Investment Strategy and the Economy
Derby District & Law Society (D& DLS) magazine – May 2010
Investment Strategy and the Economy
In our last two articles we detailed the main asset classes available for investment and their characteristics. Whilst a spread of different asset classes helps to diversify a portfolio, changes in the economic environment will affect each asset class differently.
Traditionally the market has moved through four different stages in each economic cycle, with different asset classes offering value at different stages. Please note that the below details regarding these ‘four stages of the cycle’ are generalisations.
The phase we have recently been in is one of recovery where the rate of growth starts to move above the average. Consumer Discretionary stocks, Telecoms, Tech and Basic materials start to do well in this period, due to their cyclical growth qualities. During this period you would want to be overweight in Equities generally.
The next phase is usually overheat where the rate of inflation rises. Industrials start to do well in this period, due to their cyclical value qualities and you would want to start to be overweight in Commodities and Oil and Gas.
The next phase is stagflation, or high inflation and low or negative growth. Early in this phase Oil and Gas companies tend to do well and Utilities usually perform well throughout the period, as due to their intrinsic value they have a defensive nature. During this period it also helps to be overweight in cash.
The final phase is reflation where the rate of inflation starts to fall. Pharma and Staples stocks start to do well in this period, due to their defensive growth qualities. Traditionally financials would also recover in this period as well, however, due to the extraordinary problems that they have had it might be different in the future. During this period it also helps to be overweight in Fixed Interest Investments.
The problem is knowing which phase you are in and how long and extreme each part of the cycle will be. Most experts agree we have been in the recovery phase, but are concerned that this has been stimulated by the Government rather than real economic recovery. The Government intervention might distort the usual phases described above. Timing this to perfection is only possible in very general terms and more experts get this wrong than get it right.
Different Approaches to Investing Money
As previously noted, the basic premise of investing is that over the long term a balanced investment portfolio will provide income and capital growth in excess of that available from deposits and that over a lifetime the portfolio will keep pace with inflation. However, the markets are heavily driven by sentiment, resulting in them being overpriced and inflated during the 1990’s and possibly under priced in the early part of 2003 and 2009.
There are different investment strategies that some investors use based on the above observations regarding the economic cycle and I will detail these in my next article, along with the main benefits and drawbacks of each.
A sensible overall plan
Professional Financial Centre (East Midlands) Ltd has successfully helped many clients to put a sensible financial plan into place that will last them for the rest of their lives. When looking at the huge choice of investments available we are able to prove that we only have your interests at heart. We do not have any vested interest in choosing one particular product or course of action over another. As changes happen, we review our clients’ plans, adjusting them to meet changing economic circumstances and family needs. If you want to challenge us to do the same for you or your clients, you will not be disappointed. If you simply want a second opinion, our view on your existing holdings, or have a general query about financial matters, please call us.
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