The downgrading of global growth expectations rather than the down-grading of US debt by S&P seems to have been the catalyst for recent stockmarket falls. A lack of US and European political leadership did not help and while I hope the market gyrations do not continue at the level we have seen, I cannot pretend the outlook looks rosy.
The best outcome we can hope for is a mid-cycle slowdown, a natural development for this point in the economic cycle. Many fund managers support this theory as opposed to out-and-out recession. But the problem is that the GDP growth rebound has been muted despite unprecedented stimulus. It is not the rapid recovery many hoped for and reducing levels of borrowing though austerity measures while necessary to restore confidence to the markets, is adding to fears we will slip back into recession.
This is the type of environment we are going to be in for some time in the West and Ben Bernanke’s pledge to keep interest rates low for at least another two years is evidence of the level of concern. So how do investors respond? If it is keeping you awake at night, then the answer is to keep most of your money in cash, even if extremely low rates persist. If you want more income, you simply have to take more risk – there is no getting around it.
For all investors, portfolios need to be constructed more carefully than ever. Too many people want a high-octane portfolio when the market is rising and a cautious one when it is going down. This is never achievable because of the impossibility of market timing. Instead, I would look to a mixture of defensive and aggressive funds according to what level of risk you want.
First, look at the opportunities that have arisen from market falls. If you feel a full-blown recession will be avoided, oil exploration firms look cheap and priced to reflect oil at $60 a barrel rather than the current value of around $100. Many small exploration and production companies have fallen by 35 per cent to 70 per cent and are worth considering.
I still believe in gold and in BlackRock’s gold & general fund. Physical gold looks overbought in the short term but goldmining shares look cheap relative to the physical commodity. Investors could also consider a broader equity fund and for those who want aggressive exposure to the UK market, Standard Life’s UK equity unconstrained, which favours economically sensitive areas such as industrials and mining, would be an obvious choice.
For investors looking for a defensive approach, Philip Gibb’s Jupiter absolute return fund has risen modestly during the crisis and remains a good diversifier. Troy Trojan, Miton strategic portfolio and Jupiter strategic bond could also be considered and large, global blue chips look cheap.
Income will play a greater role in an investor’s total return in the next few years and recent market falls should highlight the attractions of UK equity income funds such as Neil Woodford’s Invesco Perpetual income and Bill Mott’s PSigma income. For those wanting more international exposure, the Newton global higher income fund is a sensible option.
The market is likely to stay volatile for some time. It is a time to reassess investment risk, make sure portfolios can ride out the storm and remember that no single fund has the answer. It is the make-up and the diversification of a portfolio that will help it weather turbulence.
Mark Dampier is head of research at Hargreaves Lansdown