Stock markets will continue to fluctuate wildly for the next few months before moving into a period of "healing" to last a number of years, a leading investment strategist has predicted.
This healing will leave many companies, particularly in the US, faced with a choice between aggressive downsizing or bankruptcy, according to Mr Michael Karagianis, head of global strategy and asset allocation at Aberdeen Asset Management, who visited Dublin in recent days.
Volatility in the markets is set to be the order of the day until that stage arrives, however, Mr Karagianis believes.
"They'll be stuck in a range, with very powerful rallies and equally powerful sell-offs," he said, predicting range trading of up to 10 per cent in both directions.
In such a climate, Aberdeen will be cautious about buying bonds and overweight in carefully-picked equities, said Mr Karagianis.
As for the wider picture, Mr Karagianis does not subscribe to the "double-dip" theory, which suggests that the US economy is about to lurch into its second recession within a year.
"Our view is that it's probably unlikely", he said, admitting however that the global economic picture is "delicately balanced" as investors adopt a more conservative attitude to risk.
Mr Karagianis believes that pension funds in Britain and Ireland are likely to reflect this risk-aversion by re-evaluating their affection for equities over coming years, with typical allocations to stocks likely to fall from levels as high as 85 per cent to 60 or 65 per cent.
"It's about re-assessment of risk," he said.
"Risk was a non-issue three or four years ago."
This reassessment began to occur earlier this year and should take precedence over the theory that the current stock-market downturn is merely a cyclical slump, Mr Karagianis believes. Economic uncertainty and general concerns about corporate governance add to growing concerns about risk, he said.
Retail investors have also caught the low-risk bug, according to Mr Karagianis, with many likely to make extra payments to their mortgages rather than investing in equities, for example.
His company has developed a model to assess the "risk appetite" of investors.
This model works on the premise that events such as wars, credit shocks and currency instability - all of which are, in theory, currently in application - are associated with risk aversion.
The corollary of this is that as uncertainty increases, investors will indiscriminately sell risky assets and move into low-risk investments such as government bonds.
Events of recent weeks have, according to the model, spurred a dramatic decline in the appetite of investors to consider risk.
Mr Karagianis said that this suggests that risk markets are currently oversold and will continue to be so for at least three months.
