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Exceeding good advice

Six months into the credit crisis, investors are still reeling as the sub-prime contagion spreads through investment banks and other businesses. We have the continuing aftermath of the Northern Rock crisis, not to mention the fraud at SocGen and heavy losses and/or moratoriums on withdrawals from some property funds.

It may seem that 2008 is turning into an annus horribilis for our industry, particularly if you pay heed to the headlines announcing significant withdrawals from investment funds. But as Kipling said: “If you can keep your head when all about you are losing theirs … yours is the earth and everything that’s in it.” As (hopefully) rational longterm investors, what should we be doing with client money?

The first point is that if you are still heavily invested in equities, you may be too late to get out. We moved out of equities in favour of gilts towards the back end of last year in our more cautious funds as we saw very little upside potential in the short term in holding corporate debt as part of an income strategy. We also felt it was inevitable that the Fed would have to cut interest rates aggressively.

That move has now taken place. This does not mean it is time for a cautious investor to get back into equities aggressively. There is a possibility that recent lows will prove to have been the bottom but we believe this to be unlikely as more bad news may be hitting equity markets in relation to the unwinding of the property and credit bubbles.

We think that the Bank of England will need to cut rates and that the 10-year gilt is the best position to be at on the yield curve to benefit from this without taking undue inflation risk. We decided to have some exposure to US Treasuries as well as gilts. We believe that, in many sectors, a US recession is priced in and we are heading towards a stage when the market will look through this. Markets are likely to stay volatile in the short term but over the medium term equities look very attractive relative to other assets.

At some point, it will be the correct decision to move back to favouring equities and fund managers exposed to one of our key long-term themes – resources and emerging markets. We believe that a decoupling of Asian economies from the West is not realistic but we do think there is a strong secular growth story in parts of the emerging markets and while they would be damaged by US recession, a setback in these markets will provide an opportunity to add to areas we believe are benefiting from an increase in domestic consumption and developing infrastructure.

John Chatfeild-Roberts is head of the independent funds team at Jupiter


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