Avoid over-exposure to any single asset as bull market nears

Millions of investors will this month receive their six-monthly statements telling them how much their portfolios are now worth.

For a pleasant change many will see an improvement in performance, which is to be expected given the strong start to the year of equity markets in particular.

But while this is clearly good news, it must be borne in mind that this is now historical data – you have to keep looking ahead.

It’s been a positive start to the year in the stock market, yet there are already clear signs that things are beginning to slow down and in some cases turn negative. It is impossible not to be aware of the deepening debt crisis strangling European countries, and the recent election results in both France and Greece point to a potentially threatening revolt against austerity. Both countries have voted to remove leaders who implemented cuts in wages, jobs and public spending. This is serious, because the additional funding supplied to those countries most in need of financial aid was in return for promises to cut their spending.

In the UK the coalition government is under growing pressure to act cohesively and decisively to manage our own debt burden, while in reality public spending continues to increase. Those who rubbished the idea of a double-dip recession have been proved wrong.

The more positive news comes from the US, where the economy seems to be well ahead of the European countries in terms of recovery. House prices have perhaps stabilised and manufacturing data improves. Unemployment looks set to remain high, so it’s not a uniform improvement, but when the world’s largest economy improves, it is indeed significant.

On the other side of the world, there are fresh signs that real problems are emerging. The phenomenal growth story of China in particular would appear to be slowing significantly. Given that its largest customer – Europe – is in an enduring slowdown and its own economy is rebalancing, there is real concern that the so-called hard landing scenario might well be about to impact on China. This will adversely affect Japanese and Asian markets in general as well as the western world.

Rather than interpreting all this as pointing to yet more doom and gloom for investors, I think quite the opposite might be true, provided we are patient.

We now understand that the economic crisis started in the America and spread to Europe. Perhaps it is now set to end in Asia. While things seldom work out as predictably as we might like, there is a strong case for suggesting that this prognosis may be right.

Certainly there is mounting evidence that China is now dealing with the consequences of having its currency pegged to the dollar, which may signal a change in policy going forward. We are all very clever with the benefit of hindsight, but the China story was never going to be world domination in a seamless fashion.

Taking all of the above into account, the exciting news for investors is that we are moving closer to a significant bull market phase, which may even result in the investment opportunity of a lifetime.

Unfortunately, for such a situation to arise there, probably needs to be one more leg down in markets from current levels. It seems quite plausible that the catalyst to such a correction will emanate from China.

Patience and vigilance are crucial. This is certainly not a time to panic, or to seek the exit. It means reviewing what is held in a portfolio to ensure a degree of diversification and avoidance of over-exposure to any single asset, however attractive it might appear on the valuation statement. This is a sensible discipline at any time, and perhaps today more than ever.

l Ken Taylor is director of Mackenzie Taylor Wealth Management