Investors should ditch bonds and head for cash if they want a hedge against potentially volatile markets, a portfolio manager has claimed.
Marcus Brookes, head of the multi-manager team at Schroders, said if people were feeling cautious they could hedge their portfolios with gold or absolute return funds, but made a strong case for holding cash.
He said: "I would still say cash over bonds. If you look at the average of US, Japan, Germany and UK 10-year government bonds, it is below 1 per cent.
"This does not make sense in a world where you have okay economic growth and inflation is actually alright. I can see bonds just giving disappointing returns."
For diversifying a portfolio, he said it would be better to hold cash currently within a wider equity portfolio, and wait until bonds look more attractive before buying them back.
"Cash for me is in lieu of bonds", he added.
When it comes to equity markets, Mr Brookes said there were "one or two equity markets giving us cause for concern at the moment", but there was still a compelling case to have equity market exposure.
The one market which he had particular concerns about is the US market, which is trading now on a price to earnings ratio 25 per cent richer than it would be on average, he explained.
According to Mr Brookes, the US equity market has "a premium in it", as people had crowded into it over the past few years, seeking relative safety as Europe embarked on strong quantitative easing and emerging markets posed too many risks.
Moreover, people who wanted exposure to such companies as Facebook, NetFlix and Yahoo, which do not have international counterparts, had little choice but to get into the S&P 500.
However, the manager said investors trying to buy the US now might be coming in at the wrong end of a long bull market cycle.
Mr Brookes explained: "When you look at the S&P 500, this bull market has been going on since March 2009. The average of the past seven bull markets since World War 2 have risen around 160 per cent; this is up 320 per cent.
"So we are in the latter stages of something. It does not mean the US economy is going to roll over. But it does mean that if you think we are in the beginning of a bull market, well we are not."
When asked about whether investors could trust the valuations in equity markets, with some stocks seemingly trading on ridiculously high multiples, Mr Brookes said it was a sign of the times.
He commented: "I think you can trust them in that valuations are logical, when you look at what people's feelings about equity markets are, but I think a lot of valuations especially in the US, are backward-looking.
"For example, the US had been considered to be a safe place but actually Europe did not blow up and emerging markets are okay, so I can see why money might start flowing out of the US and into more attractive opportunities, such as Europe."