Expensive assets, nervous investors, little sense of market direction and volatility at historical lows make now an “especially tough time for investors”, according to European Wealth Group. 
Many have fled risk in recent months following the result of the EU referendum, forcing the price of defensive stocks higher, while bond prices have soared to new highs, leaving yields bordering in negative territory.
Monetary policy hasn’t helped, with the Federal Reserve so far unwilling to raise interest rates this year, while the Bank of England and European Central Bank continue their loose monetary policy measures.
In the UK, where the BoE lowered interest rates to an historic low of 25 basis points, government bonds are at record highs, while large defensive stocks have soared.
Performance of indices in 2016
Source: FE Analytics
The FTSE 100 has risen 12.1 per cent this year, despite a large drop in the aftermath of the Brexit vote, with high-quality large-cap multinationals including British American Tobacco and Diageo leading the way.
Trevor Greetham, head of multi-asset at Royal London Asset Management, said: “The UK’s vote to leave the European Union has rewarded sterling-based investors with exceptionally strong returns year to date.”
“Bonds surged on the back of easier monetary policy expectations at home and in the US while stocks also benefitted from an increase in the value of overseas earnings in sterling terms.”
However, these have risen to multiples that many view as untenable, and Richard Stammers –investment strategist at European Wealth – says everything now looks expensive.
“Normally one would hope to have an alternative to richly valued equities – but bonds are expensive too,” Stammers said. “That means it is very difficult to see obvious places to put your money. What felt like a cosy and optimistic consensus a few months ago is now starting to feel more like nervous inertia.”
“It is an especially tough time for investors who want to commit new money to the markets. At these levels it is hard to escape the feeling of buying at the top.”
The company said for this to change it would require some sort of shock – preferably a positive one – but that any potential driver for this looks unlikely.
As a result, more likely would be a negative event, which “could see some short sharp pain as investors move to a risk off position in a hurry”.
“This is why we have our cash position in place and a sharp sell-off would give us an entry point,” Stammers added.
One such event could be if the Fed raise interest rates. Focus turned to the central bank last week when Fed member Eric Rosengren suggested there could be a need to raise rates sooner rather than later.
Performance of index over one week
Source: FE Analytics
As the graph shows, the S&P 500 dropped 1.4 per cent on Friday, following Rosengren’s comments, but European Wealth warns that nothing has fundamentally changed except sentiment.
Royal London’s Greetham added: “Stocks have sold off over the last couple of days on concern that the Federal Reserve may raise interest rates at its 21 September meeting despite recent weakness in US business confidence.”
However, if the Fed does raise rates, Greetham says it could present a buying opportunity for investors.
“This may develop into a good buying opportunity. Stock markets are prone to shocks over the summer months and volatility tends to increase as we head into the autumn, so this correction is not wholly unexpected.”
He says the global economy is likely to continue to tick along, despite incremental rates from the Fed, adding that he is looking to buy dips if volatility picks up over the next month or so as it often does at this time of year.
“With policy loose and the world economy expanding we would look to buy dips in anticipation of stronger returns into the New Year,” he said.
Overall, Stammers says it is important for investors to diversify in the current market.
“Unless you expect a full blown meltdown – and we do not – then focusing on acquiring good quality assets at favourable prices remains the smart thing to do.”
One diversification strategy Stammers believes will help a portfolio is to maintain a decent weighting to gold.
Performance of index since the Fed’s first rate hike
Source: FE Analytics
The previously unloved commodity has rallied strongly since the Fed implemented its first interest rate hike since the global financial crisis in December, as a general flight to safety as a result of China’s woes and a general concern that central banks around the world are running out of fire power.
Indeed, the gold price is up some 40 per cent over that time but Stammers says it is a good asset class to hold in the current environment of elevated risk.
“Our strategy has been put in place to address these current uncertainties. Judicious diversification, including positions in gold and cash, means that we have the ability to ride over short term bumps without panicking,” Stammers said.