"From here on the best asset class on a total return basis is the equity market," said Potter. "If you’re committed to your investments, then in the context of the next five to 10 years equities are clearly the best place to park your money." While some question the reasoning for the recent surge in equity markets, Potter thinks the fact they have performed so well on the back of so little good news bodes well for the days when Europe finally gets around to putting its house in order.
"If the market is still at this level when people come back from their holidays in September I think the first thing they’d be asking is how the hell did this happen?" he said.
"Equities have rallied strongly while bonds have given back some ground over the last week or so and all of this against a backdrop where Greece and Spain are still mired in the depths of uncertainty."
"All that we’ve had is a statement from Draghi saying that Europe will do whatever it takes. That’s the point from which everything has taken a positive tone and it’s all in the expectation of further policy initiatives, whatever they may be."
"It gives us cause for optimism that the market has responded so positively to this little whiff of good news. Once things really start to improve then we could see real sustained performance from equities."
One fund manager, who preferred not to be named, said: "We’ve waited a long time for a shift in allocation towards equities away from other instruments which have been dominant for many years and this may be the start of that."
"Volumes are lower over the summer, however, so it’s difficult to say at this point. It could be that what started out as short covering by hedge funds has become a self-fulfilling situation."
Short-term hopes are pinned on the European Central Bank’s next policy meeting in September. Potter said the FTSE could hit 6,000 if the current run of good news were to meet the high expectations that have grown up around it; however, he is doubtful this will be the case.
"I’m not going to hold my breath for that to happen. They always say buy the rumour and sell the fact, and this rally has had a high degree of expectation built into it," he said.
Instead, Potter believes recovery in Europe will be slow and incremental: "They’ll kick the can another few months down the road. It’s not going to be a cathartic, blockbuster fix – the problem is too widespread and endemic."
In that context, Potter thinks investors need to identify funds that are able to take advantage of opportunities where they arise, and be flexible enough to avoid the downside.
"You need to buy managers who are nimble enough to run with the hares and hunt with the hounds, who are willing to take profits on their investments and get out when they need to," he added.
Potter highlights JPM Global Consumer Trends as one fund that fits this bill. Managed by Peter Kirkman, it has returned 38.62 per cent to investors over five years, putting it in the second quartile of its Global sector.
Performance of fund vs sector over 5-yrs
Source: FE Analytics
Potter continued: "The fund has an excellent manager, who’s raised some cash on the market rise and is looking to put it back in."
"He’s putting the money into high-quality growth companies paying decent returns. It’s market Beta sensitive but it’s also giving you good global exposure – you’re looking at stocks in his portfolio which are on a P/E of just four or five, with cashflow yields in the double digits."
Potter thinks investors should also retain some cash as the year unfolds.
"We have cash at 9 to 10 per cent in our portfolios at the moment. You need to be prepared for some disappointment."
Robert Morgan, investment adviser at Hargreaves Lansdown, agrees.
He said: "Whatever your outlook, I really think cash should be part of your portfolio at the moment."
"It gives you optionality. You can debate how much all you like, and of course you’re going to lose out if the market runs away from you, but it’s a great comfort to have some cash, to be averaging in to your investments, and to have money for any opportunities which arise as you go along."