THERE are currently several strong economic trends attracting a lot of attention. Price inflation in agricultural commodities; energy; gold; industrial minerals and the emerging economies are the most prominent. There are also powerful downward trends, such as the weakening of property prices. The dilemma facing investors is whether to continue backing these established trends or hold back to take advantage of the inevitable bouts of profit taking.
At present the market is vexed with many questions. For instance,
will gold rise through the $1,000 per ounce level and when will oil head through the $130 per barrel level? The same is true of the established downtrends in depressed sectors. Will t
raders continue to back short positions in property and banking shares or are they anticipating that current share prices are factoring in the bad news?
On a cheerier note , there are one or two good arguments for remaining faithful to the market. The average length of recession since the 1960s has been approximately 11 months, so if we were to establish that we have been in a recessionary environment since December 2007 it would mean that we only have six or seven months of adverse economic news to come.
For experienced market participants, it is the fear of missing out on the recovery stages after a recessionary period that has traditionally kept them invested. Again, the statistics indicate that after some 63 days from the low point, markets can easily rally by more than 15 per cent, and after 189 days by 32.2 per cent.
For the long-term investor, there is still a fundamental economic rationale for maintaining exposure to emerging economies such as India and China, where gross domestic product (GDP) growth is forecast to be above 7 per cent for 2008 and 2009. In comparison, the GDP growth forecast for the UK is 1.7 per cent for 2008 and 2.1 per cent for 2009, while the US forecast is 1.6 per cent for 2008 and 2.5 per cent for 2009. Nevertheless, the investment options are becoming extremely daunting and this is why one solution may be to consider using multi-asset class investing to reduce risk and to reduce correlation to the major market indices. Research on the latest returns generated by the endowment policies managed by the major Ivy League universities in the US have shown that the strategy of holding eight asset classes (including equities, commodities, fixed income and real estate, which are regularly rebased) provides more consistent returns over the longer term.
Another approach is to consider a well-managed fund of hedge funds, where the manager takes responsibility for selecting hedge fund investments which are independent, ethical, have a coherent risk management strategy and, more importantly, are able to provide liquidity for their investors. The fund of hedge funds technique covers a multitude of different strategies from "event driven" to "global macro", which enable steady returns during periods of volatility.
Irrespective of the investment strategies available, there must be logic in investing in certain key economic trends that appear sustainable over the longer term. Current examples are the expectation that price inflation in energy and food is likely to continue, as will the economic expansion in Asia. Irrespective of the investment strategy deployed, one which aims to follow a defined economic trend is in our opinion more likely to be successful.
• Charles Fotheringham is a senior investment manager at Gillespie Macandrew.
The full article contains 585 words and appears in The Scotsman newspaper.
