Investors should stay diversified and “hold more risk assets than usual, and fewer government bonds” said Kevin Gardiner, Head of Investment Strategy, EMEA. The dangers that overshadowed capital markets in 2011 have not suddenly disappeared, but the positive developments that were visible at the end of the year have continued. The European Central Bank's decisive actions are visibly muting the risk of another banking crisis. Reports of the demise of the US consumer have again proven somewhat premature. Forward-looking data even in the UK and euro area have been less fragile than feared. As a result, the New Year rally in risk assets has some foundation, as noted by Kevin Gardiner in the February edition of Compass. Kevin said: “Of course, markets rarely move in a straight line for long. We still do not know exactly how large the losses on Greek government debt will be, and who will bear them. US politicians retain the ability to snatch economic defeat from the jaws of victory. Geopolitical tensions in and around the Middle East remain high. However, a significantly worse outcome than our ‘muddle through' scenario was, we think, priced into markets in 2011.” “Our advice to investors thus continues to be that they should stay diversified, and indeed hold more risk assets than usual, such as developed equities and high yield bonds, and fewer government bonds. This is not because we expect many governments to fail to honor their commitments, but simply because those bonds look expensive.” Compass also looks at how the price paid for an investment can make it difficult psychologically to make sound decisions about selling it and provides an update on three “alternative” asset classes - alternative trading strategies, realty and commodity futures.
