What is your current Attitude to Risk?
It is often said that stock markets are driven by fear and greed – and, right now, it is probably fair to say that fear is winning. A combination of negative factors – from disappointing economic data, fears of a “double-dip” recession, the eurozone’s sovereign debt crisis and the fiscal crisis in the US to the ongoing unrest in the Middle East and North Africa and the effects of the Great East Japan Earthquake – have conspired to undermine investor sentiment. Amid an atmosphere of uncertainty and a backdrop of volatility, many investors are unsure what to do next.
The benchmark FTSE 100 Index lost more than 11% of its value over the first nine months of the year, although during early August, it dipped 15% below its starting level. The most recent figures from the Investment Management Association (IMA) suggest that investors have become increasingly risk-averse and, during July, net retail sales dropped to levels last experienced three years ago. Although demand for bond and balanced funds remained relatively robust, equity funds registered net outflows for the first time since February 2009, and net outflows from UK, US and European funds outstripped inflows into Japanese, Asia-Pacific and Global funds during the month.
Amid the tumult of market and macroeconomic noise, it is worth taking a step back and looking again at corporate fundamentals. Although the current backdrop is saturated with significant structural and macroeconomic problems, many individual companies are in good shape, and the share prices of some high-quality firms look relatively inexpensive. Corporate balance sheets have strengthened; many companies retrenched during the financial crisis and recession, and have subsequently found themselves able to resume or raise dividend payments. That said, it is worth considering any significant intensification of the eurozone’s debt crisis could squeeze corporate finances, reducing companies’ ability to return value to shareholders.
Looking ahead, there is still good value to be found in the equity market, although investors should probably prepare themselves for a bumpy ride. In the current climate, it is worth re-examining the structure of your investment portfolio and ensuring that it is properly diversified and appropriately structured to meet your needs. Above all, it is worth reassessing your attitude to risk. The summer’s extreme volatility has led many investors to reconsider their own definition of what constitutes “risk” – and, in some cases, to find that their tolerance for loss is rather lower than originally thought!
