The future of stock market investments

Tuesday, 20 March 2007 12:00

Following the recent downturn in the FTSE, experts have questioned the future of stock market investments in the current climate.

Problems with the US mortgage market, changes to investment rules in China, and fears over the global economy have seen the FTSE 100 drop below 6,000 points in the last two weeks – losing almost a year’s worth of growth in a few days.

And as the dust settles on the latest stock market correction, top fund managers are offering their investment advice for the months and weeks ahead.

“Following the sharp sell off which gripped equity markets two weeks ago, a level of calm seems to have returned, with greater stability in prices, and some tentative upward momentum being re-established in major indices,” said Paul Niven, head of asset allocation at F&C Investments.

“Having initially scrambled for justification for the sharp declines in prices, focus has resolutely turned from the carry trade to the sub-prime market in the US as the cause of recent woes,” he explained.

“Our view is that recession will likely be avoided in the US,” he added, but that did not mean stock market investments should not be looked at.

“Short term, however, volatility will remain extremely high, in our view, with significant risks of another downleg in equity markets as investors continue to fret over the spillover effects of US credit issues,” Mr Niven warned.

“Previous bull market corrections such as the sell off markets experienced in May of last year, tend to be characterised by a secondary downturn and panic selling before a trough is reached – something which we have not seen yet – and it would be foolish to dismiss the risk of history repeating itself.

“Nevertheless, the fundamental backdrop remains supportive and, in the absence of fundamental change, we continue to view further material weakness as a buying opportunity.”

Barry Norris, Argonaut European fund manager, added he believed investors were still too optimistic about stock market investments.

“Many companies are currently experiencing extremely buoyant trading and we sense that investors are not at all worried about how long the party will last,” he said.

“The reality is that nobody has much visibility about the duration of the economic cycle and macroeconomic risks in equity investing are never too far away.”

His investment advice was to move money into more defensive stocks, particularly those with strong balance sheets and good dividend growth.

“The key points to remember are that the market remains vulnerable to set-backs and that corrections, far from being anomalous, will be a feature of the landscape over the next couple of months. But on the flipside corrections create buying opportunities – I tend to get more bullish when markets fall.”

Invesco Perpetual marketing director Rick White had different investment advice.

He is urging people making stock market investments to limit their risk by putting money away regularly, rather than try and time the market.

Mr White explained: “2006 was an especially volatile year for the stock market, yet the FTSE 100 index still grew by 9.49 per cent over that year.

“Small amounts invested each month can really add up over time and this takes the pressure off individuals having to make a decision about exactly when to invest in the stock market.

“Historically, when markets rally they often do so very rapidly and individuals not already invested could miss out on the benefits of any upturn.”

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