A dramatic event need not be all bad news for investors

The volcanic ash cloud crippled air travel but made the stock price of airlines a more attractive proposition.

black monday, the Asian crisis, swine flu, the bursting of the technology bubble and now Iceland's volcanic eruption. All are major events that have not only dominated news agendas but presented golden opportunities for investors to make money. Whether it is taking advantage of stock market turbulence, cashing in on changes in demand for particular products or snapping up shares in companies unfairly affected by the backdrop, people have had the chance to make bumper returns.

James Smith, investment director and manager of the Ignis Global Equity, says it is true that newspaper headlines can have a dramatic effect on investment opportunities and cites the recent UK stock market slumps as prime examples.

"March 2009 and March 2003 both showed the benefits of being willing to buy at the bottom when pessimism – or indeed panic – was rife," he says. "In March 2003, the Iraq conflict loomed but, ironically the market rallied as the bombs started to fall."

There are also advantages in stepping back from markets as over-optimism can also create opportunities. "In 1990, Japan's economy reached stratospheric levels, then collapsed," Smith adds. "Similarly in 1999, the telecoms, media and technology phenomenon offered the chance to sell these highly priced sectors and rotate into 'dull' bricks-and-mortar companies."

It was a similar story back in October 1987 when, in the space of a few days, we had the Great Storm, which particularly devastated the South of England, and the stock market crash on "Black Monday", which wiped £50bn off the value of shares. Although it took the market a couple of years to recover to pre-Black Monday levels, investors who got in at the bottom would have eventually made decent returns, as is usually the case with every crash and subsequent recovery.

Elsewhere, there are plenty of other examples where sectors and individual companies have been affected by market overreaction to both good news and impending doom, which has provided trading opportunities for those who can think laterally and watch carefully, according to David Kuo, of the financial advice website The Motley Fool. "IT companies were some of the main beneficiaries over fears that the millennium bug would see planes fall out the sky and business grind to a halt," he recalls. "As it turned out, nothing happened but companies benefited from funds channelled into projects to make computers safe. Shares in Triad, for example, surged from around 200p to 800p. Today they are worth around 30p."

Swine flu, meanwhile, was a boon for the pharmaceutical companies, although investors had to trawl through drugs companies to identify those best-placed to deliver effective vaccines. "Novartis has been one of the main beneficiaries and recently said first-quarter profits jumped 49 per cent on the back of strong vaccine sales," adds Kuo.

Andy Gadd, head of research for Lighthouse Group, highlights Britain's departure from the European exchange rate mechanism back in 1992. "The main initial beneficiaries were companies with significant overseas earnings or overseas funds valued in currencies other than sterling, but ultimately in the medium-term the whole market rose as interest rates were reduced in the UK," he recalls.

More recently, the Eyjafjallajokull volcano erupting in Iceland has been a major talking point among investors and illustrates how events can affect share prices, says Richard Philbin, the chief investment officer at Architas.

"There are similarities between 11 September and what happened with the volcano because the airports were closed in both with positive and negative impacts," he adds. "Stocks such as British Airways have gone up because we are flying again and oil prices have taken a short spike because people will be filling aeroplanes. It is a knee-jerk reaction and is an easy way to both make and lose money."

The point is that out of every adversity comes opportunity, long and short-term. Philbin explains: "Whenever something shakes the foundation of an economy it can provide onward going opportunities."

While the impact of some news events, such as the volcanic ash cloud, will last a matter of weeks, others, such as the 11 September terror strikes on America are far longer term because they change our way of life for ever, he points out. "The increased security is here to stay, even if there is never another terrorist attack and companies have to make the scanning devices," says Philbin. "Similarly, you have seen a lot more anti-bacterial soaps in the wake of events such foot and mouth."

So what news stories are likely to provide the best opportunities for investors over the next few months?

General election

It is less than a fortnight before the country goes to the polls. Having this hanging over financial markets has meant the government bond market waning, according to James Foster, co-manager of the Artemis Strategic Bond Fund. "There is a chance government bonds might do well if something good comes out of the election such as a clear majority," he says. "This is because the market believes a hung parliament is likely and is already priced in."

Although the result of the election is important to what happens in the gilts market, Foster also believes the chances of the result causing a major dislocation in bond markets are slim. "If a good and sensible result is the outcome, the gilts market will respond very positively," he says.

