Diversity key to volatile markets

Volatile global markets underline the need for diversification, the former chief investment officer of Fidelity Investments said yesterday.

Bruce Johnstone, the company's managing director, said he was concerned about the potential for instability in some of the world's key markets.

He gave as examples that the United States was highly priced, Japan's banking sector remained weak, Germany's competitiveness was vulnerable because of the strength of the mark, and Russia was unstable because of the political power vacuum.

Mr Johnstone said these developments highlighted the danger of concentrating a portfolio in a single sector or market.

Price-earnings ratios were cheap in countries such as Norway, Brazil and India, while Germany and France looked expensive.

'The US market is very highly priced,' he said.

'Normally there is 10 per cent at some stage every year - there has not been a 10 per cent correction in six years.

'There is also a bear market - a drop of more than 20 per cent - every five years.

'We have not had one for nine years. The dividend yield of 2 per cent is at a record low, while the fixed income spread is about 8 per cent.' Mr Johnstone said US investors gradually were beginning to realise they needed to diversify.

He would not speculate as to whether the expected downturn in US stock markets would be an incremental correction or a crash.

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