Markets rally on back of election result

10 May 2010

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.”

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