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Equities: worth buying, or should you take your profits?

19 June 2015, Wealtheon

In recent months, the question has often been asked as to whether it still makes any sense to invest in equities and bonds. With a possible Grexit just around the corner we are likely to see a market correction. With rising interest rates, bonds are still yielding less – or nothing at all. But there is no real alternative! Nervousness among investors is clearly on the rise. So it is time to give investors who rely on gut feeling a more fundamental analysis.

At the moment, we are ‘neutral’ on equities. This is because many economic indicators have stopped rising and have taken on more a sideways or even downwards pattern. In the past few months, the Morgan Stanley world share index has also moved sideways, which indicates that investors – after 2½ great years on the markets – are currently adopting a more wait-and-see attitude. The reason for this undoubtedly lies with the still lacklustre economic figures from around the world, unrest surrounding Greece, uncertainty regarding the economic data for the second quarter of 2015 that will be published at the beginning of July – and the simple fact that there are lower levels of trading in equities during the summer months (lower market volumes), with higher average market volatility as a result.

You have certainly already read or heard that the historically low interest rates that persist in the euro zone – and even in the USA – mean that the expected returns on equities will be higher than on bonds or savings accounts. In fact they are likely to remain that way for some time to come, until interest rate levels head back towards the 4% mark again. Add to that the economic recovery now underway in the euro zone and Japan, stable growth in the USA and India and continued attractive growth in China, then things are hopeful for 2/3 of the world’s economy – and hence also for equities. If these elements lead to a resumption in company profits, then the value of shares will fall again, negating any talk of equities being overvalued.

For the time being, many investors are fearful that there is a serious fall in equity prices on the way, likely to result in major losses. The reason for this is simple: in the past, (the managers of) these investors didn’t have to sell any equities to protect their portfolios, so why would they suddenly start to do so now. Experience tells us that the strategy of actually reducing equities in less good times is a good one. And vice versa. But that requires the necessary vision and decision-making skills, which is not something granted to everyone.

So the weeks ahead will be very interesting again and possibly this summer some serious buying opportunities may be created that provide a foundation for handsome returns in the future. I wish you a very pleasant holiday – but remember to keep one eye on the market: things can move quickly!

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