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Stock markets have enjoyed their best start to a year since 1989. AP Photo / Richard Drew
Stock markets have enjoyed their best start to a year since 1989. AP Photo / Richard Drew

Flight to safety gives way to a risk renaissance in the markets

Global investors are shifting from low-risk, low-return cash and bonds in search of higher income and growth in stocks.

The recent stock market bull run will have baffled anybody who thought the global economy was on its knees.

Stock markets enjoyed their best start to a year since 1989, pushing many global indices to five-year highs and giving hard-pressed investors something to celebrate at last.

The recent share price surge was largely driven by temporary factors and investors should expect it to slow in the spring, says Russ Koesterich, the chief investment strategist at the fund manager BlackRock.

The first factor was sheer relief that squabbling politicians in the United States had struck a last-minute deal to prevent the economy falling over a "fiscal cliff" at the end of last year. "Then there is the so-called January effect, a modest historical tendency for stocks to advance in the first month of the year," he says.

Mr Koesterich expects the rally to founder on renewed fears over the US debt and a euro-zone split. "There isn't much bad news priced into the market right now, so any negative shock could drive markets lower."

But as the global economy gradually finds its feet again, the long-term investment outlook is promising, and riskier assets such as stocks and shares should reap the benefit, says Keith Skeoch, the chief executive at Standard Life Investments. "History and common sense suggest the best rewards are unlikely to come from safe-haven assets such as bonds, where prices are still close to 100-year highs."

Some call it the great rotation, which will see investors shift out of low-risk, low-return cash and bonds, in search of the higher income and growth that stock markets currently offer. With Wall Street leading the recent charge, US stocks no longer look that cheap, and there may be better value elsewhere.

After several years in the doldrums, emerging markets such as China and India should roar back into form, says Mike Kerley, fund manager at Henderson Far East Income. "We are positive on the outlook for Asian equities, where valuations remain below their long-time averages. In China, economic data suggests growth will be positive, which will support the region as a whole."

If tempted, you should spread the risk of investing in developing nations by putting your money into a mutual fund. First State Global Emerging Market Leaders and Aberdeen Emerging Markets have both performed strongly lately, growing 56 per cent and 48 per cent respectively over three years, according to figures from Trustnetoffshore.com.

Bolder investors might also consider frontier markets, many of them in the Middle East, which are following the trail blazed by Brazil, Russia, India and China.

The mutual fund Aberdeen Global Frontier Markets invests in a spread of countries, including Sri Lanka, Nigeria, Kenya, Oman, Qatar, South Africa, Egypt and Jordan, and grew 30 per cent in the past year alone.

Europe shrugged off the single currency crisis to outperform almost every other global market last year, and it still has a lot to offer investors, says Rory Bateman, the head of European equities at the fund manager Schroders. "It houses some of the best companies in the world, all too eager to take advantage of demand growth across global markets."

Better still, the euro-zone crisis has driven share valuations to near historic lows. "There are plentiful opportunities to invest in attractively-valued, unique, global European businesses," he says.

The mutual funds Allianz Euroland Equity Growth, Henderson European and Invesco Continental European Equity all returned about 20 per cent in the past year.

So why are stock markets so buoyant? One reason is that markets reflect where investors think the economy will be in the next nine to 12 months, rather than today. We should all hope they are heralding a global rebound. Easy monetary policy has played a huge role, as the US Federal Reserve and other central banks print more virtual money to get their economies motoring again.

All that newly minted money has to find a home, and given the near-zero returns on cash and bonds, stock markets have won by default.

Commodity and energy stocks could be the next to benefit, says Neil Gregson, a fund manager of the JPM Natural Resources Fund. "After two difficult years, we believe the sector is poised for a recovery. China's recent pick-up in activity has begun to flow through to demand and this should support commodity pricing."

You could buy a mutual fund investing in a mix of commodity stocks, such as BlackRock Mining Opportunities or JP Morgan Natural Global Resources, or if you're feeling brave, an exchange-traded fund (ETF) investing in individual commodities. Mr Gregson says copper, iron ore, mineral sands, gold, oil and gas are most likely to outperform.

If you believe in the next great bull market, don't hang around waiting for the perfect time to invest, says James Thomas, the regional director at Acuma Wealth Management in Dubai. "There is only one way to prepare and that is to start buying stocks and shares now. If you keep waiting for the perfect moment, you can miss a great deal of performance."

He suggests you invest in a mutual fund offering a spread of global stocks, such as Schroder Global Diversified Growth and JPMorgan Global Balanced Fund, which both returned more than 20 per cent over the past three years. "These are well-diversified funds that invest across different regions and sectors, offering good returns while limiting downside risk."

Or you could buy a fund of funds, where a manager invests in a selection of "best of breed" funds covering different countries, sectors and asset classes. Thomas recommends Skandia Investment Group's fund of funds range.

More experienced investors who are happy to buy individual company stocks should consider high-growth, cyclical businesses. This could mean the global miners BHP Billiton and Rio Tinto, the oil giants Exxon and Royal Dutch Shell, or the car manufacturers BMW and Volkswagen.

Investors should not throw all of their money into riskier assets, says Thomas Connolly, head of asset management of Middle East and Africa at BNY Mellon. "I would maintain exposure to US equities and global equities, but balance this by investing in emerging market government debt and corporate bonds."

Even if we are heading for the next great bull market, don't expect to get rich overnight. You should only invest money you will not need for at least five to 10 years, to help you overcome short-term volatility.

The next great bull market may be on its way, but there is likely to be plenty of volatility in between.


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