Equities are generally considered one of the best ways to invest for growth and to protect capital against the erosion of inflation. On a long-term basis, the fundamental supports for equities remain but they have recently become synonymous with volatility due to uncertainty over the global economy and the liquidity crunch. Sentiment remains a key driver of equity markets but further turbulence is likely.
Are bonds’ defensive attractions and steady income stream a better bet? High-yield bonds have been avoided amid concerns of defaults and government bond prices are stretched. The interest rate environment is supportive, with expectations biased towards further rate cuts in the US and the UK – looser monetary policy in Europe may take longer – but much of this has already been factored in. The natural shift towards defensive assets has pushed yields to historically low levels.
Property is having problems although falling interest rates have stemmed the decline in values in US residential markets and in commercial property in many countries. Holding exposure to property remains a sound idea on a long-term basis but capital values have room for further decline. There are many other options but falling interest rates are compromising the returns on cash, sentiment towards hedge funds has been hit by high-profile collapses and private equity is being squeezed by the lack of liquidity.
The answer is a big-picture view open to all options. It is crucial to pick those asset managers that have their own investment ideas and the conviction to follow them.
It makes sense to explore new investment ideas but by no means should Western economies or traditional asset classes be discounted. Investors may currently be wary of the UK, US and European equity markets but, historically, the point at which the consensus finally deserts a market can often be the best time to invest.
Although markets are not in such an extreme position at the current time, sentiment is undoubtedly depressed and many markets offer long-term value.
We believe that successful investing starts with being open to all investment options, both in terms of asset classes and world markets, blending these components intelligently and selecting managers that exhibit flexibility and originality.
Cara MacGregor is manager of the HSBC open global return fund