THE FTSE 100 plunged more than 200 points on Thursday, its biggest fall for five years, wiping £48 billion off shares and prompting some City experts to warn of an impending market crash.

In one of the worst days since the dotcom crash the Footsie dropped 3%. It finished the week down 6% at 6,215, wiping out all gains since March.

It wasn’t just larger UK companies that were hit. The FTSE 250 index of medium-sized firms posted its biggest points fall since records began. And America’s Dow Jones index slumped 311 points.

Some experts fear there is worse to come. Fund managers at the investment house New Star said last week investors should prepare for a 10% correction.

We answer your questions on the slump.

What sparked last week’s sell-off? It was all down to fears that higher global interest rates will lead to a “debt crunch” whereby companies and consumers who have borrowed heavily are forced to tighten their belts.

Low interest rates in recent years have made it dirt cheap for businesses to borrow money to take over rivals, which has fuelled an unprecedented boom in mergers and acquisitions.

But the era of cheap cash has come to an end around the world. Several companies had to pull debt-backed deals last week, including Cadbury’s and Boots, and there are already signs that higher borrowing costs are taking their toll on UK plc. Profit warnings are at their highest level since the end of the dotcom bubble in 2000, according to Ernst & Young.

Investors have also been casting their eyes nervously to the US, worried that reckless lending in the sub-prime mortgage market could drag down the economy. Last week it emerged that new-home purchases fell more than forecast in June.

Will it get worse? Fund managers at New Star said key warning signals had begun to flash red, pointing to a slump of at least 10%. Its multi-manager team is considering taking the highly unusual step of insuring against a market drop through a put option. These rise in value as the market falls, enabling the holder to make up for losses on an orthodox share portfolio.

Craig Heron at New Star said: “The signals are flagging a serious correction in the second half of the year, probably in October. We have been moving out of risk-ier assets in preparation.”

Morgan Stanley is even more bearish, predicting that stock markets could plummet 14% as early as next month, when Japanese interest rates are expected to go up. That would knock the Footsie back to 5,344, levels last seen in November 2005.

Is this the end of the bull market then?

The bull market that started in March 2003 has been one of the longest on record. Since then shares have soared 90%. David Schwartz, a stock-market historian, said: “This bull market began 53 months ago, but the average runs for just 25 months.”

However, most managers believe a setback will not last long. Even Heron said he would use a crash to buy back into shares on the cheap because he thinks the bull market has several more years to run.

Managers draw comfort from the fact that stock markets do not look overvalued. The FTSE 100 is trading on a price/earnings (p/e) ratio of 12 times, compared with 26 before the dotcom crash and a long-term average of 14.

Should I buy safe-haven bonds? Bond investors have seen poor returns over recent years: UK bonds are down 0.3% over the past year, according to Clerical Medical. Last week they rallied, though, as investors looked for safe havens. However, many experts believe it is still too early to move into bonds.

Jim Wood-Smith at Williams de Broe, a broker, said: “The outlook for bonds is still not great, with one exception: shorter-dated index-linked gilts look good value for higher-rate taxpayers.”

How can I protect myself from a serious downturn? The best way to reduce the risks is to make sure you have a balanced portfolio, which includes assets that perform differently from shares.

Gold is a classic safe haven, and Ross Norman of The Bullion Desk predicts it will reach its 27-year high of $850 this year, against $660 on Friday.

Advisers suggest investing in Merrill Lynch Gold & General or a gold exchange-traded fund (ETF) rather than buying direct.

Heron has been moving money into agricultural commodities. The recent extreme weather and the increasing use of biofuels have already helped to push up the price of crops but some experts think they could keep on rising for years.

The Schroder Alternative Solutions Agriculture fund, listed in Luxembourg, invests in agricultural commodities worldwide.

Should I quit shares altogether? It is generally not a good idea to quit equities altogether, as you risk missing out on a market rally when the correction is over.

Justin Modray at Bestinvest suggests that a medium-risk investor should have about 70% of his or her portfolio invested in equities, 15% in corporate bonds and 15% in commercial property, commodities and hedge funds.

Which are the best shares in turbulent times? In the UK, analysts recommend large companies with strong balance sheets and steady earnings. Citigroup recommends firms such as British American Tobacco, Scottish & Southern Energy and Tesco.

Some fund managers are keen on Asian countries such as Thailand, which is one of the cheapest markets globally following a period of political turmoil including a coup last September.

Heron said: “While stock markets elsewhere have been booming, Thailand has lagged. When you get a correction other markets are likely to see higher levels of selling, so Thailand could emerge relatively unscathed.”

Firms such as Fidelity, Crédit Agricole Asset Management and Franklin Templeton run dollar-denominated offshore funds that invest solely in Thailand.

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