The Analyst: It's going to be a bumpy ride in 2008

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The Independent Online

We are getting close to the time when stock-market pundits will be asked for their forecasts for 2008. My first piece of advice for all of you is to take them all with a huge pinch of salt. The forecasts are usually wrong and, given the current uncertainty in the markets, they will be even less accurate than usual this year.

At the moment, we are witnessing a level of market volatility that I haven't seen for many years. Stock-market stability depends on there being a consensus about the scale of any problems; share prices can then be discounted appropriately. However, at the moment there are too many unanswerable questions so, as each new piece of data emerges, the market lurches either up or down.

The current $64m question (or perhaps that should be $640bn!) is whether the US economy will go into recession and drag the rest of the world with it, or whether the development of Asia and other emerging markets will keep global growth ticking over. There is no definitive answer to this, but let us look at some of the known facts.

The sub-prime mortgage problems in the United States have caused banks throughout the West to stop lending to each other, and also to cut back on their lending to you and me. Interest-rate cuts this year and/or early next year are likely, but that won't necessarily solve the problem.

If banks are too nervous to lend money, it doesn't really matter what the interest rate is you just can't get any credit.

We can be confident that Western economies will experience a slowdown, which must in turn affect company earnings. I am therefore not sure that the current earnings estimates are quite right.

I also expect further bad news to come out of financial stocks as a result of the sub-prime mortgage fallout. It is interesting to note that, although Barclays has made several statements reassuring the market that they are doing all right, RBS has remained suspiciously quiet.

I believe that interest rates will move down next year in the UK and US. This liquidity is likely to escape to emerging markets and fuel further growth there. At the moment, I feel the Asian markets are not in bubble territory, but it is possible that they could get there late next year. For the time being, however, this remains my favourite investment area.

Chinese growth figures are being dismissed by some analysts as heavily reliant on the US economy. However, China is far more robust than it was a few years ago and the country is industrialising at a phenomenal pace. They are spending a staggering $165bn on rail infrastructure alone over the next five years. Pardon the pun, but is this likely to be derailed? The answer is no, unless the government wants huge civil unrest, which clearly it does not especially with the Olympic Games in Beijing just around the corner.

As Henrietta Luk, who runs the Melchior Asian Opportunities Fund, has said to me, the key reasons for investing in Asia remain intact. Remember that many Asian economies are flush with cash, whereas the Western economies including the UK have in effect maxed out all their credit cards.

Ms Luk believes that the recent sell-offs in Asian markets are another great buying opportunity. The Melchior Asian Opportunities Fund remains one of my favourite funds investing in the region.

So how might investors position their portfolios in the current climate? It is always wise to keep a decent chunk of your wealth in cash and this becomes more important than ever in times of uncertainty. If you are investing in the UK, then stick to the top-quality fund managers. These include Ashton Bradbury (Old Mutual UK Select Mid Cap), Neil Woodford (Invesco Perpetual Income) and Ian McVeigh (Jupiter UK Growth).

The areas I believe investors should avoid are commercial property, which I have been negative on for years, and buy-to-let. If credit becomes even harder to come by, these are not the asset classes you want to be owning.

For those of you who aren't investing but have debt, this is definitely the time to be trying to pay some of it back. Please try not to blow your credit-card limit at Christmas it could make for a not-so-merry New Year. In my opinion, 2008 will be a much tougher year than 2007 has been, and you need to make sure you are prepared.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent

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