It seems the downgrading of global growth expectations, rather than the downgrading of US debt by S&P, was the main catalyst for recent stock markets falls. The lack of political leadership both in the United States and in Europe hardly helped, and while I hope the market gyrations do not continue at the level we have seen, I cannot pretend sovereign debt problems have been solved or that the outlook is rosy.
Probably the best we can hope for is a mid-cycle slowdown, a natural development for this point in the economic cycle. Many fund managers I have spoken to support this theory as opposed to a return to out-and-out recession. The problem is that the GDP growth rebound has been muted despite unprecedented stimulus. It is not the rapid recovery many were hoping for, and reducing the level of borrowing through austerity measures, while necessary to restore confidence, is adding to fears we will slip back into recession.
This is the type of environment we will see for some time in the West, and Ben Bernanke's pledge to keep interest rates low for at least two years is evidence of the level of concern. So how do investors respond? If it is keeping you awake at night the answer is probably to keep most of your money in cash, even if low rates persist. If you want more income, you have to take more risk – there is no getting around it. For all investors, portfolios need to be constructed more carefully than ever. Too many want a high-octane portfolio when the market is going up and a cautious one when it is going down. This is never achievable because of the impossibility of market timing, especially in an economic climate of extreme uncertainty. Instead, I would look to blend defensive and aggressive funds according to your level of risk.
First let's look at the notable opportunities that have arisen from market falls. If you believe a full-blown recession will be avoided, oil exploration companies look very cheap and priced to reflect oil at $60 a barrel rather than the current value of around $100. Many small exploration and production companies have fallen 35 per cent to 70 per cent during the turmoil and an investment in Junior Oils Trust, a portfolio concentrating on profitable small producers, is a fund to consider. I am also a strong believer in gold and BlackRock's Gold & General Fund. In the short term physical gold looks a little overbought, but gold mining shares, like oil shares, look cheap relative to the physical commodity. Investors could also consider a broader equity fund, and for those who want aggressive exposure to the UK market, Standard Life's UK Equity Unconstrained, which favours more economically-sensitive areas such as industrials and mining, is an obvious choice. For investors seeking a defensive approach, absolute return funds could be used. Philip Gibb's Jupiter Absolute Return Fund has actually risen modestly during the crisis and remains a good diversifier for a portfolio. Troy Trojan, Miton Strategic Portfolio and Jupiter Strategic Bond could all be considered too. In addition large, international blue chips look cheap and I would suggest Lindsell Train Global Equity, which is full of quality companies with strong brands.
Finally, I do think income will play a much greater role in an investor's total return in the next few years, and recent falls in the market should highlight the attractions of UK equity income funds such as Neil Woodford's Invesco Perpetual Income and Bill Mott's PSigma Income. For more international exposure, the Newton Global Higher Income fund is a sensible option.
The market is likely to stay volatile for a while. It is a time to make sure your portfolio can ride out the storm and remember no single fund necessarily has the answer.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent