Stock and commodity markets suffered another rocky week as fears grew that the bank bailout would not stave off a recession.

However, there is a glimmer of hope: analysts believe inflation at a 16-year high of 5.2% will soon fall, giving central banks room to slash interest rates.

“There’s an old adage that says the markets can stop panicking when the authorities start panicking,” said Trevor Greetham at fund manager Fidelity.

“Having been stuck in ‘stagflation’ since December 2007, our investment clock model, which we use to help time our decisions, has moved into ‘reflation’ this month as falling inflation pressures have opened the way to global rate cuts.”

Jeremy Batstone-Carr of broker Charles Stanley agrees. “We are at a crucial turning point — ultra-high volatility in financial markets is an indicator of a sea-change of investment strategy,” he said. “The leaders as we went into this phase will not be leaders when we get to the other side. “This includes emerging markets, residential property and mining.”

In fact, Greetham has moved from emerging markets to more developed ones such as America as well as increasing holdings in healthcare and global consumer stocks, which have lagged since 2004. “Consumer stocks tend to underperform during a boom and outperform as interest rates fall and consumers’ discretionary spending rises,” he said.

BONDS

Falling interest rates usually mean a better outlook for bonds. This is because they pay a fixed rate of interest, which becomes more attractive as rates fall.

John Pattullo, co-manager of the Henderson Strategic Bond and Henderson Preference & Bond funds, said: “We think it is ‘bonds o’clock’ because of the stage in the cycle that we’ve reached.”

If, as Pattullo expects, we see Bank rate at 3% by the end of next year, investors have a great opportunity to lock into current bond fund yields of 8%.

Brian Dennehy of the adviser Dennehy Weller said: “It would not be a surprise to see double-digit returns on bond funds during 2009.”

However, some experts are not so sure. Theo Zemek at Axa Investment Managers said: “Chancellor Darling had predicted a £36 billion borrowing requirement for this year and that could go up to £100 billion. Greater supply means a weaker market. Longer-dated bonds look poor value, particularly at this level of inflation.”

HEALTHCARE

Greetham has been moving into healthcare and biotech, a traditional defensive sector with stable earnings.

It is down only 1.4% over the past three months, with pharmaceutical groups Astra Zeneca up 4% and Glaxo Smith Kline down 2%.

However, some analysts fear the expiry of patents and influx of generic drugs could hit the sector. You may be better off with biotech stocks such as Synergy Health of Swindon, Wiltshire.

CONSUMER STOCKS

Batstone-Carr advises investors to concentrate on consumer companies that are maintaining their margins. Cadbury Schweppes said last week it was 60% of the way towards reaching cost-saving targets that would boost margins — it announced an 8% rise in chewing-gum prices in America, for example.

He also tipped retailers such as J Sainsbury that have succeeded in expanding their own-brand ranges.

US v EMERGING MARKETS

While most commentators concede that US shares are more defensive than emerging markets in today’s climate, a lot depends on your time horizon — over one to two years America looks safer, but in the longer term emerging markets may be a better bet.

Alan Steel of Alan Steel Asset Management has increased his exposure to the US from about 10% to 35% in the past year. He likes Martin Currie North America, a £490m fund with which has investments in US exporters and tech.

However, Simon Ward of New Star said: “In fact, the fall in emerging markets means they are now looking quite cheap.”

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