How to profit from falling stock markets

James Yardley of Chelsea Financial Services, a broker, said: “Stock markets have been choppy due to persistent inflation. Rising costs are devastating for markets as they force central banks to turn off the easy money we are all used to.

Yardley added that the environment was even more dangerous for investors as the bond market had been shaken by new government economic policies.

“It spooked the market and led to a massive sell-off in gilts. The additional stimulus is inflationary,” he said. “Why would you lock yourself into buying long-term gilts at 3% when the inflation is likely to be much higher?

The sell-off in UK bonds was partly mirrored in the US market, where the yield on 10-year Treasuries – widely regarded as the highest quality government debt – rose to 4% this week, adding to fears that global central banks will need to raise rates faster to fight inflation and prevent their currency from weakening further against the US dollar.

Mr Yardley said that environment was radically different and “in some ways worse” than in 2008, when government bonds performed well even as the stock market crashed.

However, for brave investors, there could be buying opportunities amid the market chaos. David Henry of wealth manager Quilter said the FTSE 250, which tracks London-listed mid-sized companies, could present a buying opportunity because the pound was so weak.

The British pound hit a record high against the US dollar this week, hitting $1.04. When the pound is weak, investors often buy the FTSE 100, London’s benchmark index, because its companies earn much of their income in US dollars. When converted back to sterling, it flatters their income and can increase dividends.

“Around 80% of FTSE 100 revenue comes from overseas,” Mr Henry said. “But many people don’t realize that 60% of FTSE 250 revenue also comes from overseas.

This index is trading at cheaper levels than the FTSE 100 and could be an attractive opportunity for investors with a good appetite for risk.

He recommended using a cheap tracking fund, such as the Vanguard FTSE 250 ETF, which charges just 0.11pc per year. He chose Mercantile Investment Trust as an actively managed alternative. Although it charges a higher annual fee of 1.2%, it has outperformed the ETF by 12 percentage points over 10 years with a gain of 49%.

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