Investors are in for a long ride, so wear a seatbelt

May 2 2007 By Andrew Miller, The Journal

In the middle of April, the FTSE 100 hit a six-year high. Now, you might think there was nothing particularly remarkable about this. After all, the FTSE rose to one six-year high after another during February, and April's new peak wasn't that much loftier than the previous one.

But when you consider that February's last high was followed by the biggest one-week fall since the start of the current bull market, it is pretty surprising just how fast markets have bounced back.

The story is the same in the US, where the Dow Jones actually reached an all-time high last month. Europe has also recovered well. And the best performers of all have been the riskier markets in emerging economies, particularly China. Investors seem as keen to jump on the gravy train as they were before March's setback.

The question now is whether the bounce is justified. After all, the US economy is looking less than healthy, with a shaky housing market and falling consumer confidence. And in the UK, inflation has crept up despite the Bank of England's best efforts.

Have markets got even further to go - or are the bulls too brave for their own good?

We think that it will pay to be cautious. Although we think the global economy will expand gently this year, markets are still unpredictable.

That isn't to say you shouldn't invest at all; equities are good value at the moment compared with bonds. But we'd look for countries that are more resilient to swings in sentiment. Top of our list is the UK.

This is because the UK is a defensive market, less dependent on cyclical consumer spending than most, particularly its larger companies.

The European market has done well lately, but we have a neutral view on it overall. As we mentioned in this column recently, Germany in particular is powering ahead. Although Spain has recently been hit by housing-market trouble, there are signs of recovery in France. But we think the strength of the euro will affect returns.

Until recently we were fans of the Japanese market, and we still think there's a good case for investing in Japan long-term. But we would be cautious over the next six months. The yen will hurt profits if it strengthens against the dollar, and investors are already concerned that the summer elections could bring political upheaval.

The American economy is deeply uncertain at the moment, with investors watching every tremor of the housing market. And we'd steer well clear of most emerging markets, which will be most vulnerable to any setbacks in the global economy - in March's sudden fall, China was the leader of the pack.

So, while global markets reach one record high after another, we think it will pay to go along for the ride, but wear a seatbelt. And although the FTSE 100 is now heading merrily back towards its all-time peak of 1999, we still think the UK is one of the better places to put your money.

Andrew Miller is regional centre head of Gerrard Investment Management, a part of Barclays Wealth.