Meanwhile, Co-operative Asset Management (CAM) predicts there are some areas which will provide good opportunities to make money regardless of which political party is in charge of the country come 7 May.

The need to cut the national debt will drive public sector organisations to rationalise their back-office functions, which could be good news for companies involved in support services, CAM suggests. "Outsourcers work on the basis that they will maintain and even improve service levels while delivering cost savings of up to 30 per cent, which is an attractive option to a government looking to cut costs."

In particular, CAM believes Serco and Mitie, which already have expertise and experience in the public sector, are particularly well-placed to benefit. Healthcare is another important area. As the first of the baby-boomers born since 1945 retire this year, it will be vital that any government puts in plans to ensure that adequate health services and long-term care are provided.

"This growing demand for healthcare is difficult to reconcile against the economic budgetary belt-tightening that is inevitable," says a spokesman for CAM. "Just as the US has recently grappled with its own health reforms that saw the government take a greater role in healthcare funding, so the UK could be faced with its own major re-think on funding for this critical sector."

Increased public sector involvement will grow the size of this market for a number of healthcare companies, it suggests, which could mean good long-term prospects for companies such as GlaxoSmithKline and Shire.

World Cup football

One of the biggest news events of the year is the football World Cup being held in South Africa this summer. But the tournament, which is held every four years, may have both positive and negative impacts on investors. Research has shown that the blue-chip FTSE 100 index usually falls by at least 25 points the day after the England side is knocked out of a major championship, which is enough to wipe more than £1bn off share values.

The worst fall in the past 20 years happened during the 1992 European Championships, when England's 2-1 loss to Sweden was followed by a 1.37 per cent fall in the FTSE 100, recalls Professor Bill Gerrard, of Leeds University Business School, who studied the ups and downs with the International Institute of Banking and Financial Services.

The impact of England's penalty defeat by West Germany in the 1990 World Cup, made famous by Paul Gascoigne's tears, was only marginally better – with a 1.02 per cent decline in the Footsie the following day.

Graham Spooner, an investment adviser at the Share Centre, believes bookmakers such as Paddy Power and Ladbrokes may benefit from the tournament. "Domino's Pizza might also receive a boost if people are staying in to watch the matches," he adds.

Longer-term news stories

With a shortage in power generation capacity looming, urgent action is needed to secure Britain's future energy supplies, as well as to meet EU targets for reducing greenhouse gas emissions against a backdrop of growing concern about climate change, says CAM.

"Scottish and Southern Energy is strongly positioned to benefit because renewables already account for more than 20 per cent of its overall generation capacity," it says.

"Specialist engineering and infrastructure planning consultancies such as RPS, which has expertise in different areas, should also grow."

A word of warning

Although Justin Modray, founder of the advice website Candidmoney.com, agrees that newsworthy stories can provide investment opportunities, he warns that only investors with strong nerves and impeccable timing can expect to benefit. Although profiting from major events is great in theory, he says, the reality can be rather different, with any potential upside priced in quickly so that by the time private investors latch on to what is happening, they have probably missed the party.

"Stock markets often overreact to bad news, such as airlines stocks plunging after 9/11 and bank shares falling in the wake of the global banking crisis, and this can present opportunities," he explains. "However, this is high-risk investing because you could buy at what you believe to be the bottom, only to find that more bad news comes along."

Even if you manage to make money by reacting quickly to a breaking news story, you must also be focusing on the exit, warns Graham Spooner at the Share Centre. "It is better to travel than to arrive," he says. "You have to be getting out almost before the event peaks, otherwise you could end up losing money."

Opportunity knocks

*Shares in British Airways fell steadily last week and earlier this week after the International Air Transport Association estimated that the six days of disruption caused by the volcanic ash cloud might cost airlines £1.1bn. Meanwhile, analysts suggested larger carriers would suffer more than budget airlines owing to the higher costs associated with assisting passengers and the larger number of cancelled flights. But that slump in share prices offered an opportunity to invest in airlines, says Mark Westwood, manager of the threadneedle UK Select Fund.

"In the week after the volcano erupted, airline stocks fell by about 7 per cent. So we have increased our exposure to airlines because we felt the effects were likely to be very short-lived," says Westwood. "More important for the sector is the strengthening global recovery.

Smaller investors were also excited by BA shares, according to Angus Rigby, the chief executive officer of execution-only stockbrokers TD Waterhouse. "British Airways entered our top ten buys this week, at No 8, following the ending of the six-day flight ban."