The financial crisis of 2008 made it startlingly clear how interdependent the world economies had become. It seemed hardly possible that the default of relatively few mortgage borrowers in the US could precipitate such a serious ‘crunch’ in international lending, but the financial instruments used to repackage the risks of these distant lending decisions meant that investors around the globe lost heavily. It seemed to illustrate the maxim “when Wall Street sneezes the rest of the world catches a cold”. Now however, many believe that we should worry more about China’s wellbeing, so crucial is demand from the emerging economies felt to be to global recovery.
Investing within the FTSE 100 won’t shield you from international developments as the firms making up this index are vast multi-nationals, with fully two thirds of their earnings gained overseas. Despite the economic doom and gloom, many of them are doing rather nicely, because global diversification protects them from the woes of the UK economy due to factors such as exposure to emerging markets and currency fluctuations. Falls in investor confidence tend to be reflected wholesale across stock market indices when in fact the balance sheets of the constituent companies are often in good shape. They can react far more swiftly to adverse economic news than governments can dream of doing, adjusting their strategy by, for example, rapidly cutting costs. Fund managers look carefully at ‘fundamentals’, seeking value from a blend of under-appreciated stocks rather than relying heavily on the fortunes of just a few companies. At this precarious stage of the recovery they may also focus on a company’s exposure to emerging markets, or evidence of healthy cash-flow or perhaps a continuing programme of research and development which will benefit them as the recovery strengthens.
With returns from cash so low, investors are increasingly looking to shares for enhanced returns. From the vast universe of available funds, your financial adviser will recommend those which correctly reflect your attitude to risk and the ‘winner’ funds in their field. It is important to take a long-term view when investing in equities and equally important to monitor your funds regularly. Advisory service Bestinvest recently calculated that, astonishingly, £14.25bn of investor cash is currently invested in ‘dog’ funds (those which have underperformed their benchmarks by 10% every year for the last three years). Some of these may have been yesterday’s star performers – this is why it is so important to undertake regular reviews with your Financial Adviser.