The Best Strategies To Follow In Choppy Stock Markets

The Best Strategies To Follow In Choppy Stock Markets

If you follow the right strategy you could even beat the markets. Here we highlight five of the best strategies to follow in choppy stock markets.

1 Don’t fight the Fed


Analysts are keeping a close eye on America’s Federal Reserve Bank because, when it slashes interest rates, global stock markets tend to rally. With further cuts in US rates expected, possibly this week, investment bank Morgan Stanley is advising investors to stick with shares for at least another year.


Graham Secker at Morgan Stanley said: “There is no need to sell until the next Fed rate hike, which we don’t expect until 2009. Our US economists expect two more 25-basis-point cuts by the Fed, one this quarter, one next.”

In 14 out of the 16 occasions since 1972, US rate cuts have been positive for markets, according to Morgan Stanley. On average, markets rose 17% in the period between the first cut and the first hike, the exceptions being 2001 after the dotcom bust and 1987 following the Black Monday market crash.

The FTSE 100 has surged 8% since the Fed last cut rates by 50 basis points in September. If the market follows form, this means there is another 9% rise to come before it peaks.

You could beat that by focusing on investments that traditionally rally as rates fall globally. Stephen Whittaker at New Star Asset Management is backing rate-sensitive sectors such as banks, retailers and travel and leisure. Stocks he holds in his portfolio include airline operator British Airways, because travel stocks tend to perform well when rates head down, and the retailer Halfords.

But when the cycle turns and rates start to go up, it could be time to take profits. The markets fell an average 5% after the first cut.

2 Go international


The UK economy is facing one of its most severe challenges for decades, according to the Bank of England. The banking system looks vulnerable following the run on Northern Rock, the commercial-property market is struggling and higher mortgage costs are eating into household finances.

However, investors can ride out economic troubles at home by focusing on UK companies that make most of their profits overseas. Over the past six months the best performing sectors have been oil and gas, mining and mobile telecoms, with returns of 20%, 35% and 44% respectively. They all make most of their money internationally, while domestically focused businesses such as real estate, retailers and household goods have suffered. They are down 29%, 13% and 14%.
Parkes said: “Over the past few months, the sectors that have done badly have been those with domestic exposure, and those with international exposure have been performing well. This trend will continue if, as our economists expect, there are risks to the UK economy and consumer spending.”

Jeremy Batstone-Carr at stockbroker Charles Stanley highlights drink companies like SAB Miller and Diageo, technology firms such as Autonomy and Sage and telecoms giant Vodafone. They should also get a boost if the pound weakens as rates fall, because their international profits will be worth more in sterling.

Investors can also get exposure through funds such as Artemis Income and Merrill Lynch UK Special Situations.

3 Supersize your portfolio


Some of Britain’s best investors have been using the market turmoil as an opportunity to pick up large firms at bargain prices. Big businesses that generate plenty of cash and pay good dividends have a better chance of withstanding further turbulence.

While the FTSE 100 has risen 3% over the past six months and 7% so far this year, smaller firms are having a harder time. The FTSE 250, which covers the next biggest firms, has lost 3% of its value over six months, and is up just 3% this year.

This reverses a trend that has held sway since the turn of the century, which has seen blue chips lag their smaller rivals – by 57% in the past seven years, according to research from Lehman Brothers, an investment bank.

Nick Raynor at The Share Centre, a stockbroker, thinks mega-caps such as Glaxo Smith Kline, Tesco and Vodafone will beat the market. If you prefer a fund, Ben Yearsley at Hargreaves Lansdown, an adviser, highlights Schroder UK Alpha Plus and Psigma Income.

4 Get in at the bottom


One of the benefits of a turbulent market is that good companies are sold off indiscriminately, offering savvy investors the chance to pick up some bargains. And one of the best ways to spot a good-value share is to look for stocks with a sound business and high dividend yield (dividend income as a portion of the price). This is the kind of strategy employed by some of the country’s best fund managers, including Neil Woodford of Invesco Perpetual.


Buying shares paying high dividends was one of the most successful approaches in the bear market following the dotcom bust, according to research by Digital Look, a financial website. It returned 10% between December 2001 and March 2003. During the same period, the FTSE All-Share slid 28%.

The strategy also pays dividends over the longer term: over five years it has returned 128%, more than doubling your money.

However, there is no point buying a high-dividend payer if it can’t continue to provide bumper payouts. Many fund managers suggest you steer clear of banks. They pay high dividends but continued turmoil in the financial markets could force dividend cuts.

Analysts suggest you should buy stocks with an average dividend yield of 3% over the previous four years, and also with dividend cover of at least two. This means they could pay the dividend twice over.

Ideally, a share should also be undervalued by the markets but still growing fast. To find one, use the price/earnings growth, or Peg, factor. A Peg below 0.75 is a good sign because it shows the firm’s growth is not overrated by the market: a Peg above this suggests it is overvalued. All this information can be found on financial websites such as digital look.com, advfn,com and hemscott.com.

Stocks that now meet both criteria include insurers Aviva and Legal & General, car firm Inchcape and Northumbrian Water. If you want a fund to do the legwork for you, advisers recommend Invesco Perpetual High Income.

5 Follow the crowd


Momentum investing, where you buy shares that have been performing well, may seem at odds with buying “value” shares that have been unfairly punished in a market sell-off. But it can be a great short-term strategy in a “mature” bull market as shares continue to do well simply because people believe they will.


Investors Chronicle, a financial magazine, used momentum to select shares in the FTSE 350 from December 1997 to March 2004. It bought the 10 shares that had performed best, relative to their 60-day average over the previous three months. After three months the profits, or losses, were reinvested in the next batch of top 10 shares. It returned 418% over the period while the market generated 15%.

You should trade every three to six months as shares can lose momentum after a year.