have benefited from recent market momentum, with a view that we will be able to reinvest this cash after a market pause.

Our main approach to the current market environment leans into our skill set as fundpickers. We are tilting portfolios towards managers who we believe have the foresight, skill and mandate flexibility to deliver strong relative and importantly absolute returns for investors during these volatile conditions. Clients are not necessarily risk-averse but they are loss-averse.

Scott Spencer is portfolio manager at Credit Suisse Multi-Manager Services.

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