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The silver lining

Amid the market volatility, a flight to quality is needed, as it is the experienced managers with a few grey hairs who will best be able to exploit the opportunities that undoubtedly exist in the markets.

It is with some trepidation that I am writing this article as, given the volatile state of the markets, it is easy to look stupid within a day or so. However, that is all part and parcel of writing about the stockmarket, just as sharp corrections are part of investing in it. It will be scant comfort to those who invested a few weeks ago but this is one of those times when you just need to be patient.

I vividly remember the market crash of 1987 when the FTSE 100 plummeted by 22 per cent in three days and it seemed like the end of the world. If you look at a long-term chart of the FTSE, that fall is hardly more than a blip.

I expect that we will look back on the current difficulties in the same way years from now. These events should not cause genuinely long-term investors to lose any sleep.

Many investors expend great effort trying to predict which way stockmarkets will move from one day to the next. That is perfectly natural but is also a complete waste of time. The truth is that nobody can be certain how stockmarkets will perform over the short term.

The bears who are gloating about how they called this fall should remember that they have missed out on the best of the gains during several bull years.

What I am certain about is that throughout my 25 years in the industry, every fall has created new opportunities. This is the time when advisers need to get out there and talk to clients, write to them, engage with them and hold their hands if necessary.

Clients are being fed a daily diet of death and destruction by the media, which rarely has a good understanding of the markets. It is up to us to bring some reality and perspective to clients.

It is easy to present a bearish case. Indeed, it has been for some time and that is what has given me some confidence. It is when everyone is ragingly bullish that you really need to worry.

I was fortunate enough to speak to Jupiter joint chief executive Edward Bonham Carter a couple of days ago and thought he summed up the situation well. He believes that we are seeing a repricing of risk. This can be seen in high-yield bonds where, despite a low level of defaults, you really were not getting paid for the risk.

The yen carry trade was another area where many investors had become too complacent.

We should not lose sight of the fact that central banks all over the world have been trying to put the brakes on for a while so should we be surprised that Wal-Mart is reporting lower consumer spending? Should we be surprised if the housing market slows down? No, we should not. It is a question now of how far things go. I suggest the present crisis has acted like a big interest rate rise and in due course central banks will react to the slower growth by reducing rates.

On that basis, I would consider the present problems to be a buying opportunity. Those of your clients who have monthly savings plans should, if anything, consider increasing them. Those with a big lump sum may be well served by feeding it into markets gradu-ally on the weakest days.

The obvious funds to buy are the highest-quality ones and I would look for experienced fund managers with a bit of grey hair. UK blue chips look undoubtedly cheap at only around 11 times earnings so recommended funds here would be PSigma income, Schroder UK alpha plus, Artemis capital and M&G UK select.

Given that financials have taken a real pasting, I would also consider Jupiter financial opportunities where Phillip Gibbs has been very canny and built up his cash positions ready for exactly this type of market.

Asian and emerging markets are also taking a hit but here again the fundamentals look extremely good. The experienced managers will see you through. Hugh Young and Angus Tulloch have taken some criticism for being behind their peer group but this is exactly the sort of market in which they should prosper.

European blue chips also look good so I would make a dash for Cazenove European. The SmartGarp system at Artemis always struggles at inflection points and that usually presents a buying opportunity so I would look at its European and global funds too.

In a recent conference call with Legg Mason’s Bill Miller – one of the most experienced American fund managers – I was interested to hear that director buying was at the highest he had known for many years. This is a good indication that corporate America looks good, even if the consumer is overstretched.

The market situation may well get worse before it gets better but I believe it is up to us not to get caught up in the hype and to talk sensibly about the problems with clients.

Mark Dampier is head of research at Hargreaves Lansdown

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