Q&A: Should I invest in equities?

I think this is just a bear market rally. How should I position my portfolio?

Mick Gilligan at Killik suggests that investors take their profits now if they believe it is a bear rally, by selling equities and moving into a combination of cash, absolute return funds and bond funds. But he also suggests buying into the rally if it loses 5 or 10 per cent from its high, as a lot of fund managers missed the initial rally and so may be keen to get back into the markets.

I don’t think this is a bear market rally. I am feeling gung-ho about the green shoots. So what stocks should I buy?

Gilligan says investors shouldn’t stick to one area of the market – they should include both cyclicals and defensives in their portfolios. He also thinks smaller companies could still outperform. In spite of a strong performance so far this year, he thinks they are still at significant discounts to many of the larger stocks in terms of absolute valuations.

Clive Beagles, fund manager at JO Hambro, suggests buying cyclical stocks that haven’t risen much yet so are still undervalued – for example travel company XL, or mining company suppliers such as Delta.

Ben Yearsley at Hargreaves Lansdown says bullish investors should buy managers with lots of cyclical stocks in their portfolios, such as Richard Buxton, who manages the Schroder UK Alpha Plus.

For those feeling particularly optimistic and willing to take extra risk, Gilligan suggests buying something on margin (borrowing money from your broker to buy stock), for example a CFD or a call option.

I have no idea what to do. Help!

Managers at Iveagh, who look after the Guinness family money, are reluctant to call the market either way. So they are gradually adding a little risk to the portfolio, buying credit, commodities – which perform well when demand stops contracting – and Asian equities. John Ricciardi, partner at Iveagh, favours Chinese stocks as they have enormous surpluses to put fiscal stimuli in place.

Investors could also dip a toe into the markets, but with protection. For example, they could take out stop losses on spread betting accounts, which prevent them from losing a certain amount. Or they could buy a structured product, which limits the gain they can make but also the loss. Matrix, for example, has a new product which pays 116 per cent of the upside and is underwritten by Goldman Sachs.

Yearsley says that cautious investors could opt for absolute return funds such as Cazenove UK Absolute Target or Blackrock UK Absolute Alpha. They could also pick more defensive managers, for example Neil Woodford’s Invesco Perpetual Income fund.