I saw one writer recently refer to investors as suffering "risk fatigue". It's a perfect description of today's environment. Since the onset of the financial crisis in 2008, we have had the varied afflictions of banks to contend with.
Just as we thought their wounds might be healing, we find damage has not been mitigated, but transferred. Now sovereign nations face huge debt mountains and liabilities that must be paid for – huge challenges in an environment where growth is drying up.
It is one thing to restructure a bank but quite another to restructure a country. At least a board of directors can generally agree on an appropriate course of action. For politicians, challenged by opposition parties and swayed by the electorate, things are less straightforward. Many suspect the US will be a textbook case in the run up to the November presidential elections, but, for now, the spotlight remains on Europe where the politicians' bluster continues.
Tiredness among investors has set in. How many more times is the euro going to hit the headlines? How many more bailouts and broken promises? How many more summits will there be to save the euro? I suppose the fatigue is due to the absence of a firm solution – good or bad. None of the wayward countries have been fixed, but neither has their fate been sealed outside the single currency.
This frustrating lack of clarity is what spooks the markets. Investors, at the mercy of the utterances of politicians, are understandably scared. Yet we are now at the stage where much of the bad news must be priced in – even a Greek exit. I am reminded of what happened in September 1992 when Britain left the Exchange Rate Mechanism. An initial market fall was very soon reversed. A resolution to the uncertainty meant the market not only bounced back, but continued rising strongly thereafter.
Most investors and asset managers have had plenty of time to reposition their portfolios. The markets have been largely stagnant. Having made their allocations to cash, fixed interest and equities, many are simply sitting on their hands waiting.
It seems that given the uncertain economic environment, portfolios are generally defensively positioned – perhaps too defensively.
Markets seem to be ignoring the bad news recently, and I think this is a promising sign. Company results too provide some reassurance. Despite the economic backdrop they have been quite good. Businesses, especially larger ones are also cash rich, though like investors they are hesitant to deploy their capital. With investors favouring traditional safe havens such as government bonds in the US, UK and Germany, yields have been driven down to levels not seen for 300 years.
It points to the fact that "risk" assets are better value. In fact, it turns the whole concept of risk upside-down. The resolution of problems in the eurozone could, for example, see southern Mediterranean debt soar and perceived safe havens such as gilts tumble. This could have knock-on consequences for corporate bonds too. Investors need to keep a close eye on what is a changeable situation and ensure they are aware of all the risks – not just the obvious ones such as chaos in Europe or a Chinese hard landing.
In a low-growth environment I still favour equity income funds such as Invesco Perpetual Income, Marlborough Multi Cap Income and J O Hambro Equity Income. As they provide a periodic, high level of income, at least you are paid to take risk and await a sustained market recovery. Investors shouldn't ignore more growth-orientated trusts either. Three UK funds that spring to mind are AXA Framlington UK Select Opportunities, Old Mutual UK Dynamic Equity and Liontrust Special Situations, all of which have first-class managers at the helm capable of extracting the best of any market surge.
You may well be suffering from risk fatigue, but don't assume the risks you fear will be the ones that will bite you. It may be investments that you consider safer will turn out to be the problem.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit www.h.l.co.uk/independent