Timing key for scheme move back to risky assets

The fund management firm's monthly investment view examined a variety of factors that needed to come together before investors would see the end of the equity bear market.

These included effective monetary, fiscal and regulatory policies, stabilisation in earnings estimates and the housing market, and sufficient recapitalisation of the financial system.

SLI head of global strategy Andrew Milligan said: "Financial markets are expected to remain volatile for some time, as they take on board two sets of issues, the credit crisis and the economic crisis.

"Government actions in September-November have gone a long way towards stabilising the largest financial institutions, such as Royal Bank of Scotland or Citigroup. Nevertheless, the full scale of potential losses facing the financial sector in the US, the UK and Europe remains a major hurdle."

But he said the stream of recent bad news and uncertainty about the future had also created opportunities for investors.

Milligan explained: "The net result of this stream of bad economic news, and uncertainty about the policy outlook, has been the creation of long term value across a range of asset classes; examples include investment grade corporate bonds, inflation linked debt, or parts of the stock market."

He added: "Those investors looking for yield will need to examine investment grade corporate bonds, high dividend paying equities with solid cash flows, and government bond markets where longer dated bonds will prove to have yields somewhat higher than bank rates."

Despite this, Milligan said there were still risks ahead, in terms of policy mistakes, deflation becoming entrenched, or further banking sector problems - and said investors needed to time their move back into riskier assets.

He explained: "Our house view remains defensively positioned into the New Year, awaiting positive signals from a series of valuation, policy and economic triggers before moving back into riskier assets."