Investment strategies for volatile markets

GLOBAL INVESTOR 3.07 Editorial — 05
Ulrich Körner
CEO Switzerland
Daniel Brupbacher
Head Multi Asset Class Solutions
Photos: Thomas Eugster
In the first eight months of 2007, we have already seen two substantial
bouts of volatility in global financial markets. Stock markets corrected
sharply in February and again in July and August, and bond
markets also saw sharp gyrations. We do not think this signals an
end to the bull market in equities that started in 2003. But we do
think it ushers in a period of significantly greater volatility, as markets
have to cope with higher interest rates, tighter supplies of resources
like energy, as well as profit growth below the stellar rates of recent
years. And bond markets look likely to enter a more difficult phase,
with yields no longer on a long-term downtrend, and credit conditions
no longer improving.
In short, the current economic and investment cycles are starting
to mature, just as we are seeing an increasing number of disruptions
from structural change caused by the emerging powers in Asia
and the implementation of new technologies. Against this backdrop,
we advise investors to carefully review how much market exposure
they want to carry in their portfolios and how much risk
exposure they want.
There are a number of ways to adjust the balance between risk
and reward in a portfolio, whether through standard diversification,
or by the use of the many other products and strategies now available
to investors, such as total return funds. These tools are especially
relevant in an environment of rising volatility. Drawing on the
lessons of a long historical perspective, as well as the range of
theory and empirical results available to financial analysts, this issue
of Global Investor examines how these tools can be used to help
investors benefit from long-term growth in the economy, while at
the same time controlling the risk of capital loss.