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Spread the risk around

Last week’s scorching weather left me wondering if it was safe to take a leave of absence from the market.

With the investing public nervous of economic slowdown or geo-political upsets, it was clear that little could be left to chance and the economic numbers that were emerging were not giving a clear signal to markets.

Take the UK inflation figures which caught the market on the hop. The consumer price index rose by 0.3 per cent – three times the rate that many forecasters had factored in to their calculations. It brought the year-on-year figure to 2.5 per cent, enough to upset the gilt market and have money markets expecting a rise in interest rates.

But the movement in fixed-interest prices and yields was quite small. It seems we are used nowadays to more modest changes in interest rates and inflation.

Equity markets remain volatile. The appetite for risk appears to have diminished although there is still demand for cheap shares on bad days. But the rush for the exit when the going gets tough reminds us how fragile confidence has become. Picking out a theme to follow during the dog days of summer has proved testing. It was useful when our strategy team decided an update was due, given the difficult ride we have had. Trawling through their conclusions has proved interesting and a little comforting.

Among the opportunities they have identified for the summer was the chance to use asset allocation in a creative way to deliver value to clients. This is not as easy as it sounds. Aside from anything else, there are a variety of ways to play asset allocation. I read in my briefing notes last week that the tactical exposure to the US had been raised for appropriate accounts. This appeared to be no more than opportunism, based on the relatively undemanding valuation accorded to US shares and the likelihood that this reporting season would bring the ratings down still further.

But tactical considerations aside, the sort of market moves experienced recently provide an opportunity to re-evaluate the attractions, or otherwise, of various asset classes. The developed markets appear cheap, both compared with the past and in relation with bonds. There seems only limited risk associated with maintaining an up-to-weight position in major equity markets, such as the US, the UK, Japan and Europe, but that is not the same as saying they are going to rise and are most unlikely to fall in value.

The strategy team continues to view emerging markets with suspicion, not least because of the significant capital inflows of late. In the first quarter of this year, more money was invested in these markets than in the whole of 2005. History suggests that emerging markets suffer during periods of US monetary tightening, partly because dearer US money has an impact on global growth. Yet, given the way the Chinese economy continues to power ahead – 11 per cent plus growth for the second quarter – you have to wonder whether this is as important as it once was.

Singling out commercial property as an asset worth backing gave me particular comfort. Only last month, I decided to invest a slug of my modest wealth in this market, although I confess this was a decision based more on asset diversification than a belief that this market is poised for lift-off.

In the end, it does not pay to try to be too clever on portfolio construction. No asset class can deliver superior returns ad infinitum. At the risk of sounding like a cracked record, spreading your risk remains the most crucial aspect of wise investment.


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