Too much caution can be a risk itself

Published on Friday 19 December 2008 19:36

SPARE a thought for our IFAs this Christmas. As we head towards the end of an awful year, the impulse to put safety first must be powerful, writes James Fairweather.

Equally, however, a too-cautious approach risks missing the historic opportunities currently on offer in global equity and corporate bond markets. It's a delicate balancing act.

Striking an appropriate balance between risk and reward is, of course, a fundamental issue for all investors. But, in the 20-odd years that I've been a professional investor, I can't recall another occasion when striking that balance has been as difficult as it is now.

The attractions of the safety-first approach are obvious: the economic environment is alarming. Retail, car and housing sales are plummeting and the West's debt-fuelled economic growth model is unravelling. Unemployment in the US is rising more quickly than at any time since 1974.

Yet the value in equity markets is beyond dispute. As an equity specialist, my views might be biased, but the figures speak for themselves. Until recently, book value was perceived as providing a floor for share prices in a worst-case scenario. Today, around 80 per cent of companies in Japan trade below their book value. Elsewhere, many shares yield more than bonds. Given that bonds won't participate in the eventual recovery in corporate profits, that's a remarkable situation.

I recognise, however, that noting that equities represent excellent long-run value isn't enough. So when will all this value be realised?

The key to a sustainable rally will be the return of stability to the credit markets. The Federal Reserve's recent pledge to "print as much money as necessary to revive the frozen credit markets" give us reason to hope that better times may be round the corner. Thankfully, judging when that corner will be turned is a call for asset allocators rather than equity specialists. That's why, this Christmas, I'll be sparing a thought for our IFAs.

&#149 James Fairweather is chief investment officer at Martin Currie.