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It has been almost a year since American consumers finally fell to the global economic woes. The mortgage woes and belt tightening were long expected and certainly overdue, but the subsequent credit crunch pushed economies to the brink and equity fund managers to despair. The gloom has yet to lift.

It is hard to find fund managers who currently feel confident about equities. Patrick Armstrong, co-manager of Insight’s Diversified range, is quite blunt: “We simply don’t like equities,” he says.

That said, Mr Armstrong is far happier than this time last year when he disliked both equities and bonds, making it difficult to find any substantial assets to invest in. Yet the crunch has been good news for bond holders and completely turned around the moribund market in the last 12 months.

“A year ago, bonds were priced to perfection. So, of course, we had no exposure.” says Mr Armstrong.

Since then he has been buying up bonds from financial institutions, given the almost implicit guarantee that central banks around the world will not allow any major issuer to go under – as seen by the Bear Stearns and Northern Rock sagas.

Financial bonds now make up 15 per cent of Mr Armstrong’s low-risk portfolio and he is adding to the position on an almost daily basis. Bonds from AIG, Deutsche Postbank and Royal Bank of Scotland have been recently added to the pot. From a peak of cash plus 5 per cent in March, the portfolio is now yielding around cash plus 3-3.75 per cent, as close as bonds can get to equity returns of the last 100 years.

On the equities front, Mr Armstrong says market watchers and analysts are falling for mankind’s inbuilt, but wrongly placed, optimism. “Our species is terrible at forecasting. The most accurate forecasters have been shown in studies to be the clinically depressed.”

Not surprisingly, he dismisses double-digit growth forecasts as “bonkers” in the current climate.

Historically, economic growth of 2 per cent has resulted in zero-earnings growth. With expected growth figures way below that level, his own outlook is a downward move for equities for the time being. To that effect, Mr Armstrong is shorting US small caps even while some analysts predict 20 per cent earnings growth in the segment over the next year.

The Diversified team's negativity has not left it short of other opportunities however. Mr Armstrong is still a fervent believer in commodities such as natural gas and livestock. In property, he has been setting up swaps based on the IPD index that should offer a 30 per cent premium a year for the next three years. Such odds are undoubtedly a reflection of the further horrors that bricks and mortar property fund managers face, but are great news for flexible multi-asset managers.

Senior fixed income manager Craig Shute at London & Capital is also finding opportunities for his segment of the company’s absolute return portfolios.

He says: “The bond market is suffering from heightened volatility and we are playing it extremely cautiously. Capital preservation is right at the forefront of our thinking. Liquidity risk and inflation premiums have been priced back in for the first time in ages. The focus is on short-end, index-linked bonds. Although they are expensive, they still have value.”

Mr Shute believes the bond market has at least another year of ripples and shocks in store, which will lead to further volatility. He is countering by establishing long exposure to that volatility, and says while all market making has suffered in the crisis, there are still traded options available.

Picking high-yield bond opportunities remains fraught with danger. Default levels in Europe and the US have yet to rise significantly, but will always lag the general recessionary trend. Investment-grade, non-financial, BBB bonds remain better value.

Emerging markets are exposed to inflation risk, many central banks are running with negative real rates and the situation cannot be sustained. To that effect, Mr Shute is shortening emerging market durations.

His fixed income portfolios have so far missed their Libor plus 1 per cent and plus 2 per cent targets, but Mr Shute is confident they will hit the mark by the end of the year.

While multi-asset managers are surviving, long-only equity managers are struggling. As Colin Morton, manager of the Rensburg UK Equity Income fund says: “In relative terms, we have done well and are first quartile. The bad news is investors have still lost a lot of money.”

With the FTSE down 20 per cent and the Equity Income sector down 24 per cent, on average, overweight positions in utilities, tobacco and pharma stocks bolstered Mr Morton’s position. Nonetheless, the fund is still down 18 per cent.

He says: “This is a genuine bear market and it is absolutely impossible to run an equity income portfolio without losing money.”

Bright spots have included GlaxoSmithKline and Astra Zeneca, both of which have languished until recently, but the last six weeks have wiped most subsequent gains. Even glamour mining stocks have been hit. Rio Tinto has fallen from £71 to £49.

“Nobody wants to own equities now," adds Mr Morton. "The secret is to try and not make silly mistakes and not take any risks. Things will turn eventually.”

Investors should overcome their natural feelings and see today’s market as a buying opportunity, he argues, even though economic conditions will get worse in the short term. “Investors must be patient. Common sense and value do not count for much at the moment, even if stocks appear exceptionally cheap. But history has shown that these times are when you make the most money.”

Peter Lucas, global investment strategist at Ashburton, says the markets have already caught out his inbuilt optimism once this year. They may well do so again.

He says: “I am constantly looking for positives but underestimated the extent of the interaction between the credit crunch and high oil prices. In March, I felt confident Ben Bernanke could restore confidence in the financial sector, but then oil prices went up, as did European interest rates, which led to another loss of confidence and falling asset values.”

The key to any turnaround will be a lower oil price and thankfully brent crude is moving in the right direction – for the time being at least. Dramatic daily changes in share prices could also indicate that investors wanting to sell out of the market have probably already done so. Mr Lucas is watching sentiment surveys, which are bottoming at historically low levels, and looking for key reversal days on intraday trading. RBS recently bounced from £1.44 to £1.66 and similar moves could be of short-term significance.

But he warns: “Even my resolve has been tested. Investors may use an upswing as a chance to sell down equities and we could see prices relapse from a short recovery.”

There is no such negativity emanating from Godwin Tsui, chief investment officer at Close Investments. He has been busy convincing investors of the benefits of his protected funds in falling markets. Each subsequent fall in the FTSE is yet another feather in his cap.

While many funds are suffering substantial outflows, he says Close’s protected funds are stable and should see a pick up in inflows as investors return from their summer holidays and face up to the ravaged stock market.

He says: “Equities are going down and gilts and cash are being eroded by inflation. With protected funds, investors know the risk, how far the fund can fall and get the upside exposure. We expect inflows to pick up in August.”

Laura Mossman is features editor of Investment Adviser