The main catalysts behind the poor month are the usual suspects. The Eurozone debt problem lurches from one flashpoint to another, with Spain now in the spotlight. In the US, the bi-partisan "super committee" convened to tackle the massive US deficit had failed to reach an agreement, which will now lead to automatic cutbacks in budget cuts, due to start in 2013. Indeed, US growth for Q3 2011 has been downgraded from 2.5% to 2%, with similar downwards revisions expected for Q4. Even China has seen its manufacturing fall to a 32 month low.
In short, it feels like August all over again. With most asset classes (with the notable exception of UK Gilts, German Bunds and US Treasuries plus a handful of others) moving lower, what should investors do in conditions such as these?
Firstly, investors should remain calm, and remember that all investment is a medium or long term process.
Markets will inevitably fluctuate over the course of an investment cycle, and staying the course with a chosen strategy is arguably one of the safest bets. However, an added element to consider is that "risk free" returns - i.e. cash - are so poor, running for the relatively safety of cash is not really an option either. Certainly in the UK, there are very few if any deposit accounts that will pay a return to keep up with Retail Price Inflation (currently 5%), therefore cash returns are (by and large) condemned to loose value in "real" terms.
In these conditions, I continue to favour quality Corporate Bonds, selected sovereigns (particularly UK Index Linked Gilts) and Gold. However, should Equities fall much further from here, say by 10% or more, then on a fundamental basis, selected positions will begin to look attractive, particularly defensive industries such as food retail and utilities.
As ever, seek professional advice from a suitably qualified person before taking any investment decisions.
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