Unless equity markets manage a rally of improbable proportions between now and the year's end, it seems certain that 2002 will be the third year in a row in which all the major equity indices around the world will have fallen in value. Play it safe, advises Robbie Kelleher.
It will be the first time this has occurred for more than 60 years. The last time was the period 1939 to 1941, in the middle of the second World War.
In the US, the major benchmark indices are close to 50 per cent off the peak reached in the early part of 2000; in Europe, the decline from peak has been almost 60 per cent.
Those of us whose experience in equity markets mainly spans the 1980s and 1990s would have a strong initial instinct to encourage investors back into equity markets at these levels. During those two decades, any time markets fell sharply in value they subsequently recovered strongly and regained previous peaks relatively quickly.
However, this time we would caution against trusting such instincts too far.
Although markets have fallen sharply from their peak, this decline has come after a period of unprecedented appreciation in the second half of the last decade.
Accordingly, even at these levels, overall equity valuations still do not look compelling value, particularly in the context of a global economy that looks set for sub-par growth rates for several years.
We would recommend to clients that they maintain an above-average weighting in cash and bonds, and that funds that are committed to equities are managed with a strongly defensive bias to minimise risk.
For example, it is important that investments be spread across a range of asset classes and across a range of investment managers.
It is worth noting the trend towards multi-manager investment products and the array of choice available in products such as the Frank Russell suite of products (www.russell.com). Given our cautious view on markets we would recommend choosing a basket of funds within such a suite that has a strongly conservative and defensive bias.
Capital preservation should also be the central focus. We recommend that investors consider some of the tracker products available as a way of preserving capital but at the same time maintaining some exposure to the possibility of a recovery in markets.
Robbie Kelleher is head of research with Davy Stockbrokers