Flight to safety as IFAs turn to cash and bonds

Stock market volatility is prompting a flight to short-term safety as IFAs advise clients to invest in cash and bonds to avoid the recent massive swings in the FTSE-100, according to the Virgin Money Investor Intentions Index.

Cash and bonds are the top two sectors chosen by advisers for the next three months after a shift in sentiment away from emerging markets and UK shares which were the top choices in the first Virgin Money Investor Intentions Index.

The Index, which tracks the confidence of IFAs across the country in 10 different investment sectors on a quarterly basis as well as where they advised their clients to invest their money over the preceding quarter, reveals short-term confidence in equity investments has been shaken by recent market events and warnings of more gloomy economic news to come.

The FTSE's recent rollercoaster ride has seen it climb from 5,479 at the start of July to more than 5,529 by the middle of the month before falling back to 5,150 and then rising again to 5,569.20 by August 27th. However at the beginning of May this year it was 6,087.3.

Around 86 per cent of IFAs are advising clients to invest in cash over the next three months and 83 per cent are choosing bonds. UK shares have not completely fallen out of favour with 78 per cent choosing them. In the previous three months cash was chosen by 78 per cent of IFAs while bonds were chosen by 75 per cent and UK shares by 74 per cent.

The sectors that have taken the biggest hammering are property and commodities. Only 41 per cent of IFAs are choosing property for the next three months and 40 per cent picking commodities. In the previous index 50 per cent chose property and 52 per cent commodities.

Gold was the least popular investment sector in the last quarter, with only 29 per cent of IFAs saying they had advised their clients to invest in gold stocks.

However advisers remain optimistic in the ability of shares to deliver the best returns - 36 per cent say they feel most optimistic about emerging markets while 29 per cent chose UK shares. Around 11 per cent are not optimistic about any sectors.

The Virgin Money Investor Intentions Index tracks 10 sectors in total. These are: UK shares, European shares, green investments, cash, commodities, property, bonds, Far East, emerging markets and gold. The Index details advice over the last 3 months and investment intentions for the next quarter.

Scott Mowbray, spokesman at Virgin Money, said: "The shift to cash and bonds is a sign of the times with stock market volatility and almost daily doses of bad news hitting confidence in shares. It is clearly a case of safety first for advisers with clients' best interests at heart.

"Concerns about inflation are the dominant factor in the market with that worry outweighing fears about the UK economic slowdown tipping over into recession.

"Despite the short-term angst our research shows IFAs remain optimistic about the long-term outlook for UK and emerging market shares. The real damage has been done to property and commodities while other sectors such as green investments are holding up well."

The past quarter has seen a stream of negative economic news for the UK culminating in Consumer Price Inflation hitting 4.4 per cent for July - well above the two per cent target the Bank of England has to maintain. This has lead to speculation that the Bank may have to increase interest rates from their current five per cent with a potential risk to economic growth. The Bank is predicting growth of just 0.1 per cent in the first three months of 2009 compared to its previous forecast of one per cent and Governor Mervyn King has warned of a "chill in the economic air".

The Virgin Money Investor Intentions Index tracks both short-term and long-term trends and crucially it also measures IFAs' long-term confidence in various sectors.