Time to return to equity markets

09.06.2009Fears of a complete collapse of the world economy and investment markets have subsided. There continue to be challenges in the economy, but a return towards normalcy has slowly begun. Therefore, there are grounds for long-term investors to gradually shift from low-return money-market investments and deposits to investments with higher returns, that is, equities and corporate bonds.

Turnaround in sentiment

The beginning of the year was a painful path for investors; all investments involving risk fell like a stone as economic fears worsened. However, the world changed rapidly at the beginning of March. Risk appetite returned to investment markets, as confidence in the banking system strengthened and economic prospects stabilised. Now it seems that the rest of the year for the economy will be much better than feared.

Therefore, long-term investors should not wait any more. During the spring, many investors have believed the world will collapse and watched the rally in equity and bond prices from the sidelines. Evidence that the collapse can be avoided is now mounting day by day. The return on risk-free investments, such as deposits, will remain low. Therefore, other types of products must be included in the portfolios in order to achieve returns. It is advisable for long-term investors to shift their assets into equities and corporate bonds.

Equities at same levels as at the turn of the year

Equity prices have responded strongly to the improvement in economic prospects – prices have rallied as much as 30–50 percent from the bottom in less than three months. Even after the rally, equities have only roughly returned to the levels of the turn of the year, still remaining 40 percent below their highs in 2007.

A rapid and steep rise in the markets is often followed by a downward correction, and the rally of the past few months may not be an exception. However, the timing of the correction is difficult to pinpoint. On the other hand, its depth will be limited by the fact that many investors are waiting for a correction in order to buy equities. Hence, time may be too slow for those who wait for a decline, and gradual equity purchases may be a better option.

Let money grow

We do not expect a permanent steep appreciation in equities, but the worst is over in the equity markets. The markets are gradually returning to normalcy. The over-indebtedness accumulated at the beginning of the millennium will keep the performance of the economy and the investment markets more sluggish than in the past few years. However, the return on risk-free investments, such as deposits, is so low that long-term investors should focus on other markets and products in order to achieve returns.

Lippo Suominen
Investment Strategist
Strategic Investment Advice
Nordea Asset Management