IN WHAT must rank as one of the most torrid market periods for many years, contestants have done well to hold their nerve. I would have been tempted to switch the entire portfolio into an index-linked gilt. As it is, those funds that began the year with a heavy weighting in cash have done relatively well.
While I see the rationale for switching out of funds heavily exposed to the UK, I am not as sure as I was at the start of the year about the attractions of emerging markets. It would seem that they are as vulnerable to high oil prices and the consequ
ent slowdown in key export markets such as the US. And I am particularly cautious about China.
After such a sharp drop in both the US and the UK, I would expect to see some sort of technical rally. This could result in sharp recoveries in some oversold sectors.
However, looking at the flow of economic news and company earnings updates, the rally, welcome though it is, will prove temporary. We could be in for further storms in September-October. What we need to see is a substantial and continuing fall in the oil price, combined with evidence of an inflow of petro-dollars from oil rich Middle East states.
Investor confidence in the UK and the US has been badly shaken and it is now difficult to tell whether a share price is reflecting fundamentals or substantial short positions taken by hedge funds. However, the contest is proving the wisdom of investing via well diversified funds. A self-select portfolio comprising high yielding stocks would have been blown to pieces.
