Where To Now?

Asset allocation decisions are more trying than usual for UK investors right now. Fears of a slowdown in consumer spending, high oil prices and the strong position of Sterling suggest investors and the UK market could be in for a rocky ride.

Historically UK investors have long held a notable bias towards domestic equities with a heavy weighting to UK equities at the expense of other assets and regions often the norm.

This is despite diversification across the various asset classes being identified by experts, such as Paul Myners, as the vital part of investment, yet for ordinary investors diversification is likely to mean holding more stocks or maybe adding in an investment property.

Meanwhile the outlook for the UK economy is looking more uncertain by the day.

The governor of the Bank of England has expressed surprise at how well equities are faring despite the credit crisis.

An investment event held recently by Jersey-based fund manager Ashburton provided some possible answers.

The economist and contrarian Marc Faber gave a tour-de-force on the money printing policies of the Fed, the rise of Asia, particularly China and India, and the benefits of real assets, such as gold.

Vietnam was tipped for its huge potential, partly based on its very high literacy rates.

More generally Asian real estate, healthcare, commodities, tourism and financial services were all seen as having a positive outlook.

However Faber noted that with only Zimbabwe in recession, there is potential danger on the horizon that a synchronised global bust could develop, following current benign conditions.

He added that a further factor for investors to ponder is the rise of fiat currencies, without backing by gold or other precious metals.

Under lax monetary policy, Faber tipped gold as one way for investors to hold their purchasing power.

Among other views expressed, economist Anatole Kaletsky said Sterling’s amazing 15 year ride looked to be over, as three mainstays of the UK economy, the finance and banking sectors, along with the property market, are moving into reverse.

So for UK investors, the picture is looking a little fuzzy.

Investors should be looking to invest more widely, but there must be doubts over whether they will do so.

Low savings ratios and a low level of financial knowledge have produced a retail investment market that is fairly unsophisticated and risk-averse.

With the world economy becoming more complex, it is possible investors staying with what they know could miss out on many opportunities and suffer losses.

The collision between volatile and complex markets and the ordinary UK investor could be compelling but make for ugly viewing over the next year or so.

One hopes that things will turn out well, but there is every chance that weaknesses in both UK equities and the UK property market, coupled with a lack of familiarity with other possibilities, could prove a toxic mix for many ordinary investors.