Consider the global picture before allocating

That said, it is rarely a surprise when market forecasts turn out to be wrong. It is very difficult to get these things right on a consistent basis, because there is really very little anyone can know about the future. Therefore, most predictions are actually based on investors’ most recent experience of events.

Therefore investment decision making should avoid forecasting and focus instead on what valuations today are signalling about how attractive different assets may be in the current environment.

This process can be more difficult than it sounds. The temptation to try to forecast markets may exert a powerful emotional pull on investors. It can be very uncomfortable to admit that we do not know what the future has in store.

The best chance we can give ourselves of navigating such uncertainty is through disciplined adherence to an investment process that focuses on the facts.

When you consider the value on offer across the global investment landscape today, the immediate question is, with real cash rates negative, why would anyone still be happy to hold cash, when it costs them money to do so?

Some real bond yields, even at the long end, are also very low nominal, or even negative real. Yet even today there is still huge demand for perceived ‘safe haven’ government bonds. Even credit yields are not particul­arly attractive relative to the historical norms.

In fact, in developed markets today, only selected equities are offering attractive real yields. Even though equities have performed well over the past couple of years, valuations in many regional equity markets remain attractive, with real yields still higher than historical trends – and consensus forecasts suggest they should be.

The global fundamental picture today points to continued gradual recovery, albeit with much regional dispersion, rather than another likely recession.

Trends in terms of profits and growth are positive in most places, while global policy remains largely very accommodative, and the recent collapse of the oil price could provide a very meaningful boost to growth.

Therefore, a central observation in terms of strategic positioning at the moment is that equities are currently being offered at a significant discount, at a time when the global economy is actually doing just fine.

This situation is the result of risk aversion, short-termism and a lack of willingness to wait for opportunities to pay-off over a medium-term time horizon. The reason for the ongoing distortion in risk premiums is down to behavioural factors.

Investors continue to struggle with the mental scarring of the 2008 financial crisis, which is causing them to demand too much compensation to hold so-called ‘risk assets’. Macro uncertainty persists, and over the past 12 months or so, a notable shift in investor sentiment has been observed.

While the facts about the global economic outlook have been broadly improving, investors still seem to be struggling to accept that a well-seated recovery is indeed under way.

This means, even while maintaining a positive economic outlook, a considerable degree of volatility should be expected across financial markets in the period ahead.

One thing investors can be fairly certain of is that they will be surprised this year – most likely by factors that no-one has yet even thought about. However, short-term volatility should not be confused with genuine risk, and may actually present some compelling investment opportunities.

Dave Fishwick is head of the multi asset team at M&G

KEY FIGURES

25.99%

Rise in the S&P 500 index in the 12 months to March 4 2015

$45.19

Price per barrel of Brent crude at its low point on January 13 2015

1.86%

Yield from UK 10-year government bond as of March 4 2015

9.68%

Yield from Greek 10-year government bond as of March 4 2015