Partner Article

Cautious optimism in investment markets: wariness breeds opportunity

Richard Clark and Simon Patterson, Private Bankers at Barclays Wealth and Investment Management, Newcastle, share their views on the factors behind investor confidence.

The fall-out from the somewhat wild investment patterns of the nineties and noughties still casts a shadow in terms of investor confidence and behaviour. But successful investors will not let fear stand in the way of some of the opportunities that still exist to make returns on a balanced and varied portfolio.

In our last post, we discussed treasure, one of the less ‘mainstream’ asset classes, and highlighted the risks associated with acquiring treasure assets solely for profit. After successive market crises dating back at least to 1998 many investors are understandably concerned now primarily with protecting wealth rather than growing it, ideally while generating some dependable investment income.

Recent events have also dented investor confidence. To date in 2012, we have seen Greece formally defaulting and balancing on the edge of Euro secession; a shortfall in Spanish growth and government finances; a new, reactionary administration in France; another ‘double dip’ debate in the US, and fear of ‘taxmageddon’ there; an actual double dip in the UK GDP data; and rumbling fears of a hard landing in China.

However, it is important that investors do not become too risk-averse. For one thing, it is no longer entirely clear which asset classes are safest. At current prices, many credit-worthy government bonds are potentially volatile if interest rate expectations ever begin to normalise. So too is the gold price. Even cash – a common ‘safe haven’ choice - is at risk from inflation.

Also, we still think that true disaster in the global economy will be averted comfortably. Increasingly, investment opportunities are available now that many companies can issue bonds at yields below those paid out on their own stock. The Eurozone is showing encouraging signs of potential for recovery, with politicians seeming increasingly able and the ECB acting as a backstop while the labour market liberalisation needed to give the euro credibility is slowly put in place. Meanwhile, China has pledged to boost domestic demand at a
time when its exporters are facing difficulties.

The investor wariness which we have seen in recent weeks and months has also helped to keep relative valuations in check. With expectations set fairly low, the mere avoidance of true disaster may be enough to send prices higher.

Where possible, we would suggest that investors look to add to their long-term investments by playing on the favourable conditions created by prevalent scepticism in the markets and, as always, we do emphasise that investing in shares is not for everyone. Their value can fall and you can get back less than you invest – if you are unsure, you should seek independent advice.

This was posted in Bdaily's Members' News section by Richard Clark .