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‘Correction is a lesson to complacent investors’

F&C stewardship growth and income manager Ted Scott says the recent correction in UK markets should be seen as a warning for investors that stockmarkets will not go up in a straight line for ever.

Scott says since the last correction in May and June 2006, investors have become increasingly overconfident in their market positions and that the recent problems in China and the US have had a positive effect in that they may have calmed investor exuberance.

Scott believes the biggest factor for this change in the market has been the reassessment of risk.

He says: “This has been highlighted first and foremost by the reversal in the yen carry trade, which has seen investors buying up yen to lock in profit, causing the value of the currency to shoot up in a couple of days.”

Scottpoints out that the Vix index, a key measure for market volatility, had risen in recent weeks to levels that were in correlation to the ones before the correction last May.

He says: “The recent sell-off has bought home to the investment community that risk is currently quite high and that the financial system can be very precarious.

“If attitude to risk starts to change, credit spreads will widen and it will become more difficult to borrow money.

“The bubble in takeover activity could be at bursting point and going forwards investors should be reasonably cautious and invest more money with companies with strong fundamentals, be it strong growth or cashflow.

“Those companies whose valuations have risen on the back of takeover speculation are looking increasingly more vulnerable.”

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