Markets started well in January: global economic growth was robust, corporate profitability healthy and inflation under control, thanks largely to a 30 per cent fall in oil prices. Investor sentiment was buoyed by a series of actual or rumoured takeovers: Sainsbury's, Alliance Boots and Gallaher all came under the spotlight.
Then it all changed. Markets turned at the end of February: volatility rose and, for a few days, investors held their breath. The causes were variously promoted as problems in the US mortgage industry, profit-taking in China, Japanese interest rates and inauspicious comments about the US economy from Alan Greenspan, former chairman of the US Federal Reserve.
But the real culprit appears to have been simple risk aversion. The last three years have been good for UK investors. The FTSE All-Share index rose by 17.1 per cent a year over the three years ending December 2006. For many investors, the damage caused between 2000 and 2002 was repaired and some came to believe that the good times were set to continue.
Charity investors should be aware, however, that future returns are unlikely to reflect the highs of the recent past. The first quarter of 2007 ended in positive territory, and a number of stockmarket indices have since been testing new highs, but the outlook is less certain. Property has been the best-performing asset class in the UK for the past decade. Although IPD Monthly, the UK's property industry benchmark, returned 18.6 per cent a year over three years to December 2006, I believe returns are likely to be in single digits this year.
If volatility is to become a feature of markets, what can investors do? For most endowments and grant-giving charities, the events of February and March represent a bump in the road rather than a major junction. Diversification remains key and the appeal of other assets and commodities becomes more apparent in this environment. Equities, however, remain more attractively valued than bonds and, in the long run, should deliver a real return that helps charities to meet their commitments.
In the meantime, investors should hold tight. As Sinatra observed: "You're riding high in April, shot down in May, but I know I'm gonna change that tune, when I'm back on top, back on top in June."
- Mark Johnson is a director at BlackRock Investment Management.