Investors likely to remain cautious of equities in 2008

The final quarter of 2007 saw net outflows out of general equity funds, while absolute return funds and asset allocation funds with medium equity exposure proved popular. This is a function of investors’ increased uncertainty towards the end of last year as a result of heightened fears around subprime issues, the US housing market and warnings of a possible recession.

These fears have intensified even further in the first quarter of 2008, as US investment banks are forced to write down further substantial losses, the US housing market continues to deteriorate and the recession in the US economy appears increasingly likely.

In this environment investors are likely to remain cautious towards equities and we envisage low equity asset allocation funds will attract attention going forward.

It is important for investors to remember that while the outlook for equities in the short term is not great, much of the bad news is already priced into equity markets worldwide, and they are not looking expensive.

In addition, while the consumer boom that has driven earnings and the stock market domestically for four years has slowed substantially, corporates are finally spending significantly and Government’s massive infrastructure spend over the next three to five years will continue to drive earnings and growth going forward.

So expect slower growth and slower markets, but don’t try to time the market. If you are uncertain, go for an asset allocation fund where an investment professional markets the decisions on your behalf. Don’t avoid equities; just manage your consumption thereof based on your risk profile.

By Jeremy Gardiner, director, Investec Asset Management