Why history may be about to repeat itself

Having suffered for nearly four years from falling company profits, deflation, global recession, terrorism and war, it is inevitable that the majority of investors are gripped by uncertainty and nervousness.

However, with the end of the tax year looming, investors who have held back from buying their ISAs may now be encouraged by the early signs of politicians committing themselves to finding a resolution to the global debt crisis.

The direct comparisons and lessons that can be drawn with past events may allay some of these fears even further.

In the last two decades, the biggest gains were made by those who invested at the start of the two main recovery periods, in 1992 and 2003. In both cases these years signalled the start of a sustained bull run.

The parity between events during and after recessions in 1990 and 2001 were uncanny; it seems history may be about to repeat itself.

With negative equity returns and massive equity market volatility, we have exactly the same environment as we did during those periods.

Indeed, some of the events over the past 18 months that have caused this volatility boast similarities to what happened in the early 1990s and 2000s.

In both cases, markets factored in worst-case scenarios for the Gulf War and the war with Afghanistan, rather like they have done with the Middle East crisis. Rising unemployment and a hike in the oil price are also consistent over all three periods.

While there are, of course, differences in detail, today’s fundamental indicators are similar to those that preceded the two bull runs.

Valuations are cheap, backed by the aggressive monetary policy of the US, UK and continental Europe. This has yet to ease the effects of recession and assisted recovery, although recent news indicates that a resolution to the debt crisis will come sooner rather than later.

With prices where they are, now is a time to consider investing. Otherwise, investors face missing out on the kind of returns we saw in the mid-1990s and 2000s.

It is important to remember, however, that both of these periods taught us that it is unwise to choose a selection of companies and hope for the best. Stock selection will remain the key to success, no matter how strong the bull run is.

While there are a phenomenal amount of funds to select from, there are only a select few that offer true active management, with managers whose skill and expertise are in stock picking rather than blindly following benchmarks. Such fund managers will provide investors with the diversity and understanding of companies in a recovery market.

Nelson highlights M&G Recovery, Schroder UK Alpha Plus and Standard Life UK Equity Unconstrained as her pick of the three best active managed funds on the market at present.