Markets rally on back of election result
The stockmarket rallied at the start of this week after plunging last week due to the General Election result and Greek debt crisis.
Over the weekend the EU announced an emergency $1 trillion debt package for Greece, while in the UK talks between the Conservatives and Liberal Democrats about a possible coalition helped settled nerves after Thursday’s election resulted in a hung parliament.
The FTSE100 fell 2.6% on Friday, but was up 232.4 points or 5% Monday morning. British Airways Plc, Rio Tinto Group and Royal Dutch Shell Plc led gains.
However experts say the continued uncertainty about the new government means the markets will be volatile for some time to come.
Gavin Oldham, chief executive of The Share Centre, says: “Markets really dislike uncertainty, and this result is about as uncertain as you can get. Shares are therefore likely to remain volatile for several days until a sense of direction emerges.
"Continuing worries about lack of measures to tackle the deficit will particularly hit the pound and bond markets. However, equities could benefit as companies look for export opportunities and higher overseas earnings, providing we see some stabilisation in the eurozone."
So how can investors protect themselves?
One way investors can limit their exposure to market volatility is to buy global firms and sell domestic ones. Around 70% of earnings from companies in the FTSE 100 are made overseas, so international events will have more bearing on markets than the hung parliament.
Experts suggest buying blue-chip firms that will provide a cushion against further falls in markets while also benefiting from a decline in the pound. This will makes their overseas earnings worth more in sterling.
Another tactic is to buy the dollar as sterling is likely to fall against the dollar. However, the pound is likely to hold its value against the euro as the eurozone crisis rumbles on.
Ryan Hughes, senior fund manager, Skandia Investment Group, says high volatility is something that just about all investors dread as it creates uncertainty and fear, which in turn often leads to irrational investment decisions.
“The tried and tested method of insulating against volatility is to ensure that your portfolio is sufficiently diversified across a number of different asset classes such as cash, bonds, equities and property,” he says.
“These assets have historically exhibited low correlation meaning they do not behave in the same manner to market events.
"In addition to diversification, there are more 'alternative' assets such as market neutral strategies and absolute return funds which have been designed to reduce volatility and can play an important role in someone's portfolio.”
Rebecca O'Keeffe, head of investment at Interactive Investor, says recent events mean the present time is an extremely tough period for private investors.
“Investors are having to contend with the fiscal crisis in Greece, the major fall in the US stockmarket, dramatic events in the commodities markets and the uncertainty caused by the UK election results,” she says, “Investors are generally sticking to what they know, with banks, such as Lloyds, RBS and Barclays, still proving popular.”
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.
Absolute return funds
Absolute return funds aim to deliver a positive (or ‘absolute’) return every year regardless of what happens in the stockmarket. Unlike traditional funds, they can take bets on shares falling, as well as rising. This is not to say they can’t fall in value; they do. However, over the years, they should have less volatile performance than traditional funds.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).